Keeping up with changing regulations, CFPB rules, and compliance standards are a cumbersome but essential requirement for any collections professional. We know that this can cause collection teams and businesses headaches as they navigate implementing a collections strategy that takes into account these regulations, while recovering outstanding payments.
While staying current with evolving regulations is challenging, lenders must understand which regulations apply to them and which apply to debt collectors. Understanding these distinctions is essential for lenders to ensure their chosen collection agencies adhere to fair and legal debt collections practices.
In this blog, we'll explore the regulations that impact debt collection, dive into what regulations apply to debt collectors and original creditors, share expert insights on the new Consumer Duty, and expand on how digital collections software can help keep you in the good books by delivering a positive customer experience and of course, stay compliant.
What is FDCPA and Regulation F, and why are they important in collections?
The Fair Debt Collection Practices Act (FDCPA) is a federal law in the United States that sets guidelines and regulations for debt collectors. The FDCPA aims to make debt collection a fair and nonaggressive process for consumers.
The CFPB's Regulation F went into effect on November 30, 2021, and is a law that all debt collectors must adhere to. Regulation F outlines provisions prohibiting harassment or abuse, false or misleading representations, and unfair practices in the debt collection process. Regulation F also clarifies several rules on how debt collectors can communicate with consumers when attempting to collect a debt on an allegedly owed debt.
Who does Regulation F Apply to:
- Collection Agencies
- Debt Buyers
- Collection Law Firms
- Loan Servicers
But it's important to note that while original creditors (the organization that extends credit or offers a loan to a borrower and to whom a debt is owed, ex. financial institutions) are not directly covered by the FDCPA and Regulation F because they are first-party collectors, the prohibited practices outlined in these regulations still serve as a general framework for ethical conduct.
Additionally, companies that service loans can be considered first-party creditors if the loans they acquired were not in default at the time of purchase. Otherwise, they are considered debt collectors, and the FDCPA will apply.
And finally, if an original creditor collects their own debt but uses a different name that suggests it's a third-party debt collector, the financial institution is now considered a debt collector subject to the FDCPA.
The most common violations of Regulation F:
- Misunderstanding the seven-in-seven rule. Debt collectors are limited to seven communication attempts within a seven-day period with the consumer following an initial conversation (and yes, calls going directly to voicemail are counted as a contact by phone attempt).
- Calling before 8 a.m or after 9 p.m due to a time zone mix-up.
- Failing to include the required information in a limited content message.
- Accidental disclosure to parties who should not have access to confidential consumer information.
- Forgetting to renew permission for SMS text communications every 60 days.
Section 5 of the Federal Trade Commission Act (FTC Act)
Section 5 of the FTC Act is a critical provision that serves as a broad mandate for the FTC to take action against activities that may harm consumers or businesses through deceptive or unfair conduct.
The overarching goal of Section 5 is to protect consumers and ensure that businesses operate fairly, honestly, and transparently, providing consumers with accurate information and fair treatment when purchasing services.
When a first-party creditor engages in practices that fall outside the scope of the FDCPA but are still considered unfair or deceptive, the FTC Act can utilize its authority under Section 5.
Under section 5, the FTC can take action when first-party creditors engage in other practices prohibited by the FDCPA - for example, disclosing the existence of a debt to someone other than the debtor.
Email and SMS Communication Regulations
Original creditors and debt collectors can communicate via SMS or email with debtors. However, debt collectors must obtain prior consent and include an opt-out mechanism.
On the other hand, original creditors do not need to obtain consent before communicating by email or SMS, as most businesses include provisions in their contracts that permit consumer contact through these channels.
Robocall Legislation
The Telephone Consumer Protection Act (TCPA) defines a robodialer as any system that can make telephone calls without human intervention. This includes machines that dial numbers from a random number generator or machines that dial pre-programmed lists and predictive dialers, which call numbers from a list in a way that predicts when a customer representative may be available to take the call.
While a robodialer is a more efficient and cost-effective way for debt collectors to place calls, under the Federal Communications Commission (FCC) regulations, debt collectors cannot call a consumer's cell phone unless the consumer has given consent to do so by listing their cellphone number or providing verbal consent for robocalls.
Also, if the consumer revokes consent to the debt collector at any time, they cannot continue to autodial the consumer.
These violations can add up quickly at $500 per violation and up to $1,500 for each known violation.
The New Consumer Duty for the Financial Industry
The UK is taking customer experience in the financial industry seriously. If we use history as our guide, it might be worth keeping a close watch on these new regulations that were designed to set a higher and clearer standard of consumer protection.
