Collections Approach in Need of a Significant Shift in Current Economy

The barrage of horrible macroeconomic news continues today as the Department of Labor reported that another 651,000 jobs had been lost in February, sending the unemployment rate to 8.1 percent.  Measures are being considered that would allow judges to restructure underwater mortgages as part of bankruptcy proceedings.  It goes without saying that nest eggs are being cracked or crushed with the recent performance of the markets.

How does this impact the collection industry, and what should its role be in the broader economy?  

My first answer today is obvious, and widely discussed.  My second answer today is more complicated, and more controversial.  Please hear me out and let me know your thoughts below.

Answer #1 goes like this: Unemployment is the key barometer for collectability; fewer jobs mean less collectable paper and lower profit margins for both credit issuers and their service providers.  Fewer refinancing events mean fewer pops as ARM companies have less access to this collection method.  Falling net wealth around the country makes people less inclined to pay past debts.  So, economic conditions are making collections and recoveries much harder, requiring companies in this industry to work smarter to maintain their margins.  

This argument is straightforward and discussed regularly here on insideARM.

Answer #2 goes a little deeper.  This recession will only correct itself based on improved consumer spending, and new spending by consumers is contradicted by many collection methods.  Payments in full may legally satisfy a past due obligation on the part of a borrower, but it may not practically recognize her existing plight, or, more broadly, her role in an economic recovery.

A reader commented on an insideARM blog recently by saying, “debt is the responsibility of the individual.  Hiding is not a consumer protection right.”  In general, this is hard to argue with – a legal transaction has occurred when purchases are made on credit.  The collection industry keeps this process efficient and allows the credit economy to function.  But I don’t think this position confers an absolute right to collect all past due accounts on all terms, especially given our extremely challenging economic conditions.

In these challenging times, a more consultative collection approach is needed.  As an industry, we should be reaching out to distressed consumers and structuring repayment schedules that recognize their plight and take their future prospects into account.  We should not be wasting our time and money trying to collect from consumers who have the least likelihood to pay; in this recession, the costs of these efforts are almost sure to exceed the revenues that follow.

“Every dollar, plus interest, right now” may have been effective in 2006, but, I argue, it is not always effective in 2009 (or 2010 as the recession – depression? – continues).  As an industry, let’s figure how to help the American consumer get back on her feet, and benefit more as the economy recovers.