VPCS Newsletter Third Party Vendor Management – August
In July, 1) The FDIC reclassified Third Party Payment Processors 2) CFPB slaps Cash America with a $5MM fine 3)Collection vendor lawsuits increase 4) Be careful outsourcing to legal collection vendors 5)fraud charges against a collection vendor 6) Study of population in collections
When reviewing these posts, please take time to think about the following:
1) How did we select our vendors? Have we developed the underwriting criteria (how you pre-qualify or certify vendors who will provide services) and required every vendor to become certified prior to using their services?
2) How do we monitor our vendors? On-site audits? Call monitoring? Are they reporting every complaint? Are you staffed to be able to perform these services?
3) Your company may be compliant, but are your vendors’ other clients? Do you have a back-up vendor?
VP Compliance offers vendor underwriting, auditing, and underwriting services. For more information contact William Wittwer at wrw@VPCS.biz www.vpcs.biz.
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Financial Institution Letters
Financial Institution Letters
July 28, 2014
FDIC Clarifying Supervisory Approach to Institutions Establishing Account Relationships with Third-Party Payment Processors
The FDIC is clarifying its supervisory approach to institutions establishing account relationships with third-party payment processors (TPPPs). As part of its regular safety and soundness examination activities, the FDIC reviews and assesses the extent to which institutions having account relationships with TPPPs follow the outstanding guidance. FDIC guidance and an informational article contained lists of examples of merchant categories that had been associated by the payments industry with higher-risk activity when the guidance and article were released. The lists of examples of merchant categories have led to misunderstandings regarding the FDIC’s supervisory approach to TPPPs, creating the misperception that the listed examples of merchant categories were prohibited or discouraged. In fact, it is FDIC’s policy that insured institutions that properly manage customer relationships are neither prohibited nor discouraged from providing services to any customer operating in compliance with applicable law. Accordingly, the FDIC is clarifying its guidance to reinforce this approach, and as part of this clarification, the FDIC is removing the lists of examples of merchant categories from its official guidance and informational article.
Statement of Applicability to Institutions Under $1 Billion in Total Assets: This Financial Institution Letter applies to all FDIC-supervised institutions, including community banks, although its application is commensurate with size and risk.
Schnurman: Cash America International ready to exit the payday loan business
Published: 21 July 2014 09:08 PM
Updated: 21 July 2014 10:02 PM
A decade ago, Cash America International collected $21 million from payday loans. Last year, those fees totaled $878 million, and now include loans that are sold online, in foreign countries, and backed by car titles.
Sounds like a great business — to get out of.
Despite the remarkable growth, Cash America is poised to spin off most of its consumer loan operation by the end of the year. The Fort Worth company wants to refocus on pawnshops, the old-school segment that made Cash America a high flier on Wall Street.
A nearby rival, First Cash Financial Services in Arlington, has been de-emphasizing payday loans for several years. The pawnbroker said payday fees generate about 5 percent of revenue today, down from a peak of about 20 percent.
The retrenchments come as regulators are cracking down on payday lenders in the U.S. and abroad, and even in some Texas cities. Tough municipal restrictions have cut into profits and revenue, and prompted Cash America to close 36 storefronts in the state.
Payday loans are controversial because they often trap the working poor in a cycle of debt. Sold as a short-term fix, most loans are rolled over many times and fees pile up. In Texas, an average payday loan of $300 costs $701 in fees and interest, the highest costs in the country.
Fourteen states and Washington ban the loans entirely. The Consumer Financial Protection Bureau, a new federal watchdog, slapped $5 million fines on Cash America last November and Ace Cash Express of Irving this month. (The companies must pay millions more in customer refunds.) The bureau also is preparing new rules for payday loans, which could limit rollovers and tie payments to borrowers’ income.
In the United Kingdom, the Financial Conduct Authority is overhauling the payday industry, and an interest rate cap is expected early next year. Cheque Centre, which has 451 branches in the U.K., exited the payday business this spring. The Financial Times reported that at least one third of the country’s payday lenders have not applied to operate under the new regulatory regime.
This affects Cash America, because British customers generate almost half the revenue at its potential spin-off, known as Enova International.
