Module 2: COLLECTION AGENCIES AND INDUSTRY SOLUTIONS

Lesson 9: The Importance of Licensing

The Importance of Licensing

Licensing is cri�cal when shopping for a Collec�on Agency. There are a number of reasons why this is true.

Senator Miriam Defensor Santiago introduced an act crea�ng a collec�on agency regulatory Board. This Act shall
be known as the "Collec�on Agency Regulatory Board Act.” No person shall conduct a collec�on agency or act as
(4) a debt collector or collection agent without first having obtained a license as provided in this Act, (5) except
that a debt collector or collection agent ac�ng in the course of his employment for a (6) licensed collection
agency.

Several businesses start to seek the services of debt collectors, especially when it comes to payment of debts. A�er
all, it’s somewhat frustra�ng to deal with customers that don’t pay their monetary obliga�ons. And as they don’t
have luck in collec�ng their unpaid bills, they work with debt buyers, atorneys, and collec�on agencies.

If you want to venture into the debt collec�on industry, having a license is excep�onally essen�al. Here’s what you
need to know about debt collec�on as well as the reasons why it’s crucial to have a debt collec�on license.

What is Debt Collec�on?

For beter understanding, a debt collec�on is a process whereby the financial account is sent to a third-party debt
collec�on. Mostly, debt collectors are companies and professionals who are tasked to collect unpaid debts on
behalf of somebody else. In debt collec�on, the original company which handles the debt of a person assign or sell
the financial account to the agency a�er they deliberately miss payments.

Below is the debt collec�on process everyone should keep in mind:

1. During the first six months of the delinquency, the debtor will have to deal with the creditor for the payment of
debts. Here, no intermediary is involved, and it can be the best �me for the debtor to setle their accounts.

2. Once the debtor fails to pay, and the creditor decides not to pursue them, the account will be assigned to a
third-party agency. At this point, the debtor s�ll owns the debt. If the collec�on agency can recover the debt, it’ll
receive a commission from the creditor.

3. In the third stage, the original creditor has decided to give up on the debt, so they’ll sell it to the collec�on
agency, which is also known as the debt buyer. Here, the collec�on agency will be the one to go a�er the debt to
earn a profit from its purchase.

This setup is typically less costly than spending their own financial resources going a�er the delinquent accounts.
However, even if the debt collectors are legally authorized to convince debtors to pay their obliga�ons, they are
s�ll limited to the methods employed by the Fair Debt Collec�on Prac�ces Act.

Under the FDCPA, below are the rules and regula�ons that every debt collector should keep in mind:

1. Limita�on on the �mes of day the debt collectors can reach you.
2. Prohibi�on against the use of insults, obsceni�es, threats, and slurs.
3. Prohibi�on against discussion of debt with the debtor’s family, employer, friends, or neighbors.
4. Requirement for verifica�on of all obliga�ons and collec�on procedures.
If you violate any of the debtor’s rights under the FDCPA, then you can be sued in court. Due to some legal issues,
most states require collec�on agencies to be licensed in performing debt collec�ons within their borders.

Why Should You Have A Debt Collec�on License?

Again, most collec�on agencies should work following state laws, and they should also comply with the FDCPA to
keep their license. But, before that, let’s first discuss why it’s essen�al to have a debt collec�on license:

1. Legal Protec�on and Federal Compliance

Nowadays, many laws have governed the debt collec�on industry, and in turn, customers are well-informed about
their rights. If you violate their rights during a debt collec�on process, you can be sued in court. Therefore, it’s
essen�al to get a debt collec�on license, which is a requirement before you can operate as a collec�on agency. If
you have a license, you can perform the process of collec�ng debts legally. Plus, you’ll be knowledgeable with the
federal collec�on laws of your state. Having a debt collec�on license can minimize the legal risks involved in
atemp�ng to collect debts.

Moreover, if you apply for debt collec�on licensing, you’re required to comply with the standards provided by the
Fair Debt Collec�on Prac�ces Act. The law ensures that you’re compliant with all the rules and regula�ons about
debt collec�on.

