The Consumer Financial Protection Bureau (CFPB) recently held a meeting to unveil its outline of proposed rules that will overhaul the debt market. The outline was presented by Richard Cordray, the head of the CFPB, and applied to both first and third-party debt collectors. The proposals generally will fall into three categories: (1) requirements to substantiate debt, (2) requirements regarding notice to consumers and (3) requirements regarding consumer disputes. When the final rules are announced, they will represent the first major regulatory change to the debt collection industry since the Fair Debt Collection Practices Act was enacted in 1977.
I had a lunch meeting with several financial advisors this week. A few lamented how their clients are not able to maintain a budget to live below their means. They mentioned the temptation to use credit cards was too great and the resultant high interest rates only exacerbate the problem. When I mentioned peer-to-peer lending sites to reduce their annual percentage rate by 10% they stared at me in disbelief, like it was too good to be true.
These types of loans accounted for $5 billion in loans last year. The question is not as much, when does it makes sense to use peer-to-peer lending to refinance existing debt, but knowing the costs involved. Regulatory and compliance considerations may provide an option for cash strapped customers. According to “The Economist” the rapid progress suggests big banks and credit-card companies may be disrupted in the same way taxi companies have been disrupted by Uber. The major platforms, Lending Club and Prosper, offer online loans of up to $35,000 for three to five year notes. Chicago-based Avant also offers personal loans up to $35,000 funded by institutional investors.
Companies like Social Finance emphasize student loans and mortgages as they are pitching student lending services. San Francisco-based lender, Earnest, uses an algorithm and 80,000 to 100,000 data points to lend money to students with little to no credit history.
This list goes on. LendingHome, another San Francisco start-up, offers mortgage loans and allows accredited investors to participate with at least $50,000. Los Angeles-based AssetAvenue targets non-owner occupied, first lien, mortgage loans, and is open to accredited investors in a few states.
The point is trying to help a customer by making them aware of options is always a good idea. For small balance customers, San Francisco-based LendUp offers up to $500 for 35 days at 272.73% APR (as of October 22, 2015). While it is clearly exorbitant to the point of being predatory, their stated mission is to help people establish credit who don’t have standard creditworthiness.
When working with consumers, there are some distinct advantages to using Lending Club and Prosper worth considering:
• A fixed rate of interest is probably one of the most compelling advantages.
• The term of the loan from major social lending sites is either three or five years.
• There is no pre-payment penalty. Customers can always pay off loans early without pre-payment fees. The application process is fairly easy.
• The online application can take just a few minutes to complete and a decision on the loan occurs quickly.
• Once they have a loan, monthly payments are automatically deducted from their checking account.
• Unlike a home equity line of credit, the loan is not secured by your customer’s home. While they are obligated to repay the loan, they are not secured by any of their assets. The general requirements borrowers must meet to qualify for these loans include:
• Must be a U.S. citizen or permanent resident.
• Must be 18 years old with a valid bank account and a valid Social Security number.
• Must have a FICO score of at least 660.
• Their debt-to-income ratio (excluding mortgage) must be below 35%. The total of monthly debt payments (e.g., credit card, school loan, car payments) divided by monthly income must be less than 35%.
• At least three years of credit history, showing no current delinquencies, recent bankruptcies (seven years), open tax liens, chargeoffs, or non-medical collections accounts in the past 12 months.
• They can only have six or fewer credit inquiries on their credit report in the last six months.
• Must have at least two revolving credit accounts currently open.
When customers apply, they are assigned a rating based on their score and credit that determines the risk to other investors. If accepted, the listing is published and investors can invest into this loan or several. Along the way they ask personal questions regarding the loan and why. They may use portions of credit reports available to them and some of the questions may be used to test a borrower’s integrity in answering them. They may also ask for the customer’s tax returns or paystubs.
Although I don’t recommend it, in the new world of peer-to-peer lending it is even possible to become an investor/ lender and finance your favorite customer’s debt.
Strategic Planning for 2016 CU Recovery Analysis on In-house Collectors vs Outsourcing
Strategic planning is an essential first step in the budgeting process. A solid strategic plan lays out the direction and goals of the credit union, as well as criteria for actions to reach the goals. The amount of money available determines, to a large degree, what options can be entertained. As goal setting moves forward, if the credit union doesn't have the budget to support its strategic plan, it will need to either modify the goal or find a financial means to support it. This is especially important during times of growth, when the question can be whether to add to staff, or outsource portions of the workload.
A question that can be asked is ‘what is real expense of adding to staff vs outsourcing?’ In a recent analysis performed by The Loan Service Center, a significant savings was found in outsourcing all or part of collection department functions. Below are the findings:
· U.S. Department of Labor statistics show that the average yearly salary for an experienced collector is $36,000.00.
· Industry statistics report that recruitment, hiring and training a new employee is estimated to cost $3,500.00, with the training portion of the hiring process an average of 31 hours.
· Employee benefits, office space, office equipment and vacation/sick leave total $6,000.00 per year.
· Harvard Business School reports that there is an average of 6.2 months of reduced efficiency while the employee learns to reach their productivity goals. Even with an experienced new hire, there is a time period of learning new procedures and processes which impacts overall effectiveness.
The results: the first year cost of a new, experienced collection department employee can equal $45,500.00.
Conversely, a fully trained and skilled Loan Service Center collector, managing a queue of 150 accounts would cost $27,000.00 with no additional expenses. The analysis clearly demonstrates that outsourcing all or a portion of credit union collection department needs can be a cost effective strategy.
About CU Recovery & the Loan Service Center CU Recovery, Inc. is a full service collection agency, working exclusively for credit unions, dedicated to maximizing recoveries on charged off loans. The Loan Service Center, Inc. provides staffing solutions for credit union collection departments to minimize losses on their delinquent active loan portfolio. The CU Recovery Collection Academy is held in October of each year and is a resource for continuing education to assure the success of Credit Union collection departments in meeting their member service and delinquency reduction goals. For more information: www.curecovery.com
VANCOUVER, WA (May 8, 2015)— The InterProse Corporation, a Vancouver, Washington-based creator of cloud software applications for accounts receivable and debt management, announced it has recently completed its examination in conformity with Statement on Standards for Attestation Engagements (SSAE) No. 16, Reporting on Controls at a Service Organization that was performed by an independent accounting and auditing firm.
Completion of the SSAE 16 Type I examination indicates InterProse’s processes, procedures and controls have been formally evaluated by an independent accounting and auditing firm. The examination included the company’s controls related to: The Suitability of Design of Controls.
“We care about our clients and want them to be successful and we’re serious about what we do,” said Matthew Hill, InterProse’s President/CEO. “Going through this type of examination, where an outside auditing firm reviews the methodology we use to develop, test and deploy software, assures our current and future clients that InterProse and our data center partners follow best practices and that the systems and controls we have in place are secure and effective.”
SSAE 16 is designated by the U.S. Securities and Exchange Commission (SEC) as an acceptable method for a user entity’s management to obtain assurance about service organization internal controls. In addition, the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 make SSAE 16 reports even more important to the process of reporting on effective internal controls by public companies.