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The most difficult part of a debt collector's job has been, and always will be, establishing communication with the consumer they are collecting from. Debt collectors go to great lengths to establish contact with consumers primarily through telephone calls and letters. In my experience, once contact is eventually established with the consumer, one of their biggest complaints is the claim they have never been notified about their debt being in collection. This would always come as a surprise because we would send consumers what is known in the debt collection industry as a "validation notice" once we received the account. The validation notice outlines the consumer's rights to validate their debt if they are unsure of it. So if a debt collector is sending validation letters – and it's my experience that the majority of debt collectors do — why aren't consumers receiving them?
The answer most likely is consumers are receiving them, but because the envelopes from debt collectors are often vague and inconspicuous, they aren't getting opened. These letters are often confused with solicitation from marketing companies who keep the return address and envelope nondescript in order to get the recipient to open the piece of mail. However, a lot of recipients won't open mail if they do not know where the letter is from or who sent it. The problem with that practice is if you are in debt and a debt collector is contacting you, the last thing you are likely to see on the envelope is anything related to a debt, most notably the name of the creditor or debt collection agency trying to collect from you.
Why the Secrecy?
So why doesn't a debt collector at least put their company name on the return address? Because that practice could be in violation of the Fair Debt Collection Practices Act. The FDCPA clearly states a debt collector may "not use any language or symbol on any envelope or in the contents of any communication effected by the mails or telegram that indicates that the debt collector is in the debt collection business or that the communication relates to the collection of a debt." Therefore, in order to remain compliant with this section of the law, debt collectors are prohibited from placing any information on the envelope, including their business name that would indicate they are a debt collector or that they are attempting to collect a debt.
But while the outside of the envelope may be vague and inconspicuous, the contents inside the envelope are more descriptive and important. Debt collection notices are often personal, confidential and time-sensitive in nature. These letters provide information the consumer needs to know as it relates to their debt, including the status of the debt and what might happen if the debt isn't resolved soon. Debt collection letters also contain specific disclosures that provide information about how consumers can dispute their debt along with other state-specific disclosures the consumer should be aware of. In addition, when consumers postdate payments with debt collectors, debt collectors may be required to send payment reminders which would also be sent within these envelopes as well.
Letters are one of the biggest expenses for debt collectors, so they want to make sure the letters are being delivered to the right consumer — and being opened by that consumer, as well. However, debt collectors must stay in compliance with the FDCPA and ultimately must hope consumers who receive the letters are going to first open the envelope, read the letter and establish communication with the debt collector so the debt can be resolved. With more consumers preferring to communicate with debt collectors non-verbally, letters will continue to play an integral part of the debt collection and resolution process. So the next time you get a piece of mail that you may not want to open because you don't recognize the return address, be sure to at least take the time to open the envelope to see whether it contains personal, confidential and time-sensitive information such as a debt collection notice.
Debt collectors are legally prohibited from misrepresenting themselves as police or lawyers when communicating with consumers. Of course, that hasn’t stopped some collectors from breaking the rules, and there are plenty of debtors who can tell stories of precisely that.
The question of what exactly qualifies as misrepresentation is at the center of a lawsuit filed Dec. 1 in U.S. District Court in San Francisco. The suit alleges that debt collection company CorrectiveSolutions violated the Fair Debt Collection Practices Act (FDCPA) after using letterhead of various prosecutors’ offices when contacting debtors. The complaint calls into question the process surrounding CorrectiveSolutions’ alleged practice of representing themselves as law enforcement to consumers and threatening legal action for failing to pay the debt. The tricky part of this case, however, lies in the fact that CorrectiveSolutions is under contract with several California’s district attorney offices for the expressed purposes of interceding on the government agency’s behalf. The legal dispute focuses on the way they intervened.
It’s all tied to California’s Bad Check Restitution Program. The program allows people who bounce checks and the businesses who received the checks to settle the case out of court through what’s known as a diversion program. In this diversion program, an offender can avoid prosecution by paying the amount the bad check was written for, plus fees, in addition to taking an 8-hour bad-check-offender class at the offender’s own expense. Through this program, people and businesses who receive bad checks can submit a complaint, along with evidence, to the mailing address listed on the DA’s website.
Under California Penal Code 1001.60, the DA is permitted to contract private companies, like CorrectiveSolutions, to help execute this program. However, district attorneys may refer cases to the program only if the check writer is believed to have violated state laws, like intentionally defrauding the recipient. A lawyer with the DA’s office is required to review the cases to ensure they meet various criteria. For example, if a business wants a bad-check writer pursued for violating the law, they must first make attempts to contact the debtor three times before the case qualifies for the program, according to Teresa Drenick, assistant district attorney in Alameda County.
The lawsuit contends that prosecutors have allowed debt collectors to use DA letterhead without first vetting the claim that the debtor violated the law. The American Bar Association recently condemned the general practice of allowing debt collectors to use prosecutors’ letterhead, as it makes the prosecutor “party to deception” and violates Bar Association rules, the association’s Committee on Ethics and Professional Responsibility wrote in an opinion issued Nov. 12. The opinion does not specifically reference California or the district attorneys’ offices mentioned in the lawsuit.
Credit.com reached out to the district attorneys’ offices in the five counties mentioned in the lawsuit (Alameda, Calaveras, El Dorado, Glenn and Orange counties), but only two responded. Joe D’Agostino, assistant district attorney in Orange County, said they’re studying the Bar Association’s opinion.
“The program is run in a method that matches what the statute is,” D’Agostino said, referencing California Penal Code Section 1001.60, which describes the district attorney’s ability to contract the bad check diversion program to a private party. “The Bar Association’s opinion came down fairly recently, so we’re studying it. We always want to follow the rules and follow the procedure.”
Drenick, the assistant DA in Alameda County, wrote in a email statement to Credit.com that CorrectiveSolutions sends the DA’s office a list of cases each month, which is reviewed by the office to ensure the debt is legitimate and would meet legal requirements for pursuing a criminal case. Then, CorrectiveSolutions is given approval to contact the debtor using the DA’s letterhead. She did not specify whether or not an attorney reviews the bad check diversion cases, as the statute requires, and she did not respond to a request for clarification.
“If we agree to allow the case to go by way of diversion, we authorize CorrectiveSolutions to send the check writer a letter on behalf of our DA Bad Check program advising that their check was returned for insufficient funds and offering them the option of participating in the diversion program to avoid criminal prosecution,” Drenick wrote. “It is a well thought-out diversion program. Last year (2013) our program returned $69,132.01 to local businesses as payment on dishonored checks through the Bad Check program. … There is no ‘rental’ of our letterhead; rather, a statutorily-authorized diversion program that helps local businesses collect on bad checks while giving the check writers an opportunity to avoid a criminal conviction/record.”
The future of this practice seems to depend on prosecutors’ reactions to the Bar Association’s opinion and the outcome of this litigation in California. Meanwhile, consumers may remain subject to the debt-collection tactic that the lawsuit is calling into question. CorrectiveSolutions did not respond to multiple requests for comment from Credit.com.
If your state doesn’t have a diversion program like California’s, writing a bad check can still come back to haunt you. If you bounce a check, the recipient may sue you over the unpaid sum, which may result in a judgment on your credit report — a credit score killer. (You’re entitled to free credit reports once a year under federal law and you can get a free credit report summary at Credit.com.) Debt collection can be confusing and intimidating for consumers, even when collectors follow the guidelines in the FDCPA. If you’re dealing with a debt collector, make sure you know your consumer debt collection rights, and form an action plan for paying off your debt.
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.
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