Archives for August 2017

The CFPB now offers an online form as a service to those seeking guidance about CFPB regulations. Check it out here.

The website still offers an email and phone number for regulatory questions (CFPB_reginquiries@cfpb.gov; (202) 435-7700), but a call to the number makes it clear that the new form is the preferred workflow for queries.

Some responses will take longer for Bureau staff to research, but the notice suggests that for the most part, some kind of response can be expected in 10-15 business days.  

The Bureau warns,

“Please understand that the responses we provide are not official interpretations of the Bureau and are not a substitute for formal legal counsel or other compliance advice. For example, we cannot moderate disputes between parties, provide guidance on matters that are under examination or investigation by the Bureau or another state or federal agency, or answer questions about specific business plans.”

insideARM Perspective

This new online form came to light with little fanfare. At first blush it seems to be a positive development, even if it is nothing more than a simpler and more convenient method to request assistance. insideARM would love to hear from anyone in the industry that utlizes the form in the future.

This article was written by David N. Anthony, Cindy D. Hanson and Julie D. Hoffmeister, and originally published on the Troutman Sanders LLP Consumer Financial Services Law Monitor. It is republished here with permission. 

On August 15, 2017, the Ninth Circuit issued its decision on remand in Spokeo, reversing and remanding the case to the District Court after finding that the named Plaintiff, Thomas Robins, has standing to pursue his claims.

Background

In Spokeo, Inc. v. Robins, Plaintiff Robins sued the “people search engine” for alleged violations of the Fair Credit Reporting Act (“FCRA”). Robins alleged Spokeo published inaccurate (though not harmful per se) information about him, including that Robins had a graduate degree and was married and had children. At issue was the fact the Complaint alleged only statutory violations and no injury-in-fact. Spokeo argued that this statutory violation alone was insufficient to confer Article III standing because it does not meet the “irreducible constitutional minimum” to establish standing, which required a plaintiff to have suffered an injury-in-fact by sustaining an “actual or imminent” harm that is “concrete and particularized.”

The District Court for the Central District of California originally dismissed the case, holding Robins failed to allege any injury-in-fact and, therefore, did not have Article III standing. The Ninth Circuit reversed, holding the alleged violation of Robins’ statutory rights alone was sufficient to satisfy Article III’s requirements, regardless of whether the plaintiff can show a separate actual injury.

On May 16, 2016, the Supreme Court in a 6-2 decision vacated and remanded the Ninth Circuit’s decision. The Supreme Court found the Ninth Circuit’s injury-in-fact analysis “incomplete” because it “focused on the second characteristic (particularity), but it overlooked the first (concreteness).” According to the Court, “a ‘concrete’ injury must be ‘de facto’; that is, it must actually exist” in a “‘real,’ and not ‘abstract’” sense, but is not “necessarily synonymous with tangible.”

While noting Congress’s role in identifying and elevating intangible harms to create standing for statutory violations, the majority made clear that this “does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.” More (i.e., a concrete injury) is necessary. Indeed, this is exactly why Robins could not “allege a bare procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III.”

Ninth Circuit’s Decision on Remand

On August 15, 2017, a unanimous Ninth Circuit issued its decision authored by Judge O’Scannlain regarding whether Robins had sufficiently pled a concrete injury required to establish Article III standing. The Court held true to its original conclusion finding Robins has standing to pursue his claim.

In evaluating Robins’s claim of harm, the Ninth Circuit considered two main issues: “(1) whether the statutory provisions at issue were established to protect [Robins’s] concrete interests (as opposed to purely procedural rights), and if so, (2) whether the specific procedural violations alleged in this case actually harm, or present a material risk of harm to, such interests.”

As to the first question, the Ninth Circuit answered in the affirmative. The Court held “that Congress established the FCRA provisions at issue to protect consumers’ concrete interests,” namely their interests in ensuring fair and accurate credit reporting and protecting consumer privacy. “Even if there are differences between FCRA’s cause of action and those recognized at common law, the relevant point is that Congress has chosen to protect against a harm that is at least closely similar in kind to others that have traditionally served as the basis for [a] lawsuit.”

