Tag: debt collection

Q3 Industry Insights: Economic Challenges, Compliance Considerations and a Silver Lining

By on October 12th, 2022 in Industry Insights

As we roll toward the end of 2022, the economic landscape continues to weigh on consumers, and companies who lend to or service those consumers are preparing for what’s to come. Simultaneously, regulatory activity in the debt collection space has also been on a roll as organizations try to make sense of how technology can (and should) be used to innovate the industry.

Read on for our take on what’s impacting consumer finances, how consumers are reacting, and what else you should be considering as it relates to debt collection in 2022 and beyond.

What’s Impacting Consumers?

It’s a no-brainer that inflation and higher interest rates are hard on consumer finances, and unfortunately, we’re not seeing them come back down to earth very quickly. These two factors compound to make it more expensive to be a consumer and harder to acquire credit needed to make ends meet. A report by Bank of America found that a large majority of workers (71%) feel their pay is not keeping up with the cost of living.

And that cost keeps rising. The consumer price index rose 0.4% in September, up 8.2% from a year ago, driven by increases in food and shelter costs, and despite falling gas prices. This unrelenting upward-cost march brings the threat of financial instability to many Americans as their money doesn’t get them as far as it used to. According to a recent LendingClub report as of August, 60% of Americans were living paycheck to paycheck, up from 55% last year. 

Interest rates keep going up, and they haven’t hit the top yet. In September, the Federal Reserve announced the third consecutive rate hike of 75 basis points (the fifth rate hike of the year) and signaled additional aggressive hikes ahead, landing the federal interest rate at 3-3.25%. These interest rates can cause economic pain for millions of Americans by increasing the cost of borrowing for things like homes, cars and credit cards.

Household net worth, which was previously holding steady, proved to be a lagging indicator that has now corrected and caught up with the market. The value of equity holdings dropped $7.7 trillion and the value of real estate held by households only increased $1.4 trillion, softer than recent increases as ​​higher borrowing costs suppress demand. The Fed’s Financial Accounts data issued in September reflected the largest quarterly loss in household net worth ever at a staggering $6.1 trillion in the second quarter. This comes after falling $147 billion in the first quarter, but the second consecutive drop was much more telling.

According to the New York Fed’s Quarterly Report on Household Debt and Credit, total household debt increased by $312 billion (or 2%) during the second quarter of 2022, and balances are now more than $2 trillion higher than they were before the pandemic.

Indicators and a Silver Lining

With prices increasing faster than income can keep up, consumers are covering the delta by pulling money from savings or putting expenses on credit cards, and it’s showing – consumer debt, including credit cards, is at an all-time high for the bottom 90% of US households. Credit card balances saw their largest year-over-year percentage increase in more than 20 years, adding $46 billion in the second quarter. High interest rates make credit cards a slippery slope for debt balances, and the latest interest rates have been over 20% for those with “good” or “fair” credit (FICO labels “good” credit scores between 670-739 and “fair” between 580-669).

Rising credit card balances aren’t the only thing to watch. Looking at month over month delinquency rates shows that consumers’ ability to repay is diminishing and they may be losing control over their debt. According to Experian’s Ascend Market Insights Dashboard from August, the end of Q2 saw 0.91% of consumer accounts rolling into higher stages of delinquency in July 2022, an increase from the month prior. There was also an uptick in 30+ delinquency rates in July, with 30+ day past due accounts increasing 7.33% month over month. And, collections and charge off rates for auto leases, personal loans and bank cards are higher than pre-pandemic.

Amidst all the economic gloom, there was a silver lining for many borrowers in the form of student loan forgiveness. In August, President Biden announced a student loan forgiveness of up to $10,000 for borrowers (or up to $20,000 for Pell Grant recipients). The New York Fed estimated that forgiving $10,000 per borrower would eliminate student debt for 11.8 million borrowers, or 31% of the total number. 

While this forgiveness may impact those borrowers significantly through credit score increases or stronger balance sheets, it likely won’t have as much impact on borrowers with higher balances as monthly obligations will remain. This is an ongoing initiative that is subject to change, and in the meantime, the COVID-19 pandemic-related program that paused federal student loan payments will end at the end of this year. Any borrowers with remaining balances after debt forgiveness must start making payments again in January.

