When "Too Big to Fail" Makes Others "Too Small to Succeed"

Joann Needleman,
Maurice & Needleman

Whether unintended or not, the CFPB’s Rules and Bulletins are driving small businesses from the debt collection industry.

As we knew, the CFPB’s Larger Non-Bank Participant Rule would have a direct impact on small businesses and law firms. Whether your business or law firm is a large or small participant in the debt collection space, as a provider of any “material service” to a larger participant you are deemed a “service provider” and subject to examination and enforcement by the CFPB. [1]  This guilt by association has made every small business and law firm an agent rather than an independent contractor. Simple Economics 101 tells us that larger participants, in an effort to minimize risk exposure, will now look only to those larger partners who can support such expansive and extensive compliance, leaving the small business out in the cold.

I know this first hand. As the President–Elect of the National Association of Retail Collection Attorneys, our membership is made up of 700 law firms whose primary practice is debt collection litigation. Some 64 percent of NARCA’s law firm members are “small firms” made up of 25 employees or less. These are hard working men and women, who are not only lawyers, they are their firm’s IT person, bookkeeper, HR person and compliance manager. Many of these firms have been in existence for over 20 years. They have always been compliant with state and federal laws, and never have had any action under the Fair Debt Collections Practices Act or other consumer protection laws brought against them. Yet in the last few months, several of these law firms have received letters from significant clients telling them in so many words “thanks, but no thanks.” While the work of these firms was exemplary in every respect, the cost of compliance was just too expensive and the risks too great. Larger participants, seeing declining revenues due to compliance requirements and needing to reduce their audit costs, would rather work with five larger partners than 10 small ones. It’s the classic story of the little guy (or girl) who just can’t compete and is now left out of the game.

This is a sad result especially if you look at the recent remarks of Director Cordray: “There is no reason why debt collectors cannot treat consumers with dignity and respect, even as businesses are able fairly to collect the money that is actually due to them.” [2]  While I agree whole heartedly with Director Cordray’s remarks, the current regulatory scheme cannot achieve the unachievable. What the CFPB wants is better customer service from the debt collection industry; a main street perspective. But how can you achieve that personal level of service when the only way to succeed is to use the Wall Street Model and employ hundreds if not thousands of people who will never talk to the same consumer twice. It’s like comparing Lowes to the local hardware store, sure Lowes is cheaper but if you have a problem you know the corner store will do a better job of dealing with the problem.

Dodd-Frank was enacted to prevent “too big to fail.” Small businesses and law firms in the debt collection industry are losing their ground in this current regulatory environment. Sadly, they are simply “too small to succeed.”