Federal Regulatory Reform Hits ARM Industry on Three Fronts

The latest regulatory reform effort emerging from Capitol Hill may not be aimed directly at the accounts receivable management industry, but it is having an impact.

At least three different sectors of the receivables management industry — health care, student loans, and credit cards — will be affected by legislation passed over the past year. And if any of the financial reform proposals become law, as many reform observers believe will, another segment of the industry, collection attorneys, could be impacted as well.

Experts say the Credit CARD Act of 2009 will have the quickest and most direct effect on the ARM industry. Although banks already had begun to tighten credit and raise fees, Larry Berlin – vice president at investment research firm First Analysis — said the CARD act, which took effect in February, has hurt the issuance of credit cards to consumers.

“When you reduce credit to consumers, it reduces, eventually, the pool of debt for companies to buy,” Berlin said.

Berlin, who covers publicly traded ARM companies Encore Capital Group, Portfolio Recovery Associates, and Asset Acceptance Capital Corp., told insideARM.com that debt supply hasn’t suffered yet. “Every one of the public companies has bought more debt,” he said, with some companies even paying a little more than they did in 2008 and 2009 because prices were so low then. But 2010 debt prices still are favorable, he noted, positioning debt buyers for good margins going forward.

“Even if they collect the same amount this year, if (debt) prices are low they will make a decent profit,” Berlin said.

Will contingency collection agencies be able to say the same? Creditors began tightening credit before the law took effect by lowering credit lines. That, coupled with fewer cards issued, will mean less volume for debt collectors, said Lou Freedman, who chairs the federal government affairs committee for the National Association of Retail Collection Attorneys (NARCA).

“Our members will feel an impact maybe later this year,” said Freedman, also an attorney with Freedman Anselmo Lindberg & Rappe, LLC, in Naperville, Ill.

Education and health care receivables collectors, however, are expected to have more time to prepare for any changes coming their way because provisions in the Patient Protection and Affordable Care Act — part of the healthcare reform package passed earlier this year — will not kick in until further down the road.

Student loan collections likely won’t be impacted at all, because the amount of student loan defaults are not likely to change just because the government has become the sole issuer, experts say ("Direct Student Lending Program May Lead to Steady Growth for ED Collection Contractors," April 9). Student loan reform was included in the healthcare reform package.

Americans also won’t be required to purchase health care insurance until 2014, when limits on out-of-pocket expenses tied to annual incomes also take effect.

Self-pay medical account volume and balances, however, could be impacted by a temporary national high-risk pool that will provide health coverage to individuals with pre-existing medical conditions. The pool is expected to become available in June. Likewise, beginning this year, adults up to age 26 will be allowed to remain on a parent’s health insurance policy.

Meanwhile, the industry’s collection attorneys are concerned that a proposal in the House version of financial reform could add new fees on top of another layer of regulation for collection attorneys and all third party collectors.

“Although attorneys are exempt from both financial reform bills, collection attorneys and all third party collectors would not be exempt,” Freedman, said. “I’d venture to say one of those fees might so impact some of our members that the practice of legal collections would no longer be profitable. Our margins have become so thin, this is just another expense that would reduce margins even more.”

Freedman said NARCA isn’t against financial reform. But said it shouldn’t establish a different set of rules for collection attorneys, who already must contend with conflicting rules from regulators.

“We understand a need for financial reform. We completely support that,” he said. “We want to make sure that as lawyers we are grouped with all lawyers and not excluded because we practice in credit and collections.”

Freedman said NARCA is reaching out to members of Congress and that it hopes to have some voice in any bill that makes to President Obama’s desk for his signature.