Increased Regulatory Activity

In addition to announcing that they are mobile-first to align with consumer use trends, the Consumer Financial Protection Bureau (CFPB) has been busy this quarter with initiatives to protect consumers including around the Unfair and Deceptive Acts and Practices Act (UDAAP), credit reporting, and a closer look at Buy Now, Pay Later (BNPL).

Data and tech are a key focus. In August, the CFPB first announced that digital marketers who are materially involved in developing content strategies for businesses subject to CFPB regulation can face UDAAP liability for unfair, deceptive acts or practices and other violations. The very same day, they took action against a financial company for using a faulty algorithm that caused consumers to overdraft their accounts – underscoring their interest in “black box” algorithm decisioning. The next day, the CFPB published a circular about requirements to safeguard consumer data, specifically citing practices that “are likely to cause” substantial injury like inadequate data security measures.

And data concerns extend into BNPL. After first opening an inquiry into BNPL in December 2021, the CFPB in September issued a report that identified several competitive benefits of BNPL loans over legacy credit products, but also identified potential consumer risks: discrete consumer harms (i.e., a requirement to use autopay), data harvesting (i.e., lenders’ use of consumer data to increase the likelihood of incremental sales), and borrower overextension.

While the CFPB supports innovation in financial services that benefits consumers, their recent announcements make it clear that organizations that do not protect consumer data and use it fairly will be in violation of the UDAAP. Lenders and debt collectors should keep an eye on this area as the CFPB continues to examine and form opinions on data and tech in consumer financial services.

Also noteworthy in debt collection regulations: In September, the U.S. Court of Appeals for the Eleventh Circuit dismissed the Hunstein opinion, which is big news for the industry. While debt collectors initially breathed a sigh of relief, there might be more to come here in state courts. Debt collectors should proceed cautiously when changing their policies, processes and procedures in light of this ruling.

What Can You Do?

So here we go into Q4, or as many consumers see it, the spending season. Will holiday spending take a huge blow from the challenging financial landscape? Will consumers rely even more on credit cards or BNPL to help cash flow and spend just as much? We’ll soon find out, but as a lender or collector, there are steps you can take to prepare:

Make sure your practices are compliant. Compliance in debt collection is a huge undertaking and will continue to evolve, and the patchwork of federal, state and regional guidelines may get messier. For a good snapshot of what compliance looks like today, check out our Collections & Compliance page.

Cater to the distressed borrower in collections. Cash-strapped consumers will need affordable options if you hope to recover past-due debt. This could be options for longer payment plans for more affordable installments, deeper settlements for payment plans, ability to “pay what you can” toward your debt, or removing minimum payment requirements.

Remember that consumers are humans. With feelings, problems, lives and a whole lot of other financial obligations. Engaging with distressed borrowers can be difficult, especially when they aren’t able to pay. Kindness, patience and understanding will go a long way in these efforts. Consider a humane, digital-first approach to align with their preferences. TrueAccord can show you how.

Compliance & Collections: 22 Essential Terms to Know

By on September 8th, 2022 in Compliance, Industry Insights

The world of regulatory compliance can be a complicated place, especially when it comes to debt collection. It can be tricky for non-security and compliance professionals. To help quickly get you up to speed on what auditors are referring to, we’ve put together a glossary, covering some of the most important compliance terms and acronyms.