You don’t want to face legal issues when collec�ng in a state where you’re not licensed. So, to make your work
easier and risk-free, contact a license provider now and learn more about how they can help you with your debt
collec�on license applica�on.

It’s the law.

Laws were designed to eliminate abusive prac�ces in the collec�ng of debt as well as to protect the money that
the agency collects on your behalf. The laws ensure that agencies operate in a professional and ethical manner
with both you and your customer.

While each state may have different laws, some requirements may include: registra�on and tes�ng of agency
personnel, audit of collec�on procedures and leters, agency bonds, and most importantly trust procedures and
audits to make sure that your money is safe.

Although collectors are legally en�tled to atempt to collect all owed debts, they are restricted in the methods they
can employ by the Fair Debt Collec�on Prac�ces Act. The law passed Congress in 1977 as an amendment to the
Consumer Credit Protec�on Act of 1968.

The FDCPA:
• Prohibits a collec�on agency from discussing your debt with your family, friends, neighbors or employer.
• Limits the �mes of day collectors can call you.
• Prohibits the use of slurs, obsceni�es, insults or threats.
• Provides remedies for consumers who wish to stop collec�on agencies from all contact.
• Requires collectors to verify all debts and end collection procedures if verification is not forthcoming.

While the original creditors are not covered by the provisions of the act, all third-party bill collectors and lawyers
who are regularly engaged in the collec�on of debts are covered. In addi�on, many states have statutes that
regulate the prac�ces of bill collec�on agencies, with some requiring them to be licensed, registered or bonded.

A majority of U.S. collec�on agencies — approximately 3,200 of them — belong to ACA Interna�onal, the world’s
largest nonprofit trade group represen�ng collec�on agencies, creditors, debt buyers, collec�on atorneys and
other industry service providers. The ACA requires its members to abide by all laws and regula�ons, as well as its
own codes of ethics and opera�ons.

The ACA requires its members to “treat consumers with considera�on and respect” and “communicate with
consumers with honesty and integrity.” It also restricts collectors from engaging in “dishonorable, unethical or
unprofessional conduct … likely to deceive, defraud, or harm a consumer.”

Legal Action vs. Debt Collectors

If a debt collec�on agency has violated your rights under the FDCPA through repeated contact, abuse, threats,
misleading informa�on or false representa�on, you can sue them in state court.

The burden of proof is on you, but if the judge rules in your favor, you can be awarded $1,000 in statutory
damages plus atorney’s fees. If you take this route, it is best to hire an atorney to represent you. If you take the
case to state court, you must do so within one calendar year from the date of the viola�on.

If you want to handle the mater yourself, you can sue in small claims courts. The process is faster, but
compensa�on for damages usually is limited.

Many disputes with debt collectors wind up in arbitra�on hearings. Businesses, especially credit card and cell
phone companies, have clauses in contracts with consumers that say disputes must be setled in arbitra�on.

If you are uncertain whether your rights have been violated, you can contact the Federal Trade Commission (FTC)
or the Consumer Financial Protec�on Bureau (CFPB) with ques�ons about the situa�on. You also can file
complaints with the FTC, CFPB or your local state atorney’s office.

2. Legi�macy of the Organiza�on

If you’re planning to run a debt collec�on agency, having a license is an essen�al factor to establish the agency’s
legi�macy to operate. Generally, some of the licensing requirements for collec�on agencies are background checks
and references. When you apply for a license, you have to be properly organized according to your state laws. It
means you’re required to comply with some paperwork as part of the licensing process. You also need to disclose
the iden�ty of all the members to make the inves�ga�on faster and provide references to know if the agency
operates with fairness on behalf of the clients.

Given these licensing requirements and your compliance therewith, the legi�macy of your organiza�on will be
likewise established

You may be liable.

