Collections Approach in Need of a Significant Shift in Current Economy
The barrage of horrible macroeconomic news continues today as the Department of Labor reported that another 651,000 jobs had been lost in February, sending the unemployment rate to 8.1 percent. Measures are being considered that would allow judges to restructure underwater mortgages as part of bankruptcy proceedings. It goes without saying that nest eggs are being cracked or crushed with the recent performance of the markets.
How does this impact the collection industry, and what should its role be in the broader economy?
My first answer today is obvious, and widely discussed. My second answer today is more complicated, and more controversial. Please hear me out and let me know your thoughts below.
Answer #1 goes like this: Unemployment is the key barometer for collectability; fewer jobs mean less collectable paper and lower profit margins for both credit issuers and their service providers. Fewer refinancing events mean fewer pops as ARM companies have less access to this collection method. Falling net wealth around the country makes people less inclined to pay past debts. So, economic conditions are making collections and recoveries much harder, requiring companies in this industry to work smarter to maintain their margins.
This argument is straightforward and discussed regularly here on insideARM.
Answer #2 goes a little deeper. This recession will only correct itself based on improved consumer spending, and new spending by consumers is contradicted by many collection methods. Payments in full may legally satisfy a past due obligation on the part of a borrower, but it may not practically recognize her existing plight, or, more broadly, her role in an economic recovery.
A reader commented on an insideARM blog recently by saying, “debt is the responsibility of the individual. Hiding is not a consumer protection right.” In general, this is hard to argue with – a legal transaction has occurred when purchases are made on credit. The collection industry keeps this process efficient and allows the credit economy to function. But I don’t think this position confers an absolute right to collect all past due accounts on all terms, especially given our extremely challenging economic conditions.
In these challenging times, a more consultative collection approach is needed. As an industry, we should be reaching out to distressed consumers and structuring repayment schedules that recognize their plight and take their future prospects into account. We should not be wasting our time and money trying to collect from consumers who have the least likelihood to pay; in this recession, the costs of these efforts are almost sure to exceed the revenues that follow.
“Every dollar, plus interest, right now” may have been effective in 2006, but, I argue, it is not always effective in 2009 (or 2010 as the recession – depression? – continues). As an industry, let’s figure how to help the American consumer get back on her feet, and benefit more as the economy recovers.
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Comments
Comment from A Collection Manager on March 6, 2009 at 12:13PM EST
We're hiring .. putting up record numbers.. good clients, good training and hard work and you shall succeed
Comment from Susann Bouchillon on March 6, 2009 at 12:16PM EST
It is time to re-train our collectors to be part of the solution. This will involve several factors: 1-the ability to manage a greater book of business per desk. 2-the ability to get a frightened debtor on the phone. 3-teach them to properly access the situation. 4-bring the account to it's greatest standard, based upon that accurate accessment. All of the above must be done with compassion; yet conviction. Respect and pragmatic efficiency.
Sincerely, Susann Bouchillon Susann@professionalcollector.net
Comment from Ted on March 6, 2009 at 12:56PM EST
I agree that helping the consumer find a workable solution is the best answer however, the current focus of our government is getting the consumer back into the markets buying and investing. That's like asking someone with a hangover if they want another shot of tequila.
Getting the consumer back into the markets is a 2-step process. First, the consumer needs to de-leverage. The proposal to re-write mortgages is seeking to address this issue but that still leaves revolving credit at historically high levels. No wonder card issuers are writing off at record rates.
The second step that's required is strong consumer confidence in current and future income. For those who are still employed, even though their real income levels have seen a boost as a result of declining energy costs, the prospect of future layoffs has them stuffing money into their mattresses after paying for food and other necessities. For those who have already lost their jobs, they face the prospect of a long waiting period before the next paycheck comes in. Without the confidence that income will remain at current levels, consumers are going to be reluctant to do anything other than hoarde cash to weather the storm.
So where does that leave us? The good news is that it's going to a really long time before we see consumer spending on the same level as 2004 through 2006. Why is that good news? Because that level of spending was fueled by borrowing at record rates based on perceived wealth (mostly in real estate value). That means consumers will be borrowing less overall than before and more likely to be able to pay debts. Banks will also be tighter with their credit controls meaning fewer marginal customers will get in over their head. The bad news is that the damage that will take place between then and now will make The Terminator look like Sesame Street.
Yes, compassion and conviction are necessary but we should all focus (and that includes the White House and Congress) not on stimulating the economy by helping consumers spend more but on helping consumers spend within their means. Maybe then we can have steady, controlled growth that doesn't risk another debt market meltdown.
Comment from Ted Roll on March 9, 2009 at 4:04PM EST
There seems to be a disconnect between the reasoned approach argued here and the strident, aggressive approach espoused by voices in the InsideArm Forum. There appears to be a sense of entitlement that prevents the more vocal amongst them from being active players in the resolution.
The recent FTC recommendations are a response to this aggressive methodology.
Comment from Brad Dey on March 10, 2009 at 8:45AM EST
One item that i think merits thought is the "New Debtor"- a population that has never been in the world of collections, but finds itself there thanks to the hardships itemized above. These people require different communications to educate them on the process, so all response mechanisms need to be evaluated as such(talk-offs, letters, VRU, etc).
Comment from Anonymous on March 11, 2009 at 1:39PM EST
We have always had this approach. Nothing new or mind blowing here.......and it has always worked for us.
Comment from Susann Bouchillon, Professional Collector, llc. on March 26, 2009 at 2:39PM EST
Response to Brad Dey
Bravo! This new debtor has two things that will drive his communication; or lack thereof. 1-Pride. This person has always paid his bills. 2-Shame. This person has always paid his bills. This person will be highly defensive and re-active.
He is terrified and ashamed. Our people's first challenge will be to convince him that we are there to help find a workable solution AND the collector must have the resources and knowledge to back up that claim.
He must be handled differently. Definition of insanity. "Doing the same things, the same way, and expecting a different outcome."
Sincerely, Susann Bouchillon Susann@professionalcollector.net