On May 8, 2017, a federal judge in Arizona ruled that a debt collector was not entitled to a “bona fide error” defense to a Fair Debt Collection Practices Act (FDCPA) claim because it failed to present evidence of a procedure or policy tailored to address the specific error at issue, and thus failed to meet its burden of proof to establish the bona fide error defense. 

The case is Gibson v. US Collections West Incorporated (Case No. 16-00166, U.S. District Court, AZ). A copy of the court’s order can be found here. 

Background 

Charlotte Gibson owed money to North Valley Endodontic for medical expenses. At some point, she fell behind on payments and US Collections West Incorporated (USCW) began collection activity to recover her account’s balance. On September 22, 2015, Ms. Gibson wrote a letter informing USCW that she refused to pay. USCW received this notice on September 25, 2015. 

Despite receiving this letter, USCW concedes that it sent two additional debt collection letters to Ms. Gibson. It asserts, however, that these communications were sent in error after a clerk, who was trained to give refusal to pay letters to a manager to handle, mistakenly placed Ms. Gibson’s refusal letter into a box for dispute letters. 

Ms. Gibson filed suit, alleging a violation of the FDCPA. USCW conceded that it violated the FDCPA but that it should not be held liable because the violation was the result of a bona fide error, which is an affirmative defense under the statute. 

Both parties filed motions for summary judgment.

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. 

The Court’s Analysis and Order

The decision, written by the Honorable G. Murray Snow, was short and to the point. He first discussed the strict liability feature of the FDCPA and then the bona fide error defense. 

“The FDCPA imposes strict liability on debt collectors for continuing to contact a consumer once the “consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease further communication with the consumer.” 15 U.S.C. § 1692c(c). Although the FDCPA imposes strict liability in such cases, debt collectors may seek to demonstrate that their actions were the result of a “bona fide error” to avoid liability. 15 U.S.C. § 1692k. 

The bona fide error defense is an affirmative defense, for which the debt collector has the burden of proof. To establish the defense, the debt collector must establish, by the preponderance of the evidence, that (1) it violated the FDCPA unintentionally; (2) the violation resulted from a bona fide error; and (3) it maintained procedures reasonably adapted to avoid the violation. 

Judge Snow then reviewed the undisputed facts in the case and applied them to the above standard. Judge Snow concluded that USCW provided no evidence that it utilized procedures reasonably adapted to avoid mistakes in the handling of consumer mail. 

He wrote:

“The Ninth Circuit uses a two-step process to determine whether the “procedures” prong may have been satisfied. First the debt collector must [maintain]—i.e., actually [employ] or [implement]—procedures to avoid errors. Second the procedures must be ‘reasonably adapted’ to avoid the specific error at issue. 

To qualify for the bona fide error defense under the FDCPA, the debt collector has an affirmative obligation to maintain procedures designed to avoid discoverable errors.” And, further “[i]f the bona fide error defense is to have any meaning in the context of a strict liability statute, then a showing of “procedures reasonably adapted to avoid any such error” must require more than a mere assertion to that effect. The procedures themselves must be explained, along with the manner in which they were adapted to avoid the error.” Therefore, a defendant must assert and explain how a procedure or policy is tailored to avoid the specific mistake at issue to take advantage of the bona fide error defense. 

In the case at hand, the undisputed record reflects that the USCW clerk filed Ms. Gibson’s refusal letter as a dispute rather than giving it to a manager as a refusal letter. At the time of the incident, US Collections asserts that it had an unwritten policy that clerks were not to engage with accounts once an individual refused to pay. If a letter reflected a dispute, “it was to go into a dispute box.” If a letter reflected a refusal to pay, it “should go to a manger to have the manager handle it and a copy go to the collector.” The manager then flagged the file to ensure that no further correspondence occurred. 

This practice, while presumably sound practice under the statute itself, merely implements the statute and is not a procedure designed to discover avoidable errors. The only reference to the clerks’ initial sorting of mail in this case is US Collections’ assurance that it generally trains clerks on how to sort mail.

