There comes a point where the cost of collections exceeds the probability of repayment. Some sophisticated credit card issuers do an excellent job of identifying risky accounts before charge-off occurs. In doing so, they can triage resources and devote precious time to those accounts who might be more probable to repay. Other firms just let the accounts linger in collection queues until charge-off occurs at 180 days past due. We covered the topic in this Mercator classic.
Collection agencies typically work on a contingent basis. They do not get paid unless they collect, and when they do, they can generate a fee of 20% to 60% depending upon how old the debt is and how many other collection agencies processed the account. Sometimes, time heals all wounds, and people go back to work, or their life crisis ends one way or another.
Collection agencies add value to the card process, but they certainly need clear boundaries to define acceptable and not acceptable business practices. That is where Regulation F comes into place. Reg F updated the original 1980’s Fair Debt Collection Practices Act. Today’s read comes from Reuters in an analysis of legal trends.
Regulation F, with its bright line rules for debt collectors to follow, gives greater control to consumers over methods and timing of communications and in doing so, lowers the legal exposure of collectors that abide by consumers’ expressed preferences.
It is a timely set of rules given inflation and rising interest rates which are creating the potential for a severe economic downturn and a significant rise in consumer delinquencies across all markets, especially subprime sectors.
Reg F is just “the right behavior” for collectors, akin to one of my favorite books, All I Really Need to Know I Learned in Kindergarten. The regulation has common-sense requirements, such as not harassing consumers with repetitive calls, not disclosing personal data to third parties, and not misrepresenting identity. Some states, such as New York, have specific laws about collecting old debt. As the NY Attorney General reports, creditors cannot sue or make a threat to sue consumers (implicitly or explicitly) on debts that are older than three years, as of April 2022.
New York’s move is interesting because it eliminates the ability of debt buyers, who pay pennies on the dollar for delinquent accounts, to collect on debt that is so old creditors are often able to substantiate. Using the statute of limitations on written contracts as a basis, the debt is considered “outlawed.”
But the collection industry faces another challenge. Improved credit card performance has diminished agency referral volume. According to the NY Fed, the percentage of accounts with collection agencies fell from a high of 14% in 2012, to 6% in Q12022. And as that happened, the average collection agency amount per person fell from $1,600 to less than $1,300.
For consumers and credit card issuers, this is good news; for collectors, not as good. As we anticipate credit quality to deteriorate as we roll into 2023, agency placement volumes will increase on a lagged basis. But either way, collections takes brains, not brawn.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group