For a lot of lenders, especially newer fintechs, who have spent the last two years originating loans and lines of credit, the obvious collections strategy solution to the challenge of an influx of charged-off or delinquent accounts is to use third-party collections agencies to handle delinquent and charged-off accounts.
How you vet those vendors and how you manage those vendor relationships will make or break your collections strategy. Proper management of those third-party collections vendors is critical to a successful recovery strategy, and it mitigates the risks associated with collecting on consumer debt.
Consumers are leveraging credit and loans at record levels, and you might not be prepared for the record increase in originations leading to a major increase in delinquent and charged-off accounts. Plus, consumers are still facing challenges like lingering inflation and economic uncertainty, and the CFPB has been extremely active and vocal about debt collection regulation, which makes collecting delinquent and charged-off accounts risky.
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 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.
Read on to find out how to improve (or build) a robust vendor management program:
What potential collections vendor warning signs should you look for before you sign the contract?
- Inauthenticity. Honesty is key when it comes to maintaining a good relationship with your vendors, and the longer you can maintain those relationships, the easier your job will be. If your potential vendor starts their conversations with a sales pitch before even getting to know you, that’s a red flag.
- Lack of Research. Just like at any job interview, you want the candidate to show that they’ve done their homework. Especially today, when it’s incredibly easy to reach out via LinkedIn with mass sales templates, you’ll want to stick with vendors who know what problems you’re trying to solve, and who are intentional in the way they reach out to you.
- They’re too eager. No one wants to be bombarded with sales emails. If you’ve made it clear to the sales team at a potential vendor that you’re not quite ready to discuss a partnership, but they keep reaching out, that’s a red flag.
- Lack of Preparation. Your vendor should have subject matter experts on your discovery calls, since it’s likely the salesperson doesn’t have all the industry knowledge you need. If your discovery calls don’t include the right people from their team, it’s the sign of a potentially rocky relationship down the road.
Which key questions should you ask potential third-party agency partners?
You can mitigate a lot of risk if you are picky when choosing your partners. Regulators expect proper due diligence before you select a partner.
Make sure to get good answers to the following 5 questions when vetting prospective partners:
- What type of experience do they have working with the type of account that is being outsourced?
- How familiar are they with the laws that regulate the particular type of debt they will be working with?
- How well-documented are their policies and procedures?
- How well is their 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?
How to manage your vendor / partner relationship for success
It can be tough to strike a good vendor management balance. Creditors who are too prescriptive can damage their relationships with vendors. Those who are not prescriptive enough can find themselves at risk for regulatory or reputational damage. But maintaining good relationships with your third-party vendors is key to a successful collections & recovery strategy. Here are four best practices for managing those vendors once they’re on board:
- Communicate expectations. Don’t just hand over your MSA/SOW/SLA and expect your agency vendors to abide by your terms. Collections & recovery executives should work with their vendors to create those work documents, and collections & recovery vendors should be able to understand performance and compliance expectations - and whether or not they’re meeting those expectations - at a glance.
- Use their expertise. There’s a reason you’re seeking a third-party agency vendor: you need their expertise. It’s a mistake to approach the relationship like you “know it all.”
- Connect the experts. Connecting business units and SMEs can help you make sure that nothing is lost in translation. Some problems can only be solved by communication between the affected business units.
- Get back to on-site visits and audits. After more than two years of a global pandemic and a major shift to remote work, many companies have fallen out of the habit. But, on-site audits allow you to gauge your agency’s preparedness in a way remote audits do not.
How to plan for successful third-party agency audits
Once you’ve set those expectations, it’s time to audit your third-party agency thoroughly to ensure those expectations are being met. Audit frequency will vary, but you need to plan to be on-site for an audit at least yearly, and remember: audits don’t have to be adversarial. Both parties should go into an audit with open minds. Your vendor’s success is your success, so here are three ways collections & recovery vendors can support their partners in advance of an audit:
- Provide a specific agenda and checklist based on your contract. All of your expectations should be laid out in a manner that allows a quick, efficient audit.
- Give your vendor partner adequate time to prepare. Sending out the agenda and expectations with only a few days’ or a week’s notice is a recipe for disaster. Your vendor partner needs time to get all of their documentation together. And since many companies are allowing remote or hybrid work schedules, they may need time to get the correct staff scheduled for your visit. Each contract should specify how much notification is required prior to an audit based on the vendor’s risk calculation.
- Highlight new policies and regulations. Call out anything that is new since your last vendor audit to give your partner ample time to gather evidence that they are applying those policies in their operations.
If you’ve provided adequate support, the audit should go smoothly. If they don't, that could be a warning sign. Here are two MAJOR major audit warning signs that you may need a new vendor partner:
- They’re disorganized. Being organized and prepared doesn't guarantee that they are following your policies and procedures as part of their normal operations, but it's a good sign. Conversely, if your partner is disorganized during the audit, it might signal deeper problems. Consider a deeper look into their operations.
- You’re surprised by a finding. Your pre-audit agenda and checklist should be enough for your vendor partner to discover any weaknesses or potential findings before the audit. They should alert you to them as soon as possible, which also sets aside time for remediation.
You can also hear from experts at vendor management in our three part on-demand webinar series, The Vendor Management Masterclass.
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