  • Action Plan: A plan to identify and facilitate remediation steps of current operating practices. 
  • Audit: An unbiased and comprehensive examination of an organization’s compliance and adherence to regulatory guidelines. 
  • Benchmarking: The process of analyzing an organization’s performance data and comparing it against the industry standard. Used to see the effectiveness of a compliance program and if there are any areas that need improvement. 
  • Best Practices: When law and/or regulation is unclear, a “best practice” policy may be implemented to safeguard a business’s compliance.
  • Bona Fide Error Defense: An unintentional mistake or violation that occurred despite the maintenance of procedures reasonably adapted to avoid the mistake/violation. A debt collector may be able to assert a “Bona Fide Error Defense” in a lawsuit alleging violations of the federal Fair Debt Collection Practices Act (FDCPA). 
  • CCPA: The California Consumer Privacy Act (CCPA) gives consumers in California rights over the personal information that businesses collect and process about them.
  • CFPB: The Consumer Financial Protection Bureau (CFPB) is an agency of the United States government responsible for consumer protection in the financial sector.
  • Code of Ethics: A document or guide that is composed of an organization’s values, standards commitments, and a set of principles. 
  • Compliance: The state of adhering to established guidelines or specifications such as a policy, standard, specification, or law.
  • Compliance Management System: A series of integrated policies, processes, tools, internal controls, and functions designed to help an organization manage, monitor, and test  compliance with applicable laws and regulations (e.g., federal, state, local/municipal). A fully functioning compliance management system is designed to continuously minimize risk, prevent consumer harm and limit financial or reputational harm to the organization. An essential in the modern business world.
  • Compliance Risk: Captures the legal, financial, and reputational dangers for failing to act in compliance with laws and regulations.
  • Conflict of Interest: A conflict that happens in a decision-making situation in which an individual or organization is unable to remain impartial and where serving an interest would harm another.
  • Controls: A checks put in place to ensure compliance with a policy and procedure. A control could be automated or manual.  
  • Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act is a US federal law that governs the financial industry by enforcing transparency and accountability with rules for consumer protection, such as its Unfair Deceptive Acts and Practices provision. 
  • FDCPA: The Fair Debt Collection Practices Act (FDCPA) is a consumer protection law passed by Congress in 1977 to eliminate abusive debt collection practices and insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged.
  • Fraud: The act of intentionally lying and cheating in order to obtain an unauthorized benefit. 
  • Governance: A formal framework made up of policy rules, processes, procedures and controls used to control risk and ensure accountability and transparency. 
  • Gray Area: A situation where the rules are not clear and can be open to interpretation.
  • Regulation F: A rule implemented by the Consumer Financial Protection Bureau (CFPB)  providing rules governing activities covered by the Fair Debt Collection Practices Act (FDCPA). It seeks to clarify and expand on the FDCPA, including requiring  collection agencies to provide additional information to consumers as part of the validation disclosure and clarifies rules for the use of digital communications. 
  • Remediation: The process of recognizing a compliance issue or deficiency and implementing an action plan to correct the deficiency or enhance/strengthen an area of compliance.  For remediation to be successful, the new or revised policies, processes or controls must address the deficiency or issue and to minimize risk. 
  • Risk Assessment: The process of identifying and analyzing all potential risks that an organization can face in relation to its legal and regulatory obligations. The results of risk assessments are prioritized based on severity and then used to determine areas of focus for risk mitigation.
  • Safe Harbor: A provision in a statute or regulation that protects against legal or regulatory liability in situations where the safe harbor provision conditions are met.
  • Transparency: The act of being open and honest while disclosing as much information about policies, procedures, and activities as possible.

Now armed with your glossary of terms, get ready to investigate the world of compliance in collections further in our upcoming webinar. Join us Thursday, September 29th at 1pm ET for our interactive webinar, The Future of Collections & Compliance, hosted by TrueAccord Associate General Counsel Lauren Valenzuela and Director User Experience Shannon Brown.  

Reserve your space now for an interactive discussion on:

  • Cutting edge digital collection compliance
  • The role of the legal team in creating a digital collection strategy
  • How cutting edge compliance drives collection revenue
  • The future of digital compliance

Register now for the upcoming webinar»»

Q1 Industry Insights: Consumers Will Consume, Lenders Will Lend, Delinquencies Will Rise

By on March 31st, 2022 in Industry Insights

It’s the end of the quarter and, as always, we at TrueAccord are looking at consumer debt trends that will impact our industry and beyond. The four key trends we’re studying are: resumed foreclosure activity, extensive medical bills, the end of child tax credits and historically high inflation. Add these all together and the financial outlook for consumers, especially those in debt, is scary.

But there are silver linings, as well. For one, the consumer credit market is looking strong with signs of expansion, specifically,  originations for credit cards and personal loans are increasing. Second, the fintech industry continues to grow and evolve to meet the changing needs of consumers, offering more opportunities for financial inclusion and innovative customer experiences.

