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Recent Settlement Shows That Consumer-Reporting and Debt-Collection Procedures are Top Priorities for CFPBposted on 2014-11-22 by H. Scott Kelly, Nick R. Klaiber, Paige S. Fitzgerald and Alan D. Wingfield
An $8 million settlement announced November 19, 2014, between the Consumer Financial Protection Bureau (CFPB) and the nation’s largest “buy here pay here” auto dealer represents yet another warning coming out of Washington, D.C. that:
1. Compliance with the requirements of the Fair Credit Reporting Act (FCRA) when businesses furnish credit information to consumer reporting agencies (CRAs) is a top federal regulatory priority; and
2. The CFPB is creating and enforcing its own debt collection rules applicable to any creditor modeled after those specified for debt collectors under the federal Fair Debt Collection Practices Act (FDCPA).
While this enforcement action is in the context of a “buy-here pay-here” car dealer operation – DriveTime Automotive Group, Inc. (“DriveTime”) – the issues raised apply to any business that reports information to the CRAs or collects consumer debts. Moreover, this enforcement action comes hard on the heels of a $2.75 million settlement of alleged FCRA violations by an auto lender; other settlements against creditors for abusive collection activities; and bulletins issued by the CFPB reminding businesses of their obligations under the FCRA. In particular, the CFPB’s $2.75 million settlement in August 2014 with First Investors Financial Services Group, Inc. involved the alleged distortion of consumer credit records via flaws in the auto lender’s computer system that resulted in the inaccurate furnishing of information to the CRAs. The CFPB-First Investors consent order can be found here.
Here, DriveTime and its finance company affiliate not only agreed to pay an $8 million civil penalty, but also agreed to follow a comprehensive set of compliance requirements for its debt collection and credit reporting operations. In toto, the settlement subjects DriveTime’s debt collection and credit reporting operations to the close supervision of the CFPB for five years.
DriveTime’s specific practices deemed in violation of the FCRA include:
In the settlement, DriveTime agreed to revamp its FCRA compliance procedures and policies in conjunction with a CFPB-approved consultant, to provide a comprehensive plan to the CFPB for improvements, and to report on implementation.
DriveTime’s specific debt-collection practices deemed by the CFPB to constitute unfair harassment of debtors focused on DriveTime’s failure to record and respect “do not call” or DNC requests, including:
In the settlement, DriveTime agreed to abide by DNC requests, and to take steps to avoid making repetitive calls to third-party references or disclosing the debt to the references. DriveTime also agreed to provide customers with information on how to make requests to limit calls to debtors and to improve its systems to prevent unwanted calls. These conduct agreements are analogous to requirements under the FDCPA that require debt collectors to respect DNC requests and to avoid disclosing to third parties the existence and status of a consumer’s debt. In other words, by way of this settlement, DriveTime is bring required to abide by standards of conduct – in collecting its own debts – analogous to those imposed on third-party debt collectors under the FDCPA, even though DriveTime is not directly subject to the FDCPA. DriveTime also agreed to revamp its debt-collection procedures, to hire a CFPB-approved consultant, to provide a comprehensive plan to the CFPB for improvements, and to report on implementation of this plan.
One other aspect of the settlement is notable. The CFPB has no specific direct supervisory authority over DriveTime, as opposed to large banks and mortgage lenders, among others. Nevertheless, even when the CFPB lacks supervisory authority, the CFPB has jurisdiction to enforce the Dodd-Frank Act’s general Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) protections against essentially any financial services company. Moreover, as part of the settlement, DriveTime agreed to subject itself to the supervisory authority of the CFPB, meaning that the CFPB will have the power to conduct on-site examinations at will.
Finally, we also note that the CFPB has included “buy-here pay-here” auto dealers in its September proposal for regulating larger participants in the nonbank auto finance market. The proposal can be found here. In sum, businesses that think that they are beyond the reach of the CFPB because they are not within its supervisory authority are mistaken and must gauge their compliance efforts accordingly.
All too often, commercial debt collection becomes a negotiation. When negotiations begin, the stronger our client’s position is, the better these negotiations will go. The ultimate deal struck could be a larger dollar amount collected, payments collected more quickly, avoiding going to court, or if necessary, the final outcome in court and the resultant judgment collection process.
We are often amazed to find that our new clients often have boilerplate deficiencies which weaken their negotiation positions and cost them money in the long-run. One boilerplate omission that we often see is no provision holding the customer liable for collection fees. Below is an excerpt from our free ebook: the Terms and Conditions Handbook which discusses over 70 items which should be considered for governing the vendor/customer relationship:
“In the USA, typically, you will not have the legal right to recover collection costs or attorney fees unless there is a signed written agreement with this provision. Just having this provision on your invoices is not necessarily enough. You want to have a document signed by your customer indicating they agree to this provision and the Application is typically the best document to memorialize this term. You want to specifically include collection costs so that collection agencies can add this fee into the amount they are trying to recover on a pre-litigation basis, as they cannot add “potential” attorney fees at this stage. Whether or not you actually collect these costs, it gives you and your agents much more leverage during collection agency, litigation, and judgment collection activities.
