Receivable/Accounts - Information for Credit and Collection Issues

Monday, June 29, 2015

More Change For Ontario Collection Laws?


I received an alert over the weekend that the Ontario Ministry of  Government and Consumer Services has issued a investigative whitepaper and survey surrounding debt collection, debt settlement, payday loans, and alternative financial services.  Reading over the paper, I see a lot of good thoughts, but some of the implementation might cause a misstep for the Ontario credit industry, and inadvertently harm consumers through bureaucracy.

First, here’s a link to the whitepaper: http://www.ontariocanada.com/registry/showAttachment.do?postingId=18882&attachmentId=28331


Alternative Financial Services?

First, the paper focuses on ‘alternative financial services’, meaning financing credit through non-bank sources.  I think the biggest problem in Ontario is there is a huge void between the banks offering a term or rotating loan at 4-10%, and a payday lender giving credit at 36-59%.  And in my opinion, the culprit for this void is Citi Financial.

Back twenty years ago, we had a number of sub-prime lenders and private label credit cards, being Avco, the Associates, Household Finance Corporation, Hamilton Discount Corporation, and so on.  A consumer who might not be able to acquire credit from the bank might be able to approach these lenders and secure credit at 12-28%, depending on the amount, security, and term of the credit requested.  These credit terms were not ideal, but it allowed access to credit for those who didn’t qualify for a standard bank loan.

Between then and now, Citi Financial grew wildly and I’ve witnessed their purchase of many of these creditors, or the squeezing out of the smaller grantors.  Citi became the de-facto B-line lender, and having collected for them at various agencies, I can attest to their growth and volume as I saw collection volumes increase.  However, Citi Financial appears to have pulled back from the Canadian market, focusing more on US-based credit, leaving a void where they used to exist – new players are stepping into this void, such as Affirm Financial and Wonga Canada, but the choice and options for Canadian consumers is far less than what it was in the 90’s.

If a consumer can’t qualify for a bank loan, their choices are severely hampered, and I believe that is what has driven a huge increase in the payday loan market in Ontario.

Some of these alternative financial services fall under the Payday Loans Act, and others aren’t governed – however, I’m not sure further regulation is necessary specifically for this tier of lending – the industry is just getting back on its feet, and it should serve Ontario consumers, not harm it as it grows again.  Excessive regulation might hurt that growth, and in turn continue to limit consumers and healthy borrowing geared to their income and abilities.


Should Alternative Financial Services Be Regulated?

I certainly suppose that a maximum interest rate or multiplier could be applied to alternative lending, or rent-to-own financing, but if that is done, it should be applied with a light hand, and input of the major creditors active in Ontario today.

The biggest danger to alternative financial services isn’t a single loan in a vacuum, in my opinion it’s consumers racking up several smaller alternative credit lines or products because there is a void in the mid-tier market.  If someone who might borrow $10,000 as a consolidation loan or rotating loan from the Associates twenty years ago can’t find a similar product, and they’ve had financial hardship or they are living beyond their means, they might take out a rent-to-own furniture product, and then borrow two to three separate payday loans to meet their immediate ‘needs’ which could easily exceed their borrowing power and available income for payments. 

To protect creditors, what I believe would help would be a mechanism to limit borrowers, not creditors.  If consumers were limited to certain debt-to-income ratio, then creditors would be protected from a high bad-debt ratio and could stimulate more mid-tier lenders to enter the market and offer reasonable interest rates.


Tracking Payday Loans

The best method for tracking these loans would be to have them report to the credit bureaus as either trade line items or registered items like a collection agency registers to a consumer.  This would be a challenge for many payday lenders, especially smaller franchises or standalone lenders.  My suggestion would be to supply a small list of 10-30 technical support workers that the lenders could contract out to work on exporting data to the credit bureaus and signing up to pull data.  The debt collection industry uses these tools on an ongoing basis, so there is very little reason the payday and alternative financing market could not work with these tools.

If a consumer has a certain number of alternative loans or a fixed dollar limit of alternative lending, the creditor could be legislated to not issue further funds, or to issue funds with educational materials to warn them of the dangers of borrowing and failing to remit payment.

Of course, this will require the credit reporting agencies Trans Union and Equifax to allow these creditors to become reporting partners and allow the retrieval of consumer credit report data.

I don’t believe an accounting of household income or a cooling off period will help consumers or creditors, as it will complicate the borrowing process and require excessive education of the creditors in assessing financial viability.  I believe a straight income-to-debt ratio or threshold will be far more easily implemented.


Remittances

Money transfer services, such as Western Union, in my view are a dying business – the growing availability of online payment services such as Paypal, Interac E-Transfer services through banks, and EFT services is slowly killing the old costly services.  Why send a Western Union Quick Collect at a $15 service fee at a physical location you need to visit when you can issue an Intera E-Transfer at $1.50 from your online banking service?