With respect to the second question, the Ninth Circuit held because Robins alleged Spokeo prepared an inaccurate report and published that report on the Internet, his claim “clearly implicates, at least in some way, Robins’s concrete interests in truthful credit reporting.” The Ninth Circuit emphasized however that “in many instances, a plaintiff will not be able to show a concrete injury simply by alleging that a consumer-reporting agency failed to comply with one of the FCRA’s procedures.” Rather, the consumer must show that the violationmaterially affected the consumer’s protected interests in accurate credit reporting. In other words, the Supreme Court’s decision “requires some examination of thenature of the specific alleged reporting inaccuracies to ensure that they raise a real risk of harm to the concrete interests that FCRA protects.”

“We are satisfied that Robins has alleged injuries that are sufficiently concrete for the purposes of Article III,” held the Court. Based on its previous finding that Robins’s injuries were also sufficiently particularized, the Court concluded that Robins has “adequately alleged the elements necessary for standing.”

Conclusion

In Spokeo, the Supreme Court laid down an important marker that federal lawsuits should be based on claims of real harm. Since then, courts across the nation have issued varying decisions attempting to interpret the contours of the Supreme Court’s decision. The Ninth Circuit’s decision represents one in a wave of cases discussing the requirement of “concrete harm” in FCRA matters.

We will monitor this case on remand as well as report on other circuit court cases that continue to grapple with these standing related issues.

Troutman Sanders is also hosting an FCRA webinar on August 24, 2017, which will include a Spokeo-related discussion. To register for the webinar, please click here.

PHOENIX, Ariz. – Empereon-Constar, a leading provider of end-to-end customer engagement and customer management solutions, and HQC LLC, the exclusive provider of a robust multi-communication channel monitoring platform, today announced their new joint venture – HQC International.  

The joint venture establishes a strategic collaboration between Empereon-Constar and HQC LLC and leverages the expertise and global resources of both companies. Empereon-Constar is majority owner of the new company, which launches operations this month. 

“We are pleased to welcome HQC International to the Empereon-Constar portfolio of companies,” said Travis Bowley, Empereon-Constar CEO. “HQC International’s services are complementary to our current suite of services and strategically build on our existing strengths, further expanding our global platform.” 

HQC International offers real-time reporting, trending analytics for Voice, SMS, Chat and Email in an environment that clients directly control. The well-defined, expert process monitors a client’s internal teams and their external vendor networks, providing key result information to clients. HQC International’s unique cloud-based technology solution also offers unlimited scalability and reduces the need for internal quality/monitoring resources. 

Yvonne Torrijos, Empereon-Constar CMO commented, “We value the longstanding success of HQC. We have developed a deep respect for the talented team who will be working with us and who share our dedication to serving customers by providing high-quality services.” 

“We are very proud of the services we provide our clients,” stated Andrew Rae, President of HQC. “The formation of HQC International offers our clients extended services and represents a significant opportunity to enhance the growth of both of our businesses.” 

About Empereon-Constar

Empereon-Constar is a leading business process outsourcing company providing end-to-end customer engagement and customer management solutions for New Sales Account Generation, Customer Care, Risk and Fraud Operations, Collections Operations, QA Agent Call Monitoring, Back Office Administration Support, and Tech Support across the entire customer account lifecycle. Our customized solutions, real-time analytics, and global footprint help our clients achieve their business goals. 

Empereon-Constar’s full range of consumer and commercial services includes: lead generation, inbound / outbound sales, account origination, customer care, customer service, technical support, first party collections, recovery collections, credit bureau dispute management, fraud risk management, anti-money laundering, loan servicing and loan processing. Our world-class services and unique global strategy allows us to meet the needs of our client partners across multichannel (email, chat, phone) communication platforms, provide exceptional customer experiences, and consistently deliver world-class performance results, while maintaining the highest level of data security and compliance. 

Empereon-Constar portfolio of companies: Empereon Marketing, LLC, Constar Financial Services, LLC, Empereon International, Constar International, and HQC International. 

About HQC International

HQC International offers real-time reporting, trending analytics for Voice, SMS, Chat and Email in an environment that clients directly control. The well-defined, expert process monitors a client’s internal teams and their external vendor networks, providing key result information to clients. HQC International’s unique cloud-based technology solution also offers unlimited scalability and reduces the need for internal quality/monitoring resources.

