Text Messaging As the Next Frontier in Collection Communication

Information technology research and advisory firm Gartner Inc. recently predicted that SMS money transfers will be the number one mobile application by 2012.

Even if money transfers fail to become No. 1 in the next couple of years, there is no denying the growing popularity of utilities for handheld communications devices — especially text messaging, or SMS. In the six months ending in June 2009, the latest figures available, there were nearly 750 billion text messages sent in the U.S., according to CTIA – the Wireless Association. That was nearly double the number from a year earlier.

Yet rules and regulations have kept text messaging out of the collection industry. Even cryptic text messages — like asking the handheld device owner to call a phone number — have been avoided due to fear of violating the law.

It is a situation many in the industry hope to change by updating the Fair Debt Collection Practices Act (FDCPA), which went into effect in the late 1970s, when the state of the art of wireless communications was a CB radio. But experts say that any change in this area would have to come from consumers seeking change in permitted methods of communications.

“The top 10 card issuers in the U.S. all use text messaging for fraud and other alerts,” said Tim Smith, senior vice president of collections for Firstsource Solutions, based in Mumbai, India, with U.S. collection headquarters in Amherst, N.Y. “But those notices don’t come under the same incredible regulatory scrutiny as notices from collection firms.”

Under the FDCPA, a communication with a consumer must include a notice that the message is from a debt collector, leading to problems regarding right party contacts and the 160-character maximum length of SMS messages. Another thorny issue is the payment of the message, much like with cell phone contacts. Currently, there is no way for a collection firm to know if a debtor has a plan that includes unlimited calls or text messages. And regulators have determined that if a contact is paid for by the receiver, it is illegal.

FDCPA reform could fix some of the issues. But Roger Knauf, executive director for debt purchasing trade group DBA International, said that health care, the budget, cap and trade and several other issues are likely to be addressed in Congress first. And with mid-term elections in November, little if any legislation is likely to be addressed after July.

One piece of legislation that likely will be addressed before July is the financial reform legislation that is already approved in the House and pending in the Senate. There is a possibility that the FDCPA could be readdressed by the proposed Consumer Financial Protection Agency (CFPA), according to Knauf. But he prefers that any changes be handled directly through Congress rather than through a regulatory agency. Due to the other pending legislative matters and the mid-term elections, Knauf doesn’t expect any changes until the next session of Congress at the earliest.

Some issues regarding text messages might be resolved using Internet links that would display disclosures and private information only upon entering information like a PIN and password.

But whether such a communication would be considered lawful has yet to be tested in the courts, said Smith and David D. Cherner, ACA International legal counsel and director of state government affairs. And collection firms don’t see the potential risk being worth the reward of lower costs.

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Another potential hurdle is the ownership of the device itself. The debtor may be using a company-owned wireless device, Smith said. The company might monitor the usage of the device, leading to third party disclosure issues if there were text-based communications regarding a debt.

Tony Coffman, director of IT for Horizon Financial Management in Merrillville, Ind., said he’d like to be able to send text messages directing people to a Web site that would include all the necessary disclosures as well as account and payment information. The name of his firm doesn’t automatically alert someone — including an incorrect contact –that the message is from a collection company.

Letters cost in excess of 50 cents apiece just for postage and handling, compared to just a few cents for a text message, Coffman added. He figures he could save several thousand dollars a year by using texting – but his clients don’t want to test the legality of the issue.

“The law needs to change,” Coffman said.

If a firm does take the plunge and the action is upheld in the courts, then there would be some legal precedence, noted Cherner, who, like Knauf, would like to see FDCPA revised to take into account the new communications environment, including the propensity of people to drop landlines entirely.

“Collectors want to be able to communicate through any channel consumers feel comfortable with,” Cherner added. And there is increasing evidence those channels are cell phones and text messages.

According to Smith, 40 percent of the consumers the company works with don’t have landlines.

There are instances in which text messaging is being used today by collection firms, but only in conjunction with other methods of communication, according to Alan Berrey, vice president of business development for SoundBite Communications, Bedford, Mass.

The mini-Miranda and other disclosures could be included in a letter or right-party telephone contact, then, with the consumer’s permission, the communication could continue via text messaging, under what Berrey called “multichannel blending.” He said some collection firms are already conducting some communications this way, but he could not reveal any company names.