A Canopy GuideA Better Debt Collection Strategy

One of the critical metrics for any lending company is the performance of loan assets and the ability to demonstrate great repayment. Considering around 68 million Americans had at least one debt in collections as recently as 2019, it’s safe to say that having an efficient, legally sound, and data-focused debt collection process is now essential. 

The right debt collection mindset

Be forward-thinking about the potential for account delinquency. Although you would like every customer to pay on time, any loan or credit you issue can become late or delinquent. Keeping that top of mind at the beginning of every customer engagement will help ensure success for you and your customers. 

Be proactive. Having the right processes in place can significantly minimize the risk of delinquency. Additionally, should customers go past due and collection efforts become necessary, you’ll already be prepared to make the process run efficiently and boost the performance of your loan assets.   

Five important debt collection tactics

1. Collect customer contact information

Gathering each customer’s contact information at the point of acquisition and getting their consent to be contacted via text message, automated dialer, and email for purposes of collecting a debt is critical to having options in collections.  

Some customers may be hesitant to provide contact information, but you must make this a required part of the lending or credit issuing agreement, regardless. This is because the Telephone Consumer Protection Act (TCPA) makes it illegal to contact customers via text message or phone if you don’t have their consent. 

One way to get buy-in is to highlight the benefits of providing correct contact information. You will also want to make clear that you maintain a policy that respects customer privacy and ensures strict data protection. 

2. Offer the chance to enroll in autopay as part of mobile app or website registration.

Consumers think about their loan or credit card the most when their account is first established. This is your opportunity to connect the lifecycle of the new account with the overall life habits of your new customers.

Offering autopay during account setup or registration can reduce the risk of missed payments and be immediately beneficial to your cash flow. It can also be a significant benefit to your customers, particularly those who may forget to make payments and find themselves with delinquent accounts due to a momentary lapse.

Most autopay systems will send customers notifications several days before a payment occurs and the day that their accounts are debited. In the case of failed payments, autopay systems also will alert you and your customer, giving both of you the chance to work together to correct the issue before the debt goes into delinquency. 

3. Create alerts for signs of trouble

Using credit scores, cash flow, and alternative credit scoring sources as gatekeepers for issuing credit or loans are industry-standard methods. Still, since many accounts go into collections even when a customer meets established benchmarks, a best practice is to create processes that alert you to common signs of potential account delinquency. 

A great way to do this is with “early warning systems.” Signs that can indicate problems in the context of a traditional credit card can include, but are not limited to:

• Velocity. This refers to the use of a loan or credit line in a given period. Customers that tap into their credit for multiple purchases in a rapid cadence can sometimes have trouble paying all of it back.

• Increased usage of revolving credit or requests for more revolving credit across multiple accounts. This can often be a sign that an impact to income has occurred.

• Risky transactions. Using a credit account for cash or making purchases from merchants who have been identified by the Office of Foreign Assets Control can be a fraud indicator.

• Changing payment source/insufficient funds. The combination of insufficient funds and a changing connected payment source should be treated as a delinquency risk.  

A modern loan management system can detect these signs early on and provide alerts that allow you to flag potential problem accounts. However, it is important to note that these indicators, by themselves, are not a panacea. They are not a substitute for having an excellent credit policy in place.

Having an excellent credit policy and an early warning system will help you manage risk so that you prevent accounts from going delinquent and prevent delinquent accounts from charging off. Additionally, a modern loan servicing system of record can be leveraged to build lists of consumers that have one or more of these early warning signs, helping your credit risk team prioritize which accounts to analyze further and which accounts to take action on immediately. These activities will only refine your customer management processes and risk policies.  

4. Comply with regulatory guidelines for collections 

Not all delinquent accounts will be eligible for collection messaging. Some accounts may become ineligible and require what the industry calls “suppression.” If a customer’s account is suppressed, continuing to collect on that account and any other account your customer has with you would put your business at risk of lawsuits and fines. 

Both the Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA) regulate how you should engage with customers regarding their debt. This includes what you should do if accounts are suppressed or blocked.

Accounts may fall into this category when:

• Customers who have experienced fraudulent activity occurred on their account

• Customers who have declared bankruptcy

• Deceased customers

• Customers who request to be placed on your “cease and desist” list

• Customers who are represented by an attorney

You don’t have to wait for an account to be suppressed by customer action. As the Fintech, lender, or loan servicer, you can proactively suppress accounts where there have been highly escalated complaints or where you find suspected fraud. This is another area where having a modern loan management system that enables you to easily detect this type of activity can be helpful.

5. Choose the correct collection agency.

Effective collection strategies start and end with your customers’ account data. You’ll need to consider how you collect, store, and utilize that data. 

If you choose to do collections through a third party, consider selecting a partner specializing in credit collections (versus medical or utility billing). The differences in how various forms of debt are treated can be meaningful both in terms of regulatory compliance and effectiveness. 

Aligning your debt collection strategy to existing laws is essential, not only to help you avoid wasting time on debts you can’t collect but to avoid the legal and financial ramifications of attempting to collect on debts that have been legally voided. 

Choosing a vendor who is current on laws and regulations will ensure that your debt collection process is structured properly from a legal perspective. Additionally, you should pick a vendor that focuses on maintaining current knowledge of the legal landscape for debt collection and one that monitors state-level attorney general actions and case laws that might impact your contact strategy in different locations. 

Effective loan management is the key to keeping delinquencies low

Can you do collections in house? Certainly. But that will involve a significant investment in legal and operational resources to ensure that everything is done correctly. Whether you choose to utilize internal or external resources, you need a system of record that allows you to extract account information and export it into a collections system used either by a third party or your internal resources. Additionally, a truly great system of record can import and export data. It can ingest collections data points from third-party systems and integrate that data into a consumer’s loan history. This enables your credit risk and other analytical teams to truly see the consumer’s story in data.  

A modern loan management system will be an indispensable tool once you begin issuing loans or credit. A system that can gather the data you need, analyze it in the correct way, and has effective reporting tools can help you minimize the need for debt collection. Given debt collection will ultimately be necessary, a modern loan management system will help you create an efficient collection process that serves both you and your customers’ interests.