How Ownership Changes Affect Your Licensing

by Matt Pridemore

Changes to the ownership structure of a licensed collection agency occur for a variety of reasons and are a regular part of the corporate life cycle.  Unfortunately, the statutory regulations for the majority of jurisdictions prohibit the transfer of debt collection licenses.  Furthermore, the inflexible language of the provisions in almost all instances does not allow for an interim or transitional license, resulting in a gap period during which the ownership structure will have changed, but the new licenses will not have been processed.  While the significance of the change and structure of the transaction are factors that help determine the specific action necessary, some level of re-licensing is almost always required.  The following will address the specific action necessary for the most common types of transactions:

Stock Transaction

While in most situations a buyer would prefer an asset transaction, there are benefits to a stock transaction with respect to the individual state licensing requirements.  Most notable, corporate registrations required as a prerequisite to obtaining state debt collection licenses are not affected in the event of a stock transaction – they are transferred seamlessly to the buyer, saving valuable time and money.

Unfortunately, the same is not true for state debt collection licenses.  Whether it is a stock sale or recapitalization, if the equity positions on the balance sheet of the entity holding the debt collection license change by more than 50% then the license is immediately invalid in almost all instances.  The entity must submit new license applications to the various jurisdictions for subsequent review and approval.  The answers to the following questions will help in determining your re-licensing strategy:

1.      What is the quickest way to obtain the required state debt collection licenses lost in the stock transaction?

Complete the required license applications prior to consummating the transaction and submit them to their respective jurisdictions immediately following the closing.  This simple action will significantly decrease the span of time in which you are without the required state licenses.  It will also have a positive impact on the way state regulators view the new regime…the longer the gap period between closing and submitting new license applications, the harder the questions you may have to answer.

2.      Will you continue to collect from debtors in those states where the license is now invalid and it is technically unlawful to continue operations until the new license is approved? 

While holding accounts in those states until the new license is obtained is the only way to fully mitigate any risk associated with unlicensed collection activity it may cost you clients and ultimately prove impractical.  As such, the following are steps that one can take to minimize those risks:

• As discussed above, complete the required license applications prior to consummating the transaction and submit them to there respective jurisdictions immediately following the closing.
• Do not announce the transaction if possible until the new licenses are approved.  While there is generally a desire on the buyer’s part to immediately announce the transaction, keeping the deal quiet will minimize exposure to frivolous lawsuits from predatory attorneys aware of the inflexibility in the change of control provisions.

• Be conscious of the fact that you are operating without a license and impress upon your staff and collectors the importance of their good behavior.  Please note that any instruction out of the ordinary could be used one day by a plaintiff’s attorney in a lawsuit as proof of willful or malicious wrongdoing.  In that regard, it is important to provide instruction in such a manner that does not imply any past or future fault.  

Please note that as the change in equity for a proposed transaction dips below 50% the number of jurisdictions where a full re-licensing effort is required declines significantly.

Key Point:

The state license applications ask for varying degrees of information related to the ownership of the entity being licensed.  However, in almost every instance the applications do not request information beyond the direct owners of the entity being licensed (corporate or individual owners).  If you are starting an agency and wish to avoid the licensing issues related to selling the stock of your agency you should consider setting up a holding company to own 100% of the stock of the entity that you will be licensing.  Selling the stock (any percentage) of the holding company would not change the equity position on the balance sheet of the licensed entity (owned 100% by the holding company) and there would be no need in most instances to re-license.

Asset Transaction

In an asset transaction, the seller retains ownership of the corporate entity and is generally responsible for unwinding it appropriately.  The buyer must either create a new corporate entity or use an existing corporate entity for the transaction.  While there are a number of reasons why a buyer would prefer an asset transaction, this deal structure creates a number of transition issues with respect to licensing.  The following are a few such issues and recommendations for dealing with them:

1.      Both the corporate registrations and debt collection licenses are tied to the corporate entity and cannot be transferred to a new corporate entity set up by the buyer.  Unless the buyer has an existing licensed collection agency in which to roll the purchased assets, new corporate registrations and debt collection licenses would need to be obtained.

