There are few winners in the current debt collection system. The majority of debt collectors have earned their toxic reputations and are deserving of increasingly heavy regulatory scrutiny. Millions of consumers are drowning in debt and the resulting collection lawsuits and wage garnishments. Meanwhile, banks are under siege as state attorneys general and federal agencies like the Office of the Comptroller of the Currency seek to hold directors responsible for the improper actions of debt buyers that purchase their charged-off consumer debt.
There may be a way for both banks and consumers to come out ahead. A tax credit proposal currently in the works could leave both banks and consumers in much better standing — and with a lot more money in their pockets. Traditional debt collection companies that use threats and abuse as weapons against consumers will need to either adapt to a new business model or go the way of the buggy whip.
I am the chief executive of CFS2, a debt collection agency that helps consumers find jobs, gain financial literacy, access social services and achieve some financial order before discussing debt repayment plans. Our experience working with consumers led to the concept of helping even more people through a special tax credit under the Family Stability and Financial Literacy Improvement Act.
Under the proposed legislation, the federal government would provide banks with a one-time tax credit for the full market value of charged-off consumer debt. Banks would then donate the debt to a newly created breed of non-profits dedicated to working with consumers on repayment plans while providing them with a range of other financial services. In order to qualify, non-profits would be required to forego the use of litigation, abstain from charging consumers any interest and agree to offer job search assistance, social services, financial literacy education and advocacy services.
Each non-profit beneficiary of the consumer loans would have the flexibility — and the incentive — to rewrite the loans they receive into long-term repayment plans tailored to each individual consumer's situation. These non-profits would be fully licensed and subject to all state and federal laws for the collection of debt. While these requirements are tough, any non-profit committed to consumer protection would be capable of meeting the required service standards. Funded by the debts they are able to recover compassionately rather than litigiously, these non-profits would provide millions of consumers with the tools and training to improve their financial circumstances.
Banks would also stand to benefit from the proposal. Through the magic of the tax credit, banks would be able to donate their delinquent consumer loans to a non-profit and receive 40% more-than-market value proceeds to their bottom line. Here's how it works.
Banks sold about $68 billion of charged-off consumer debt to private companies in 2012, according to the OCC testimony before Congress regarding best practices for debt collection and debt sales. That debt sold for approximately 10 cents on the dollar (roughly $6.8 billion). Had these assets been donated to special non-profits as under the new proposal, the banks would have received a federal tax credit equal to the market value — the same $6.8 billion. But because a tax credit flows directly to the bank's bottom line, the economic impact is multiplied by the bank's average tax rate: about 40%. Thus, the banks would have received an effective bump equivalent to $9.5 billion in revenue.
The Family Stability and Financial Literacy Improvement Act would also significantly reduce banks' compliance and regulatory risks. Ever since the release of the OCC Statement on Best Practices for Debt Sales, regulators have been targeting banks. By donating delinquent loans to non-profits instead of selling them to vilified debt collectors, banks would no longer sit in the crosshairs of increasingly aggressive federal agencies. Bank directors would feel tremendously more at ease.
A test case of this proposal showed promising results. The Center for Consumer Recovery, a non-profit I founded in 2012, studied CFS2's debt-recovery rates of more than 8,000 consumer debts between 2010 and 2013. The purpose of the study was to determine if the rate of recovery improved when the debt collector used a non-litigation strategy and when customers had the opportunity to improve their job situations and stabilize their financial conditions prior to repaying charged-off debt. The study results showed a debt-recovery rate over 200% higher than traditional, aggressive methods of collection. Moreover, thousands of consumers are now living better lives without the heavy anchor of debt.
According to another research project conducted by The Center for Consumer Recovery, this proposal would reduce the U.S. bankruptcy rate by 50% and put over $50 billion back onto banks' balance sheets in the form of debts not discharged or restructured by the bankruptcy court. It would drop the unemployment rate by one full point. It would also bring relief to state and local courthouses by preventing lawsuits filed against consumers each year by purchasers of charged-off debt.
These may seem like extraordinary claims, but this is no ordinary proposal. The Family Stability and Financial Literacy Improvement Act has the power to vastly increase effective revenues for banks, position bankers as leaders in a cause to rapidly improve our economy, save our legal infrastructure, and give indebted consumers the assistance and flexibility they desperately need.
Bill Bartmann is founder and CEO of CFS2, a debt collection agency that does not use litigation as a collection methodology but instead deploys a strategy of outreach to help consumers find or upgrade jobs. CFS2 also acts as an advocate to help consumers deal with other creditors and helps consumers find needed social services. He founded a non-profit organization, The Center for Consumer Recovery, to conduct consumer research and to advocate for consumers who are challenged to meet their debt service requirements.