USCW failed to present evidence of a procedure or policy tailored to address the specific error at issue here, and thus it failed to meet its burden of proof to establish the bona fide error defense. 

USCW concedes that it violated the FDCPA by continuing to contact Ms. Gibson. Its only defense for the violation was its assertion of the bona fide error defense. Even taking these facts in a light most favorable to USCW, it is not entitled to the protection of the bona fide error defense in this case. Therefore, as a matter of law, the Court finds that Plaintiff Gibson has met all of the essential elements of her FDCPA liability claim and is therefore entitled to damages. Further, the Court finds that USCW failed to satisfy the requirements of the bona fide error defense, and therefore will not be excused from FDCPA liability as a matter of law.” 

insideARM Perspective 

This short Order should be mandatory reading for all compliance staff. Policies are important. But, the documented procedures to ensure the policy is followed are equally important. It is critical to create procedures “reasonably adapted to avoid mistakes.” 

Once policies and procedures are created it is also important to self-audit to ensure the policies and procedures are being followed. 

For an interesting “compare and contrast” exercise, readers should go back to our April 20, 2017 article on the Washington v. Convergent Outsourcing Case. In that case the defendant debt collector was successful in using the bona fide error defense by showing they had met the criteria described above. Convergent developed procedures. Convergent’s employees were trained and tested on these procedures. Finally, Convergent performed regular audits to ensure adherence to the procedures. 

As they say – Trust, but verify.

PITTSBURGH, Pa. – Credit Management Company’s (CMC) support of Special Olympics is a further demonstration of their commitment to diversity and inclusion, as well as fostering a workplace where people with varying backgrounds and viewpoints can thrive. This commitment is clear across the company, including their support for people with disabilities. 

“Our donation is just a small part of our annual community relations efforts. We believe that businesses have a social and ethical responsibility to give back to communities and help those in need.  We have always taken pride in how we support our clients, our employees and our neighbors,” stated Joel McKiernan, VP of Sales. 

CMC is an accounts receivable management company based in Pittsburgh that is committed to providing business partners with optimum accounts receivable management, debt recovery, and customer care programs through industry expertise, call center management, current technology, and superior communication. 

CMC has been supporting clients of all sizes in many industries for over 50 years. 

About Special Olympics

Special Olympics is a global movement that unleashes the human spirit through the transformative power and joy of sports, every day around the world. We empower people with intellectual disabilities to become accepted and valued members of their communities, which leads to a more respectful and inclusive society for all. Using sports as the catalyst and programming around health and education, Special Olympics is fighting inactivity, injustice and intolerance. Founded in 1968 by Eunice Kennedy Shriver, the Special Olympics movement has grown to more than 4.5 million athletes in 170 countries. 

With the support of more than 1.4 million coaches and volunteers, Special Olympics delivers 32 Olympic-type sports and more than 94,000 games and competitions throughout the year. Special Olympics is supported by individuals, foundations and partners, including the Christmas Records Trust, the Law Enforcement Torch Run® for Special Olympics, The Coca-Cola Company, The Walt Disney Company and ESPN, Lions Clubs International, Mattel, Microsoft, P&G, Bank of America, Essilor Vision Foundation, the B. Thomas Golisano Foundation, Finish Line, The Safeway Foundation, and Safilo Group. Visit Special Olympics at www.specialolympics.org. 

 

On Monday insideARM reported the breaking news of the SCOTUS decision in Midland Funding, LLC v. Johnson. At the end of that article we suggested that we’d likely see more detailed analysis from some of our respected industry attorneys. This article, co-authored by Joann Needleman and Beth Slaby of ClarkHill, is one of them.