Recommendation:

Obtain the appropriate corporate registrations and debt collection licenses prior to closing (it will take no less than six months to fully license the new corporate entity).  If this is not possible then the recommendations for re-licensing and business conduct during the “gap” period discussed for a stock transaction above would be relevant to help minimize the exposure related to collecting without a license.  Please note that setting up the holding company structure discussed above at this point would provide more flexibility for any future divestiture. 

2.      The desired corporate name of the post transaction agency can also create a transition issue with respect to licensing.  There is oftentimes some tangible value associated with the corporate name of the acquired business.  As such, it is not uncommon for the new corporate entity to do business under the same name as the seller has historically used.  In fact, the rights to the name and any collateral material or other intellectual property are generally included in the definitive asset purchase agreement.  Unfortunately, the states do not generally allow multiple corporate entities to operate using the same or similar names.  As such, the new corporate entity cannot register to do business and then obtain the necessary debt collection licenses in the same or similar name to the name already taken by the seller.

Recommendation:

Do not wait until the seller’s existing corporate entity has either been dissolved or the name has been changed.  The goal should be to minimize the period of time in which you are not appropriately licensed and the most laborious and time consuming step in the process is obtaining the debt collection licenses for the new corporate entity.

• Proceed with obtaining the required corporate registrations and debt collection licenses under an available name prior to closing. 
• Prepare the paperwork required to request the name change of the seller’s corporate entity so that they are ready to be submitted to the various jurisdictions at closing. It should be noted that some buyers and sellers choose to dissolve the seller’s corporate entity at this time instead of simply requesting a name change.  While this strategy saves a step in the process it normally results in a much longer period in which the new corporate entity is not appropriately licensed.
• Submit the requests to change the name of the new corporate entity to the ultimate name in which the buyer intends to do business as the name becomes available in the various jurisdictions.

Summary:

Changes to the ownership structure of a licensed collection agency occur for a variety of reasons and are a regular part of the corporate life cycle.  Dealing with the licensing issues surrounding them should not be taken lightly.  One should fully understand the impact that the structure of a proposed transaction has on licensing and develop a strategy to minimize any related exposure prior to closing a transaction.  Cornerstone Support has established the reputation as the premier licensing service provider to the collection industry.  We understand the particular nuances of licensing all types of collection agencies and in all types of situations.  We are professionally staffed and trained to help you navigate through the gauntlet of regulations that is not only confusing, but can prove costly if misunderstood or neglected. Call us at (770) 587-4595 or visit us at www.cornerstonesupport.com to discuss the details of your business and see how Cornerstone can support your overall compliance strategy.

M&A Update - Pricing Multiples Remain Strong, Despite Lower Total Transaction Value

by Brian Greenberg, CEO, Greenberg Advisors, LLC 

Transaction value was down in 2Q 2012, with $1.11 billion in Accounts Receivable Management (ARM) and Revenue Cycle Management (RCM) deal value transacted over the LTM (last twelve months) period ending 2Q 2012. This is off 25% from the LTM period ending 2Q 2011, but in line with the numbers from the LTM period ending 2Q 2010, as shown in Figure 1 (below). The number of transactions, however, held steady at 51 deals reflecting the fact that with a few exceptions, smaller firms dominated the activity.
 

We usually analyze pricing multiples on a quarterly basis, however as with other statistics, they can fluctuate significantly from quarter to quarter, therefore we occasionally assess them on an LTM basis. Figure 2 (see page 2) shows the LTM median Price/EBITDA multiple at 6.0x in transactions as of 2Q 2012. A steady upward trend has developed over the past 2½ years, which may surprise observers who don’t think market demand is strong enough to support a viable exit strategy.

Figure 1

The largest ARM deal in 2Q 2012 was Encore Capital Group’s (Nasdaq: ECPG) acquisition of tax lien purchaser Propel Financial Services, which is also an example of a successful PE-exit by previous owner McCombs Partners.  Interestingly, there have been 4 PE exits of ARM firms thus far in 1H 2012 as shown in Figure 3, nearly equaling the pace of 2011 in which there were 10 PE exits throughout the year.  Institutional investors are often astute judges of market cycles, in conjunction with a subject-company’s lifecycle, and thus timing to enter and/or exit an investment.