Last Thursday Senator Elizabeth Warren (D-MA) sent letters to the CEOs of sixteen of the top U.S. banks, asking them to go on record with their position on the Consumer Financial Protection Bureau’s (CFPB) arbitration rule.

The CFPB issued a rule on July 10 which prohibits banks and other creditors from including a clause in their agreements that prohibits the use of class action bans in certain financial contracts. The CFPB’s blog post – which also contains an animated video explaining the rule — stated,

“Our new rule will restore the ability of groups of people to file or join group lawsuits. In some cases, not only will companies have to provide relief, they will also have to change their behavior moving forward.”

Opponents of the rule claim that this is an example of regulatory overreach, and that it really only supports wealthy trial lawyers, who often walk away with hundreds of thousands – or millions – of dollars from class action lawsuits, while consumers receive a check for something like $23 (Warren’s letter cites a figure of about $64, from the CFPB’s Arbitration Study). House Financial Services Chairman Jeb Hensarling (R-TX) said,

“Americans were promised a Consumer Financial Protection Bureau but instead they obviously got a Trial Lawyer Enrichment Bureau.”

Within two weeks, the U.S. House of Representatives invoked the rarely used Congressional Review Act to begin the process of overturning the rule. The Congressional Review Act allows Congress to revoke a rule issued by a federal agency by enacting a joint resolution of disapproval within 60 days of the announcement of the rule. On July 25, the House voted 231-190 against the CFPB’s arbitration rule. The Senate, now in recess until September 5, needs to do the same shortly after its return. If they do, it is widely assumed President Trump will follow suit.

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Warren’s letters, which also request data on the financial institutions’ use of arbitration clauses in consumer agreements and the outcomes of arbitration proceedings, were sent to JP Morgan Chase, Bank of America, Wells Fargo & Company, Citigroup Inc., U.S. Bancorp, PNC Financial Services Group, Inc., TD Group US Holdings, Capital One Financial Corporation, HSBC North America Holdings, Charles Schwab Corporation, BB&T Corporation, Suntrust Bank, Barclays US, Ally Financial Inc., American Express Company, and Citizens Financial Group.

Senator Warren requested a response by September 1, 2017.

insideARM Perspective

Many rules associated with financial services – like debt collection — can be nuanced and complicated, and walking the fine line between public relations, advocacy, and duties to shareholders can be tricky. Associations typically do the work of representing their members in matters like this. Indeed, Warren’s letter specifically mentions the U.S. Chamber of Commerce, the American Bankers Association, and the Financial Services Roundtable. Here is the letter that those groups – and several others – submitted to Congress in July 2017.

It is notable that a lawmaker would call out the leaders of affected firms – essentially daring them to publicly support a position some deem to be “anti-consumer.”

It will be interesting to see whether the CFPB’s proposed debt collection rule (anticipated perhaps later this year) will draw similar passion from lawmakers and industry.

A district court judge in Oregon has dismissed a plaintiff’s complaint that a letter she received from a debt collector did not disclose that interest was not accruing, and also that using an abbreviated account number was misleading. The case is Powers v. Capital Management Services, LP.

You can read the full Order here.

Editor’s Note:  A motion for summary judgment is based upon a claim by one party (or, in some cases, both parties) that contends that all necessary factual issues are settled or so one-sided they need not be tried. The summary judgment is appropriate when the court determines there no factual issues remaining to be tried, and therefore a cause of action or all causes of action in a complaint can be decided upon certain facts without trial.

Background

Powers alleged that the defendant, a debt collector, violated the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (FDCPA) by not disclosing that interest was not accruing on the debt balance she owed, and by using only four digits to identify the account, in alleged violation of the ‘false representation’ clause of §1692e(10).

The original debt at the center of the case was a delinquent U.S. Bank account owed by plaintiff. Capital Management sent powers a letter listing the original and current creditor as U.S. Bank, the account number as 5702 (the last 4 digits of the US Bank account number placed with Capital for collection), and the amount of debt to be $565.91. During the attempts to collect the debt, Capital was not adding interest to the amount owed.

Capital sent one letter to Powers, and closed and returned the account to US bank on November 3, 2016, at U.S. Bank’s request.

