CFPB Credit Card Market Report Addresses Collections and Recovery

Just before the holidays the Consumer Financial Protection Bureau (CFPB or Bureau) released its latest Consumer Credit Card Market Report. You can see the full report here.

This report is mandated (every two years) by the Credit Card Accountability Responsibility and Disclosure Act (“CARD Act” or simply “Act”), passed by Congress in 2009. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, that requirement passed from the Board of Governors of the Federal Reserve to the CFPB.

Chapter 8 of the 352-page report covers the debt collection market. The report states that the Bureau surveyed “a number of large credit card issuers in order to understand current practices and trend, as well as to identify changes to internal policies in the credit card and debt collection and recovery arena.” It does not state how many creditors participated, however the report does note that none of those who responded allow third-party agencies to credit report; they do it themselves. 

Some of background highlights:

1. Approximately one in eight debt collection complaints between January 1, 2015 and December 31, 2016 identified a credit card as the source of the debt.
2. Debt collection industry revenue has declined in recent years, falling from about $13.3 billion in 2012 to $11.4 billion in 2016.
3. Creditors employ around 300,000 collectors to work initial delinquencies, while the much smaller third-party collection industry employs approximately 125,000 (a reduction of nearly 10,000 jobs in the past two years). The source of this data is noted as IBISWORLD.
4. The net credit card charge-off rate for all commercial banks rose from 3.8% in the second quarter of 2015 to 4.9% in the second quarter of 2017. Charge-off rates declined from an all-time high of 16.3% in 2010 to 4.3% in 2016. 

Highlights from the survey responses:

In-House Collections

• Contact attempts: In general, issuers’ actual average contact attempts tended to fall well below policy maximums. Daily contact attempt limits ranged from three calls to as many as 15 per account. See table below.
• No issuer allowed calls to continue within a given day once “right party contact” has been made.
• Right party contact rates typically fell between 3% and 7% for in-house and first-party collections and between 0.5% and 2.0% for third-party collections over a three month period.
• In general, issuers’ average daily number of contact attempts via telephone fell between 1.5 and 3.5.
• Most issuers restricted the number of voicemails that can be left for a consumer each day. Among those that do so, nearly all allowed no more than one voicemail per day.
• Nearly all of the issuers surveyed used email as a part of their credit card collection strategy. Conversely, less than one-third of issuers surveyed employ mobile text messages to communicate with delinquent consumers.

First-Party Collections

• Nearly all of the issuers that use first-party collectors prior to charge-off noted that they do not “place” specific accounts with first-party agencies. Instead, they allocated work between in-house and first-party collectors throughout a given day. Therefore, if available resources have shifted, a single consumer account could be handled by both in-house and first-party agents within the same week, day, or hour.
• From 2015 to 2017, the surveyed issuers increased the total number of unique first-party agencies by 36% to 15 total agencies.
• Those issuers that used first-party agencies used three different agencies on average.
• A majority of the issuers surveyed required that first-party agents place, receive, and document calls to consumers using the issuer’s own case management system and dialers. In general, first-party collection agents were contractually bound to abide by the issuers’ consumer contact limit policies.

Third-Party Collections

• More than half of the surveyed issuers worked with third-party contingency collectors.
• The number of unique collection agencies used across issuers remained steady between 2015 and 2017, with 30 unique agencies in 2015 and 31 in 2017.
• The percentage of delinquent accounts placed with third-party agencies prior to charge-off dropped from 8.3 in 2015 to 7.9 in 2016.
• The average number of third-party agencies used by each issuer was seven in 2015 and eight in 2017.
• Contingency fees ranged from 6.4% to 24% in 2015 and 7.2% to 24% in 2016, with the variation being attributed to the risk profile of the accounts being placed.

Pre-charge-off loss mitigation strategies

The report addresses a range of strategies used by issuers, including re-aging accounts, short and long-term forbearance programs, debt settlement, and debt management plans.

• Re-aging returns a delinquent credit card account to current status without collecting the balance due. Issuers may perform a re-aging in order to assist customers with temporary cash flow issues. The quarterly re-aging average ranged from as low as 0.6% of total delinquent dollars to a maximum of 4.5%. Average re-aged balance was $660 million per quarter, with an uptick noted in the fourth quarter of 2016 due to the recent increase in credit card delinquencies.
• Forbearance is designed to help those borrowers with longer-term financial hardship. Most of those surveyed offered one or more of these payment programs, typically consisting of a fixed payment amount over a specified period of time, and often at a reduced interest rate. New enrollment rates among the individual issuers ranged from low of 0.6% to a high of 5.3%. Forbearance inventory showed a 30% reduction from the first quarter of 2015 to the first quarter of 2016.
• Debt settlement programs are those in which an issuer agrees to accept less than the full balance owed as full satisfaction of the balance owed. Generally, pre-charge-off loans are settled with a single lump-sum payment or multiple installments. The installments typically consist of three payments, but the total duration is not to exceed 90 days. The portion of the balance that is forgiven should generally be charged off when the settlement agreement is fulfilled. Post charge-off settlements can be structured over any length of time.

Post charge-of recovery strategies

In general, the survey found that:

• The majority of issuers used third-party agencies throughout the entire review period
• The majority of issuers engaged in internal recovery
• The majority of issuers engaged in post-charge-off litigation
• The minority of the issuers sold debt
• All issuers warehoused a portion of their account balances 

insideARM Perspective

Given the context of potential debt collection rulemaking, it is also interesting to note that the report addresses communication with consumers. This is a very hot topic from an industry perspective, with many asking the Bureau to update and clarify the law regarding modern methods of communications. 

Most issuers reported that they accommodated special requests for limited cease communication requests, such as stopping communications at a particular time of the day or day of the week. A few issuers accepted requests to cease communications in certain channels (e.g., requesting the issuer cease making phone calls but permitting emails, letters, and text messages). Total balances in pre- and post-charge-off inventory with requests to cease communication grew significantly in recent quarters for most issuers. The year-over-year growth in account balances with these requests ranged from 5% to 44% among the surveyed issuers.

Also worth noting is the description that issuers are able to manage multiple accounts with the same consumer at once; 75% of those surveyed said they bundled accounts and handled them during a single call to the consumer. The report states that most of the issuers surveyed did not have a similar approach to bundling post-charge-off debt, with only 25% placing all of a consumer’s charged-off accounts with the same third-party agency for collections. From the perspective of consumer-friendliness, bundling accounts is a distinct benefit – it reduces the number of contacts necessary, and minimizes hoops a consumer has to jump through to designate preferences.

Additionally, benefits of the bundling strategy to the creditor include:

• Ability to negotiate repayment on the accounts in the customer's bundle that are most advantageous for the issuer to mitigate the loss.
• Allows for higher account-to-collector ratios as a result of multiple accounts with one customer being counted as one account for the purposes of a call.

On the other hand, there are some challenges for issuers, incluing:

• Finding ways to link accounts based on common identifying criteria.
• Bundling at the customer level on the system of record, for purposes of pushing a single account representing all to a dialer or other channel.