Looking at the buy-side, PE firms and PE-backed strategics were responsible for 9 of the acquisitions in 1H 2012.  This is likely driven by the significant amounts of “dry powder” built up by PE firms in the past several years.  Of the 4 RCM deals which occurred in 1H 2012, 1 was completed by a PE-backed strategic.  Based on interest we’ve seen from many buyers, we fully expect that transactions involving firms that provide RCM services will continue to be an active segment for M&A activity. 

Contact us to discuss any of the M&A trends noted herein, or to let us know of your strategic objectives.

 Figure 2

 

 

Figure 3

Note: This update is for informational use only.  Information contained in this update is based on data obtained from sources believed to be reliable, and in some instances contains estimates.  Nothing in this publication is intended as investment advice.  Use of any of the included proprietary information for any purpose without the written permission of Greenberg Advisors is prohibited.

 

New EEOC Guidelines: Using Criminal Records in Pre-Employment Screening

by Brian Heatwole,

Vice President of Sales, S2Verify

Why Employers Should Pay Attention

On April 25, 2012 the Equal Employment Opportunity Commission (“EEOC”) released new guidance (“Guidance”) regarding acceptable uses of criminal histories acquired from background checks during the hiring process. These changes were based on the EEOC’s findings that “criminal record exclusions have a disparate impact” on African-American and Hispanic applicants.

The Guidance from the EEOC is not binding on employers, but is still very important as the EEOC will include this recent Guidance in its efforts to enforce Title VII. The EEOC zealously pursues claims of hiring discrimination and has commenced hundreds of investigations into allegedly illegal uses of criminal history. Earlier this year and before the new Guidance, Pepsi settled an EEOC hiring discrimination claim for $3.13 million. What has changed?

1. Conviction Inquiries: Employers should not ask about convictions on applications unless they are clearly job-related inquiries, e.g., on an application for a position at a day care it would be acceptable to inquire about convictions for child abuse.

2. Arrest Records: The EEOC has stressed that it does not consider arrest records to be job related or necessary when assessing applicants. This does not mean that arrest records are never useful, but employers will need sound justification for using them to exclude an applicant. In other words, employers cannot rely on the mere existence of arrest records when excluding applicants. Instead we advise employers to focus on specific reasons for each arrest and whether any record directly threatens the integrity for of the position for which the applicant applied.

3. New Job Related Assessment Factors: There is not a limitation on the employer’s ability to consider recent criminal records, nor is there a specific list of offenses that are or are not acceptable. Instead the EEOC has provided three factors for assessing criminal histories.
a. The nature and gravity of the offense or offenses (evaluating the harm caused, elements of the crime, and classification, i.e. felony or misdemeanor)
b. The time that passed since the conviction and/or completion of the sentence (checking this time period for signs of repeat offense)
c. The nature of the job held or sought (including specific duties, essential functions, and environment)

4. Individualized Assessment: If a potentially disqualifying criminal history is discovered after analysis using the three factors above, the EEOC recommends further individual assessment of each such applicant’s situation, using the factors below, unless the criminal histories are so clearly relevant to a position that further assessment is not necessary (Examples: exclusion of day care applicant convicted of violence against children, or pharmacy applicant convicted for drug dealing).
a. Facts or circumstances surrounding the offense or conduct;
b. Number of offenses for which the individual was convicted;
c. If the applicant is of an older age at the time of conviction, or release from prison;
d. Evidence that the individual has performed the same type of work, post conviction with the same or a different employer, with no known incidents of criminal conduct;
e. Length and consistency of employment history before and after the offense or conduct;
f. Rehabilitation efforts, e.g., education/training;
g. Employment or character references and any other information regarding fitness for the particular position; and
h. Whether the individual is bonded under a federal, state, or local bonding program.

Best Practices
• Eliminate policies/practices that exclude people from employment based on the existence of any criminal record;
• Develop narrowly tailored written policy and procedure for criminal record screening;
• When asking questions about criminal records, limit inquiries to records for which exclusion would be job related for the position in question and consistent with business necessity;
• Train managers, hiring officials, and decision makers on Title VII, employment discrimination, and implementing policy consistent with Title VII;
• Identify essential job requirements and the actual circumstances under which the jobs are performed;
• Determine specific offenses that may demonstrate unfitness for performing such jobs;
• Identify criminal offenses based on all available evidence;
• Determine the duration of exclusions for criminal conduct based on all available evidence;
• Record the justification for your policy and procedures;
• Maintain record of consultations and research considered in crafting policy; and
• Keep information about criminal records of applicants and employees confidential

In light of the above, we believe our Customers will be best able to utilize background checks by carefully documenting the factors justifying use of criminal histories so that all third parties can easily determine that exclusion on that basis is fair under the circumstances of the individual and job.

