Lenders are faced with a major challenge right now: building a well-managed collections function.
What does that mean?
Taking into consideration that the collections process is “fraught with challenging consumer experiences,” this whitepaper, by 2nd Order Solutions, seeks to outline the key areas where lenders must improve in order to successfully manage collections as delinquencies rise.
Here are three key takeaways from “Building a Well-Managed Collections Function,” by Jonathan Stalls, Dave Wasik, and Justin Metacarpa at 2nd Order Solutions:
1 – What makes the collections process uniquely challenging?
The bottom line answer to this question is the highly regulated nature of collections, and how many business functions are impacted by those regulations. For example, credit bureau reporting can be critical to a successful collections strategy, especially for debts that are later stage. The CFPB is hyper-focused on credit reporting, especially when it comes to managing credit bureau disputes. Regardless of the size of your business, this is a major challenge because of the heavy oversight and the time and resources required to create a compliant dispute management process.
Is your credit bureau dispute management process good enough? Find out here.
In addition to the focus on credit dispute management, the CFPB published Regulation F in November of 2020. While the current version doesn’t apply to creditors explicitly, many have decided to comply. This regulation limits how many times a collector can contact a consumer via telephone, and while there are no such restrictions for texts and emails, “[n]avigating phone call frequency combined with emails and/or text messages in the same week must be part of a thoughtful outreach strategy,” explains the whitepaper.
2 – Working with third parties is a necessary risk.
Many lenders shelved their litigation strategy during the pandemic, but it’s now a much more viable option. However, “even a modestly sized litigation strategy involves dozens of third-parties,” notes the whitepaper. Much like credit bureau reporting, lenders must do a risk/reward analysis as they decide whether or not to pursue litigation. A successful one can certainly lead to better recoveries, but it will be time and resource intensive.
Another third-party option is debt sale. For lenders with less expertise in the area, there can be a lot of hidden risks in selling debt. “One of the seemingly attractive aspects of debt sales is that by selling, the lender can ‘sell it and forget it’,” the whitepaper explains, but “there are many post-sale exception processes, like buybacks, bankruptcy-related headaches, and media requirements,” that can sneak up on an unprepared seller.
3 – There are at least three things you can do to remain compliant.
The first piece of advice they outline is hiring a dedicated Compliance advisor for collections. This will mitigate risk and help lenders navigate through the many challenges associated with collections.
2nd Order Solutions also recommends outsourcing more complex functions. According to the whitepaper, your best bet is to “select suppliers who support large banks” because they are more likely to have robust compliance systems in place due to scrutiny from those banks and regulators.
Finally, they suggest a heavy investment in monitoring, specifically with a focus on roll rates and liquidation curves, as well as the areas of risk identified here (among others).
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