Decision

Duty to Disclose Interest Accrual

In Santibanez v. Nat’l Credit Systems, Inc., 2017 WL 126111 (D. Or. Jan. 12, 2017), the judge ruled that a debt collector does not have a duty to affirmatively state that no interest is accruing or to warn the consumer that interest could accrue if the account is sold to another creditor in the future. The judge in this case agreed, explaining that it is “only in instances when interest is accruing on a debt does Section 1692g(a)(1) require a debt collector to disclose that fact and include both principle (sic) and interest when stating the amount due.”

In her response, Powers argues that while Capital demonstrated it was not accruing interest, there was no evidence about whether US Bank was or wasn’t adding interest. The judge was not moved by the argument because the record showed that US Bank assigned the debt to Capital, and Capital held the debt during the time it was in collections.

Since a debt collector is not required to inform the debtor that interest is not accruing on the principle when that is the case, Capital Management deemed to have fulfilled its obligations under the FDCPA by sending a letter to plaintiff clearly stating the amount of the delinquent debt to be $565.91.

Misrepresentation of Account Number

Capital’s collection letter set forth, on its face:

“Original Creditor: U.S. Bank
Current Creditor: U.S. Bank
Account #: 5702
Amount of Debt: $565.91”

5702 were the last 4 digits of the plaintiff’s U.S. Bank account number, and Powers did not dispute her knowledge of that. She still argued that Capital Management’s use of the last four numbers of her account was a misrepresentation, and that Capital should have conveyed, by preceding the 4 digits with Xs, for example, that 5702 was not her entire account number.

Did Capital Management use any “false, deceptive, or misleading representation or means in connection with the collection of any debt” (15 U.S.C. §1692e) or “any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer.” 15 U.S.C. § 1692e(10)? Judge McShane said no: If a false but non-material representation is not likely to mislead the least sophisticated consumer, it is not actionable under the FDCPA. In this case, there was no showing that the defendant was false or misleading, and the letter did not generate four random, untraceable numbers. Because the numbers could be associated with the US Bank account, and the letter contained the exact outstanding debt amount, the court found that a very unsophisticated consumer could still understand and identify the account in question.

The fact that the Defendant maybe had other, and perhaps better, options in how to represent the account number doesn’t equal bad “malevolence,” the court found.

The FDCPA was designed to “eliminate abusive debt collection practices by debt collectors” (15 U.S.C. § 1692(e)), and the court reflected that as a matter of law, there was no basis in this case to find that Capital had used false or deceptive tactics.

insideARM Perspective

Every bit of case law holds a nugget of wisdom for the ARM industry. As companies begin to plan for the future, make investments in technology, and look for ways to efficiently partner with clients and abide the law, Powers v. Capital Management can be seen as a case study in designing future best practices, and avoiding costly litigation.

Creditors and the collection agencies they partner with might consider/ask:

1. Balance reporting: What systems are in place to keep itemized, real-time balances reporting on all the communications that may be rendered to consumers? Helping consumers fully understand what they’re being asked to pay, and reminding them exactly how the debt was incurred is helpful to all parties and can help reduce complaints and litigation.
2. Auditing vendors: In vendor audits, issuers should ask to see templates of all communications sent, and have those templates reviewed by your in-house counsel. Be sure you understand exactly how variable fields will populate. See our vendor audit checklists for more information on how to perform and document a thorough vendor audit.
3. Identifying accounts: There are many ways to associate collections accounts with original creditor accounts, but it’s worthwhile to go the extra mile and use as many explicit account markers as you can. In a world where the same consumer can have two credit cards issued by the same bank, or have multiple hospital visits with different doctors to cope with a chronic illness, it makes sense to create as much transparency as possible. Use the “least sophisticated consumer” lens on everything you do. There’s no worthwhile reason not to.

Technology can help get a lot of these issues handled efficiently, but nothing beats routine check- ins with vendors, and manual, in-person vendor and internal audits. It’s important to not only look for ways to improve, but also get into the habit of creating formal audit reports with any hotspots identified and plans to cure explored. Then, document your corrective actions. It’s a good way to keep records you can share with future potential vendors, and if you find yourself defending a lawsuit, it may also demonstrate your good faith and desire to act in line with federal law and the laws in your state.

This article was written by David N. Anthony and Reiss F. Wilks, and originally published on the Troutman Sanders LLP Consumer Financial Services Law Monitor. It is republished here with permission. 