——-

On Monday, May 15, 2017, the Supreme Court put to rest a theory of liability under the Fair Debt Collections Practices Act (FDCPA or Act) that had a major impact not only upon the credit and collection industry, but bankruptcy practitioners who represent creditors as well. In the matter of Midland Funding, LLC v. Johnson,  __ U.S. ___, (2017), the Court, in a 5-3 decision, found that “the filing of a proof of claim that is obviously time-barred is not a false, deceptive, misleading, unfair or unconscionable debt collection practice” under the FDCPA, reversing the judgment of the Eleventh Circuit.

The Johnson case was the by-product of another Eleventh Circuit matter: Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir, 2014). In that case, the Eleventh Circuit found that the filing of a time-barred proof of claim in a Chapter 13 bankruptcy case was in fact a violation of the FDCPA, even though the filing of such a proof of claim does not violate the Bankruptcy Code (Code). What happened thereafter was nothing short of mayhem. Hundreds upon hundreds of lawsuits were filed against third-party debt collectors. Certiorari was denied as to Crawford, but as the lawsuits multiplied and a split of decisions by the Circuit Courts grew, the high court took up the Johnson case, which was factually identical to Crawford. 

The consumer in Johnson filed for bankruptcy in Alabama under Chapter 13 of the Bankruptcy Code. Midland was a creditor of Johnson, purchasing the credit card account some years prior. Midland filed a proof of claim in the amount of $1,879.71 and accurately acknowledged that the last transaction on the account was in 2002, some 10 years before Johnson’s bankruptcy. The relevant statute of limitations for collecting unpaid debt in Alabama is six (6) years. Johnson objected to the proof of claim and the Bankruptcy Court disallowed the claim. Johnson then sued Midland for violations of the FDCPA. The District Court in Alabama dismissed the case but the Eleventh Circuit reversed based upon the decision in Crawford. 

Writing for the majority, Justice Breyer rejected the Crawford analysis and the arguments asserted by Johnson as follows

• Definition of a “Claim”. Under 11 U.S.C. § 101(5)(A) of the Bankruptcy Code, a claim is defined broadly  as a “right to payment…whether or not such right is…fixed, contingent, matured, unmatured, [or] disputed.” The Court noted that state law determines whether a person has a “claim,” or “right to payment” under § 101(5)(A). In this case, the relevant state law is the law of Alabama, which provides that a creditor has the right to payment of a debt even after the limitations period has expired. The Court found no validity in Johnson’s argument that a claim under the Code is synonymous with an “enforceable claim,” as no such word appears in the Code’s definition. The Court found it difficult to square Johnson’s interpretation with other provisions of the Code. For example, § 502(b)(1) of the Code says that if a “claim” is unenforceable, it will be disallowed; it does not say that an “unenforceable” claim is not a “claim.” § 101(5)(A) makes clear that a right to payment exists even if the claim is not enforceable and it is still a “claim” under the Code.
• A Proof of Claim is Not a Civil Law Suit. Crawford, Johnson and those cases that followed have all argued that the filing of a proof of claim is similar to the filing of a civil lawsuit. The filing of a lawsuit to collect a debt beyond the statute of limitations is in fact an FDCPA violation. The Supreme Court did not see them as the same. For one, it is the consumer who initiates the bankruptcy process. In a Chapter 13 context, a knowledgeable trustee is available and is charged with the evaluation of the claims. Further, the claims process is a more streamlined and a less unnerving prospect for a debtor than facing a collection lawsuit. It is these features of a Chapter 13 bankruptcy that makes it considerably more likely that an effort to collect upon a stale claim will be met with resistance, objection and disallowance. The Court noted that the debtor as well as the trustee has the right to assert an affirmative defense of timeliness. The Court further rejected the notion that carving out an exception for debtors in bankruptcy to avoid asserting such an affirmative defense would require defining the boundaries of that exception.
• The Independent Purposes of the Act and the Code. The Court noted that the FDCPA and the Code serve separate purposes. In the case of the FDCPA, the Acts works to protect consumers by preventing consumer bankruptcies in the first place. By way of contrast, the Code creates and maintains the delicate balance of a debtor’s protections and obligations; to find the FDCPA applicable in this bankruptcy scenario – filing a proof of claim that is otherwise permissible under the Code – would upset that “delicate balance.” To go down that path, the Court concluded, would result in a new and significant bankruptcy related remedy in the absence of language in the Code to support it. 

