Inefficiencies and Errors in Manual Risk Management

Since its founding in 2006, NeuAnalytics has provided solutions for lenders/creditors across the financial services spectrum. Our goal has been to help lenders manage their receivables while staying compliant with consumer protection laws. To that end, the NeuAnalytics service model has been aimed at increasing debt recovery, while staying compliant with federal and state-level regulations.Today the Consumer Financial Protection Bureau (CFPB) can use Regulation F as a hammer. Collection agencies and their third-party agents want to avoid being the nail through risk management monitoring and red flags to avoid the bruising experience of government sanctions. However, reporting and monitoring in a sea of regulations, when done manually, can lead to errors, high costs, and inefficient use of resources.

NeuAnalytics solutions are about overcoming antiquated systems and technology and keeping up with the times. Antiquated technology can manifest itself in the following ways:  

• The organization receives troubling weekly performance reports from its third-party collection managers. Those reports prompt calls to poor performers to encourage them to work harder. There is no automated follow-up system to monitor vendor performance to track needed improvements in vendor performance. 

• Delayed reports and reviews disclose that some third-party vendors have lapsed licensing and certification. The organization needs to know about those violations quickly so it can move its collection accounts and avoid sanctions. Spreadsheet monitoring and other automated methods are too work-intensive and just don’t work well.
• Compliance and performance reports are scattered across the organization in a piecemeal fashion with no way to access the big picture. Real-time and aggregated reports are not delivered on schedule, much less on demand. Individual reporting silos and turf struggles are adversely affecting the whole organization. 

• The organization distributes its collection accounts in a “round-robin” way. There is no correlation or connection between the distribution of the accounts and the vendor’s performance record. There is no system in place to give collection accounts to the third-party vendors that perform the best.
• Third-party collection agents send the organization spreadsheets or email reports. Those reports must be culled and searched to react to requests or include in performance reports. There is no automated way for regulatory agencies, customers, or even third-party collectors to access the information they need to do their jobs.
• In the case of operational support requests, there is no automated system to adapt all those spreadsheets and emails to analyze fraud, adjudicate disputes, or resolve debtor complaints. Those functions must be performed separately using duplicated information.
• Sampling accounts for collection agency compliance is ineffective when the CFPB, other regulators, and consumer attorneys will sue for one individual violation. 

Compounding the foregoing weaknesses is that many lenders and their third-party agents use their ad-hoc debt tracking tools. Those tools are not set up to provide on-demand reporting. The reporting, in turn, is a manual process that can be subject to human error and risks in the collection operation—and even inadvertent violation of collection regulations.  

There is a Better Way

This blog will highlight better ways to overcome antiquated methods and technology and resolve all the foregoing problems by automating the process through NeuAnalytics suite of solutions.

Previous Practices Can’t Keep up With Today’s Plethora of Regulations

In previous years, creditors would physically audit third-party vendors. The sample size would be extremely small, only auditing between 10 and 100 accounts, and audits would take place weeks or months after the fact. The absence or delay of real-time data means that auditors were looking for a needle in the haystack. Undetected, that needle could quickly turn into a poisoned arrow, resulting in state or federal sanctions ranging from heavy fines and lawsuits.

Regulating Bodies’ Expectations

Definitions and Applicability

Consumer protection laws apply only to the collection of consumer debt. That is debt incurred by a consumer for household, family, or personal purposes. Those protections do not cover business, corporate, or agricultural debt. By law, a debt collector is defined as someone who “regularly collects, or attempts to collect, consumer debts for another person or institution.”

Requirements for Third-Party Monitoring

Federal and state regulating bodies--FTC, OCC, CFPB, etc.—as well as other agencies, not only require third-party debt collector monitoring but also that the monitoring is backed up through audits and timely reports.

No Outsourcing of Vicarious Liability

Lenders can be held liable for the misbehavior of their third-party vendors. All creditors and third-party vendors must, for their protection, have risk management with a monitoring system in place--and when it comes to tracking down misbehavior or malfeasance, manual hit-or-miss reporting is not a system. If a violation is found you must be able to track the violation, remediation, and go-forward plan for the avoidance of that violation in the future.

