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With the massive amount of layoffs occurring during the present pandemic — the Federal Reserve estimates unemployment could reach 32% nationwide — debt collectors are going to need to make hard choices over the next few months. Our industry should consider whether continuing collections is both a positive moral and a positive business decision, particularly in regard to using aggressive collection methods. The morality stems from the fact that many debtors with charge-off debt in collections are likely to have lost their jobs, making it much more difficult to pay for basic necessities despite government assistance. Kicking debtors while they are down and forcing them to pay during times when they can barely afford food and rent may not be a good moral choice. It would also put debt industry employees in difficult positions regarding work ethics and could lead to losing good collectors. Aggressive collections would not only have moral problems, but would also have a high chance of being financially counterproductive. Even unpaying debtors would more likely be hesitant to deal with aggressive collectors, in my opinion, and less able to provide payment if they were out of a job. Collectors would be pressing harder and harder and making less and less. Collection groups could make just as much net money if they slowed down collections and focused on bringing in the easier money without aggressive methods and full staff. Also, aggressive tactics could lead to legal action, even under a favorable government administration. Aggressive collections during national financial instability have tended to also increase laws written against debt collections. For example, the Fair Debt Collection Practices Act, or FDCPA, was birthed in the late 1970s in response to heavy-handed tactics used by collection agencies, practices that even modern aggressive collectors may consider overbearing. The Consumer Financial Protection Bureau was also born in 2011 out of similar circumstances, when rogue collection agencies were failing to adhere to the standards of the FDCPA and enforcement was lax. Agencies need to think long-term and make sure they have a business model that will be able to survive in the long run. Collection groups would also be well advised to reduce call volume, but there may be a solution to assist in the short term. Agencies may find some holdover business in offering a substantial discount for a lump-sum payment for debtors who can do so with their stimulus funds. The time-value of money comes in at a great benefit here, as taking a short settlement now would be a similar deal to the time-consuming effort of pressing for a larger payment later down the road. Organizations should also utilize omnichannel options for debtors to provide payments, and consider possibly even providing discounts for doing so. Mobile and online payment options via smartphone and PC should be standard procedures for collection businesses. When customers can easily make payments, they are more inclined to do so, in my experience. Collection groups need to take a step back and consider their methodologies over the next few months. Using aggressive tactics could turn out to be a poor business decision down the road. All business methods and practices should be examined for best usage, cost-effectiveness and true profit.
The typical convenience fee conversation between a third-party collection agency client and its legal counsel usually begins like this: Third-party agency client: Can I legally charge a convenience fee or not? Attorney: It’s complicated. Third-party agency client: I’m not paying you to tell me it’s complicated. Attorney: Let’s talk. The terms convenience fee, processing fee, administrative fee and payment fee all refer to a charge to the consumer for making a certain type of payment. Such a fee is most commonly associated with a debit card or credit card payment but can also be used to describe a bank account transfer or even a paper pay-by-phone check. For purposes of this article, the term “convenience fee” will be used in connection with a charge to the consumer for initiating or authorizing a credit card or debit card payment transaction. This article does not address state surcharge or cash discount laws. The ability to charge fees associated with credit card and debit card transactions is regulated by VISA MasterCard Rules and the specific rules of each card company as outlined in the merchant agreement. The ability for third-party debt collectors to charge fees associated with credit card and debit card transactions is regulated by state laws, the Fair Debt Collection Practices Act (FDCPA) and consent orders and Guidance Bulletins published by the Consumer Financial Protection Bureau (CFPB). This workflow analysis focuses on the charging of convenience fees in connection of the collection of debt as that term is defined in the FDCPA. There are two important provisions in the FDCPA governing convenience fees. The first explains the types of debts that trigger convenience fee issues and the second explains the prohibited convenience fee practice. Fair Debt Collection Practices Act 15 U.S. Code § 1692a – Definitions Debt. As used in this subchapter … (5) The term “debt” means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment. Fair Debt Collection Practices Act 15 U.S. Code § 1692f – Definitions Unfair practices. As used in this subchapter … A debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section: (1) The collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law. At this point, the convenience fee conversation between a third-party collection agency client and its legal