Justice Sotomayor’s dissent, joined by Justices Kagan and Ginsburg, did very little to analyze the facts of the case and to acknowledge the plain language of both the FDCPA and the Code. They simply felt that the claims process was rigged and that debt buyers were using a “loophole”.   

Unlike other federal consumer protection statutes, the FDCPA has been subject to a tortured interpretation due to a lack of regulations. For years, the courts have been willing to stretch and pull the Act beyond what Congress had intended. Exactly one year ago from today, the Supreme Court rejected another unrealistic reading of the FDCPA in the case, Sheriff v. Gillie,  ___ U.S. ___ (2016) which attempted to find a FDCPA violation against a law firm for using an accurate designation of “Special Counsel” on their firm letterhead. The law firm had in fact had been hired by the Ohio Attorney General. In that case, Justice Ginsberg, then writing for the majority, stated that the section of the Act in question “bars debt collectors from deceiving and misleading consumers, it does not protect consumers from fearing the actual consequences of their debt.” 

The FDCPA is a strict liability statute which serves a remedial purpose. However, many courts have construed the Act broadly in order to achieve that purpose. Today’s decision attempts to reign in that far-fetched analysis that has been so predominate in this area of consumer protection law. The decision was a quick 10-page read and took aim at the attempts to use the FDCPA as a substitute when other statutes do not provide the “right” outcome. The majority looked for simplicity and found it in the four-corners of the Act. Other courts need to do the same. 

AMHERST, N.Y. – American Coradius International LLC hosted its annual charity hockey game and fund raising drive to support the American Cancer Society’s Grand Island Relay For Life.  

Friends and family of ACI attended and played in the 5th Annual Daniel McBride Memorial Cup on April 30th at the Harborcenter in downtown Buffalo. The game featured current Buffalo Sabre Justin Bailey, local NBC news anchor Pete Gallivan, and professional female hockey player Hayley Williams.

The event was attended by several hundred spectators, and raised over $5,200. Including proceeds raised through the hockey game, ACI’s employees have raised and donated well over $15,000 and counting for the American Cancer Society in 2017, as their second quarter charity of choice.

 

The Consumer Financial Protection Bureau (CFPB) released a student loan industry report yesterday that shows 9 in 10 high risk borrowers were not enrolled in federal affordable (or income-driven) repayment plans (IDR) – plans that allow people to make payments based on how much they earn.

The report from the CFPB Student Loan Ombudsman, Seth Frotman, can be found here.

According to the findings, nearly half of those borrowers not enrolled in an affordable repayment plan redefault, as opposed to less than 10 percent of those who are enrolled. Frotman claims that a combination of problematic servicing practices and government programs prevent the most vulnerable student loan borrowers from accessing affordable repayment plans, which increases cost to taxpayers and fails to set up borrowers for success over the long term.

The following are the summary findings:

• The vast majority (greater than 90 percent) of borrowers who rehabilitated one or more defaulted loans were not enrolled and making IDR payments within the first nine months after “curing” a default.
• Borrowers who did not enroll in IDR were five times more likely to default for a second time.
• Nearly one in three borrowers who exited default through rehabilitation defaulted for a second time within 24 months, and over 40 percent of borrowers redefaulted within three years.
• A large majority (over 75 percent) of borrowers who default for a second time did not successfully pay a single bill to their student loan servicer.
• In stark contrast, borrowers who used consolidation to resolve their student loan defaults are more likely to immediately begin to repay their debts successfully.

Frotman concludes from the findings that the data supports the policy recommendations made in the 2016 Annual Report of the CFPB Student Loan Ombudsman. Among those recommendations is to simplify and streamline access to an income-driven repayment plan for all borrowers, irrespective of default status. In other words, the suggestion is to bypass the current collector-driven 10-month rehabilitation process for which, among other things, the Ombudsman questions current financial incentives.

