The CFPB and Your Recovery Agent…Are Things Finally Going To Change?
The acronym CFPB has been in countless emails, blogs, webinars, and magazine articles. We are seeing it in Credit Union online magazines, BHPH Car dealer magazines, and memos issued by banks, online articles by creditors-rights attorneys, and every repossession-related seminar. Its everywhere.
Judging by the actions the CFPB has taken so far, third-party service providers are not initially going to directly governed (or fined) by CFPB …the creditor is. But the bureau is making it clear that they are holding the creditor liable for the actions of any of their third party service providers.
A stunning example is from a recent memo by the CFPB, where they intend to hold the creditor responsible for improper mark-ups or discriminatory rates in an indirect auto loan….even if it was a sketchy car dealer who did it!
And so far, the biggest CFPB fines against the banks have been a result of the actions of third party service providers.
In July, the CFPB forced Capitol One to refund $140M to consumers, and fined the bank an additional $25M, for the actions taken by a outside vendor selling identity-theft protection and debt forgiveness policies for CapOne’s credit cards.
CapOne attorneys tried to make the case that the alleged misconduct was attributable to third party vendors who failed to adhere to Capital One’s “sales scripts and sales policies for payment protection and credit-monitoring products’. The government didn’t buy it, and lowered the boom on them.
This past September, Discover Bank was forced to refund $200M to consumers, and pay an additional $14M penalty, again for hiring a third-party marketing firm that sold products in a deceptive manner.
So far, the CFPB has been targeting the actions of a creditor’s vendor more than the creditor itself.
An article in the American Banker from April 4th, 2013 said “Vendor risk management is indeed the most pressing challenge in financial operations risk management today.”
One of the suggestions in the article was that not all third-party vendors be viewed the same. The question of “Do they have contact with the customer?” being one of the criteria, and needs special consideration.
Wow, possible contact with the customer? Doesn’t an auto repossessor have an unparalleled opportunity to have “contact with the customer?” Both verbal contact, but in a worst case scenario, potential physical contact with a consumer as well? One would think that a auto repossession process would boost a creditor’s “special consideration” to astronomical levels.
Think about it…thanks to Section 9 of the Uniform Commercial Code, repossessors have a right to enter onto a consumer’s property, at any hour of day or night, and seize a vehicle or other collateral without consent. The potential for conflict in this, the riskiest “collection practice” allowed in the US, is enormous. Risk management should be “Job 1”.
For most of the professionals in the repossession business, risk management has long been “Job 1”. In the past few years, we seen some auto lenders take a “its all about the money” approach to their repossessions, with bargain-basement prices trumping “due diligence”.
Now the CFPB is evidentally targeting wayward third party service providers, there is finally a renewed interest on the part of auto lenders to know this question: Who exactly is representing us in the consumer’s driveway at 2am in the morning?
This renewed interest no surprise to us. Thanks to so-called “reality” TV shows like Operacion Repo, banks and credit unions can see watch in real-time what a repossession-gone-wrong could theoretically look like. Or how it might be played on the evening news. Or, what might have to be explained to federal investigators. “Yes, our bank hired…that guy”.
We also understand that the CFPB will be driven By Consumer Complaints. The CFPB has built an online interface for the American public to log complaints about any lending institution or their service providers. On March 28, 2013, the CFPB website announced:
“Today the Consumer Financial Protection Bureau (CFPB) goes live with the nation’s largest public database of federal consumer financial complaints, opening up to consumers across the country information on more than 90,000 individual complaints on financial products and services”.
“By sharing these complaints with the public, we are creating greater transparency in consumer financial products and services,” said CFPB Director Richard Cordray at a field hearing in Des Moines, Iowa, where he announced the expansion of the CFPB Consumer Complaint Database. “The database is good for consumers and it is also good for honest businesses. We believe the marketplace of ideas can do great things with this data.”
Will there be complaints about the repossession process? Sure. Lots of them.
From our experience, almost every repossession produces at least some sort of consumer complaint. There’s the famous “Rolex in the glove box”, or “your tow truck scraped by driveway”. Then there’s“the bank promised to give me more time”. We’ve all heard them all. In order to keep themselves out of the CFPB’s complaint-driven crosshairs, creditors are going to have to use agencies that will minimize the number of credible complaints.
Let’s go beyond consumer complaints…and talk about consumer protection. We mean that literally…consumer protection.
How much exposure and responsibility does the lender have in literally physically “protecting the consumer” in the repossession process. A whole lot, it seems.
This is from an article in the Huffington Post, March 2012:
“(News) accounts indicated there were at least 16 shootings and five deaths stemming from repossessions in 2011. Often it was the repo man who was hurt. In 2009, the same year Jacobs died, two Alabama repo agents were shot and killed. In some ugly cases, you might blame the ill will of debtors. In others, the carelessness of bad-apple agents. In many cases, however, industry insiders trace the problems back to decisions by lenders at the top. According to insurers, lawyers and longtime repo agents, the big-time financial institutions as a group are paying less than ever to have vehicles recovered in the event of default.
In the minds of many repo agents, the penny-pinching by lenders has pitted them against one another, as reputable firms struggle to do the job on thinner margins and less-reputable agents willingly take on the cheaper work.
“This is where the recession and the finance world come right into the front yard,” says Kevin Armstrong, a former repo man who is now a collections manager and runs CUCollector on the side.”
