Archives for March 2024

This blog shares actions proven to prepare for regulatory exams by adopting a proactive and informed approach. At a high level, to prepare for regulatory examinations, organizations should adopt a proactive and informed approach. Staying abreast of regulatory changes and updates is crucial, and the bank should establish a robust Compliance Management System (CMS) that encompasses policies, procedures and controls aligned with current regulatory requirements. Regular internal audits and risk assessments must be conducted to identify and rectify compliance gaps, with a commitment to promptly address any deficiencies discovered.

Start Exam Readiness Planning by Identifying High Risk Functions and Performing Risk Assessments

Clients often ask, “We have an upcoming exam and are not sure where to start – what do we do? There are certainly some common standards, but our answer often varies by client, based on many factors that must be considered before planning readiness activities. These factors include:

• Who is the examiner (e.g., CFPB, OCC, FRB, FDIC, NCUA, State)?
• What functions (if known) are being reviewed during the exam?
• What is the context for the exam (is it the first exam conducted by a particular regulatory agency or the fourth exam?)
• What is the maturity of the individual client’s risk and control infrastructure?

We ask these questions before we begin to construct a readiness plan. While the most logical starting point always varies, there are several steps that can be taken to prepare. Start with identifying high-risk functions that are likely to be the focus areas of the exam. Then, compare the current state against known regulatory expectations for compliance/control. Identification of high-risk functions will help streamline readiness efforts and result in a prioritized list of impacted processes.

Identifying High-Risk Functions to be Exam Ready

Identifying high-risk functions will guide all readiness activities. Typically, once you’re aware of an upcoming exam, there isn’t time to check, double-check and triple-check every process. So, prioritization is a must. These steps can get you ready:

1. Determine Regulatory Applicability and Compare Expectations to What You Currently Do

You must first understand the applicability of all regulations to job functions, as well as regulators’ expectations for compliance and control to compare to current operations.

2. Analyze Complaints to Identify Potential Root Cause Weakness

Important in advance of any exam—but especially so for CFPB exams. This should not be limited to “highest volume” complaint types, as we’ve seen a small handful of complaints be signs of significant errors.

3. Review Recent Enforcement Actions

Review public enforcement actions to gain insights into regulatory expectations and identify where other organizations have been most impacted. This helps pinpoint areas for greater reputational risk.

4. Re-Examine Past Internal Audits of Regulatory Exam Findings

Repeat exam findings must be avoided as should un-addressed internal audit findings. Any function with recent findings should be automatically flagged as a higher risk and prioritized.

How to Perform a Risk Assessment

We recommend performing risk assessments on any impacted processes. The risk assessment finds gaps and helps determine how to address gaps prior to the exam.

Effective risk assessments for exam readiness must meet the following three criteria:

1. They are initiated quickly to give you more time. But, also, it increases the likelihood that results from changes will be evidenced within the examination period. You’ll have a powerful narrative to show a regulator that you were proactive.

2. They are completed independently to be sure that you don’t sacrifice rigor. You don’t need to hire third-party consultants to conduct each assessment. However, ensure that people conducting the assessment have distance from the business line. While subconscious, those close to the operation are more likely to have bias that all is well, which can create residual risk.

3. They are done thoroughly with full knowledge of the regulatory applicability and expectations. Many assessments fall short here. Risk assessments need to be deep—and go to the regulatory element level (i.e., testable elements) to ensure full compliance is addressed through policies, procedures, process maps, and monitoring and validation.

Typically, a risk assessment is completed in a format that allows for easy identification of gaps against a predefined expected state. Using a matrix with some well-defined fields to allow for a consistent prioritization methodology is encouraged. Regardless of approach, what is important is that the gaps identified during the risk assessment are prioritized, acted upon, and implemented in a way that tells a clear story.

Factors for prioritization may include the risk of customer or member harm, financial risk, implementation effort, implementation cost, time required for implementation, and process frequency.  The resulting prioritization document should be designed for handoff to any stakeholder, whether internal or external, seeking clarification on why an identified gap may have remained unaddressed.

Demonstrating a thoughtful approach to prioritization can go a long way with a regulatory body.

Execute the Regulatory Exam Readiness Plan and Establish Corrective Action and Project Structure

Once prioritization is complete, it is time to develop the readiness plan. This activity should ensure that items to be executed prior to the exam are completed. The plan also provides a roadmap sharing when open gaps will be addressed in the future.

