Guiding Banks Through the Debt-Collection Minefield

Debt-collection rules are shifting under the feet of bankers, who may need to bring collections back in-house to dodge enforcement actions, according to a leading industry expert on the subject.

In the postcrisis legal landscape, banks can be held accountable for misconduct by debt buyers or collectors they work with, so they need to vet and monitor these firms like never before, said Joann Needleman, an attorney at Clark Hill in Philadelphia. For some lenders it might be cheaper — and safer — to simply do debt collections themselves, rather than outsourcing as most banks have done for decades, she said.

And Needleman should know: she advises banks and other creditors on how to stay out of debt-collection trouble, and advises the Consumer Financial Protection Bureau, as a member of the regulator's Consumer Advisory Board. She is also president of the board of the National Association of Retail Collection Attorneys, a trade group for lawyers who represent creditors' interests.

Years of bad practices by banks and the companies they outsourced to have brought unprecedented scrutiny to the collections industry, both from regulators and courts.

The problem is that the ground rules are still being written, so banks have to adjust on the fly. The Consumer Financial Protection Bureau has not yet issued its new rules on debt collection, but it is still issuing enforcement actions, and agency officials have said banks should use these consent orders as a template for compliance.

American Banker spoke with Needleman on what the CFPB is planning and how banks can stay out of the regulator's dragnet. The interview has been condensed and edited.

How have the rules for debt collection changed for banks in the past five years?
Banks never used to have to worry about collection. If they had a debt, they would try to collect it, then they would pass it off to someone else — out of sight, out of mind. It was true outsourcing.

Now that no longer exists. Even if banks outsource, they're not really outsourcing, because they have to spend so much money and time monitoring their third-party collectors. Independent contractors are treated as your employees now. That increases the cost of compliance exponentially.

How can banks avoid getting in trouble for bad behavior by debt collectors or buyers they work with?
Extensive vetting and ongoing monitoring. While vetting is important, the umbilical cord cannot be cut. There's got to be a back and forth all the time to know what these vendors are doing, especially if they have any consumer-facing activity.

But that being said, I don't have an easy answer. It's really, really hard, unless you plan on putting a representative in each one of your vendors to make sure they do what they're supposed to do. Banks don't do that because it would be very inefficient and costly, but if the CFPB had its way I think that's exactly what they'd want you to do.

Do you advise banks to bring their debt collection back in-house?
It's a cost-benefit analysis. For some banks, bringing collection back in-house will mean a complete change in their structure and processes, and that's going to mean a lot of money.

But by the same token, the risk analysis may call for it. There are some very large banks that are really scared about litigation. They're scared of the reputational risk, and they're scared that the standard for proof is still not set.

I think that a lot of banks are going to bring debt collections back in-house, and then they're not going to know what to do. So they really need to work internally and figure out how they can do it right, because if they don't do it right, let's face it, they're the deep pocket. They're the ones the regulators are going to go after first.

What do banks need to understand about dealing with the CFPB?
What the CFPB is looking for is very different from what prudential regulators are looking for, and I don't think banks understand that yet. With prudential regulators, it's all about safety and soundness. The CFPB's focus is quite different: how are you treating the consumer? Nobody has come in and asked those kinds of questions, and banks are still not 100% clear on that.

The CFPB also has a very broad authority to prevent unfair, deceptive or abusive acts or practices, or UDAAP, against consumers. That's an extremely broad authority, and the difficulty with UDAAP is that it's really hard to define — you know it when you see it. So it's also very hard to prevent, because what's not considered UDAAP today could potentially be UDAAP tomorrow.

Because we don't really know what the rules are and we don't really know what UDAAP looks like, there needs to be constant, ever-changing re-evaluation of your processes and systems.

So part of the problem is vagueness in the rules for debt collection?
The CFPB is developing standards and regulations not through rules — because in debt collection the rules haven't come out yet — but through a plethora of enforcement actions which dictate policy and which the financial services industry must follow. An order may only be directed at two companies, but everybody else in the space has to look at that order and say, "If they didn't like it when they did it, they're not going to like it if I do it."

When do you expect the CFPB to issue its debt-collection rules, and what do you expect those rules to look like?
I think we're at least a year away from a final rule. And I really don't know what the rules are going to look like — I would just be speculating. But I think it's going to be massive.

What are you most worried will make it into the final rule? What would be hardest for banks to comply with?
My fear is the rules will just create unnecessary barriers to communication, which at the end of the day doesn't help the consumer.

Take oral dispute. All the consumer has to do is say, "I dispute," and the process gets shut down. We are not given the ability to try to find out what the dispute is and try to rectify the dispute. Nor has "dispute" been defined. I think that's one of the most important things — if we're going to come out with rules, let's ensure that the terms that we have to live by are clearly defined.

You're on the CFPB's Consumer Advisory Board. Does the bureau take your advice?
Can I say something that's going to change the CFPB? No. But I do think they appreciate the perspective.

Clearly, I'm in the minority. The board is very heavily consumer-focused, not industry-focused. I'm the only person who's in the debt-collection and recovery space. The CFPB's goal is to bring in different perspectives, and they are successful at it.

The court system took a lot of criticism over collections cases, from reports of "rocket dockets" to judges accepting robo-signed paperwork. Have the courts changed the way they approach these cases?
Yes. Many courts are trying to adjust the rules for evidence. There has been a lot of criticism of banks — and I don't agree with it all — for not providing proof of the debts they sell or collect. There's an assumption that somehow all the information banks provide is inaccurate.

The misunderstanding is that the financial services industry operates on bits of data. It's all electronic. There's no document — people who think there's a room full of contracts somewhere are kidding themselves.

There needs to be wholesale education about how banks do their business. In this day and age, when you go to Lowe's or Best Buy and you get a credit card, you don't sign anything. There is no piece of paper anymore. Technology has played an increasing and important role in financial services, but proofs are hard when everything is technologically oriented.

What's the first thing that should be fixed about the way the courts process debt cases?
Accommodating the self-represented consumers, the pro se people who don't have attorneys. Why do they have to come to court ten times, why do they have to sit and wait hours and hours to get their cases heard? These are people who are working. Why can't we do some of this stuff over telephone? I think there needs to be some forward thinking on those issues.