Auditing Standards

The FDIC, which regulates banks and other federal financial institutions, has published standards for a compliance management system. The system requires oversight and periodic compliance audits to ensure that financial institutions comply with federal consumer protection laws and regulations.

The audit is an independent assessment of the institution’s system of internal controls and operations. As long as those performing the audits are independent of the areas being audited, the audits can be internal or performed by an external activity.

The following basic standards apply:

• CFPB requires an effective compliance management system, which should include “Monitoring and/or audit.”

• A company’s monitoring program must be scalable—i.e., commensurate with the company’s size, complexity, and risk profile.

• Programs must be monitored proactively—rather than reactively--to identify weaknesses and mitigate regulatory violations.

• Complicating matters is that among the different compliance regulations are additional laws and regulations that must be considered, and manual monitoring and reporting cannot keep up—especially in light of Regulation F.

The Impact of Regulation F

Regulation F tightens many of the CFPB’s restrictions on consumer protection already in place. Additionally, Regulation F:

• Breaks new ground with specifics on how creditors must communicate with consumers to run their business and make it more compliant.
• Requires that a collection process must begin with a validation notice where the creditor sends a form letter to the consumer with specific information about the debt, how the consumer can register a dispute about the debt, and the information the consumer needs to respond to the notice.
• Has specific guidelines for electronic and telephone communications, including email and text messaging from the debt collector. The regulation limits the number and frequency of calls to a consumer to no more than seven calls in a seven-day period.  Once the collector reaches the consumer, they must not attempt to contact them again for seven days. 
• Exempts telephone and electronic communications from the timeline telephone rules, so long as the consumer gives prior consent, but has an easy way to opt-out of such methods.

States and some Local Authorities have their own Debt Collection Regulations.

In addition to the federal Fair Debt Collection Practices Act, which governs collection agencies and bill collectors nationwide, many states—and some local authorities like New York City borough regulations--have their own fair debt collection laws, and many mirror the federal act. Lenders must have systems in place to ensure their third-party agencies comply with state as well as local requirements.

Some states offer additional or similar protection to the consumer.  A few states specify more types of behavior that violate state law and provide for other types of damages. Some examples:

• California specifically prohibits debt collectors and creditors from using deceptive, unfair, or harassing tactics. California has new (2022) licensing laws covering debt collectors. 
• Colorado prohibits debt collectors and creditors from using abusive and unconscionable tactics while collecting debts.
• Florida prohibits both debt collectors and creditors from using abusive or deceptive tactics in collecting debts.
• Georgia regulates debt collection of consumer loans less than $3,000.
• Illinois requires debt collectors to be licensed and regulates how collectors communicate with debtors.
• New York protects consumers from abusive debt collection lawsuits.
• Washington State requires that debt collectors be licensed and bonded and prohibits certain types of activities.

The Risks and Penalties of Noncompliance

While the financial services sector has always been monitored and regulated, in these times of heightened consumer protection, legal actions, fines, and orders for restitution in 48 enforcement actions in 2020, for example, have amounted to $12.9 billion in consumer relief, 175 million individuals eligible for relief, and $1.6 billion in penalties. 

The CFPB landmark cases occurred in 2015 when two debt collection agencies—Encore and Portfolio Recovery Associates—were found to have collected debts that were either unsubstantiated or inaccurately recorded. 

Those agencies also violated consumer protection regulations in that they:

• used misleading robo-signed court filings to manufacture lawsuits based on those unsubstantiated and inaccurately recorded debt records
• told consumers that the burden of proof was on the customer to disprove the debt
• falsely claimed that an attorney had seen and reviewed the consumer’s indebtedness file 

Both agencies paid millions of dollars in fines and were forced to stop collection or refund over $160 million in consumer debts.

Wanted: A Solution Built on Compliance and Risk Management

So, everything described so far has resulted in the double-edged challenge of heightened consumer protection competing with the need to collect money owed to creditors. Those challenges cannot be met with antiquated processes and technology. 

