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|Collecting on Bad Debt:|
Lessons from AFP and Telework Programs
In September 2009 NATTAP asked the AFP and Telework listservs to describe their processes for pursuing the collection of bad debts. The intention was to determine if any one approach prevails among the programs, and might be deemed a best practice. This is a summary of input from several programs.
Programs, whether lending directly or guaranteeing loans, are often confronted with debts which fall into default. Pursuing the collection of such bad debt is a necessary step to ensure the preservation of capital. Each program has the discretion to decide on its own how, and indeed if, it wishes to pursue collections efforts against debtors, based on their own circumstances and preferences.
NATTAP has found that programs pursue collections in several ways:
Through discussion with several loan programs, it was discovered that several key factors play a role in determining the approach that programs take relative to their collections efforts.
Factors Influencing Choice of Method
Collection activities are regulated by both federal and state laws that define both how collections activities can be pursued, as well as who can legally collect on a debt. In some states, a loan guarantor is not permitted to attempt to collect on a defaulted debt. In such situations, a guarantee program may only find itself in a position to collect on a defaulted debt if it takes the loan "in house" and issues a new promissory note as a direct loan from the program.
Federal laws, including the Fair Debt Collection Practices Act regulate methods organizations are able to utilize to collect past due debt. Privacy concerns are addressed in the law, as are several practices that are defined as deceptive in the law.
In some cases (including Michigan, and South Carolina), the lending partner and the loan guarantee program have an agreement requiring the lender to make contact with customers as soon as a payment is missed. Michigan, South Carolina, and other states, the lending partner contacts, and attempt to work with consumers until such time as the loan guarantee is paid by the program per their lender agreement's provisions on curing debt.
At that point, the responsibility for collection shifts to the program itself. A decision can then be made on how to pursue the account further. In states where it is allowed, some guarantors might pursue collections immediately after curing the guarantee. Several programs will take the loan in-house and issue a promissory note of their own. In either case, programs can then attempt to collect using their own resources, or contract with an outside collection agency, as Louisiana, Wisconsin and Washington have done.
It is therefore important that lender agreements have a clearly defined set of responsibilities for contacting late payers, covering who will be in touch with borrowers at various stages of the collection effort, and the processes they will, and will not use to as part of the collection effort.
Ensuring Accurate Credit Reporting:
Maintaining Positive Public Image
Outsourced collections work, whether conducted by the lending partner or a third party should be done on the basis of a clear set of procedures to be followed. ACA International, the association representing the collections industry, has produced a statement of principle and guidelines for the collection of healthcare debts that may serve as a useful guide.
Any situations that arise outside of the bounds of the agreements should fall to the responsibility of the loan program, which should maintain ultimate control over actions taken by its agents.
The choice of if and how to pursue a collection effort will depend on several factors: legal constraints that may prevent a guarantor from pursuing collections on paid off debts; the nature of the relationship between a program and its lender; the desire to ensure accurate reporting of the debtor's repayment history, and the desire to maintain a positive image of the loan program. Careful consideration of the programs goals and situation is required.
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