In dismissing a claim against a debt collector, brought under the Fair Debt Collection Practices Act, the U.S. District Court for the Eastern District of Wisconsin found that language used by the debt collector clearly informing the consumer that interest and fees would continue to accrue on the balance did not violate the FDCPA.

In Boucher et al. v. Finance System of Green Bay, Inc. et al., the plaintiffs defaulted on medical debts which were placed with Finance System to collect.  Finance System sent the plaintiffs letters containing the following disclaimer:

“As of the date of this letter, you owe $ [stated amount].  Because of interest, late charges and other charges that may vary from day to day, the amount due on the day you pay may be greater.  Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check.  For further information, write to the address above or call [listed number].”

The plaintiffs claimed that Finance System could never have lawfully imposed late fees or charges on medical debt.  They asserted a class action, alleging that the letters were materially false, deceptive, and misleading under the FDCPA.

Finance System filed a Rule 12(b)(6) motion to dismiss for failure to state a claim, arguing that the disclaimer used in its collection letters mirrored the safe harbor language found in Miller v. McCalla, Raymer, Padrick, Cobb, Nichols & Clark LLC. 214 F. 3d 872, 876 (7th Cir. 2000).  Finance System also argued it was entitled to accrue interest on the plaintiffs’ accounts because interest was authorized by the creditor.

In granting the motion to dismiss, the Court held that Finance System accurately notified the plaintiffs of the amount due on the date of the letters and properly informed them that the amounts due may vary due to additional charges.

The Court referenced Miller and stated that the Seventh Circuit recognized that a debt collector who uses such language would not violate the “amount of the debt” provisions as long as “the information he furnishes is accurate and he does not obscure it by adding confusing other information (or misinformation).”

The plaintiffs tried to argue that Miller required debt collectors to narrowly tailor the Miller statement to each unique situation and eliminate the variable charges that no longer apply.  Failure to do so, the plaintiffs argued, would therefore result in inaccurate and misleading information in violation of the FDCPA.

The Court held that the plaintiffs’ interpretation of Finance System’s collection letter was unreasonable.  The central purpose of the Miller safe harbor formula was to provide debt collectors with a way to notify consumers that the amounts they owe may ultimately vary.  Therefore, the Court noted that, as in the Millercase, no reasonable person could conclude that the letters used by Finance Systems failed to clearly inform the plaintiffs of the amount due or that the balance may increase by the time of payment.

This case has now been appealed to the Seventh Circuit.  We will continue to monitor the outcome of this case and other current account balance cases, and will report on future developments.

ANN ARBOR, Mich. — Brock & Scott, PLLC is pleased to announce the addition of Charity A. Olson to the firm.  Olson will lead Brock & Scott’s Consumer Financial Services Litigation Group. Olson specializes in the defense of individual and class action claims stemming from alleged violations of lending, debt collection, credit reporting and other consumer financial statutes. She also regularly handles complaints involving the Consumer Financial Protection Bureau, state attorney generals and licensing boards and is skilled in handling enforcement actions and other regulatory inquiries related to lending and debt collection practices.  Her clients include financial institutions, loan servicers, credit card issuers, asset buyers, third-party collection agencies and law firms located throughout the United States. 

Olson received her Bachelor of Arts degree, magna cum laude, from the University of Michigan and obtained her law degree, magna cum laude, from Western Michigan University Cooley Law School.  She is a past president and board member of the Michigan Association of Collection Agencies and serves as ACA International’s State Compliance Chair for Michigan.  She is a frequent lecturer on FDCPA, FCRA, TILA, TCPA and UDAAP claims.

Founding Partner Tom Brock said “We are excited to add Charity’s talent and industry expertise to our executive management team as a Partner.  She is a leader in the consumer financial services arena and a tireless advocate for her clients. Her addition to the firm will greatly expand our litigation and compliance offerings which will benefit the firm’s existing clients as well as the diverse roster of clients that are already partnering with Charity. Adding her experience further solidifies our progress as a full-service law firm that delivers results, while adhering to a high level of compliance and best practices.”

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Olson added, “Partnering with Brock & Scott presents a unique opportunity to expand this practice with a best-in-class firm that is a leader in the marketplace. I am proud to join this dynamic team and look forward to adding immediate value as we continue to broaden the firm’s existing litigation and compliance footprint.”