The most important components of the exam readiness plan are related to the project management that surrounds its execution.

Effective components of an exam readiness plan include the following:

• Owners at the task and work stream level (one owner per line item)
• Documented due dates and task statuses
• Regularly scheduled working team update meetings
• Regular Steering Committee meetings for key decisions and accountability
• Formal change control processes to govern enhancement implementation
• Dedicated project manager(s) and a central repository

While these items alone are not enough to ensure exam success, they do contribute to the creation of a highly structured, consistent narrative.  It establishes the groundwork for clear likes of accountability, regular communication, and prompt identification of emerging risks.

The Consumer Financial Protection Bureau (“CFPB”) filed an opposition brief (the “Opposition”) on March 12, 2024 in response to a request by plaintiff trade groups to enjoin the CFPB’s final credit card late fee rule (the “Final Rule”) during the pendency of a lawsuit seeking to invalidate the Final Rule. In the Opposition, the CFPB argues that plaintiffs are unlikely to succeed on the merits, and that the Final Rule is consistent with the CARD Act’s mandate that late fees be “reasonable and proportional” to the late payment.

Plaintiff’s reply brief (the “Reply”) in support of its motion for a preliminary injunction (the “Motion”) was filed on Thursday, so the Motion is now fully briefed. The Final Rule, which was issued on March 5, 2024 and published in the Federal Register March 15, 2024, reduces the late fee safe harbor amount to $8 for “large card issuers” and eliminates automatic annual inflation adjustments on the $8 late fee. Absent an injunction, the Final Rule is set to be effective 60 days from today (after publication in the Federal Register).

The plaintiffs in the lawsuit are the Chamber of Commerce of the United States of America, Fort Worth Chamber of Commerce, Longview Chamber of Commerce, American Bankers Association, Consumer Bankers Association, and Texas Association of Business. The lawsuit, filed in the United States District Court for the Northern District of Texas just days after the Final Rule was issued, included the Motion seeking a preliminary injunction.

In the Motion, plaintiffs argued that they are likely to succeed on the merits of their claims because (1) the Fifth Circuit has ruled in CFSA v. CFPB that the CFPB’s funding is unconstitutional, and (2) the Rule violates the CARD Act, Truth In Lending Act (“TILA”), and Administrative Procedures Act (“APA”). Plaintiffs also argue card issuers will suffer irreparable harm if the Final Rule takes effect, including the need to incur compliance costs, lost late fee revenue, and lost customer goodwill if they are forced to reduce their late fees to $8 and then subsequently raise them should they prevail in the lawsuit. We discussed these arguments here.

The CFPB asks the court to deny the plaintiffs’ motion for a preliminary injunction, claiming that venue is improper, that the plaintiffs are not likely to succeed on the merits of their statutory claims, and that the “balance of the equities” does not support a preliminary injunction.

In the introduction to its Opposition, the CFPB begins with a policy argument, rather than a legal argument, asserting that the Final Rule eliminates “an outdated and unjustified regulatory safe harbor, which allowed large card issuers to charge late fees billions of dollars in excess of their cost with relative impunity.” The CFPB also notes that the lawsuit was not brought by large card issuers, but instead by allegedly “forum shopping” industry trade groups, and further to its venue argument, claims that the case does not have “a real connection” to the district court in which the suit was filed: According to the CFPB, only one plaintiff, the Fort Worth Chamber of Commerce, is located in the Northern District of Texas, and that organization only identifies one member — based in Utah — as being harmed by the Final Rule.

The CFPB further argues that the Final Rule is the result of a nearly two-year regulatory review process. According to the CFPB, it determined the existing safe harbor amounts for late fees, the process for which was set by the Federal Reserve Board after notice and comment, were “inconsistent” with the CARD Act’s instructions that fees be “reasonable and proportional” to the late payment.