“These regulators have enormous sway over the industries Enova operates in,” wrote credit analyst Shakir Taylor of Standard and Poor’s.
S&P touted the unit’s liquidity and strong growth in revenue and profit. But it raised flags about charge-off rates (as high as 30 percent for payday loans) and the push by regulators. S&P expects “extensive scrutiny and a restrictive regulatory framework” over the next year and a half, and that could constrain growth, Taylor wrote.
Enova handles Cash America’s e-commerce segment. It accounted for 87 percent of consumer loan fees last year, or $765 million. The retail services segment brought in the rest, but it primarily makes pawn loans and sells pawned merchandise.
In late May, Enova sold $500 million in senior notes, agreeing to pay almost 10 percent in annual interest. Proceeds from the offer went to Cash America for intercompany debt and a cash dividend.
Cash America has tried to separate Enova before. It filed the paperwork for an initial public offering but yanked the deal in 2012, amid a tepid market.
If it elects a spin-off, Cash America plans to retain a stake of about 20 percent, probably for two years or less, CEO Daniel Feehan told analysts in April. The company isn’t ruling out other options, such as a sale, but one way or another, a split seems likely.
“Separating the businesses makes sense for us today, for a whole variety of reasons,” Feehan said in April.
Future of Enova
Cash America’s stock price declined in each of the last two calendar years, a rarity in its history as a public company. Feehan acknowledged that management lost focus on the pawn business, shifting attention to consumer loans — and their regulatory risk.
In early April, the company reported strong quarterly earnings and announced the potential Enova spin-off. The stock price shot up almost 15 percent in two days and remains up by double digits for the year.
Separating Enova should lift some of the payday stigma attached to Cash America. And it would give Enova a chance to excel on its own.
Enova has plans to expand into Brazil and China, fast-growing markets with fewer regulatory threats. Even in the U.S. and U.K., regulators don’t want to end the business; they just want to protect consumers from the worst abuses.
Enova has been making major adjustments. Five years ago, payday loans accounted for 93 percent of its revenue, according to S&P. In the first quarter, revenue was almost evenly divided among payday loans and more traditional installment loans and lines of credit.
In a recent letter to shareholders, Feehan said strapped consumers will continue to search for solutions.
“We intend to be their provider of choice,” Feehan said.
Even if that’s a separate, stand-alone company.
Published by InsideARM.com July 17, 2014
We’ve all seen the headlines lately with the statistics of lawsuits rising against collection agencies, of penalties handed down by the CFPB and the courts, of settlements against collection agencies and even speculation that the business of debt collection is going the way of the dinosaur. But is the business of collections really going away, or is it just going through another change?
Back in 1977 when the FDCPA was enacted, many agencies thought “that’s it, we’re done”, but agencies didn’t go away; they just had to comply with some much needed regulation. Those who could and would comply did, and those who couldn’t or wouldn’t are gone, but that’s a good thing. It’s been better for consumers, and has helped to bring a little more respect to the collection industry.
So now fast forward to 2010 and the creation of the CFPB. The collections industry is going through yet another change, but again, that may not be such a bad thing. A routine weeding out of those who aren’t already abiding by the FDCPA is good for consumers and it’s also good for those upstanding agencies that are already abiding by the rules, but getting a bum rap because of the negative press relating to those who aren’t running their businesses within the law.
After reviewing many of the 1,500 or so comments received as a result of the CFPB’s recent Advanced Notice of Proposed Rulemaking (ANPR), it’s clear that there is still work to be done within the collection industry. There are still those out there who are pushing the limits and even going beyond the limits to collect debts. Once the CFPB piles through the comments from both consumers and businesses alike, new rules will likely be written, and our industry will be refined once again.
So does this mean that CFPB exams and additional regulation will be easy? Not in the least! It’s going to be a rough road for everyone involved. But getting your compliance management program in order, and adding a little more oversight to your vendors will go a long way to getting your collection agency in line for this new wave of regulation.
In fact, with the additional requirements surrounding vendor oversight, it’s forcing the hand of those who are not already in compliance to either get there, or be left behind. If your vendors aren’t already protecting your data, treating your consumers with respect, or running their business in a compliant manner that is in line with industry regulations, then it’s good that you’re finding this out! And perhaps it’s time for you to find a compliant vendor.