There's a lot we can learn and take into consideration from this new Consumer Duty that is fast approaching on July 31, 2023. We asked Chris Warburton from RO-AR, an expert in the industry for his thoughts:
"The Consumer Duty primarily concentrates on ensuring that firms provide products and services that meet customers' needs, help them meet their financial objectives, and prevent any foreseeable harm. As a result of the duty, there is a regulatory expectation that firms provide fair value, good customer outcomes and can provide evidence in their processes.
At first glance, this duty appears straightforward, sensible, and similar to existing principles such as treating customers fairly, however, this is more complex.
The consumer duty has had deep ramifications across the lifecycle on product design, pricing – interest and fees, customer communication – ensuring customers can easily understand services, process design – including agent incentives and even down to ensuring customers have no difficulties reaching firms (for example, to cancel their service easily). All of this also needs to be evidenced, with data, to demonstrate that any treatment is fit for purpose to result in better customer outcomes.
The change is also considered cultural. From the board to the front line, staff are expected to be aware of, comply with, and be advocates of consumer duty principles. It is no longer about making a financial return and delivering good customer service but about generating good customer outcomes that can also generate a financial return. The tables and priorities are reversed.
Specifically for collections it has several important implications:
1. All actions in collections need to be viewed through the lens of generating good customer outcomes.
2. Providing customer support is the priority; the cost of any support is now being considered secondary to delivering good outcomes (in general).
3. Agent incentives for collecting or curing accounts are still not allowed. They may incentivise the wrong behavior that does not deliver good customer outcomes.
4. Contact channels and service levels need to be provided to ensure financial services are readily accessible and at the same level as any other part of the business for all customers.
5. Suitable support programs, such as payment plans, or forbearance/forgiveness plans, must be available for customers in financial difficulty. These need to be tailored for individual customers, demonstrating that they improve customer outcomes.
6. Suitable third-party support, such as debt help and vulnerability support charities, must be signposted for those in need, with suitable collections treatment paused as needed.
7. The performance and monitoring of good outcomes for all collections treatment need to be monitored and will be used in evidencing compliance.
Increasingly, regulators across the world appear to be in discussion, and regulations are slowly aligning. Regulations around the frequency of contact, avoiding abusive, pressure tactics, or bad treatment are gradually being strengthened. They are trending in the same direction, and regulators are increasingly taking a principled-based and evidenced approach.
In the UK, the Consumer Duty, is taking this to a new level.
Will others follow? We need to wait and see, but starting the journey and preparing now seems both prudent and cost-effective to create a flexible infrastructure that can be ready for whatever flavor of changes may come, and deliver better customer outcomes today."
How Lexop’s digital collection software helps with compliance
With regulatory requirements constantly evolving, technology can help in many ways.
1. Payment flexibility and empathy
Empathy is an essential part of compliance in debt collection. Lexop's digital collections software is built to deliver clear and transparent communication in your customer's preferred channels with self-serve payment tools that include payment plans and flexible payment options. This approach helps build trust and improves the overall consumer experience through empathy and choice - which is why these regulations in collections are in place.
2. Automated workflows and templated communication
Consistency and accuracy is important to avoid customer complaints that could lead to further investigation from the CFPB. Automated workflows ensure that collections processes follow predefined steps and rules, reducing non-compliance risk.
Templated communication with predefined fields ensures the use of standardized compliance details such as customer name, payment due dates, and amount owed.
3. Secure consumer data
Lexop's cloud infrastructure is hosted in Azure's data centers, leveraging the robust capabilities provided by Microsoft.
With a focus on reliability and data protection, our storage and operations are backed by Azure's geographical redundancies and stringent measures. This ensures high availability and disaster recovery, aligning with our commitment to maintaining the security and integrity of your data.
As part of our dedication to compliance, Lexop is SOC2 Type 2 compliant, providing further assurance regarding the safety and confidentiality of your information.
4. White-labeling for trust and brand recognition
Our digital collections software is white-labeled with your company logo, brand colors, relevant links, and support numbers, ensuring a seamless repayment experience that your customers can trust.
5. Documentation and audit trails
All interactions and transactions are recorded within the back-end dashboard and can be easily retrieved when needed. Lexop's digital collection software also carries an embedded audit trail recognized as legal proof of delivery and can be used for an external audit or remediation.
“Having a company like Lexop who is proactive and remains focused on compliance and upcoming legislations, and being able to develop and deliver solutions to meet those ahead of our requests, is so beneficial.”
- Manager of Accounts Receivable at SaskTel
Compliance requirements are not going away and given the direction the UK is headed with taking consumer experience to the next level, regulations that empower consumers will only get stronger. If you're considering tools to help you improve recovery rates, it's important to ensure the chosen vendor is also aligned with the current state of regulations and staying on top of evolving ones. Book a call with our team to learn how Lexop can remove the burden of keeping up with regulations and reduce manual errors that can lead to compliance issues.