Agencies that don’t adhere to the laws become a major liability to you and your business. If a legal issue should
arise with your debtor, he or she can sue you both based on the ac�ons of your Collec�on Agency. And without
licensing, there’s no one making sure the agency ‘plays by the rules.

The Securi�es and Exchange Commission (SEC) has issued a memorandum circular preven�ng unfair debt
collec�on prac�ces such as the use of insults or profane language, violent threats or false representa�on.
In the new circular, the SEC said that financing companies, lending companies and their third-party service
providers could no longer harass borrowers and employ unfair means to collect debt.

“Financing companies, lending companies and third-party service providers hired by them may resort to all
reasonable and legally permissible means to collect amounts due them under the loan agreement provided that, in
the exercise of their rights and performance of their du�es, they must observe good faith and reasonable conduct
and refrain from engaging in unscrupulous and untoward acts,” the SEC said in the circular issued Aug. 19.
The SEC said such unfair debt prac�ces include the use of obsceni�es, insults or profane language; publica�on of
the names and other personal informa�on of the borrowers; and the use of any false representa�on or decep�ve
means to collect or atempt to collect any debt or to obtain informa�on concerning a borrower.

Furthermore, the corporate regulator said that making contact at unreasonable or inconvenient �mes or hours –
before 6 a.m. or a�er 10 p.m. – is not allowed. This is unless the account is past due for more than 15 days or the
borrower has given express consent that the said �mes are the only reasonable or convenient opportuni�es for
contact, the SEC said.

Financing and lending companies found to be viola�ng the circular face penal�es ranging from P25,000 for lending
companies and P50,000 for financing companies for the first offense to P50,000 to up to P1 million for both for the
third offense and possible suspension or revoca�on of their license.

The SEC issued the circular because it has been receiving numerous complaints against financing and lending
companies that allegedly harass borrowers and employ abusive, unethical and unfair means to collect debts. It said
the SEC has regulatory and supervisory jurisdic�on over these companies by virtue of Republic Act 8556 or the
Financing Company Act of 1998 and Republic Act 9474 or the Lending Company Regula�on Act of 2007.

3. Increased Reputation

Almost all states require collec�on agencies to have bonding insurance before they can get a license. By being
bonded, it means that creditors who hire debt collec�on agencies have protec�on against loss caused by the
incompetence of the former. Ul�mately, the protec�on against loss that a creditor can get makes the collec�on
agency more trustworthy. If many will see you as a reliable partner for debt collec�on, you’ll get more customers
and thereby increase your chances of business success.

Your reputation is affected.

The Collec�on Agency you partner with becomes a reflec�on of your business. You operate your business
professionally and honestly – You should expect your Collec�on Agency to do the same, conduc�ng itself with
respect and courtesy in the course of collec�ng a debt on your behalf.

4. Guaranteed Knowledge and Ease of Dealing

Again, respected No win No fee Debt Collec�on agencies are also licensed. In addi�on to federal compliance,
those who apply for a debt collec�on license should have adequate knowledge about the ethical and fair debt
collec�on. They know how to deal with debtors when they find them without viola�ng any rules set forth by
FDCPA. Moreover, licensed collectors are knowledgeable about the legal op�ons available to them and the
creditors once the debtors don’t setle their accounts. They use the best techniques to ensure successful debt
recovery from the debtors.

Hence, if you have a license and you’re equipped with proper knowledge, it’d be easy for you to convince debtors
to pay and to get out of their debts.

Over 20 states require commercial collec�on agencies to be licensed to do business in their state. Surprisingly, very
few agencies pay aten�on to these laws. To find out if an agency is licensed, ask for a copy of their state issued
cer�ficate. States with licensing requirements issue them to compliant companies, so producing it shouldn’t be a
problem. If they are unable to do so, request that they TELL you the requirements for the state in which you are
doing business. If the person on the other end of the line is stumped by that ques�on, they probably aren’t in
compliance and it’s �me for you to move on.
Partnering with a licensed agency is one important way you can protect your business.