The Opposition contends the plaintiffs read requirements into TILA that do not exist in determining the late fee, and that the CFPB was only required to “consider” the factors enumerated in 15 U.S.C. § 1665d(c) in setting the late fee (including the cost incurred by the creditor, the deterrent effect on the cardholder, and the conduct of the cardholder), and was not required to directly tie the amount of the late fee to those factors. In response to arguments from the plaintiffs that the data utilized by the CFPB did not support the $8 safe harbor amount, the CFPB asserted it had conducted a detailed analysis of available empirical evidence using late fee data from large card issuers in setting the fee amount. Further, the CFPB contended that the express exclusion of post-charge-off costs was proper and consistent with the CARD Act and the APA. According to the CFPB, just because the plaintiffs dislike the new late fee safe harbor does not mean it is inconsistent with the CARD Act.

The CFPB takes the position that the proposed Final Rule effective date, 60 days after publication in the Federal Register (which occurred today), is permissible, despite a legal requirement to the contrary pointed out by the plaintiffs. TILA dictates that regulations “requiring any disclosure which differs from the disclosures previously required” under certain sections of TILA “shall have an effective date of that October 1 which follows by at least six months the date of promulgation.” 15 U.S.C. § 1604(d). In response, the CFPB argues that the Final Rule does not require any different disclosures, but “at most” just changes the amount of the late fee within disclosures that are already required.

Finally, the CFPB states that the balance of the equities weighs against a preliminary injunction, arguing that that the Final Rule “could return around $10 billion to consumers’ wallets . . . [and] [a]s for the large card issuers, they will be fine.”

In its Reply, plaintiffs note that the CFPB does not contest that the plaintiffs are likely to prevail on their claim that the CFPB is unconstitutionally funded based on the Fifth Circuit opinion in CFSA v. CFPB; that the Final Rule will cause plaintiff’s members irreparable harm; or that plaintiff Fort Worth Chamber of Commerce is based in Fort Worth and has impacted members. They argue that venue is proper in the Northern District of Texas as each plaintiff has standing because at least one plaintiff, the Fort Worth Chamber of Commerce, has standing, and that transactional venue would be proper even if they lacked standing as plaintiffs’ members have cardholder customers within the district.

Plaintiffs also address some of the statutory arguments made by the CFPB in the Opposition, observing that the CFPB ignores the plain-meaning of the term “penalty” in the CARD Act and noting that the agency’s limited reading of TILA’s requirements in setting the $8 late fee ignores statutory requirements in favor of policy arguments. They also argue that the CFPB’s assertion that the Final Rule’s 60 day effective date complies with TILA because new disclosures are not required ignores the fact that every large card issuer will be required to provide new disclosures.

We will continue to monitor the case and the court’s decision on the Motion. On Thursday, Judge Reed C. O’Connor recused himself from the case, which has now been assigned to Judge Mark Pittman. Notably, Judge Pittman, a Trump appointee, vacated the Biden Administration’s plan to forgive approximately $400 billion in federal student loans under the HEROES Act of 2003 in November 2022. It is unclear if the reassignment of the case will impact the timeframe for a decision on the Motion, but we expect the court to move quickly.

Today’s current economic climate is already influencing consumer spending and credit in 2024, and is becoming a hot topic for businesses seeking to engage past-due customers.

Economic Growth in 2023, But Slowdown Expected in 2024

Last year proved that the US consumer has been very resilient to the rumblings of a potential recession and continued to spend with surprising growth all the way through the end of 2023.

Despite inflation and high interest rates, consumers helped the economy end the year in a far better position than most predicted.

And consumers reported an uptick in optimism about the financial state, according to Deloitte’s ConsumerSignals financial well-being index, which captures changes in how consumers are feeling about their present-day financial health and future financial security based on the consumer’s own financial experience. We saw an increase to 101.4 in November 2023, up from 97.6 a year ago. Additionally, WalletHub’s Economic Index, which measures consumer satisfaction, rose by about 4% between January 2023 and January 2024.

But even as economic experts adjusted their outlook towards a soft landing and consumers reported a more positive financial outlook, 2024 is still expecting a slow down in consumer spending.

“Growing debt balances, stubborn interest rates and elevated prices are still a thorn for consumers, and contribute to their overall financial stability,” explains TrueAccord CEO Mark Ravanesi in his Q4 Industry Insights: Cautious Optimism with a Side of Holiday Hangover. “For lenders, service providers and debt collectors, guaranteeing repayment will still be a challenge [in] 2024.”