counsel can go south: Third-party agency client: How am I supposed to know whether the agreement between the consumer and my clients permits convenience fees? Attorney: It’s your job to know if you want to charge a convenience fee. Third-party agency client: What about that state law thing you mentioned, “if permitted by state law?” Which states permit convenience fees? Attorney: It’s complicated. Not surprisingly, agencies that charge consumers convenience fees for paying by credit card or debt card are engaging in one of the most high-risk practices associated with debt collection. The law is murky. Mistakes give rise to huge class action lawsuits. Most states prohibit them, a few are silent, and fewer still, permit them. Worse yet, consumer attorneys actively troll for such law violations. So, what is the easy answer? Agencies lacking a clear legal basis to charge consumers a convenience fee should not charge consumers a convenience fee. But wait, there’s more. What if another party charged the consumers a convenience fee? The following scenarios drive home the difference between the workflow triggered when the third-party debt collector charges the convenience fee to the consumer, and the workflow triggered when an independent payment processor charges the convenience fee to the consumer. Scenario I – Workflow for Direct Charge Third-Party Debt Collector Charges the Convenience Fee: Determine if the card rules governing the use of the card, permit, restrict or prohibit the charging of convenience fees for any reason and identify whether such reasons apply to the collection agency. Determine if the original credit agreement between the creditor and the consumer permits the collection agency to charge the consumer a convenience fee directly. If the collection agency is permitted to charge the convenience fee directly, determine if any state law prohibits the collection agency from charging the consumer a convenience fee directly. If state law does not prohibit the collection agency from charging the consumer a convenience fee directly, present the consumer with an option to pay that does not include any sort of convenience fee charge. Present this option before the consumer agrees to any other form of payment having a convenience fee charge associated with it. The requirement to present the free option must be addressed regardless of the form of interaction with the consumer. This means the free option and the requirement to present the free option before the consumer agrees to any other form of payment having a convenience fee associated with it, applies to web sites, payment portals, IVR scripts, live interaction, text messages, emails and all other forms of written and verbal communications. The amount of the payment and the amount of the convenience fee should both appear on the consumer’s monthly credit card or debit card statement as separate items charged to the collection agency.* Disclose the convenience to the consumer prior to completing the transaction so they can cancel the transaction. Charge only a flat fee regardless of the transaction amount. The fee cannot be a percentage of the transaction [apart from government debt and approved government merchants]. Be aware, many card agreements prohibit anyone from charging a fee on recurring payments. Charge the same convenience fee for all card brands and payment types that have a convenience fee associated with their use. When processing the payment, the collection agency will advise the processor of both charges. Be sure to retain a copy, or access to a copy, of the consumer agreement and any voice, web or digital record should the convenience fee charge be challenged and retain the copy according to the agency’s document retention policy. *Please note: Some card agreements require the convenience fee and the payment amount to appear as a single charge by the collection agency. For this reason, a general statement cannot be made which applies to all card agreements.
As the owner of a startup, you know a non-paying customer can have a serious impact on your cash flow. Getting the money owed can be a tricky task, which is where debt collectors could be beneficial to you.But if you have never used a collection agency before, you may not know where to start. To help you in your search, here are 5 tips for startups looking to work with debt collectors… 1. Exhaust your options first No business owner wants to get debt collectors involved. In an ideal world, all your customers would pay on time without the need for calls and reminders. Unfortunately, that’s just not realistic. Customers come up with all manner of excuses as to why they can’t pay and, as a startup, you need to break through those. But before you get a third party involved, it’s important you exhaust all of your options. Dealing with the situation on your own could be the most cost-effective method of retrieving your money. Develop a structured escalation process for your business as a way to oil the debt collection process. Of course, no matter how hard you push, some clients will continue to push back, which is when you need the help of a debt collection service. 2. Check their reputation Your startup’s branding and reputation is one of the most important factors when it comes to determining future success. So, when you’re hiring a debt collection service, think of them as an extension of your company. The way they behave is going to reflect positively or negatively on your business. Do extensive research on the reputation of any debt collector you are thinking of using. If you get the decision wrong, you could end up with an agency that repels customers, damages your brand, and possibly lands you in legal hot water. However, using a trusted third party such as TrueAccord can actually help to increase client retention and improve brand perception. Don’t let a second-rate debt collection agency ruin it with poor service. 