Founded in 1998, Brock & Scott has been a mainstay in legal recovery services for close to 20 years with offices across Michigan, Ohio, Maryland, Virginia, North Carolina, South Carolina, Tennessee, Alabama, Georgia and Florida. The firm provides a comprehensive suite of practice area offerings covering mortgage default, bankruptcy, special assets resolution, eminent domain, real estate transactions, complex litigation, collections and financial services consulting. Brock & Scott continues to be a leader in the marketplace, providing value and results driven solutions to help achieve client goals.  

For more information related to this announcement or on Brock & Scott, PLLC, please visit us at www.brockandscott.com or contact Charity.Olson@brockandscott.com or Kevin.Frazier@brockandscott.com.

ANN ARBOR, Mich. — Brock & Scott, PLLC is pleased to announce the addition of Charity A. Olson to the firm.  Olson will lead Brock & Scott’s Consumer Financial Services Litigation Group. Olson specializes in the defense of individual and class action claims stemming from alleged violations of lending, debt collection, credit reporting and other consumer financial statutes. She also regularly handles complaints involving the Consumer Financial Protection Bureau, state attorney generals and licensing boards and is skilled in handling enforcement actions and other regulatory inquiries related to lending and debt collection practices.  Her clients include financial institutions, loan servicers, credit card issuers, asset buyers, third-party collection agencies and law firms located throughout the United States. 

Olson received her Bachelor of Arts degree, magna cum laude, from the University of Michigan and obtained her law degree, magna cum laude, from Western Michigan University Cooley Law School.  She is a past president and board member of the Michigan Association of Collection Agencies and serves as ACA International’s State Compliance Chair for Michigan.  She is a frequent lecturer on FDCPA, FCRA, TILA, TCPA and UDAAP claims.

Founding Partner Tom Brock said “We are excited to add Charity’s talent and industry expertise to our executive management team as a Partner.  She is a leader in the consumer financial services arena and a tireless advocate for her clients. Her addition to the firm will greatly expand our litigation and compliance offerings which will benefit the firm’s existing clients as well as the diverse roster of clients that are already partnering with Charity. Adding her experience further solidifies our progress as a full-service law firm that delivers results, while adhering to a high level of compliance and best practices.”

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Olson added, “Partnering with Brock & Scott presents a unique opportunity to expand this practice with a best-in-class firm that is a leader in the marketplace. I am proud to join this dynamic team and look forward to adding immediate value as we continue to broaden the firm’s existing litigation and compliance footprint.”

Founded in 1998, Brock & Scott has been a mainstay in legal recovery services for close to 20 years with offices across Michigan, Ohio, Maryland, Virginia, North Carolina, South Carolina, Tennessee, Alabama, Georgia and Florida. The firm provides a comprehensive suite of practice area offerings covering mortgage default, bankruptcy, special assets resolution, eminent domain, real estate transactions, complex litigation, collections and financial services consulting. Brock & Scott continues to be a leader in the marketplace, providing value and results driven solutions to help achieve client goals.  

For more information related to this announcement or on Brock & Scott, PLLC, please visit us at www.brockandscott.com or contact Charity.Olson@brockandscott.com or Kevin.Frazier@brockandscott.com.

Last Tuesday PRA Group (PRAA) released Q2 2017 financial results and hosted a conference call for investors. The company reported net income of $11.7 million in the second quarter, compared with $36.5 million in the prior year period.  Diluted earnings per share were $0.25 versus $0.79 in the second quarter of 2016.

PRAA is one of the largest purchasers of defaulted receivables worldwide.

Second Quarter Business Highlights

• Delivered record quarterly investment in purchased portfolios in Americas Core and Americas Insolvency, outside of a business acquisition.
• Hired almost 900 net new U.S. collectors since June of 2016, including nearly 250 in the second quarter of 2017 alone.
• Plan to open new domestic call centers in order to provide continued, expanded service to customers and sellers. 
• Grew cash collections in all segments on a currency adjusted basis compared with second quarter of 2016 except Americas Insolvency, where cash collections grew sequentially for the first time since the second quarter of 2014. 
• Expanded North American credit facility to $1.2 billion and issued $345 million in convertible senior notes.  Capital available for portfolio purchases of $1.1 billion globally.   

