The regulatory framework for oversight of the consumer debt collection industry has long been a patchwork of dated legislation. Beginning in the 1970s, the federal government passed a series of laws aimed at protecting consumers from abusive and predatory practices in the financial services industry.
The foundational Federal Debt Collection Practices Act (FDCPA) was passed in 1977 and has been updated through the years. It was followed in the early 1990s by the Telephone Consumer Protection Act, which focused on limiting the use of telephone communications in debt collection. In 2010, the Consumer Finance Protection Bureau (CFPB) was created as an outcome of the Great Financial Recession.
The patchwork nature of the regulatory framework, combined with significant ambiguity with respect to interpreting dated legislation in the modern era, has resulted in a challenging environment for industry participants. Most legislation pre-dates and did not envision the Internet and texting, for instance.
This year, though, a transformative set of new proposed regulations was published by the CFPB in an attempt to address such challenges. In May, the CFPB published the first set of substantive proposed rules seeking to modernize and clarify the industry regulatory framework. In addition to limiting the quantity of outbound telephone contact attempts (seven calls per seven-day period per outstanding loan) that debt collectors can make to delinquent consumers, the regulations also address, for the first time, permissible uses of new technologies like text messaging and email.
For industry participants, there are two key takeaways from the new regulations. The very good news is that the CFPB’s proposed rule-making seeks to create clearer, brighter lines around permissible activity. Put simply, creditors and debtors may now interact through modern channels with clearer rules of the road. But also, the CFPB is putting the industry on notice, backed by its enforcement authority, to dramatically improve the customer experience for delinquent customers. Expect severe sanctions and enforcement actions for rogue players once the rules are formalized.
Outbound calling is outdated
For the last 40 years, many debt collection agencies have been stuck in a simple business model based on the guidelines of the initial FDCPA, in part because they feared sanctions. Seen in the context of today’s mobile and digitized world, those guidelines were clear only with respect to telephone calls (for example, prohibiting outbound phone calls at unusual and inconvenient times).
As almost every modern citizen can attest, outbound calling is inefficient and almost archaic today, both with regards to customer experience and collection rates. According to an industry report, returns between 18% and 20% were the norm a decade ago, but that’s been cut in half. The unmistakable and persistent decline in the success of phone calls to recover debt is the result of myriad factors, including the rise of illegal spam calls and robo-callers, which has bred distrust and a reluctance to answer one’s phone across the board.
Consumer behavior has changed dramatically in the last ten years, too; I do my banking on my smartphone and can stream movies on an airplane. We all live in the iPhone era, which means bouncing between text, email, and apps is the norm. The proposed rules from the CFPB acknowledge and embrace this shift, which means debt collection agencies can feel confident in employing omnichannel communications to engage with customers when accounts are delinquent. In one sense, CFPB is demanding a shift from outbound telephony strategies to a more customer-centric omnichannel strategy.
This is good news for customers. According McKinsey, delinquent customers actually prefer to be contacted by email or text. Lenders and collection agencies should have reassessed the use of outbound telephone outreach as their primary means of communication anyway.
Implementing omnichannel is not difficult
For many debt collection agencies, though, the fear is not just about regulatory sanctions—it’s about the cost and time involved in a perceived large-scale IT overhaul. But the technology framework has transformed as well—the other side of the coin from the consumer revolution. Driving the consumer mobile revolution has been an explosion of new technologies and digital offerings, as cloud-based and SaaS products are being developed and brought to market.
Digital communications can be complementary to existing “legacy” IT strategies and to each other. It’s okay to choose different vendors for SMS and email, as long as you have a platform that can integrate all your channels. Technology that improves an integrated customer experience and return rates can be implemented without tremendous investments—and with substantial payoff.
Debt collection agencies should view the proposed CFPB regulations as a catalyst for an exciting technology transformation—particularly because embracing such technology won’t be optional for very long. The normal cycle for lenders and collections agencies to upgrade technology has been delayed by a good economy; delinquencies are low, even as Americans borrow more than ever, so companies are pushing tech investments down the road. But, to be blunt, the economy won’t roar forever. And the CFPB has laid out the road map for desired outcomes. Debt collectors who embrace the mobile revolution now will see a positive impact on today’s revenue and will set themselves up to weather any economic storm that may blow our way. Used strategically, the new rules are a win:win for everyone.