Outsourcing collections means outsourcing risk, right?
There have always been risks associated with creditors and lenders outsourcing services like debt collection, but with the implementation of Regulation F, and the recent language used by the CFPB, the risk to the originator or lender has become more direct, and potentially more costly.
The Risks of Outsourcing
There are major risks associated with outsourcing services to a service provider that is:
- Unfamiliar with the legal requirements applicable to the products or services being offered;
- Not making efforts to implement those requirements effectively and in a manner that demonstrates compliance with the laws that regulate the applicable activities; or
- Exhibiting weak internal controls, which can harm consumers and create potential liabilities for both the service provider and the entity with which it has a business relationship.
Outsourcing work to a service provider with dubious practices could invite a supervisory review, which could lead to serious reputational, if not financial and legal, damage if enforcement action is taken. The CFPB recently announced that it plans to use its supervisory authority to examine any nonbank financial company that poses a risk to consumers, so it is imperative that companies who previously believed they were not subject to the oversight of the CFPB start preparing now.
Mitigating Those Risks
Outsourcing still benefits creditors, and may be the best or only option in some cases. This is especially true when creditors are faced with resource constraints, a lack of expertise, or have a need for a service that would not otherwise be available without significant investment.
Creditors must be picky when choosing their partners. Regulators expect proper due diligence before a partner is selected, whether that partner is a first or third party debt collector.
The initial review of a prospective partner should include the following questions:
- What type of experience does the debt collector have working with the type of account that is being outsourced?
- How familiar is the potential partner with the laws and that regulate that particular type of debt?
- How well documented are their policies and procedures?
- How well is the staff trained?
- What types of controls are in place to ensure they are compliant with and continue to comply with not just the laws and regulations, but with our contractual obligations?
Perhaps the most important question, though, is...
Does the potential partner have documented evidence that they can produce to support their answers to all of the above?
After selecting a partner, creditors need to continue to monitor their activities by conducting regular audits. This not only mitigates risk, but is the expectation of the CFPB.
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