The argument is that the rehabilitation process is a legacy feature of the bank-based guaranteed loan program, and is no longer relevant in the single creditor (Department of Education) environment.

The 2016 report also suggests that policymakers and market participants take near-term steps to address challenges identified in consumer complaints by improving borrower communication throughout the default-to-IDR transition and by streamlining IDR application and enrollment.

insideARM Perspective

While not the only complicating factor in play here, one very important element in this dynamic – hardly mentioned in the 2017 report — is the ability for servicers and collectors to actually communicate with borrowers. This is required in order to help them. Student loans are complicated. Information is sent by snail mail. Many individuals, especially younger adults, say they don’t open their mail. Phone calls are made. Many individuals, especially younger adults, say they don’t listen to voicemail, and choose not to answer the phone if they don’t recognize the caller – or in the case of a caller looking for payments they feel unable to make, even if they do recognize the caller. 

From the 2016 report:

Policymakers and market participants may wish to consider steps to ensure student loan servicers “reach back” to borrowers during the rehabilitation process in order to establish early communication during the transition out of default.

As noted in prior reports, accurate and actionable information is critical to facilitate successful enrollment in IDR plans. This is particularly true for borrowers with characteristics that are associated with or predictive of future financial distress. In the July 2016 policy direction noted above, the Department of Education identified previously defaulted borrowers as one cohort of “at risk” borrowers. Policymakers and market participants should consider further enhancing servicer communications for borrowers transitioning out of default, including communications related to IDR enrollment that are personalized to reflect the financial circumstances of these borrowers. These communications can be timed to reach borrowers when these communications can be most effective – during the final stages of the rehabilitation process.

The recommendation above relates to timing – and perhaps content, if one interprets what is said. What is not addressed is channel. insideARM encourages policymakers to also take into consideration how all forms of modern communication might be available to servicers or collectors to communicate with borrowers in the way(s) they typically use, and prefer. (Emphasis added)

A new study from TransUnion has revealed that when faced with the choice of which debts to pay, consumers in financial distress are choosing to prioritize unsecured personal loans ahead of others such as auto loans, mortgages and credit cards.

This is the first time unsecured personal loans have been incorporated into the TransUnion study, which has analyzed the consumer payment hierarchy since 2010. The company reports that since at least 2004, consumers have historically prioritized auto loans over mortgages and credit cards.

The study reports the following delinquency rates* by product:

*Delinquency rates after 12 months for consumers who possess and are current on all four credit products at the beginning of the respective performance measurement period. 

The full TransUnion study can be found here.

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Yesterday, PRA Group, Inc, (Nasdaq:PRAA) issued a press release announcing they had reached a settlement with the Internal Revenue Service (IRS) in regards to Notices of Deficiency for tax years 2005 to 2012. The matter had been scheduled for trial this month. A copy of the press release can be found here.

Under the agreement, which remains subject to court approval, PRA Group will utilize a new tax methodology to recognize net finance receivable (NFR) revenue effective tax year 2017. The Company will not be required to pay any interest or penalties related to the prior periods. 

Per the press release: 

“This settlement ends a long outstanding tax controversy and puts this matter behind us. Additionally, the new methodology is consistent with an approach we have been supportive of for years,” said Kevin Stevenson, President and Chief Administrative Officer for PRA Group. “This settlement should have no direct impact on reported earnings since we are not required to pay interest or penalties related to prior periods. This controversy has always been simply a matter of tax payment timing, not of ultimate tax payment or tax accrual for financial statement purposes. Additionally, we do not expect this to have any material impact on our ability to purchase nonperforming loans.” 

The dispute with the IRS was detailed in a LexisNexis Law360 article on October 30, 2014 by Erica Teichert (subscription required). In that article Ms. Teichert wrote: 

“Consumer debt collector Portfolio Recovery Associates Inc. has asked the U.S. Tax Court to reverse an Internal Revenue Service finding that it owes $192.6 million in back taxes stemming from the defaulted consumer debt accounts it purchases, saying that the agency inappropriately recalculated its taxable income using different accounting methods.

