ARM leaders would be well-advised to understand the current legal and regulatory environments governing the industry. There have been major changes recently and even larger ones may be to come.

by Patrick Lunsford
insideARM

Members of the accounts receivable management industry are increasingly finding themselves under attack from state attorneys general and civil lawsuits brought by consumers alleging violations of the Fair Debt Collections Practices Act (FDCPA). ARM leaders have always been well-advised to understand the legal and regulatory environments applicable to the industry, but that need is even more important today.

Individual Lawsuits on the Rise

In most cases, the enforcement actions taken by authorities are a direct result of consumer complaints against collection agencies. Likewise, individual civil and class action lawsuits brought against debt collectors are driven by consumer complaints, the record of which is used in legal proceedings. Over the past several years, a cottage industry has sprung up dedicated to helping consumers “deal with aggressive collectors.”

Organizations like the National Association of Consumer Advocates (NACA) provide consumers with direct links to hundreds of lawyers’ websites, some of which provide calculated advice for consumers contacted by collection agencies. Some of these online resources urge consumers who speak with collection agents (“even if [they] want to pay the debt”) not to verify information, discuss the debt, or return collection calls. Also, many online groups teach consumers how to spot minor technical violations of the FDCPA. Lawsuits citing technical violations are often easier for consumer attorneys to win settlements than complicated cases of prolonged abuse which the FDCPA was enacted to curtail.

Furthermore, opportunistic consumers who, in efforts to dodge their financial obligations to creditors, have educated themselves on representative FDCPA violations, for example, and will use specific catchphrases to bait debt collectors into committing infractions of the law.

The result of this trend is an ever-increasing tally of civil lawsuits claiming violations of the FDCPA. By some estimates, lawsuits claiming violations of the FDCPA brought by consumers against collection agencies could be up as much as 30 percent in 2009 compared to 2008.

Many collection agencies view consumer litigation as a cost of doing business and elect to settle cases quickly rather than bearing the expense of defending claims are often difficult to dispel. But more and more are beginning to fight the charges as technical and frivolous claims become more commonplace.

Understanding debtors in these contexts expands ARM companies’ ability to gauge the nature of legal challenges as well as the motivations behind them in order to mount an appropriate response. As a result of the U.S. economic situation, litigation-related expenses will continue to increase in coming years. Like other approaches for success in a highly regulated industry, ARM companies must continually evaluate their litigation exposure, assess the value of settling versus contesting legal challenges, and invest wisely in their businesses to minimize the financial and non-financial risks of consumer lawsuits.

Legislative and Regulatory Environment

The U.S. regulatory landscape is undeniably challenging for ARM companies to navigate, particularly in times of larger economic instability. The collection industry must conform to myriad state and Federal laws in order to successfully conduct business.

The Democratic majority in both houses of Congress is unlikely to approve any pro-ARM industry legislation anytime soon, leaning instead toward consumer-driven measures, some of which should grant further enforcement authority to federal agencies like the FTC or the new Consumer Financial Protection Agency (CFPA) that will regulate a range of financial products as well assume the responsibility to enforce the FDCPA, the Fair Credit Reporting Act (FCRA) and the Gramm-Leach-Bliley Act (GLBA).

Other recent federal legislative or regulatory initiatives include: the FTC’s Red Flags Rule requiring creditors and financial institutions to implement identity theft prevention programs (enforcement delayed until June 1, 2010); changes to IRS Form 990 Schedule H which places new restrictions on the way hospitals account for their bad debt, community benefit, and charity care allocations; healthcare reform, which passed through the House of Representatives on November 7, 2009; and the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, consumer-driven legislation which broadly expands government oversight of credit grantors and seeks to more thoroughly shield consumers from issuer practices including: arbitrary interest rate increases, excessive fee levies, billing statement gimmicks, and lack of transparency related to the terms under which credit is extended.

In addition, regulatory action on the state level continues.

The majority of states are looking into an abyss of unprecedented budgetary shortfalls and amid falling income tax revenues. Of the 47 states that reported first quarter 2009 revenues, 45 saw revenues shrink. On average, first quarter 2009 tax collections fell 12.6 percent, representing almost $20 billion in uncaptured revenues.

A report issued in June 2009 by the Center on Budget and Policy Priorities estimated that the total 2010 budget shortfall for 48 states would reach $166 billion. By 2011 the gap in those states is expected to balloon to $350 billion.

Under internal pressure to boost revenue through three generally accepted methods—increasing taxes (politically unpopular and fiscally impractical), cut programs and services (politically unpopular), or rely on reserves (which in many cases no longer exist)—states are exceedingly inclined to cast wider safety nets over their citizens to stabilize local economies and garner some political favor with the voting populous.

While prototypical “bad seeds” will surface from time to time in the ARM industry, regulatory compliance serves as a competitive advantage to those collection agencies that strive to thoroughly understand the regulatory framework in which they operate. Companies that develop comprehensive approaches to system-wide compliance, develop incentives for proper collection performance, maintain open lines of communication with federal and state regulators, and maintain a watchful eye on regulatory and judicial changes nationwide, will secure distinct competitive advantages in the highly regulated ARM industry.

This entry was posted on Thursday, January 14th, 2010 at 6:58 pm and is filed under Receivables Management Solutions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.