Steve Harms

Thursday, August 25, 2011

Credit Reports on Consumer Debtors: Limitations!

A United States District Court in the Ninth Circuit held that the Fair Credit Reporting Act severely limits when a creditor can access a consumer credit report. Specifically, the court held a consumer credit report (Experian, Equifax, and Trans Union are the key players in this arena) could only be drawn when the underlying debt involves a “credit transaction.”

So, what is a CREDIT TRANSACTION? Well, it is where the consumer voluntarily seeks credit, such as a credit card, promissory note, or other voluntary credit transaction. Examples of an involuntary credit transaction, where the creditor can’t pull a credit report, would be where the consumer didn’t voluntarily enter into a credit relationship with a creditor, such as where the debt arose from a traffic ticket or towing charges for failure to pay a ticket.

Many industry groups have opposed this ruling as it has become common practice to draw a credit report during the collection process of any debt, no matter how the debt was incurred. How-ever, the United States Supreme Court ( in a January 2011 refusal to grant Certiorari), has refused to review the Ninth Circuit’s decision, thus, the ruling stands.

So, bottom line, a consumer credit report can be drawn only where:

     1. There is a judgment against the consumer for a debt, regardless of source. Or,

     2. The underlying debt before a judgment is entered is based upon a “credit transaction” which means, according to the court, a voluntary transaction such as a credit card, a note, a debt voluntarily entered into...basically, situations where a consumer requested and re-ceived credit.

The case was Pintos v Pacific Creditors Association. It was heard in May 2010. The U.S. Supreme Court refusal to review the Ninth Circuit holding was done in January 2011.

Where do we go from here? Well, stay tuned as there may be more case decisions on point as we go forward, perhaps from other circuits. However, for now, we must look at the underlying debt on each file to determine whether (unless we have a judgment) we have a permissible purpose to pull a consumer credit report—the key being whether the consumer voluntarily requested the credit transaction.

Click here to see a PDF file of the actual court case

Wednesday, August 24, 2011

Collections Using a Dialer (auto dialing or predictive dialers): Caution!!!

According to recent reports, a federal lawsuit will NOT be dismissed by the court in a situation where a collection agency used a dialer to contact a debtor.  The plaintiff in that suit, a debtor being dunned by the agency, was called on their cell phone from an automatic dialer.  The law involved is the Telephone Consumer Protection Act, and it now involves debt collectors (it may have been designed to snag telemarketers).

Many large debt collectors use these dialer systems, and should be cautious about using them, and what numbers are fed into them.

Quoting from the case:  The TCPA prohibits calls to certain telephone numbers,

including cellular telephone numbers, using an “automatic telephone

dialing system,” except in an emergency or with the recipient’s

“prior express consent.” 47 U.S.C. § 227 (b)(1). As defined in

the statute, an “automatic telephone dialing system” means

“equipment that has the capacity — (A) to store or produce

telephone numbers to be called, using a random or sequential number

generator; and (B) to dial such numbers.” 47 U.S.C. § 227 (a)(1).

The phrase “random or sequential number generator” is not defined.

As we understand these terms, “random number generation” means

random sequences of 10 digits, and “sequential number generation”

means (for example) (111) 111-1111, (111) 111-1112, and so on.

CPS’s expert states that early dialers operated in this fashion,

calling every conceivable telephone number. (Cutler Decl. ¶ 15.)

More recently, companies like Castel have developed dialers that

call lists of known telephone numbers — in this case, the telephone

numbers of CPS’s customers.
Read the case, itself, click here

Thursday, August 18, 2011

Collecting Past Due Money: Red Flags to Watch For!

Keeping a steady cash flow is difficult in good economic times and a real challenge when recessionary pressures set in. Since cash flow is critical to payment of your company’s own bills, a cycle of events occurs, starting with your customers’ commitments to pay your company’s invoices timely. In other words, a domino effect occurs when your customers fail to pay your company on time—resulting in your company’s inability to pay its creditors on time.

To keep your cash flow positive and sufficient to cover your company’s bills, you must implement some general controls as part of your credit policy. Some advice:

* Be aware of slowing payments. I can’t emphasize this red flag enough. Watch for any signs of deterioration in paying habits. While one late payment may not break the bank, it is significant as it shows a disregard of your company’s payment terms—such that even one late payment does justify a polite nudge to the customer. The nudge may take the form of a “thanks for the payment” compliment combined with a gentle reminder of the terms—“please keep in mind the terms are [whatever the terms are, such as net 30].”

* Be ready to respond to customer bad habits. Communicate with your customers. Let them know slowdowns in paying habits aren’t acceptable, and prompt them to make payments. Once a second payment late, for example, inform them that you may have to take steps to correct late payment habits, such as the temporary suspension of credit terms.

At the early stages of payment slowdowns, you can be intentionally vague about what steps you may take, especially if you don’t intend to take stronger action at that point. Your customer will still get the message.

* Be considerate, yet firm. No need to panic and ruin a relationship . . . yet. Your communication at this stage is still very polite, yet firm enough to convey dissatisfaction—such as notifying your customer that a privilege, such as favorable credit terms or 24/7 availability of goods or services, may have to be suspended until confidence in prompt paying habits is restored.

* Be prepared to reduce a line of credit, require COD (cash on delivery), or cut off deliveries or services. If invoices are being paid slower and slower, don’t get yourself in any deeper. You don’t want or need the added credit exposure.

Let your customer know that you’re following established credit policies (discuussed in detail in Chapter 2) that require specific responses to deterioration in paying habits, including reduction and possible elimination of credit terms. The old standby: “It’s nothing personal – it’s just business” approach can help you avoid sending bad vibrations to a customer you’re simply trying to nudge back on track.

* Be honest in your communications. Although some consider bluffing to be an acceptable tool in business, it’s not effective a second time, and perhaps not even a first time. If you threaten to take action if you don’t get what you’ve asked for, be prepared to do it.

If you notice a decline, step up the pressure for payment, as discussed in Part II. Notify the appropriate people within your own company that they may experience a slowdown in cash flow. If the account is substantial, they may want or need to adjust the company’s expenditures in advance of encountering financial problems. Adjustments may include delaying discretionary purchases or employing free interns from local schools, rather than hiring more hourly help.