Although PRA calculated its taxable income for tax years 2008 through 2012 using a cost recovery accounting method, the IRS told the company in a deficiency notice that it wasn’t entitled to use that calculation, according to a petition filed on Oct. 8.”

Per the article, PRA maintained that its accounting methods were appropriate because it is in the business of buying extremely risky assets without any guarantee of recovering its investments or making a profit. As a result, the company says it uses the the cost recovery accounting method so it can “recover all the costs for each consumer debt account deal it makes before reporting its taxable income from collection on the accounts.”

In an article by Bryan Koenig published yesterday afternoon in LexisNexis Law360 (subscription required) Koenig wrote: 

“Details of the deal were sparse, including in Tax Court Judge Cary Douglas Pugh’s order on Monday — the same day trial had been set to begin — striking the case from the record and giving the parties until June 14 to file an update or submit their proposed settlement documents. 

Exactly how much money was at issue had also been in dispute, with PRA’s mid-April pretrial filing showing that the company thought the bill totaled more than $170 million although it said that the IRS’ math pegged it as in excess of $250 million. The parties appear to have resolved the math difference in protected filings afterward.”

insideARM Perspective 

From the little information provided in the press release to the limited information insideARM was able to find from other public sources, the settlement appears to be positive for PRAA. The key takeaways are that the company is not required to pay any interest or penalties and the settlement will have no impact on reported earnings.

LiveVox will join other industry leaders to discuss forward-thinking approaches to Cybersecurity and best practices to defending contact center operations from potential threats on a panel at CRS 2017

• With a timely focus on payment line security, LiveVox will also share insight on the rising costs required to maintain PCI certifications and how cloud is helping offload a significant portion of the burden while adapting to changing consumer preferences.To learn more, click here.

• The panel takes place Thursday, May 11^th at 3:30pm PT at the 2017 CRS Conference in Las Vegas

SAN FRANCISCO – LiveVox Inc., a leading provider of cloud contact center solutions for enterprise operations, announced that it will join cybersecurity, operations, and technology experts to discuss top threats to cybersecurity and leading strategies to protecting operations from potential security breaches.

In today’s world, organizations must be prepared to defend against threats in cyberspace. Accessing and transmitting sensitive data requires that businesses are always up to date with the latest standards and regulations in protecting and storing data securely – a prime example of this is PCI certifications. As a changing consumer base continues to place greater pressure on regulatory bodies like the FTC to enforce stricter security standards, what once may have been given a pass in a PCI audit may now result in a fail. To meet these tightening audit requirements, contacts centers are left facing potential security expenses ranging from hundreds of thousands to millions.

On the topic, panelist Andy Avila, Sr. Director of Security, LiveVox states, “Cloud is changing how contact centers approach payment line security by helping offload a vast majority of the financial and resource burden of obtaining and maintaining PCI certifications through on-demand solutions that provide some of the highest levels of payment security. As security requirements continue to mount, it is imperative that businesses stay ahead of the curve with their security and risk-mitigation strategies. I am excited to join industry leaders to discuss best practices to mitigating risk exposure and sharing how Cloud is leading the charge in providing some of the most innovative and cost-effective payment data security solutions.”

To read more about how to offload the costs of securing payment lines for a changing a consumer base, read our latest blog post here.

 

About the event:

• EVENT: CyberSecurity for the Non-IT Collection/Recovery Professional
• DATE/TIME: Thursday, May 11th, 2017 at 3:30pm PT
• LOCATION: CRS 2017, Las Vegas, NV
• PANELISTS:

o   Mark Naiman, Absolute Resolutions Corp.

o   Todd Stephenson, ControlScan

o   Mike Wright, TECH LOCK

o   Andy Avila, LiveVox, Inc.

