The Importance of a Credit Policy Review

credit-policy-reviewWe talked about the Consumer Financial Protection Bureau and their proposed rulemaking for the debt collection industry in an earlier post. It is important to note that this proposed rulemaking will affect not just debt collection agencies; it will also affect the original debt owner – the creditor. The CFPB is focusing on data integrity to make sure collection agencies are receiving accurate data from their clients before they begin the collection process.

The CFPB states that “the most common debt collection complaint received by the Bureau concerns collectors seeking to recover from the wrong consumer or in the wrong amount.” They further state that they believe this stems in large part from “substantial deficiencies in the quality and quantity of information collectors receive at placement of the debt.”

Before you send a debt to collection, the CFPB is now going to require that you be able to substantiate the debt. That means having complete billing information on all responsible parties, as well as an accurate description of charges. Backup documentation, such as any signed agreements or statements sent, also need to be carefully maintained. You need to make sure all of this information is complete and accurate before you turn the account over for collection.

CCS has always placed a big emphasis on the quality of information. Our onboarding process allows us to identify the type of data elements our clients are capturing and make sure these elements are being passed on at time of assignment.

We encourage all of our clients, from the outset of our relationship, to begin with a Credit Policy Review. If cash flow is the life blood of a business, an effective and up-to-date credit policy is the heart that keeps the blood pumping. CCS helps clients analyze the entire billing cycle and its effectiveness. We look at:

  • Risk areas
  • Credit terms
  • Credit agreements
  • Information systems
  • Collection methods
  • Follow-up procedures

A thorough review will allow a client to update their credit policy in order to make educated decisions on extending credit and enforcing credit policies. Equally important, in light of the CFPB proposed rulemaking, a review of the information systems will ensure that full and accurate data is being collected. And accurate data is the key to right party contact during the collection process.

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How to Choose a Collection Agency

teamCreditors should be looking for a partner that will be the best collection agency for their accounts. But often, as discussed in this article in Collector magazine, a flawed Request for Proposal can make the decision making process less successful. Here are six problems industry insiders frequently see, and how to solve them.

  1. Out of place, boilerplate language. You wouldn’t use the same RFP when choosing a tree-trimming service that you would when choosing a collection agency. But all too often, those documents look very similar, containing a lot of questions that do not apply to the bidder. Collection services are pretty specialized, so you and the agency will benefit if you streamline the document and be specific about what you need from a collection agency.
  2. Asking about company size. Asking an agency how many employees they have, or how many employees would be dedicated to their account, will not necessarily give you a clear idea of how much work they can do for you. These days most collection agencies rely on sophisticated technology to automate work and streamline tasks. Better questions to ask would include;
    1. What is your average total number of accounts placed per month?
    2. What is your average daily outbound call rate?
    3. What is your meaningful contact rate?
    4. What is the average number of accounts per collector?
  3. Failing to provide essential information. It is a huge misconception that the less an agency knows about a creditor’s collection history and average account balance, the lower they will bid. In fact, the opposite is true. Without this kind of information, the agency is likely to bid high, because the accounts could turn out to be unprofitable. This will force them to be cautious.
  4. Overreliance on recovery rate. It makes sense to ask an agency about their recovery rate, but it is a very difficult number to pin down. Recovery rate will vary from agency to agency simply based on their client list. Collecting on accounts for a huge healthcare system is going to yield very different results from collecting on accounts for a small physician’s office. It is a good idea to ask the agency how they calculate their average recovery rate. But perhaps a more meaningful gauge would be to talk to references: find out what their reputation is with their own clients.
  5. Blinded by fees. Don’t make the mistake of letting the low bidder knock out all the other applicants. Experience and qualifications count for a lot. What really matters is how much you are getting back for every dollar spent. Lower fee and higher recovery rate rarely go together.
  6. Not validating compliance and data security. Don’t just ask if an agency observes state and federal regulations. Insist on certain standards, and detail what data security requirements and audits agencies must have to get the contract.

CCS has a proven track record in a variety of industries. We customize our services to our clients’ needs, and offer everything from pre-collection letter services, to training, billing/early out, credit policy review, debt collection, and payment processing/merchant services.

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