In the event that Vendor commences any action to collect delinquent invoices, Applicant agrees to pay collection expenses and attorney fees, whether or not suit is filed.
We see the following version less frequently, but it has the advantage of spelling out the liquidated damages in the event of default. Some courts use a schedule to determine the fee to be awarded to attorneys for getting a judgment. This fee typically is substantially less than the contingency or hourly fee paid to the attorney. By having an agreed attorney cost in the executed Application, the Vendor has a much better chance of being awarded the full attorney cost, thereby offsetting the cost of having to litigate to get paid. It also helps at the collection agency stage, and gives in house collectors more leverage during the threat to send to collections:
We further agree to pay a 25% collection charge, in the event of default, if the account is placed with an attorney or bonded collection agency.”
When we are collecting on a $25,000 claim, adding our collection fee of 20% (i.e., $5,000) to the delinquent amount means that we can begin negotiating from a starting point of $30,000 (more if interest and/or late fees are also included in the provision). By starting at a higher dollar amount due, this gives us a stronger negotiating position with the customer regardless of what the customer is negotiating for, for example a discount or more time to complete the payments.
When the customer realizes that the collection fees will be added to the amount due, this often encourages the customer to give the debt owed a higher place on the payment priority list. In fact, this by itself can help us get a resolution while the debtor then pushes other debts back or ignores them entirely.
Any time we are able to collect collection fees our client is financially better off. Our clients frequently choose to waive the collection fee as a way to motivate the customer to immediately pay what is due. This is a far better option for many of our clients than going to court and often it incentivizes the debtor to pay off our client’s past due invoices instead of paying what is owed to other vendors.
This collection fee provision can also give in-house collectors better leverage with past due customers. Phone calls and final demand letters sent to delinquent customers can remind them that if the claim is turned over to collections, they will be responsible for the significant collection costs. This provision may motivate debtors to become current to avoid collections even when all previous collection attempts have failed.
Surprisingly, of the 22 terms and conditions examples included in our free ebook, only one included a provision for collection fees, and only six included a provision for attorney fees. These omissions definitely represent missed opportunities for our clients.
For companies that use credit applications, the collection fee provision may be included in this document, as described in our free ebook: the Credit Application Handbook. For companies that do not use credit applications, this provision should be included in your terms and conditions which should also be referred to in the sales and insertion orders or other contract to be signed by the customer.
Usually vendors use a credit application to collect information about a new customer and establish credit and contractual terms. Unfortunately, often the credit applications we see are deficient in key items necessary to protect our clients in the event their customers become delinquent. Below are some of the most painful situations we see at our commercial collection agency:
· The contact information is not complete, allowing the customer to avoid you;
· There is no acceleration clause included so that in the case of delinquency, all amounts owed are immediately due;
· No clause is included making the customer liable for all collection costs in the event of default;
· No clause is included making the customer responsible for attorney costs;
· Provision for jurisdiction, litigation venue and law is incorrectly worded;
· No clause allowing creditor to evaluate personal credit of business owner;
· No personal guaranty language is included;
· Signature block design is inadequate.
These items are not important if your customers all pay on time. However, these credit application problems can cause lower recoveries if your customer becomes delinquent and you send the claim to our third party collection agency. Yes, we have an 85% success rate on viable claims, but our clients are frequently forced to accept less than what is owed or longer payment plans because of the credit application problems listed above.
A big reason for this is due to companies developing their credit applications without considering the debt collection process. In addition, the attorney working on the credit application is probably not a specialist in contingency based debt collection litigation. Nor do the credit professionals involved have direct work experience at a third party collection agency which would give them insight into what can make a big difference in the debt collection process. Finally, often companies design their credit applications based upon other credit applications they have seen, keeping the same poor wording and omissions.
Unfortunately, until now there has been no single easy to find comprehensive credit application resource. We know, because we have frequently tried to find one to give to our clients.
We did find an ebook by The Credit Research Foundation called “In Search of the Perfect Business Credit Application” which sells for $10. Published in 2005, this 14 page ebook provides an excellent summary of a number of topics based on evaluation of nearly 100 credit applications. For the price, this ebook provides a lot of value, but it does not address many of the issues we deal with frequently at our collection agency. CreditToday subscribers have access to lots of articles relating to these issues (including several authored by me), but the information is presented piecemeal and is not comprehensive, and the same holds true for the other resources we came across.
This is the reason we have created the 77 page free ebook: The Credit Application Handbook. This ebook covers all the issues listed above and also provides sample language to solve each of these issues. The ebook also includes:
· A check list containing 40 items to help evaluate existing or proposed credit applications:
· 19 sample credit applications including our favorite two;
· A list of information to collect to evaluate a potential customer’s creditworthiness;
· A list of information to collect if a customer stops paying;
· Terms of granting credit;
· Terms to include to protect creditor if the customer goes delinquent;
· Other terms to include which govern the commercial relationship;
· Sample language for each term discussed;
· Signature block design recommendations;
· General advice on how best to utilize credit applications when making credit decisions.