So we might laugh off a debtor lying about the Rolex in the glove box, or having $5,000 cash in the center console. But no one is laughing about injuries or deaths in the repossession business. This takes the need for consumer protection to a whole new level.
Why a sudden surge in repossession-related deaths and injuries? We think it’s a series of things.
Years ago, virtually every creditor would have direct interaction with their recovery agent. Through that, they would gauge a sense of the agencies competencies. But now days, some larger creditors assign accounts through fourth-party aggregators called “forwarders”. One of the downsides of this relationship was that the creditor had no direct interaction with their repossessor, and thus no longer knew WHO was representing them in the consumer’s driveway at 2:00am. And since these forwarders were purchasing and reselling their services largely based on price, many of the more experienced repossession agencies wouldn’t work under the terms or fees offered by many of the forwarders.
Many still don’t.
IOne more change happened. Not only did this arrangement create a lack of transparency that would have allowed the creditor to know their recovery agent…..then the forwarders added a new dangerous component. They wanted to assign repo accounts on a “Contingent basis”. No repo, no fee.
In some endeavors, taking work on a contingent basis makes sense. An attorney stands to collect 30% of a settlement; a debt collection firm might charge 25-30% of their successful recoveries.
These repossession assignments were not offered that kind of contingent work; forwarders were offering contingent fees that were LOWER that what were previously understood to be “standard”.
In an online article, Ed Marcum, a spokesperson for RSIG (an insurance group who insures repossession agencies) said “A lot of the violence is strictly due to the fact that they have to get cars,” he said. “There’s a lot more risk. You have guys out here now, if they’re not successful, they donʼt eat. There’s no doubt in my mind that the contingency adds a lot of liability”.
Long before all this recent discussion about the Consumer Financial Protection Bureau, the National Consumer Law Center published a white paper called “Repo Madness: How Auto Repossessions Endanger Owner, Agents, and the Public”.
At the center of this article was a particular forwarder, who at the time was working for many of America’s larger banks. The document detailed many of the deaths and injuries associated with their recovery processes, and outlined how their low pay, and contingent offerings, resulted in their amassing a network of undertrained, overworked and desperate repossession agents…and that this army of desperate repossession agents resulted in these deaths and injuries.
The Huffington Post article also quoted Joe Taylor, a former banker, and now an educator and trainer for the repossession industry.
“Taylor described an industry wrenched by falling revenue and rising business expenses: “The costs of operating a professional collateral recovery business have increased drastically with $60,000 tow trucks, higher wage rates, fuel costs over $4 a gallon, expensive secure storage facilities, computerized offices, high-end key machines, rising insurance premiums, damage free auto ‘entrance’ tools and other expenses”
At the same time, revenue has fallen, as prices for repossessions have been driven down by low-ball competitors that “failed to maintain the proper recovery insurance, provided no training to agents, used inferior equipment, had improper storage for collateral and personal property,” Taylor wrote.
Low fees, offered on a “contingent basis”, to underfunded and unprofessional agents results in a deadly mix. There is currently a tremendous attrition rate of repossession agencies, the majority of whom failed while trying to survive working for the forwarders on that basis.
It was, and remains, a system that relies on repossessors who essentially can’t balance their own checkbooks. It reminds us of the “Darwin Awards”, a tongue-in-cheek honor society; as Wikipedia puts it “people self-select themselves out of the gene pool” due to their own “(unnecessarily foolish) actions”. You pay peanuts, you get monkeys.
There’s good news and bad news in all of this.
The good news is the CFPB’s enforcement is going to force anyone in the repossession vendor-supply chain to be more professional. They will need have adequate insurance, to be without a relevant criminal record, to have proper facilities, to be a type of agency that has developed proper employee manuals, disaster recovery plans, and one that commits its staff to ongoing continuing education. The public will be safer, and America’s banks and credit unions will have a smaller target painted on the outside wall of their institutions. All that is good, and much needed.
The bad news is that repossessions are going to be more expensive. There’s a couple of reasons why.
One is the cost of compliance. Compliance costs for a repossession agency can be huge. To be vetted by a compliance company can be from $2k to $20,000 or more. And that’s only to certify the compliance has been met.
The actual compliance involves increasing computer and premises security…everything from software costs to locking cabinets to better fencing….to new demands for training and credentialing. These demands threaten to sweep away the repossessors whose main selling point was price. A lot of them are already gone.
It is good news is that something is redirecting the discussion from price to qualifications. And why not? What other collection practice has the potential of death or physical injury to the consumer or the creditor’s contractor?
For many years, when an auto lender has contacted a professional recovery agency, the two questions asked were a.) “what do you charge?” and b.) “will you send us a copy of your insurance policy”?
No one asked about the agency’s experience in the industry, or their certifications or training. No one asked about their commitment to continuing education, or if they participated in a national trade association.
It was odd (and sad) that one of the few requested credentials was an insurance certificate. This is a document that would only be meaningful AFTER something catastrophic has occurred.
That’s not risk management…that’s damage control.
If an auto lender wants to use a professional agency, by definition they are going to have to use legitimate agencies with secure brick-and-mortar facilities, with secure computer systems, and one that employs intelligent agents that are committed to legitimate training and continuing education.
By default, these are NOT going to be the cheapest agencies out there.
Those that have championed professionalism in this industry are glad to see the winds of change blowing in this business….even if driven by the federal government.