White Paper: Consumer Litigation Recovery in an Age of Increased Regulatory Scrutiny

The management team at Harvest Strategy Group regularly engages with companies and institutions of all sizes in many different market segments. The degree to which companies understand and have implemented a significant litigation recovery strategy (where balances dictate) can be classified into three distinct categories:

  • Those that have never implemented or have ceased a litigation model to recover charged off receivables
  • Those that include a highly selective, limited litigation recovery model
  • Those that fully understand the financial, compliance and reputational benefit to including a litigation strategy as a critical component of their overall recovery strategy

What are the differences among these groups? The first two groups are usually driven by a lack of knowledge of the risks and rewards (fearful or overly and needlessly cautious), a perception that litigation will negatively affect the reputation of their brand or because they have had previous bad experiences in litigating. Frankly, when counseled by litigation industry specialists, most of these perceptions can be overcome. In fact, with the right strategy and effective execution, integration of a litigation stream can be a game changer with respect to bad debt revenue recapture and brand value enhancement.
In 2017 it is certainly not an easy environment to be collecting past due or charged off receivables. Operating with full compliance while meeting financial targets requires a litigator’s knowledge of State and Federal laws, an IT professional’s experience with technology solutions, a chartered accountant’s structure and discipline to understand the data and the drivers of performance, an auditor’s sense for identifying the process gaps that diminish performance or create risk. Just when today’s collection professional thinks that they have all of these processes locked down, the attorneys that prey on unsuspecting creditors hit them with nefarious lawsuits.

What issue does the collection professional stress and lose the most sleep over? Perhaps it’s that the chosen vendors are not quite as secure with the data or as compliant in their operations as they should be. Could a TCPA claim be on the horizon? At $1500 per occurrence a TCPA claim can bring a company to its knees. If you’re not concerned about that, when does the stress over a potential state Attorney General complaint diminish? If you think that you have your bases covered so far, is there a risk of a CFPB audit uncovering some unidentified malfeasance that will result in a Consent Order or lawsuit against your company? Ask the recipients of the CFPB’s wrath whether they thought they were managing their business in a compliant and ethical manner, and we’ll bet that they would agree that they were.

With traditional recovery options being scaled back, limited by regulatory oversight and cost, what options exist for the ARM/RCM manager to maintain loss recovery expectations? The collection agency industry, once a powerhouse and dominated by a few large players, has been recreating itself around a new set of rules and requirements. Increasing (non-revenue creating) compliance costs that all debt collection servicers have had to assume have eaten up once healthy margins or in many cases evaporated completely and forever.

To survive, the few formerly large third party collection agencies have had to diversify their product offerings to include first party, call center work, CRM and other services that have migrated their businesses far away from their roots in third party contingency collections. Former power houses have either completely divested themselves of standard third party collection work or the segment represents a small percentage of their overall business model. The same can be said for many collection law firms across the country as well. Despite the vacuum at the top being filled by many mid-size stable agencies, the collection industry continues to be in a rapid state of evolution. Hang on to your hats, the remaking of the third party collection industry is not over yet.

Where does this uncertainty and turmoil leave the ARM/CRM manager? What strategy can be implemented to compensate for the downturn in recoveries as a result of diminishing return from their collection agency partners? Tightening of credit on the front end? That’s not an option for many companies as it would likely have a detrimental effect on sales. Those that don’t grant credit (healthcare industry, government debt, etc.), don’t have those options. Is selling the debt the answer? Yes, in our opinion, under the right circumstances with a strategically selected tranche of accounts. The only remaining, viable option is to introduce a robust litigation recovery strategy.

Years of data clearly demonstrate that compared with non-legal recovery tactics (collect in-house, multiple collection agency streams, bad debt sale or a combination) when the right accounts are selected for a pre-legal and litigation stream, that long term revenue recapture rates can provide a lift of 3 to 5 times the baseline. The data shows no particular biases demographically or by debt type.

What are the keys to successful execution and making this a reality? Simply put, the following factors must be in play:

  • Objective and data driven selection of the right accounts either manually at the collector level and/or supplemented by a predictive legal selection model
  • Working with the industry’s best collection partners (attorneys, pre-legal partners), ensuring that they have the right skill set, capacity and focus to meet needs from a recovery and compliance standpoint
  • Development and successful implementation of a well-defined treatment handling strategy, fully documenting all agreed upon action items and resources requited in a contractually binding SLA (Service Level Agreement)
  • Reporting and analysis of the KPI data (key performance indicators) that drive activity and results
  • ‘Boots on the ground’ active daily, weekly and monthly management of activity levels to maintain focus from a qualitative and quantitative basis at the collection partner
  • The ability to proactively identify and react to negative variances of deficient KPI and change tactics accordingly on a timely basis
  • Design, development and integration of a robust and thorough CMS (Compliance Management System) with oversight by someone outside the recovery operations department
  • Access and the ability for the client to deliver full media (documents) to the service partner

The question is often asked of those of us in the legal recovery space…”Why is a legal recovery strategy more effective than the other strategies utilized”? We respond as follows:

