The State of the Industry: What is Next for ARM?

Other areas to watch closely in 2008

Changes in the FTC are expected.

In October 2007, the FTC held a workshop to examine the current state of the collection industry including the Fair Debt Collection Practices Act (FDCPA), the most significant review of its kind since its enactment some 30 years ago. The collection industry has evolved considerably since then; most noteworthy is the involvement of debt purchase and sale. The industry remains in a wait-and-see mode to learn what the FTC will recommend.

Evolving regulatory compliance will remain a hot topic for debt buyers.
Some state regulators and their attorneys general are watching debt buyers within their regions. States like Wisconsin and Michigan have already placed strict limits on the statute-of-limitations for collecting debts, and some municipalities are increasing regulations within their own jurisdictions. This will continue to impact purchases of portfolios of aged debt.

In addition, those interested in purchasing healthcare receivables will watch to see if other states follow Nevada’s lead in passing legislation barring county and district hospitals from selling or transferring the interest of the hospital in a lien created against a debtor.

What impact will the ’08 presidential election have on the ARM industry?

Going into the end of last year, the IRS showed signs that it would continue to utilize private collection agencies amidst intense pressure from consumer groups that strongly oppose the plan. Will the $350 billion plus tax gap be enough incentive for the program to continue? Every move will be closely watched by those ARM service providers who believe they are well positioned for this windfall if it ever materializes.

Also worth noting for those contemplating sale of their businesses in the near future: many believe that a Democratic administration will try to increase the capital gains rate from its current level of 15% to as much as 25%, materially reducing the after-tax proceeds resulting from a business sale.

Finally, the three Democratic frontrunners all have established plans for some type of national universal healthcare coverage. Any implementation of those plans is still years away, but some federal legislative action is likely to occur during the next administration. A December Kaiser Family Foundation poll found that Americans rank healthcare the second most important topic that they would like presidential candidates to address (after the economy and before the Iraq war). Estimates indicate that more than 45 million U.S. citizens lack health insurance. We do not envision a government single payer model in the United States; however, pressure is too great for material changes not to occur.

Municipalities will continue to outsource collections
Municipalities have emerged in recent years as a significant source of business for many collection agencies. There are some 35,000 towns and municipalities in the U.S. generating roughly $1.25 trillion in revenues each year, with a staggering $40 billion of delinquent debt owed to them. In the past, few municipalities outsourced their collection matters to third party agencies and those that did predominately placed their accounts with local agencies based in their region. Municipalities today, burdened with declining federal and state support, are forced to decide whether to cut spending, increase taxes, or improve collections. More and more municipalities are placing accounts with collection agencies; however one trend we are watching closely is the movement among some municipalities from local collection agencies and collection law firms to larger, regional players.

About Kaulkin Ginsberg
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