The Downside

Look, coming out of a pandemic and into a tumultuous international economic situation, we don’t expect it to be easy. But some definitely feel it more than others. For many families, government stimulus through child tax credits (which ended in December) was helpful in covering the gaps in income from pandemic losses, but it wasn’t enough to prepare them to take on new expenses and restart all the financial obligations that were temporarily on hold. In fact, a recent report from the Columbia University Center on Poverty & Social Policy found that 3.7 million U.S. children were plunged back into poverty by the end of January when child tax credits expired, indicating that the stimulus was making a significant financial difference for many families.

In January, the foreclosure proceedings that were paused under the CARES Act resumed after an 18-month hiatus. In January alone this amounted to 56,000 foreclosure starts, up 29% from the month prior. But that doesn’t tell the whole story: 964,464 mortgages are still seriously delinquent and not in forbearance, with 49% in loss mitigation plans. Even more concerning, of those 474,071 borrowers in loss mitigation, 72% just aren’t paying.

The average American household is now paying an additional $276 per month on expenses thanks to record-high inflation. And don’t forget pandemic-related medical expenses from Covid-19 testing and treatment. A recent survey found that 56% of Americans, with or without insurance, owe health-related debt, and almost one in six people with medical bills aren’t paying them off.

And it’s not just medical bills. According to Experian’s latest Ascend Market Insights, February marked the 9th month in a row with increasing 30+ delinquency rates on a unit basis across debt types. Their data shows that 30+ day past due accounts showed a 7.59% increase month over month with notable delinquency increases in first mortgages, second mortgage, auto leases and unsecured personal loans. Additionally, month over month views of roll rates show 0.91% of consumer accounts were rolling into higher stages of delinquency in February 2022. This indicator has now returned to the same level as the start of the pandemic in March 2020. 

While student loan payments are still paused through May, the day is quickly approaching when many will see their financial obligations increase yet again, compounding the burden and financial pressure on consumers.

The Upside

In spite of the challenging economic landscape, the good news is that consumers now have more options when it comes to lending and personal finance, and they’re taking advantage of them. Higher costs of living and, for some, sustained unemployment (partially influenced by the Great Resignation) are driving consumers to look for new lines of credit to manage expenses. According to TransUnion, originations for personal loans are expected to continue rising in 2022 to both non-prime and prime and above consumers, reaching pre-pandemic origination volumes last seen in 2019, while credit card origination and balances will hold steady near pre-pandemic levels.

And lenders are happy to lend. Between extra cash on hand from government stimulus, pauses on many financial obligations and new cash flow budgeting options like BNPL taking the payments industry by storm, consumers actually did a pretty good job managing their finances in regard to repaying debts during the pandemic. Delinquencies were at record lows, causing lenders to become more comfortable serving subprime segments that were performing well. As a result, originations for credit cards and personal loans have returned to pre-pandemic levels and have been holding fairly constant over the last two quarters.

This bodes well for financial inclusion and the bevy of fintechs looking to get in on the action. From eCommerce and retail to banking and money transfers, every sector features a fintech company that’s innovating digitally to provide more people with better financial access and positive customer experiences. A recent report by Plaid includes key findings about what consumers want from their financial services: 1) apps and services that work when and how they want and that make it easier to manage money, 2) interoperability, with apps and services providing connected experiences, regardless of the providers, and 3) services that not only help them save money but achieve better financial outcomes. And guess what? Fintech companies are delivering. According to research from Bloomberg, fintech companies now originate 38% of U.S. unsecured personal loans, with a large presence in the mortgage and auto loan categories.

Boiling This All Down

Remember when stimulus money was flowing, consumers weren’t spending as much (because what was there to do?) and instead taking the opportunity to pay off loans and debt and save at record rates? Those times are gone and signs show that consumers are looking to use more credit and take on new loans in response to economic pressures. Unfortunately, a rise in originations will inevitably lead to a rise in delinquencies, especially in a challenging and unpredictable economy. Knowing what comes next, now is the time to start thinking about pre-default and keeping consumers on track with payments and out of collection.

For lenders, this means engaging delinquent customers early on when the first signs of slippage occur, and how you do that is important. Consumers today expect a seamless, personalized experience in every financial transaction, and the right recovery operations can continue to deliver that all the way through the customer journey when you have the right strategy in place. If you don’t know where to start in building a strategy, our Recovery & Collection Starter Kit is a good place.