The check list is designed to help you identify deficiencies in your current credit application. The ebook navigation allows you to go directly to specific sections and the sample language options to cover each issue. There is one sample provision that I can guaranty will save creditors thousands if not tens of thousands per year that has never been seen before because it is original based upon our years of commercial debt collection experience.
Please check out our ebook and share it using the social media icons listed below or any preferred means with other credit, accounting and business professionals. We welcome your comments and suggestions – we will update the ebook with new commentary and information when appropriate.
Creative Ideas Solve Credit Risk Problems - How One Credit Manager’s Cre¬ativ¬ity Made the Big Sale Possibleposted on 2014-07-16 by Dean Kaplan
Most credit managers have been in this situation: the company wants to make the big sale, the buyer is ready, but their credit situation doesn’t make a standard transaction possible. Bud Rule, who has 40 years of credit experience, recently shared this story of a creative solution he used years ago.
Their company was gearing up for the big annual trade show. A salesman was working with a dealer to place a large at the show. This was a long-term customer so everyone was happy. But, one problem: the customer had shown slowness in repayment and the approved credit limit was not sufficient enough for the order.
Bud traveled to the trade show a couple days in advance for a variety of reasons, including to meet the customer face to face the day before the show started. The customer explained the unusual circumstances that resulted in their current predicament. Bud discussed all the typical methods that the customer might use to generate immediate cash or become more credit worthy, but nothing panned out.
Bud was under a lot of pressure to figure something out. Management wanted the inventory sold. The salesman wanted his commission. And now a long-term customer was upset that he was being told “No” on a deal that would really help him.
During the conversation, he couldn’t help but notice the customer’s HUGE diamond ring. In a moment of inspiration, he asked the customer if he was willing to put the ring up as collateral. They went out and got it appraised right then and Bud took it back and locked it in the company safe. When the invoices were paid a few months down the road, Bud offered to fly back and deliver the ring. The customer was so happy with how things worked out that he flew to corporate to say thank you and put the ring back on his finger.
Bud told me “So many people look at the Credit Department as the ‘Sales Prevention Department’. I’ve worked throughout my career to make it the “Assist Sales Department”. I’m sure many credit professionals can relate to this.
Bud has had a long and quite productive career. At this stage, he is no longer looking for that high profile credit manager position and salary. He just wants to stay active (full or part-time) in the credit and collection field. So anyone who could use a highly experienced professional for daily routine matters or to help improve things, check out Bud’s profile on LinkedIn.
And a shout out to all AR professionals: please contact me if you have a story where you have creatively solved a credit problem. I want to share more examples with our community so we can all learn from each other.
A Credit Manager’s Creative Way of Saving Customers
Want to see a salesperson squirm with displeasure: just tell them the account for a long-term customer is being sent to a collection agency. The salesperson has visions of rogue debt collectors badgering their customer with threats of bad credit references, legal suits, judgments and garnishments, caring only about collecting a few dollars and no concern about preserving relationships. They assume that once the customer has been through this ringer, he’ll never talk to the salesperson again.
Of course, this customer hasn’t been talking to the salesman since his account went past due and his credit availability was suspended. At the last industry trade-show, the salesman saw his customer coming down the aisle, but then abruptly turn away when brief eye-contact was made. Presumably the customer was embarrassed that his account was delinquent and didn’t want to face the salesman he let down. The salesman’s nightmare got worse when later that day he saw the customer in another booth negotiating his first-ever purchases from a competing brand.
Unfortunately, at the moment the customer is not a customer any more. And the longer the account is allowed to stay delinquent, the lower the likelihood he’ll return to being a customer. While he can’t buy from your organization, the customer is working to develop new sources and relationships. Positive experiences with new vendors can lead to permanent lost sales for historical vendors. And the incentive to pay invoices to ‘historical’ vendors during cash-crunches also goes down.
One enterprising credit manager we know has taken a novel approach to the delinquent account process. Their goal is to ‘Save Customers’ for the sales department. He believes it is much easier to resurrect a previous customer than to generate a new one, and in the process, gain the respect and appreciation of the sales department and senior management.
Here’s the 4 step process he uses to Save Customers:
The results of this program have been astounding for over a decade. Over 70% of claims are collected within 30 days of placement with the agencies (including our agency), and over 60% of these companies place new orders within 90 days. Over 85% of all claims are collected, so actual write-offs are minimal. It is extremely rare that a customer ever allows their account to become delinquent again — they know this company means business when it comes to its receivables terms.
An added benefit is that senior management realizes the fees paid to collection agencies to save a customer were nominal in comparison to what it costs to get a new customer. So now when a salesperson hears that “this customer needs special attention”, they know they are likely to have a “saved customer” and new orders in the next quarter. And the Credit Manager is perceived as profit contributor and strategic thinker, with the respect and compensation that comes with that accomplishment.
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