As Consumer Delinquency Rises, So Does Consumer Confusion

That financial holiday hangover Ravanesi described is a harsh reality for consumers: approximately one-third of American adults go into debt to pay for holiday expenses, contributing to their overall financial stability year-round. Credit card balances hit a trillion dollars in 2023, but that unprecedented milestone proved to just be another number as credit card balances continue to grow—by the fourth quarter balances increased to $1.13 trillion and the share of those balances that were at least 90 days delinquent approached 10%, an increase of more than two percentage points in a year.

In January, overall delinquency grew with a 2.31% increase in delinquent accounts and 10.49% in delinquent balances month-over-month. Today, about 61% of American households have credit card debt and the average credit card debt balance sits at $5,875.

Bottom line: households took on more debt at the end of last year and we’re seeing loans increasingly going bad, according to data from the Federal Reserve Bank of New York, leading to a shift in consumer spending for 2024.

On top of historic credit card balances, delinquencies continue to climb across the board: automotive, mortgage, bank cards, and unsecured personal loans.

The rising popularity of the Buy Now, Pay Later (BNPL) options and their corresponding delinquencies are also a piece of the puzzle, but one that is not currently captured by the Bureau of Economics and falls into a category known as “phantom debt.”

“Today’s consumer is using more and different financial products,” shares Ravanesi. “Buy Now, Pay Later was a big driver of purchasing power [in 2023] amidst elevated interest rates. While a helpful product for consumers, BNPL can be tricky as it doesn’t show up on most credit reports and can be an invisible and unaccounted-for debt burden.”

With so many different BNPLs offered, consumers can be borrowing from a variety of different lenders all at the same time and it is becoming more difficult for them to keep track of the different payments—and easily slip into delinquency. This confusion can be especially detrimental considering consumers using BNPL as more likely to be “financially fragile,” as reported by the NY Fed, having credit scores below 620, being delinquent on a loan, or having been rejected for a credit application over the past year.

“It’s becoming increasingly confusing for consumers,” TrueAccord founder Ohad Samet explained in a recent webinar. “And we’re seeing consumers often need help organizing their different debts.”

And then we add student loans back into consumers’ repayment mix…

The Impact of Resumed Student Loan Repayments

Millions of people are resuming another financial obligation every month: their student loan payments. This introduces one of the defining questions of 2024 for lenders and debt collectors:

How will student loans be prioritized among other payments and debts?

It’s a legitimate concern considering surveys found 45% of respondents used the student loan forbearance period to tackle other debts, including paying down mortgage/rent expenses (27%), credit cards (26%) and other past-due bills (24%)—and even before forbearance was lifted, 85% of borrowers already anticipated facing financial hardship due to student loan repayment, with 49% saying they’ll have a hard time paying other bills. In fact, 28% of student loan borrowers say the resumption of federal student loan payments will likely require them to take on new debt to manage their personal finances.

Only time will tell, but so far student loan repayment rates have been low amongst the 22 million Americans affected—in the first month of resumed payments, 8.8 million borrowershttps://www.businessinsider.com/student-loans-what-happens-if-i-miss-payments-debt-relief-2023-12 missed their student loan payment, equating to 40% of loan holders.

Whether they missed that first payment or not, student loan repayments resuming again are having a significant impact for those who borrowed—91% say financial stress is impacting their mental, physical wellness and student loan debt is a key driver of this financial stress.

So how can lenders and collectors effectively recover debts in 2024 given the rising delinquencies and rising financial stress for consumers?

Right Message, Right Channel, Right Time for Better Consumer Engagement and Debt Recovery

Consumers have more stress and demands on their attention than ever before so it should make clear sense that consumer experience is critical for an organization’s reputation, long-term success with customers, and how effectively you can collect even in late-stage delinquency.

Research shows that contacting first through a customer’s preferred channel can lead to a more than 10% increase in payments and that 14% of bill-payers prioritize payments to billers that offer lower-friction payment experiences. Plus, 71% of consumers expect personalized experiences, which means one-size-fits-all outreach isn’t going to cut it in collections. Your business must be able to engage with the right message, the right channel, and the right time to recover the most funds possible.

“If there’s one thing we’ve learned from our consumer interactions, including the 16.5 million we added in 2023, it’s that no two consumers are the same, and what works for one may not work for the next,” explains Ravanesi. “That’s why options are so important—in communication channel, customer support method, and perhaps most importantly, in repayment.”