Second Quarter Financial Highlights

• Estimated remaining collections of $5.3 billion consistent with the prior year quarter and an increase of $181 million since the first quarter of 2017. 
• Cash collections of $374.7 million versus $387.2 million in the prior year quarter. 
• Total revenues of $200.3 million versus $228.5 million in the prior year quarter. 
• Income from operations of $48.3 million versus $72.8 million in the prior year quarter.
• Net income of $11.7 million versus $36.5 million in the prior year quarter. 
• Portfolio acquisitions of $295.6 million versus $249.5 million in the prior year quarter.

Kevin P. Stevenson, PRAA President and Chief Executive Officer commented on the quarter:

“We continue to be excited about volumes and the significant level of investment in both Core and Insolvency in the United States. We are committed to working with customers to resolve their debt and helping sellers optimize the value of their charged-off inventories. To accommodate larger purchasing volumes, we are preparing to open new call centers in the U.S. During the quarter, we saw growth in currency adjusted cash collection in all segments except for Americas Insolvency, which grew sequentially for the first time in three years. We are very encouraged by both the industry and internal trends.”

insideARM Perspective

insideARM suggests that parties interested in PRAA also review the quarterly earnings announcement for Encore Capital Group (ECPG) to get a broader picture of the debt buying industry. ECPG reported earnings last week; insideARM wrote about their quarterly announcement here.

As always, the conference call is more interesting than the press release. During the conference call, Stevenson discussed current U.S. market conditions:

“Core purchasing in the Americas was $145 million, and just like Americas insolvency, it was the largest single quarter in company’s history. We are very pleased with this result, but unlike insolvency, this performance was driven by general market conditions in the United States.

The volume increases we are seeing in Americas core are coming from current sellers in the market and not from the return of any sellers. We have no further insight into when any of the sideline sellers may plan to return. Additionally, we are aware of recent commentary that a seller is exploring, taking post-charged-up collection in-house, but that does not appear to be an overall market trend.

Overall, we are encouraged by what we’re seeing in volumes. And as we discussed last quarter, this appears to be a natural progression of the seasoning of the lenders credit card loan portfolio. We currently see nothing unusual from a macroeconomic or consumer perspective impacting credit cards.”

Stevenson also commented on the current regulatory environment:

“On the regulatory front, we are waiting for a decision from the D.C. Circuit on the ACA versus FCC lawsuit, regarding the Telephone Consumer Protection Act or TCPA. Apart from that decision, the commissioners of the FCC appear to understand the business need in regard to the TCPA, and we remain hopeful we will be able to use technology in our collection efforts.

The CFPB has indicated it will issue its notice of proposed rules in regards to the collection industry possibly as early as September. The process then consists of a comment period, writing of final rules and likely an implementation period. We are unsure of the timing for final rules but will follow the process carefully.”

As noted in the business highlights above, PRAA hired almost 900 net new U.S. collectors since June of 2016, including nearly 250 in the second quarter of 2017 alone. This led to an interesting discussion on collector attrition rates and productivity from Mr. Stevenson:

“When you’re hiring this many people, you expect turnover to be up. What I think is interesting, and I’m going to give you the numbers in a second. What I think is interesting is the current turnover rate, again, this is simple math from our Human Resources Department, is about 68% turnover rate. And that’s for call center collectors, and that’s from day 1 of hiring. That is not an unusual rate for us, by the way, historically.

So you’ve been around long enough, you remember those rates, 60%, 70% nothing unusual. What I think is fascinating about it is that we’ve talked for the past, that we let our collector force attrit. And what you end up doing is keeping your very best collectors, generally. And so our turnover rate actually went — I’ve got it here from 2014 on –  So in 2014, it was about 52%. In 2015, it went to 38%. And then it went to 42% in 2016, and now it’s back up to 68%. And at the same time, collector productivity, using the round numbers, went – in 2014, it was about $84 an hour paid. Then it spiked to $115, then to $143, and now it’s about $94. These are round numbers. So, it’s an interesting study. But I would say what I’m pleased about right now is that our turnover rate is nothing unusual compared to our historical numbers.”

Last Tuesday Performant Financial Corporation (PFMT), announced financial results for the second quarter of 2017. 

