With experts still skeptical about the ultimate benefits to creditors of the Godot-like bankruptcy reform legislation, lenders may need to rely on their own devices for collecting delinquent and charged-off debt.
At last week's National Collections and Credit Risk Conference in Las Vegas (sponsored by American Banker publisher Thomson Media), two bankruptcy authorities said the long-stalled bankruptcy legislation would probably not be the buffer against credit losses that the industry has been led to believe.
Judge Linda B. Riegle of U.S. Bankruptcy Court in the District of Nevada said loopholes in the bill compromise its objective of helping creditors collect their assets. For example, debtors who are business owners would not be affected by the legislation because of an exemption for corporate debt, she said.
The bill's formula for determining disposable income (which would be surrendered to creditors in most filings under the proposed law) would also let some debtors off easily. Because income predictions are based on the last five years of pay, debtors who simply stopped working could end up paying very little.
"For someone who's wealthy and can hire a good lawyer, there are so many loopholes," Judge Riegle said. Using the bill's formula, "Ken Lay would have no projected income," she said.
She encouraged lenders to examine the macroeconomic effect of keeping distressed debtors under obligation. "If every customer is totally burdened with debt, there's no new customer."
Bruce Markell, a law professor at the University of Nevada, Las Vegas, said the bill's fraud provision - which would prohibit fraudulently racked-up debts from being discharged under Chapter 13 - would be burdensome to debtors but potentially for creditors as well.
For example, creditors wishing to solicit those consumers for new offers would want to see those debts discharged. "There are differing incentives" among creditors to keep consumers indebted, he said.
"The bankruptcy law is not a complete panacea," Mr. Markell said. "It doesn't transfer money from debtors to creditors, but a lot of what it does is transfer money among the creditors themselves."
Judge Riegle and Mr. Markell agreed that the legislation, which is 1,500 pages long, could lead to creditor infighting along with legal and operational headaches for everyone involved.
For example, making a fraud determination in order to reclaim those dollars would itself be onerous, the judge said. A debtor is guilty of fraud when found to have borrowed money while knowing he or she had no reasonable means of paying it back.
"But what is 'knowing'?" she said. Do compulsive gamblers, reckless spenders, and the unemployed all equally know they cannot pay back their debts? Such determinations would require case-by-case reviews, costing creditors - when added to other monitoring the bill would entail - perhaps more than they stand to recoup, she said.
Resulting disputes on this and other provisions will mean "a lot of court time," Mr. Markell said. Judge Riegle said already clogged bankruptcy courts will have even less time to hear cases. Plus, what seems like the industry's good fortune in the reduction of bankruptcy filings, she said, will probably mean more face-time with debtors themselves, who are harder to deal with than attorneys.
But while experts speculate about what a new law will or will not do, creditors may be losing faith that the long-touted reform will ever happen. Legislative proposals have been passed, pocket-vetoed, and revived since 1994. Yasmine Anavi, chief risk officer and executive vice president at Citigroup Inc.'s Citi Cards division, said legislation would probably help the industry curb its credit losses, but such reforms have been "left at the altar so many times."
In the meantime, improved collection techniques, including outsourcing, are helping creditors to reclaim a share of their losses. Scott D. Emmer, the external collections manager for Household Credit Services, part of Prospect Heights, Ill.-based Household International, said in a separate presentation that better cooperation with its outside collection firms has lifted collection rates.
Traditionally, Mr. Emmer said, relationships between creditors and outside agencies have been fraught with mistrust and a lack of openness. For one thing, collection agencies are sometimes put in the awkward position of competing for a bank's internal resources, he said.
Agencies that want to recoup higher fees are seen to eat away at the bank's budget for their internal collections department, he said. Creditors' collection managers, which supervise the agencies, "are not concerned with agent profitability. … It's not even a thought - they don't want to hear about it."
Mr. Emmer advised lenders to pay their agents on a contingency fee basis, where bonuses are tied to performance. This "gets around" the simple fact that creditors "want to pay the lowest fee, and agents want to earn the highest."
He said Household pays its three agencies contingency fees and also discusses their profitability with them openly - perhaps one reason why they have doubled their collections rate for Household twice in the last two years.
Household also encourages its agents to consider themselves more as Household staff rather than contracted employees of an outside firm, Mr. Emmer said. Evidently it doesn't take much: Household dispenses to its agents "anything from a T-shirt to a hat to a mug," he said. "It really goes a long way."
Separately, J.P. Morgan Chase & Co. said it is considering using computer-generated telephone reminders (as opposed to live customer service representatives) in its early-stage collections effort in its credit card division. Chase Cards has completed a successful pilot of the technology in its fraud prevention practice, deploying the calls to verify suspicious-looking transactions, said Mike Cunningham, a senior vice president in charge of fraud prevention for the division.
The pilot allayed some of Morgan Chase's initial concerns about using computer-generated voices, Mr. Cunningham said. Cardholders are generally grateful for courtesy calls to verify transactions, he said. A good 73% of those who were phoned rated it "very good," he said. The cards department has upped its fraud detection rate by 2% and cut customer service costs in half. Chase now routes 500 accounts a day to the vendor, Adeptra Inc. in Stamford, Conn., he said.