3. Understand your client As an entrepreneur, you will probably understand your client deeply. It’s important that the collection agency you choose understands them too. Many collection services deal with the process in a one-size-fits-all manner. However, you will see more return when you choose a firm that understands how your clients work. TrueAccord uses innovative machine learn to analyze consumer behavior, leading to a fuller understanding of clients’ quirks and preferences. From there, we know the optimal way of communicating with each debtor and which repayment packages they are most likely to accept. That’s why we have anywhere between a 50% to 500% better collection performance than our competition. 4. Know the process Before you hire a debt collection agency, you should have a good understanding of their processes. You need to know what will be expected of you and what information you need to provide. Typically this will include information on the debtor, so make sure you keep all this information well-organized and easy to find. You should also understand how the company will behave during the collection process. Ensure the agency you are going to work with will be able to provide you with full control and visibility over client interactions. If they are unwilling to show you their client interactions then this should serve as a red flag and you should stay well clear. 5. Review the costs For any startup, cash flow is going to be integral to success. You should make sure to optimize the debt collection process to increase the amount of money that comes in from your debtors. The key to maximizing your returns is choosing a collection agency that is both successful and cost effective. Speak to any agency you are working with and make sure you understand their charges. Different agencies work with different contracts so it’s important you get to grips with the fees before handing over your business. Lowering your costs and increasing the money coming in is the best way to turn this tricky time into something positive. Bottom line: Tips for startups looking to work with debt collectors Hiring a debt collection agency can be a daunting task for a startup business. You are effectively trusting a third party with your reputation during a highly delicate period. Get the wrong agency and it could end up damaging your business. However, get the right one and your startup could receive the cash it is owed with its reputation as good as ever.
It is a well-established rule that lending money to family members or friends should not be done. Shakespeare admonishes us with his immortal words, “Neither a borrower nor a lender be.” However, it is the words that follow that inform us of the consequences, “For loan oft loses itself and friend.” This is just as true today as it was in the time of Hamlet -- if you loan money to a friend or family member, you can expect to lose both the money and the relationship. In a money-etiquette survey it was found that 57% of people have seen a relationship ruined because the borrower didn’t repay the loan. Still, many people who are in a position to do so feel compelled to help a close friend or family member in their time of need; and that doesn’t have to be a bad thing as long as you go about it with your eyes wide open. Here are some things to consider when your friends asking for money: What’s More Important – Repayment or the Relationship? If someone approaches you for a loan, chances are they aren’t creditworthy enough to qualify for a loan from a lender. So, you know going into it you are taking on the risk of not seeing all or some of the money again. The question becomes whether repayment of the loan or the relationship is more important to you. You should know in advance how you might handle a situation in which the borrower gets behind on payments or no longer returns your calls. You can expect things to get very awkward, especially if see the person at family events or around town. Alternatively, if you truly value the relationship, you can treat the loan like a gift. With a better than 50% chance the loan won’t be fully repaid, earmarking it as a gift frees you of any stress. The person will likely try to repay you as if it was a loan, but the pressure is off the relationship. Are You Helping or Enabling? While you may have the right intent, you may be hurting the very person you are trying help. If the person needs money to cover basic living needs or to pay off credit card debt, loaning them money may only exacerbate their financial problems. What they might really need is financial counseling or help with finding alternative sources of income. If you do loan them money, do so under the condition they seek the help (or offer it yourself) they need to turn things around. Don’t Make it Open-Ended The problem with loaning money to a friend is they are often open-ended based on a handshake with no specific terms for repayment. That leaves both parties in a state of limbo with no expectations as to when the loan is to be repaid. It also creates a false notion in the mind of the borrower that there is no sense of urgency to repay the loan, especially when other things come up that relegate loan payments to low priority status. Without clear expectations or specific loan terms, it becomes difficult to approach the borrower about payments. If you are going to loan money, put it in writing with specific terms. Is the Loan IRS Compliant? Lending money to family or friends is often