What is required is a system that is built on compliance and generates immediate alerts/red flags to auditors. Those red flags are the starting points that allow real-time corrective action to be taken. 

Automatic monitoring—e.g.., through a platform like NeuAnalytics—can monitor all accounts, instead of a small sample size. This correlates to the big picture of what is happening within the lenders’ collection space. Likewise, when automatic auditing and reporting can comply with all federal/state/local compliance regulations, automation ensures that third-party vendors are acting appropriately, no matter what jurisdictions are involved.

NeuAnalytics’ Suite of Solutions for Reporting and Auditing Collections

NeuAnalytics’ system is fully automated and audits all accounts each time data or action is loaded into the system. Its main advantages are as follows:

• The platform allows auditors to ensure all accounts are being watched continuously, alerting for any red flags that are suspicious or might demand intervention.
• NeuAnalytics sees all accounts in real-time, eliminating retrospective reporting or auditing.
• NeuAnalytics’ solutions eliminate errors associated with manual reporting, while also auditing in compliance with regulatory agencies. 
• The auditing is in accordance with federal/state/local regulations. Also, the auditing approach is based on standards that must apply to the individual account under review.
• The NeuAnalytics system is extremely efficient and can audit vendors in a matter of minutes, as opposed to hundreds of hours spent on manual reporting. 

Also, NeuAnalytics’ solutions have built-in compliance to:

• allow creditors to continuously monitor their third-party vendors in collections
• enhance efficiency and reduce errors caused by manual reporting.
• ensure all regulations and laws surrounding risk management and collections are being followed and adhered to at all times

In summary, NeuAnalytics’ solutions employ the following tools to do all the above:

• Software for tracking the bonding and licensing of third-party vendors—keeps creditors and third-party vendors in regulatory compliance
• Custom platforms for risk, work, and vendor management to resolve disputes and complaints.
• Software that raises a red flag when compliance issues arise so the lender can intervene before it’s too late--ensures third-party agents are following different levels of regulations and safeguards against compliance-related fines, lawsuits, etc.

No need to get another platform to monitor collections and accounts receivable: NeuAnalytics platform includes the latter in addition to risk and compliance management.

Use Cases for the NeuAnalytics Platform

NeuAnalytics use cases include:

The aforementioned compliance management – provides reports with data down to the consumer level. Automatically audit and track vendors to ensure compliance with applicable federal, state, and local consumer protection laws.

Fraud, complaints, and disputes management--a single system to allow the lender to streamline critical workflows to detect, resolve, and adjudicate those sensitive areas of compliance. Includes tracking of fraud, disputes, and complaints with the ability to find accounts within these statuses.

Receivables management – helps the user understand both the details and the big picture of receivables, along with daily balances, payment plans, and settlement status. Allows lenders to predict or activate collection strategies for each account and to manage vendors' performance for better results.

Let's Recap

Manual debt-collection auditing and reporting in these days of CFPB consumer protection oversight cannot keep up with the challenges. These times include a plethora of federal, state, and local consumer protection regulations that must be tracked and cannot be violated through ignorance or oversight.

Lenders who must monitor third-party vendors cannot rely on sample auditing with time lags and antiquated report systems. Regulating bodies require proactive monitoring and timely auditing. Regulation F also requires complete transparency in collection processes and protects the consumer from constant and harassing telephone calls.

States and some local authorities also have their debt collection laws, and those laws must be considered when the lender audits the third-party collection agencies. Federal, as well as state laws, carry stiff penalties for noncompliance. 

NeuAnalytics provides the solution: a platform to bring everything lenders need to ensure compliance by their third-party vendors. The suite of solutions overcomes the inefficiencies of manual monitoring and watches every vendor account to ensure compliance.

NeuAnalytics does all that through software that tracks vendors’ licensing and overall performance. The platform also provides fraud, complaints, and disputes management as well as management of receivables, normally not found on the same platform.