Financial institutions in New York State are concerned that a slate of tough new regulations approved by Gov. Andrew Cuomo concerning the conduct and practices of third-party debt collections may eventually expand into their in-house collection operations.
With the Consumer Financial Protection Bureau also eying debt collection practices, it's an issue that both CUNA and NAFCU said credit unions should be monitoring.
Among other things, New York's revised rules — which apply to companies based anywhere in the U.S. attempting to collect debts from residents of New York State — stipulate an extended period for consumers to dispute a collection attempt and require debt collectors to substantiate at any time that they are pursuing legitimate debts if a consumer requests such proof, either orally or in writing.
Signed on Wednesday, Cuomo's measures — coinciding with similar efforts by federal agencies — are designed to regulate firms that harass borrowers, target consumers who no longer owe money or engage in fraud while trying to collect consumer debt. Indeed, The Consumer Financial Protection Bureau (CFPB) plans to issue its own proposal in April 2015 for rules governing debt collectors.
However, all these rules (passed or proposed) presently apply only to third-party collectors (that is, outside firms used by banks to retrieve delinquent loans from borrowers). It is unclear if CFPB will propose new restrictions for in-house collectors, but the bureau and the Federal Trade Commission have already sent some signals in that direction.
Under the terms of Fair Debt Collection Practices Act (FDCPA) of 1977, in-house collections are exempt from the stringent rules imposed upon third-party entities. Still, banks believe the writing is on the wall for such rules creeping into the practices of their in-house collection businesses. Indeed, in September 2013, The Office of the Comptroller of the Currency issued a consent order requiring JPMorgan Chase to reform its troubled in-house debt collection department in response, the bank simply closed the division.
Banks fear that if in-house (first-party) collections fall under the purview of new regulations, already steep compliance costs will continue to soar.
According to CUNA, credit unions that collect their own debts have never been subject to FDCPA, but credit unions that collect debts for others, as well as CUSOs that offer debt collection services, are subject to the FDCPA rules. CUNA has urged CFPB not to expand the rules on debt collections to credit union's in-house operations.
"The CFPB does not currently have authorization to regulate credit unions in the debt collection area, but CUNA is concerned that the CFPB's far-reaching authority could eventually sweep credit unions under the purview of future rules and regulations," CUNA deputy general counsel Mary Dunn said in a statement.
Similarly, NAFCU SVP-Government Affairs and General Counsel Carrie Hunt commented in a statement: "NAFCU has steadfastly distinguished between credit unions collecting on their own behalf and third-party debt collectors in its regulatory efforts. As non-profit mutual organizations, credit unions answer directly to their members and enjoy a unique relationship with their membership. When credit unions collect on their own obligations, they work to continue to support their relationships with their members."
Michael LaNotte, the Senior VP for Association Services and General Counsel for the Credit Union Association of New York, told Credit Union Journal that as things stand now, most credit unions will not be impacted by new regulations since the majority of them have in-house debt collection units. "But if they use outside firms to collect delinquent loans, they will have to be made aware of the tougher rules," he said.
Wendy Elieff, Vice President of Sales & Service at CU Recovery & The Loan Service Center, a Minneapolis-based debt collection agency for credit unions, told Credit Union Journal that although most credit unions have some type of collection process, credit unions often turn to outside collection services for a number of reasons, including lack of specialized training, lack of space to house collectors, difficulties in handling the increases in delinquency and compliance concerns.
"The majority of credit unions utilize third/outside parties to collect on their charged-off loans," she explained, referring to loans that are considered uncollectible.
"With the time and expertise that it takes to collect on charged-off loans, most credit unions will not get the return on investment that they need to work them in-house. Using an outside party for early dials or, in some cases, to do all collection functions for a credit union, is a growing trend. Some use an outside party for early dials and some use it as an addition to their in-house collectors because they can't find qualified collectors. For some it just makes financial sense to have an agency handle collections."
However, amidst some concern over potentially tougher regulations against debt collection activities, loan delinquency rates for both credit unions and banks have actually been edging downward in recent years.
Data from CUNA revealed that as of October 2014, the 60-plus-day delinquency rate at credit unions clocked in at 0.7% (down from 1.01% in October 2013), the lowest such rate since the end of 2007, right at the cusp of the Great Recession.
CUNA Mutual Group said it expects the delinquency rate to fall below 0.7% next year "due to a stronger economy and faster loan growth."
"Loan delinquencies for credit unions have traditionally been quite low, largely because these firms work closely with their members and provide good loans," LaNotte commented.
For banks, the delinquency rate on business loans for all commercial banks amounted to 0.76% as of the third quarter of 2014, down from 0.97% as of third quarter 2013, according to the Federal Reserve Bank of St Louis. That rate was as high as 4.3% in the fourth of quarter of 2009.
But Elieff at CU Recovery indicated that delinquencies at credit unions sometimes exceed the corresponding rate for banks since credit unions "are more lenient with their delinquent members than banks and are also more concerned with keeping them as members. Credit unions are also known for taking more risk than banks."