interest free, which is not a good idea. First, it diminishes the value you place on the money you loan someone; secondly, it could put you at odds with the IRS. Charging interest is not unreasonable, especially when it is done at below-market rates. The IRS expects you to charge interest on a family loan if you don’t want it to be treated as a gift for tax purposes. The IRS doesn’t care about small loans made to children. Loans of $10,000 or less are not subject to gift tax rules if they are not used for investments. However, larger loans could show up on the IRS radar if appropriate interest is not charged. To avoid treatment as a taxable gift, the loan needs to be in writing with the amount, terms, and rate of interest clearly defined. The IRS requires a minimum interest rate to be charged which is reported as income by the lender. If the loan is made for a down payment on a house, the borrower may deduct interest charges, but the loan must be secured by a lien on the home. What are the Alternatives? One alternative is to just say “no.” That may be hard to do, but, in many cases, it could be the right thing to do. Or, you can say “yes,” but with conditions. First, is that they at least try to obtain a personal loan on their own. While you don’t want them to get stuck with a “payday” type loan, there are alternative lending sources which can offer reasonably priced personal loans for people with less than good credit. https://lendedu.com/blog/should-you-loan-money-to-friends-or-family-members
Editor’s note: A version of this first appeared on Medium. I was fired from the Consumer Financial Protection Board’s Consumer Advisory Board last week, along with all of its other members. Why? Because the acting head of the bureau, Mick Mulvaney, appears intent on running the consumer protection bureau into the ground while claiming a lack of “global perspective” and wanting a “fresh start.” Never mind that this board has been the most diverse it has ever been — split about evenly between consumer advocates and business people (with some academics thrown in for good measurement). If Mr. Mulvaney was concerned the board was only wild-eyed consumer protection activists, he didn’t appear to notice executives from industry giants Citi, Discover, FICO, Mastercard and PNC. Or if he really cared about private sector innovation, as he claims, he missed the presence of fintech legend Max Levchin, TrueAccord’s Ohad Samet, NerdWallet’s Tim Chen, Oportun’s Raul Vazquez (both of the latter being Core portfolio companies, for disclosure) and myself. This mass firing is the latest in a string of actions meant to kill a regulatory body that was formed in response to the most devastating consumer financial abuse in nearly a century. Mr. Mulvaney, famous for having called the bureau a “sick, sad joke” before taking its helm, was installed as a cynical gesture by a president who knew the bureau was too popular to dismantle. Mr. Mulvaney has all but kicked the life out of the bureau through a series of navel gazing exercises and a moratorium on all (but Wells Fargo’s) enforcement of legal consumer protections. Acting Consumer Financial Protection Bureau Director Mick Mulvaney's decision to fire the bureau's consumer advisory board is just the latest example that underscores his desire to kill an important regulatory body. Bloomberg News “Good riddance,” you say? I’d ask you to think again. Yes, our financial regulatory system is a messy patchwork of state and federal agencies. Yes, the industry is spending way too much on compliance, shuffling way too much paperwork. Yes, I think the CFPB overused its stick relative to its carrots in the past. Instead, we should make a long-term, concerted effort to modernize our regulatory infrastructure (taking inspiration from the United Kingdom and Singapore). But consider the alternative: every rule in place today is a response to incredible harm done to hardworking Americans by greedy, unscrupulous, short-sighted and sometimes outright criminal actors in finance. The CFPB, in several short years, has collected more than $12 billion in penalties for 29 million Americans who were sold misleading products or services. As a profit seeking capitalist who invests in high-growth fintech startups (like Ripple, Mosaic, Oportun and more than 30 others), I believe in guard rails, in rules, in regulation. And I believe the prudential regulators’ primary responsibility of safety and soundness of our financial system does not adequately protect consumers. And I believe financial products are sufficiently complex and materially impactful on people’s lives and livelihoods that having a consumer watchdog is entirely warranted — even if it is a pain the ass, a cost to the system, and a drag on innovation. The stakes are just too damn high, for each household and for our country. So, yeah, I’m sad we were fired for no good reason. It was a genuine honor to serve on the Consumer Advisory Board for more than a year. But that’s completely immaterial to the systemic irresponsibility I believe Mr. Mulvaney is exhibiting to his duty to protect everyday Americans from harm. Further, wildly oscillating regulatory entities cost the industry by introducing even greater uncertainty. And what is perhaps to me the most annoying: Even a conservative, limited-regulation leadership can express itself in smart governance and shifting priorities; it does not need to resort to spreading organizational cancer. Arjan Schütte Arjan Schütte is the founder and a managing partner of Core Innovation Capital, a leading venture capital fund investing in financial services companies that empower everyday Americans.
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