Personalization of the collections experience—from channel to time of day to specific message—is critical in cutting through the noise and driving engagement and commitment, especially in today’s increasingly digital world.

“Digital is deeply, deeply ingrained in every group of the population,” Samet observes.

And consumers are engaging on more digital channels than ever before:

• 65% of American consumers have paid a bill by mobile device in the past twelve months
• 54% have used an online portal supplied by a biller
• 85% of consumers are already using digital bill pay
• 41% of consumers cite ease and convenience and 23% cite faster and instant payments as the most important reason to choose a digital channel
• 59% of consumers stating email as their first preference for debt collection, according to a FICO survey (versus only 16% want to receive a phone call)

Research from McKinseyconcludes that consumers who digitally self-serve resolve their debts at higher rates, are significantly more likely to pay in full, and report higher levels of customer satisfaction than consumers who pay via a collection call.

Providing multiple repayment options, communicating through a variety of channels, reaching out at the optimal time of day, delivering the message in a way that best resonates with the consumer—all of these factors play a role in how effective your debt recovery strategy will be.

The Minnesota legislature was busy in February 2024. Though the Minnesota Debt Fairness Act captured recent headlines (a deep dive into the bill can be found here), another bill that proposes to ban the sale of medical debt in the state, could also cause significant disruption to the industry and to Minnesota citizens. 

The bill, SF 3681, proposes to amend MN statute 332.37. Though the bill contains only one amendment,  it is a powerful one:

“(a) No collection agency, debt buyer, or collector shall : […]

(25) purchase medical debt owed to: (i) a medical provider; (ii) a medical facility, including but not limited to a hospital; or (iii) an affiliate of any such provider or facility.”

If passed, medical providers who are unable to collect patient debt using their own devices would be limited to using the services of collection agencies or not collecting anything on the debt at all. In other words, the bill does exactly what it looks like: if passed, it would ban the sale of medical debt in Minnesota. 

insideARM Perspective

The proponents of this bill seem to be operating under the assumption that the problem with medical debt is the sale of it to debt buyers. As with the Debt Fairness Act, the legislature in Minnesota is ignoring potential consequences and focusing on the symptom of debt collection instead of the actual problem of increased costs of medical care.

Though requiring medical providers to collect debt on their own or through an agency may seem preferable to the idea of allowing them to sell the debt, additional costs might flow down to patients. Medical providers may be less willing to offer beneficial deals or payment terms to a patient than a debt buyer. Further, providers might move to litigation on accounts they would otherwise sell, which would move up the timeline for when that debt becomes a burden on the patient. 

Additionally, this proposal doesn’t consider the potential repercussions this could have for medical care and patients in the state. What happens when medical providers can’t collect or sell the debts owed to them? Will they want to stay where they may struggle to get paid for the work they do? And will medical facilities be able to stay open facing the increasing costs and difficulty of collection?

NEW YORK, NY — Skit.ai, the leading
provider of Conversational AI solutions for the accounts receivables industry,
announced today the launch of an innovative suite of multichannel, self-service
offerings aimed at enhancing debt collection processes and elevating consumer
experiences. The company has introduced a comprehensive range of Generative
AI-powered solutions across voice, chat, email, and text communications.

Designed to cater to consumer preferences
through multiple digital self-service channels, Skit.ai’s latest offerings aim
to simplify and accelerate the collections process and improve consumer
engagement. Leveraging large language models and industry-leading AI
technology, Skit.ai ensures more efficient, fully compliant, multichannel
interactions with consumers.

“Following the success of our Voice AI
solution in the collections industry, we’ve received many requests for
additional channels in our product lineup. We are thrilled to unveil a new,
unified multichannel platform to our current and future customers,” said Sourabh Gupta, founder and CEO of Skit.ai.
“Offering consumers the ability to choose between multiple communication
channels and providing 24/7 availability will greatly simplify and enhance
revenue recovery.”

The launch of Skit.ai’s multichannel solutions
marks a significant milestone in the use of AI technologies in the accounts
receivables industry. By integrating Generative AI across multiple contact
points, Skit.ai not only facilitates a more personalized and efficient
collections process but also sets a new standard for consumer interactions in
the financial services space.

Schedule a meeting to learn more about how
Skit.ai can help you accelerate revenue recovery with higher efficiency and at
an infinite scale.

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