The regulatory message is clear, comply or get out. If you can ride this storm, and come out on top, you’ll be successful with your collection business.
For the first time this year, litigation surrounding the Fair Debt Collection Practices Act increased from one month to the next, but Telephone Consumer Protection Act and Fair Credit Reporting Act litigation decreased compared to the prior month, according to the latest data from WebRecon. However, when comparing data from June 2014 to June 2013, litigation for all three of these statutes is on the rise.
From June 1-30 2014, data shows that plaintiffs filed 806 FDCPA lawsuits, 169 FCRA lawsuits and 207 TCPA lawsuits. This means that in June 2014, FDCPA lawsuits increased four percent compared to May 2014. TCPA and FCRA lawsuits decreased 4.3 percent and 21.9 percent, respectively, compared to May 2014.
However, when conducting a previous year comparison, FDCPA lawsuits are up 15.8 percent, FCRA lawsuits are up 12.4 percent and TCPA lawsuits are up 46.9 percent compared to June 2013.
In year-to-date comparisons, FDCPA lawsuits are down 13.5 percent compared to 2013. FCRA and TCPA litigation, however, is steadily increasing, despite a few months of shaky numbers. FCRA lawsuits are up more than 11 percent compared to last year. But the big difference is in TCPA litigation. In 2014, it has increased 34.4 percent compared to the previous year. At this rate, it’s becoming increasingly clear that TCPA is poised to become the second most-litigated statue in the debt industry.
|Comparisons:||Current Period:||Previous Period:||Previous Year Comp:|
|Jun 01 – 30, 2014||May 01 – 31, 2014||Jun 01 – 30, 2013|
|YTD CFPB Complaints||20482||–||–|
|YTD FDCPA lawsuits||4864||5520||-13.5%|
|YTD FCRA lawsuits||1172||1041||11.2%|
|YTD TCPA lawsuits||1325||869||34.4%|
Meanwhile, at the CFPB complaint database, complaints against debt collectors had a stronger month, with more than 3,000 consumer complaints filed in June 2014. That number is expected to rise as more data is made publicly available. We’re now more than halfway through 2014, and the CFPB complaint portal has received more than 20,000 consumer complaints about debt collection; that breaks down to more than 100 complaints per day.
These statistics shouldn’t scare debt collectors. They should serve as motivation. This is an opportunity for collection agencies to be proactive in their response to the industry’s new legal landscape.
For centuries, the regulation of the practice of law has been delegated to the judicial branch of government. As the Supreme Court explained, “since the founding the Republic, the licensing and regulation of lawyers has been left exclusively to the states and the District of Columbia . . . (t)he states prescribe the qualifications for admission to practice and the standards of professional conduct. They are also responsible for the discipline of lawyers.” Leis v. Flynt, 439 U.S. 438, 442 (1979).
On July 14, 2014, the Consumer Financial Protection Bureau (“CFPB”), a Federal regulatory body created by the Dodd Frank Act of 2010 mounted a frontal attack on this bedrock of separation of powers principle by filing suit in the United States District Court against a prominent consumer collection law firm, Frederick J. Hanna and Associates, P.C. of Atlanta Georgia. This suit, which also names three law firm partners, asks that the Hanna firm pay penalties based on unverified allegations that the lawyers employed by the law office failed to exercise their independent legal judgment in determining whether to file collection suits. The suit also claims that the Hanna firm did not determine whether underlying contract documents supporting affidavits signed by their clients validated the accuracy of the debts subject to the state court collection actions.
The CFPB alleges that this conduct violates the Fair Debt Collection Practices Act’s provisions outlawing false, deceptive or misleading statements and unfair conduct in the collection of the debts. Although no lawyer has ever been required to obtain a license to practice law from the CFPB, this agency nonetheless claims they have the right to seek a court order restraining the law firm from filing suits on behalf of its creditor clients.
Make no mistake! This lawsuit is no mere border incursion crossing the line drawn by the separation of powers doctrine. Instead, this action represents the beginning of a full scale ground invasion which, if successful, will radically change the landscape for the practice of law in every state of the nation.