  • The customer (aka debtor, member, patient, etc.) comes to realize that they have come to the end of the road. If the right account has been selected from the outset, the customer has the ability to pay some creditors. Filing a lawsuit motivates the customer to move your debt up the priority list into the ‘must-pay’ category
  • The customer is also motivated to pay in full, settle or start negotiating payment arrangements once they realize that they will likely have to hire an attorney and take time off for hearings and a possible trial (despite the fact that far less than 1% ever reach the trial stage).
  • Initiating legal proceedings locks in the client’s statute of limitation rights and hence a much longer runway in which to collect, thereby giving the customer more time to rehabilitate or locate a source of money by which to satisfy the debt.
  • Post judgment procedures (garnishee, lien, etc.) do not require voluntary action on behalf of the customer
  • Lastly and perhaps most importantly is the fact that an effectively executed legal strategy nets returns that are many multiples over agency and debt sales, often continue to pay 10+ years after commencement

We can’t forget to address those naysayers that are concerned about reputational risk for their brand. The reality is that the opposite is actually true. Litigating accounts that are legitimately owed sends the signal to those that believe that there are no negative consequences for not fulfilling the contractual or moral obligation that is owed. By taking a firm stand and legally pursuing legitimate claims from those that have the ability to pay some or all of the debt sends a clear message to the marketplace.

A litigation strategy has risks which should be evaluated in light of the benefits previously described. One area of risk is compliance with all laws and regulations. Debt buyers must be properly registered and licensed where required. For lenders, proper notice language must be sent to the consumer within the proper timelines along with proof of mailing. There are many other compliance areas which should be evaluated as part of a formal compliance review from a compliance expert before initiating a litigation recovery program.

Another area of risk is having a consumer’s attorney file a counterclaim to your initial lawsuit against the consumer. While these are relatively rare (less than one-half percent of all law suits filed result in a counterclaim), and can often be resolved amicably, sometimes counterclaims reveal real issues which can represent significant exposure, especially in the case of a class action. In our experience, a client who has a clean compliance review greatly reduces their risk of counterclaim and also increases the chances of an amicable resolution when they occur.

There is also risk associated with the activity performed by the law firm themselves. Proper law firm selection, employee training, employee oversight and audit greatly reduces the chances of an error on behalf of the law firm. Insurance coverage and indemnification agreements should cover any mistakes on behalf of the law firm. Finally, a budget should be established to handle the random and baseless law suits which should be expected. The budget can be sued to settle or fight such lawsuits depending on the circumstances. Such a budget is typically a small fraction of the total expected recovery to be generated from a litigation strategy.

Given the challenging collection environment, what strategies are best utilized to ensure maximum recovery is attained at the lowest cost, full compliance, and nuisance lawsuits are kept to a minimum? The answer varies of course from company to company. Clearly a combination of an in-house collection effort, combined with outsourcing to collection agencies, litigation on high value claims and perhaps debt sales is used by most successful accounts receivable and revenue cycle managers.

This white paper was created to provide an overview that for most companies and debt recovery managers, is the least used, yet most effective debt recovery tool in their tool chest… litigation. Many companies dabble in litigation recovery almost as an afterthought, while others refuse to sue at all. As the data has shown and noted earlier, the benefits far out-weigh the risk. We ask the question, ‘why’? It is our experience that companies typically fall into one of two groups. Approximately one-third of this camp don’t have a robust legal strategy because they have been ‘hooked on’ the cash flow from debt sales. To this group, we say that we understand. It’s usually a fixed amount (less  ), more immediate and perceptively less of a strain on resources. We also say that there is a strong likelihood that the debt buyers are litigating a significant segment of the purchased debt and realizing the benefit that the seller could have attained. Debt buyers are amongst the most aggressive debt litigators in the industry, unless contractually bound otherwise. To this group, we assist them in developing a business case that quantifies the financial benefit, typically a rate of return that is far greater than the debt sale price, albeit over a protracted period of time.

This brings us to the second group; low volume or non-litigation debt recovery/revenue cycle managers. It is our experience that this group is usually driven by a lack of information or in many cases a wrong perception of the rewards vs. the risks. We seek to educate companies on a balanced recovery approach which includes identifying, selecting and effectively treating suit-worthy accounts with a well-managed pre-legal and legal recovery program. By doing so, the benefits far out-weigh the risks. An effectively managed program ensures that customers are held accountable for repaying their legal and/or contractual obligations to the highest level of their ability to pay. We have first-hand experience with many companies that after a successful integration of a selective legal program into their recovery strategy have had significant, game changing sustained lifts in overall dollars recovered with no negative consequences. In fact, as we will explore in future white papers, it is actually a reduction in risk to the collection manager by introducing a selective, robust pre-litigation and litigation program.

An effectively executed litigation program will yield recoveries that continue many years into the future, while doing so in a compliant, brand-centric manner.

Future white paper topics will include:

  • How to best select accounts that are deemed to be suit-worthy
  • Delivering media/documentation for a successful litigation program
  • What does your litigation Compliance Management System (CMS) look like and is it good enough?
  • Why do you need to closely manage collection attorneys? Is it really necessary?
  • What kind of KPI should you be monitoring that drive litigation performance?
  • Do you have the right strategy but have challenges executing effectively?
  • Why do I have dormant judgements and what can I do about getting them to start paying?

For input, questions, or further discussion, please contact Rob Yarmo at rob.yarmo@harveststrategygroup.com or (416) 669-5490.


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