 

About LiveVox, Inc.
LiveVox is a leading provider of cloud contact center solutions for enterprise operations. The LiveVox multi-channel platform provides risk mitigation tools, such as Four Clouds, that simultaneously addresses key compliance concerns while optimizing performance efficiencies.  LiveVox Intelligent Email system is another example of how LiveVox is providing contact centers with a competitive advantage in a changing regulatory environment through innovation. To learn more, contact us at info@livevox.com

PHOENIX, Ariz. – Empereon-Constar, a leading provider of end-to-end customer engagement and customer management solutions, announced plans today to open a new inbound call center in Lacy Lakeview, Texas. The move brings 900 full-time customer care, customer service and tech support jobs to the Greater Waco area with an expected annual payroll impact of approximately $20 million. 

“As Empereon-Constar continues to invest in the US labor force, the new Waco center of excellence will play an important part of our 2017 domestic growth strategy,” said Travis Bowley, CEO. “We are excited to announce the opening of another new flagship mega-center in Waco with over 900 seats to support our clients’ domestic growth needs in 2017.”  

Located at 1205 N. Loop 340 in Lacy Lakeview (formerly the General Dynamics building), the 68,312-square-foot call center is projected to open in July. Available positions include customer service and tech support representatives, operations management, quality assurance, IT, and other staff. All positions offer competitive pay, paid training, and benefits.  

“Waco was selected after beating out 15 other cities across the U.S. due to its impressive labor force, a beautiful plug and play facility, and a welcoming city leadership team,” said Toby Parrish, Senior Vice President, Inbound Operations. “As Empereon continues to invest in the US labor force, Waco will play an important part of our 2017 domestic growth strategy.” 

Hiring is already in process, individuals interested in applying for these positions can visit http://tinyurl.com/empereoncareers. 

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, Risk and Fraud Operations, Collections Operations and Tech Support across the entire customer account lifecycle. 

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. Visit www.empereon-constar.com for more information.

Yesterday PRA Group (PRAA) released its Q1 2017 financial results and hosted a conference call for investors. The company reported net income of $48.2 million (diluted earnings per share of $1.03 versus $0.69 in the first quarter of 2016), including the gain from the sale of the Company’s Government Services business in the first quarter of 2017. 

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

First Quarter 2017 Highlights

• Cash collections of $379.8 million versus $384.3 million in the year-ago quarter.
• Total revenues of $206.6 million versus $224.9 million in the year-ago quarter.
• Income from operations of $53.3 million compared with $70.9 million in the year-ago quarter
• Net income of $48.2 million compared with net income of $32.0 million in the prior year period
• Portfolio acquisitions of $227.8 million.
• Gain on sale of the Government Services business was $46.8 million pre-tax and excludes an additional $2.1 million in expenses associated with the sale in operating expenses. 
• Estimated remaining collections of $5.1 billion

Per the press release that accompanied the earnings announcement:

“PRA’s cash collections in the first quarter exceeded our expectations while cash operating expenses remained controlled.  We are pleased with the progress made in increasing our collector workforce in the U.S. to the appropriate level.  Both our existing collector workforce and our new hires continue to impress us with their work ethic and commitment to compliance,” said Steve Fredrickson, chairman and chief executive officer, PRA Group.  “Our cash efficiency ratio, measured as cash receipts less operating expenses divided by cash receipts, of 61% continues to compare well with previous years even with the impact of our current regulatory environment with its greater costs and negative impact on revenue.  We are also pleased with our first quarter investment, particularly in the U.S., where we see gradually improving volumes and pricing.” 

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 the report yesterday.

PRAA management provided a little less detail during the investor Q&A than their counterparts at ECPG.

Supply and Pricing

Kevin P. Stevenson, PRAA – Co-Founder, President, Chief Administrative Officer and Director discussed supply and pricing:

“We’ve seen indications in the market that supply in core Americas is increasing. Many articles have been written recently, discussing the post-crisis build in consumer credit in United States, and the predictable result of increased charge-off volumes that are now showing. Federal Reserve data shows charge-off rates increased in the fourth quarter of 2016 by 50 basis points to 3.56% versus 3.03% in Q3 of 2016 and 2.94% in Q1 of 2016.