Transparency around fees may help consumers, but I believe it is inevitable that the death of money transfer services in Ontario is going to happen eventually as new vendors come up with low-cost online alternatives, regardless of the circumstances of struggling Ontarians.


Debt Collection Revisions Again?

The concept of applying the debt collection rules to debt purchasers is not a horrible concept on the surface, but it will complicate issues when the details apply – for example, a debt purchaser may take acquisition of a portfolio of 50,000 accounts in a single debt purchase – should they have to send collection notices on every single file and wait six days before calling, and then license every single staff member that might speak to a consumer regarding a debt?

The other concern is the most recent revision to the Collection Act regarding debt settlement has already prompted a shift in the industry – rather than debt settlement companies based in the US operating in Ontario, their work is shifting to lawyers who hold an exemption under the CDSAA rules.  If the act further expands to cover debt purchasing, billing outsourcing, or debt assignment, we may see more and more of this work pushed through law firms to avoid excessive regulation.  These law firms are outspoken at industry events about not being required to follow the CDSSA and often cause consumers grief when issuing legal demand notices on statute barred debt, and similar practices.  This isn’t a case of litigation, but setting up collection agency call centers within their law firm premises, and employing collectors to represent national banks, credit grantors, and telecommunications companies for large consumer portfolios that are either too small in balance or too aged in delinquency to consider legal action.

To prevent this continuous slide of collection, debt purchasing, and debt settlement services into the hands of law firms, I recommend the exemption should continue to exist for lawyers, but remove the exemption from their employees and require their registration under the CDSSA.

1.(1) This Act does not apply,
(a) to a barrister or solicitor in the regular practice of his or her profession, but does apply to his or her employees.

If the Ontario government wants to change the collection act further, I would also recommend the following changes:

First, clearly identify who needs to be licensed – the act currently states it applies to a company “who obtains or arranges for payment of money owing to another person or who holds oneself out to the public as providing such a service”.  This could apply to debt purchasers, billing providers, and so on.  The act should clearly identify these alternative service providers with clear concise language.

Secondly, as the debt purchasing market often deals with aged debts with inaccurate information due to consumers moving, I would recommend a change to the wording requiring an initial notice – something that helps consumers have more access to notices.  Many provinces do not require physical collection letters in advance, and with the recent changes to Canada Post I believe we would be far better served by allowing email notices, and initial contact prior to a mailed notice on older accounts:

21.1 No collection agency or collector shall demand payment, or otherwise attempt to collect payment, of a debt from a debtor unless the collection agency or collector has sent the debtor, my ordinary mail, or by electronic mail, a private written notice setting out the following information:

21.4 If a debtor states to a collection agency that the debtor has not received a notice required by subsection (1) or exempted by subsection (5), the collection agency or collector shall send a notice ot the debtor at a physical or electronic address provided by the debtor, and no demand for payment, or other attempt to collect the payment of the debt shall be made before the sixth day after the day the notice is sent.

21.5 If a debt is deemed to be delinquent of an age more than two years, the requirement for an initial written notice will be waived, unless a consumer requests a written notice and provides a current physical or electronic email address.

The concept to advise a consumer of certain basic rights is an excellent idea, but as an agency that operates in the US, I can tell you that the various state requirements for letters is reasonably onerous as they don’t conform to similar guidelines.  Recently the PAIC wrote a whitepaper called “All Along The Watchtower” recommending a two-page flyer including consumer rights to be included … that’s just unwieldy and unhelpful.  A far better suggestion would be for the Ontario government maintain a concise website detailing consumer rights, and require collection notices in Ontario to include a hyperlink to that website.

Lastly, the requirement to prevent contact by a collection agency by telephone would defeat the purpose of the industry, and cause widespread harm to consumers – from a collection agency standpoint, I can advise that 90% of our arrangements come from telephone contact.  This contact does not need to be adversarial, and we have many consumers who have left positive Google+ reviews on our company website stating we treated them with respect and consideration.  Without telephone contact, meaningful co-operative negotiation or education of a consumer’s rights can’t be upheld by the collection industry.


Conclusion

Those are my thoughts and opinions – obviously we won’t have revisions to the various credit and collection acts that will satisfy all parties, but the fact that the Ontario government has issued a survey and is interested in the opinions of consumers and vendors is a very good sign.

If you would like to take this survey, it can be found here: http://www.ontario.ca/form/consumer-financial-protection-survey

Thanks kindly,

Blair DeMarco-Wettlaufer
KINGSTON Data & Credit
Cambridge, Ontario
226-946-1730
bwettlaufer@kingstondc.com