Perhaps the CFPB felt it could flex the heavy hand of government enforcement action against large collection firms by using Mr. Hanna as a test case. They may have picked on the wrong party. Mr. Hanna already successfully defeated a broad invasive subpoena request issued by the Georgia Administrator of Fair Business Practices Act which sought to investigate alleged abusive debt collection practices by the Hanna law firm. Mr. Hanna took his case to the Supreme Court of Georgia which quashed the subpoena and issued an opinion, State ex rel. Doyle v. Frederick J. Hanna and Associates, P.C., 287 Ga. 289 (2010), holding that only the Georgia Supreme Court has the authority to regulate the practice of law.
Undoubtedly, Mr. Hanna’s defense of the CFPB’s ill-conceived action will focus on the separation of powers principle recognized by the Georgia court. His response should also point out the Dodd-Frank Act’s specific exclusion that the CFPB “may not exercise any supervisory or enforcement authority with respect to an activity engaged in by an attorney as part of the practice of the law under the laws of a state in which the attorney is licensed to practice law.” 12 U.S.C. § 5517(e)(1) (emphasis added).
The entire credit and collection industry, including creditor clients who are represented by collection attorneys, must recognize the present danger to the viability of the collection of consumer debts and to the preservation of the attorney-client relationship represented by this CFPB enforcement action. The concern about the encroachment on the court’s function in overseeing lawyers is one that should be shared by every lawyer who has ever taken an oath to the highest court in his or her state to abide by the court’s rules of professional conduct in the representation of the lawyer’s clients.
If it seems that this piece is laced with a fair amount of hyperbole and somewhat reminisce of the Chicken Little adage that “the sky is falling,” the dramatization of this recent development is justified. The Federal Government should stay out of the business of regulating how attorneys conduct the practice of law in representing clients. The only reasonable outcome of this CFPB lawsuit is a complete dismissal of the suit and a vindication of the principle that a lawyer will answer to the courts if the lawyer’s conduct in representing a client and in prosecuting lawsuits does not meet professional standards of conduct.
A joint study from the think tank Urban Institute and debt buyer Encore Capital Group released today reported that more than 35 percent of U.S. adults with a credit report have accounts that qualify to be in some stage of the debt collection system. The average balance of those accounts is $5,178.
The study, “Delinquent Debt in America,” looked at a sample of TransUnion consumer credit reports in September 2013 to determine how many delinquent accounts were noted on the reports and how many collection tradelines could be found. In addition, the study’s authors looked at closed and/or charged off accounts still being reported to determine if they were eligible for collections, even if there was not a specific note of collection on the credit report.
“Collection accounts” for the purpose of this study included direct reports from collectors, accounts that had been charged-off and either sold or outsourced, accounts still being worked in-house after charge-off, and accounts being warehoused by creditors.
The result was that 35.1 percent of the credit reports examined showed collection accounts or those qualified for collections. Those results closely mirror a Federal Reserve study from 2004 which showed 36.5 percent of credit reports with an account in collections.
The authors noted that even the 35.1 percent figure is a bit too low; some 22 million low-income adults do not have credit files and were represented at all in the study. Researchers used a random sample of 7 million TransUnion reports at a fixed point in time. The sample was out of a total population of 220 million Americans with credit files.
The study also included every type of debt imaginable, with the exception of mortgage debt. Researchers noted that, “While mortgage debt could result in collections activity, it is very rare.” In addition to traditional financial debt (credit cards, bank loans, etc.), the study found medical debt, utility bills, membership fees, phone bills, and many other kinds of debt being reported as charged-off on credit reports.
Among people with a report of debt in collections, the average amount owed was $5,178, with a median of $1,349.
The study also examined delinquency within the same credit report sample. It showed that 5.3 percent of Americans with a credit file were at least 30 days late on an account. Among people with debt past due, the average amount they need to pay to become current on that debt is $2,258.
The delinquency rate is much lower than the collection rate because typically only financial products are being actively reported to credit bureaus. This means that non-financial accounts comprise the vast majority of accounts in collection.
The study was conducted by the Urban Institute’s Center on Labor, Human Services, and Population and by Encore Capital’s Consumer Credit Research Institute.