Charge-off rates for some credit issuers are higher and expanding faster than this since these lenders also serve the mid-prime customer markets. Additionally, outstanding credit volumes continue to increase and we expect this combination of issuance and charge-off rate growth to provide increased supply into the sales market. Importantly, this supply increase is propelled by the increase in lending as well as normal, historical charge-off patterns and not an economic downturn like we’ve experienced during the global financial crisis.”

Later in the call, another analyst pushed management for more specific detail on pricing.  Steven D. Fredrickson, PRAA – Co-Founder, Chairman and CEO responded:

“I think, other than Kevin’s points that we believe we’re buying the higher IRRs than we were a quarter ago or a year ago, we’re buying a wide variety of quality of paper and we also win deals at a fairly large range of IRR. And so it’s very difficult. I’d say it’s impossible to say that pricing has moved by X percent. This is not an efficient market. This is not a commodity market. And we believe that there’s a fair amount of inefficiency in pricing. And so other than to say we think the pricing has moved in a meaningful way, I’m not going to make a guess as to what percentage it might be.”

TCPA and Regulatory Environment 

Frederickson also discussed the TCPA and current regulatory environment. He said:

“We’ve seen very little concrete movement in Washington as it relates to regulation. However, there has been some recent commentary on the TCPA by a Commissioner of the FCC which gives us hope that they’ll overturn the past misguided ruling and allow businesses to appropriately utilize today’s technology to contact customers. We’re awaiting a ruling from the D.C. circuit on the industry appeal that was filed and argued in 2016, but are hopeful that regardless of that outcome, the FCC will revisit the current interpretation of the TCPA.

There’s been no further definitive communication on debt collection rule making from the CFPB, but we anticipate that they’ll continue to work with the industry in crafting rules that are fair to both consumers and business. As we mentioned last quarter, with almost a year having passed since we implemented new operating rules related to our consent order, we now feel our operations have stabilized and we’re beginning once again to be able to fine-tune processes to improve efficiency.”

Later in the earnings call one of the analysts pressed management on what impact any change in the TCPA might have on production. Stevenson responded:

“It would be an impact that we would certainly talk to you about. Assuming that happens tomorrow, we would have our dialers turned on within a couple days. But I think it would be a fairly meaningful impact. And we’ve been talking about this for years and it would allow us not only to be more efficient with our reps but also continue to penetrate our portfolios more deeply because, to your point, we don’t use dialing equipment for calling cellphones at all.”

Finally, at the very end of the earnings call, one of the analysts asked a question about the delayed CFPB debt collection rulemaking and whether the change in administration might lead to some modification or reversal of the consent order PRRA signed with the CFPB in September of 2015. The analyst felt that PRAA and ECPG were being forced to a higher standard than others in the industry. See insideARM story on the consent order here.

Frederickson responded:

“I mean, we would love to see uniform industry-wide rules be promulgated that are, as I’ve said, fair to consumer and businesses. And that’s our hope. We’re doing what we can do with our conversations with lawmakers and regulators to try to make that result come about. But I think it’s a fool’s error to make a guess on what’s going to happen on the regulatory front, other than saying we’re hard at work to try to influence what we can. Ultimately, what comes out of it, we can only try to influence and then wait and watch.”

The gain from the sale of its government services business in Q1 provided a significant boost to PRAA’s numbers for the quarter. Without that boost the number would be quite different. It will be interesting to watch the company performance over the next 12-24 months as they are buying more paper, and buying the paper at more attractive prices. 

One consistent item from both the ECPG and PRAA reports was the fact that while volume is increasing for both, the average balance per account is decreasing. Lower balances may impact legal collections in the future as the cost of litigation often precludes legal involvement on smaller balances.