PFMT is one of the few publicly traded companies in the ARM space. The company has also historically been one of the Department of Education’s (ED) top performing private collection agencies. However, the firm’s contract with ED expired in April of 2015 and they have not received placements from ED since then.  ED has been a significant portion of the firm’s revenue and profits for years.

insideARM last wrote about the Department of Education (ED) RFP on August 3, 2017. In that article, we reported that ED had provided a current status report on the RFP “Do Over” that is currently in process.

Editor’s Note: See here for a link to an insideARM page that provides a history of our ED-related articles. The page is automatically updated as new stories are written.

Second Quarter Financial Highlights

• Total revenues of $35.9 million, compared to revenues of $38.1 million in the prior year period, down 5.8%
• Net loss of $2.4 million, or $(0.05) per diluted share, compared to a net income of $1.5 million, or $0.03 per diluted share, in the prior year period
• Adjusted EBITDA of $5.0 million, compared to adjusted EBITDA of $8.9 million in the prior year period
• Adjusted net loss of $0.5 million, or $(0.01) per diluted share, compared to an adjusted net income of $2.9 million or $0.06 per diluted share in the prior year period

Second Quarter 2017 Results

Student lending revenues in the second quarter were $27.5 million, a decrease of 4.5% from revenues of $28.8 million in the prior year period. Our Guaranty Agency clients and the U.S. Department of Education accounted for revenues of $26.2 million and $1.3 million, respectively, in the second quarter of 2017, compared to $21.8 million and $7.0 million in the prior year period.  Student loan placement volume (defined below) during the quarter totaled $0.9 billion, compared to $1.3 billion in the prior year period.

Healthcare revenues in the second quarter were $2.1 million, down from $3.4 million in the prior year period. Medicare audit recovery revenues were $0.1 million in the second quarter, a decrease of $2.2 million from the prior year period, as the Company’s recovery activities are just beginning on the two new RAC contracts awarded to the Company for Region 1 and Region 5. Commercial healthcare clients contributed revenues of $2.0 million, an increase of $0.9 million or 81.8% from the prior year period.

Other revenues in the second quarter were $6.4 million, up from $5.9 million in the prior year period.

insideARM Perspective 

The conference call discussing the earnings announcement was fairly short.  Still, there were few interesting items. 

Regarding the new business ramp up for the IRS contract and CMS Recovery audits Lisa Im, PFMT Chairwoman and Chief Executive Officer, said:

“As we mentioned earlier, we began the start-up of the IRS recovery contract in both Region 1 and Region 5 CMS recovery audit contracts. While still in the very early stages, we believe these will be strong long-term programs. And in a time when federal government agencies are looking for ways to reduce expenses, these programs achieved that objective through generating returns with a success fee-based structure.”

When asked about the status of the ED RFP and the potential for awards to be announced yet this month, Ms. Im said:

“There is an insideARM article that came out today that probably puts a little bit better light and kind of bets on the fact that the August 25 date might be extended out further, based on the evaluations that they are doing and the process that Department of Education has put forward. So my best guess is that they probably will go longer than August 25. But I think we don’t know until we get to that point.”

Finally, Ms. Im discussed the refinancing of the company’s credit facility:

“Early this year, we hired an investment bank and credit firm with substantial capital market lending and restructuring experience. With our adviser, we approached over 30 different financing sources. But given the current situation with the Department of Education and subsequently, the Great Lakes notice, it was very challenging to find a lending partner who could be flexible and competitive.

The Department of Education procurement process, on which we do not have a clear view on how — or when it will be ultimately concluded, had become a strain on the arrangement with our current lending syndicate and on refinancing. Despite these challenges, this week we entered into a new credit facility with an affiliate of one of our existing clients that will fully refinance our existing indebtedness. The new credit facility provides for an initial senior secured term loan of $44 million and up to an additional $15 million of senior secured term loans that we may draw on within 2 years following the close of the initial term loan. The initial term loan is scheduled to close this week. And as I said, the proceeds from the initial $44 million term loan under this new credit facility will be used to repay all outstanding borrowings under our prior credit agreement. The new credit facility has a 3-year maturity with up to 2 1-year extension options.”

The refinancing should allow the company greater flexibility as it ramps up their new business, and, hopefully new business from an ED contract.