Probe of Wireless Debt Collection Practices Moot for ARM Telecom Players

If Congressman Dennis Kucinich (D-Ohio) has his way the use of mandatory arbitration in debt collections will become a thing of the past. The Ohio Democrat announced last week that the Domestic Policy subcommittee he chairs will investigate the debt collection practices of major wireless providers.

Like major banks, Kucinich said that most cell phone providers have forced their customers to settle disputes through mandatory arbitration, thereby requiring consumers to give up their right to use the court system. The agreements are included in the wireless providers’ service contracts as a precondition to receiving service.

Kucinich’s investigation into the wireless industry’s use of arbitration is an extension of his look into banks use of forced arbitration to collect credit card debt.  In 2009, the subcommittee released a report and held hearings on the misuse of arbitration that later led nine major banks, including J.P. Morgan Chase and Bank of America, to remove debt-collection arbitration in their new customer agreements. Seven banks have since completely removed forced arbitration from their agreements.

Although competition and economic pressures continue to plague some areas of the telecommunications industry, Fitch Ratings has forecast that wireless subscriptions would grow 4 percent in 2010. Given the growing rate of wireless phone use, and the multiple accounts under one name, consumers could find themselves subject to multiple arbitration clause agreements. 

Kucinich’s investigation into arbitration use by the wireless industry could lead phone providers to follow banks’ led and drop such clauses from their contracts. If that happens, at least one agency that buys and sells telecom debt doesn’t foresee a need to change the way it does business.

“In our dealings, we’ve not collected one dime through the arbitration process. It’s not a tactic we employ,” said John O’Donnell, vice president of Afni, Inc. of Bloomington, Ill.

The 75-year old agency has specialized in telecom debt collections for more than 40 years, O’Donnell said. Landline accounts make up the bulk of Afni’s telecom portfolio, but placements from wireless providers have been steady when compared with last year’s volume, he said.

The average balance for wireless have been fairly steady whereas the average balance for the landline business have increased slightly – primarily due to bundling of services including high speed internet and television programming.

O’Donnell said he has not heard of any other telecom debt collectors or buyers using arbitration as a collections tactic, either.  He said it simply is not cost effective to use arbitration to collect bad debt on wireless accounts, even if an agency wins the judgment because arbitration is expensive and the agency only gets a percentage of the payment.

“The average balance of a (wireless) account is $400 or $500. Once you go down a legal path, the cost offsets the gain,” O’Donnell said.

If arbitration is being employed to collect bad debt on wireless telecom accounts it likely is happening among wireless service providers, thereby giving them more cause for concern than members of the accounts receivables management industry.

“The carriers may be more concerned with that (limiting arbitration) from a defensive position,” he said.