Insurance For Collectors - Is Your Agency Protected?

by Ben Johnson, Director of Risk Management

Insurance, like many other areas of business, is largely impacted by relationships. Your insurance agent’s comfort level with your specific professional services can have a direct impact on insurance quotes. If they can’t help the underwriter understand your industry, it can affect the premiums and may even cause an underwriter to decline offering terms at all.

It is important to use an insurance agent who understands your business and can communicate your needs clearly to the insurance carriers. It is also critical to use an agent who works with multiple insurance companies to give you options and keep you apprised of coverage changes that can impact your bottom line.

E&O renewals are approaching for many collectors and debt buyers, so this is a great time to examine your coverage. Have you compared pricing to find out if you are paying a fair market rate for your coverage? Have you taken a look at the policy exclusions to understand what types of claims are not covered under your policy?

We frequently receive calls from collection agency owners at renewal time, after they have learned that their premium is increasing or that the coverage is not being renewed at all due to claims. This situation can put you in a bind if your agent is not well-prepared to market the account to multiple insurers. But there is more to the equation than simply being able to shop around - the insurance agent should also be able to explain the coverage differences in regards to coverage for debtor claims filed under the FDCPA, FCRA and TCPA.

It is easy for an insurance agent to service your account when things are going well. You want to be certain you have partnered with a provider who can also take care of you when the going gets rough.

Cornerstone Support is the premier provider of insurance and licensing services for the collections industry. Please contact us at info@cornerstonesupport.com or (770) 587-4595 and let us know how we can help.

Creative Growth Solutions for Tight Economic Times

by Matt Pridemore, Vice President

- Are your strategic goals being ignored because of capital constraints?
- Have you developed a scalable business that has yet to be scaled?
- Do you have clients ready to give you more business if only you were licensed in more jurisdictions?

If you are anything like the hundreds of agency owners I have talked to in the last 18 months, then the answers to at least one of these questions is likely yes. Whether due to the tightening in the credit markets, the general uncertainty concerning the economy, or the current political environment; it seems as if the entire business community has collectively pushed the pause button.

The good news is that there is sufficient evidence in the ARM industry to suggest that a number of organizations are ready to push play. Unfortunately, the balance sheets of many organizations are not strong enough to support the capital investment necessary to achieve their desired growth and traditional sources of debt financing are still difficult to obtain.

Several of our clients have used innovative lease programs to fund state licensing projects that have immediately allowed them to attract more national clients. The days of leasing as an option only for cars and copy machines are long gone. Whether it is a state licensing project or a collection software implementation there is probably an innovative lease program available for you.

Terry Rozzini, President of Cypress Financial Corporation, has been in the leasing business for more than 30 years and has provided the following information related to the advantages to leasing:

Provides 100% Financing
Leases can include more than just service fees or equipment costs; you may include maintenance contracts, freight, install charges, software, training and other miscellaneous charges.

Offers Tax Advantages
Businesses can usually deduct their monthly lease payment as an operating expense or if a capital lease or EFA is a better choice; Section 179 under the IRS tax code will allow business to accelerate the depreciation of the equipment to write-off the entire equipment cost in the same year as the purchase.

Lease Term to Suit Your Needs
Leasing, which is simply dollars-per-month financing, helps fit a monthly payment into your budget. You can set up 90 day no payment programs, seasonal payment programs and step payment programs to help you get the licensing, software or equipment you need today and pay for it when it is best suited for your exact situation – unlike bank loans.

Fixed Payments
Your monthly lease payments are fixed for the entire term of the lease. You decide the term and structure of the contract in the beginning. Fixed payments make it easier to budget and manage capital dollars for the months or years ahead.

Protection of Future “Borrowing” Capacity
True leases are means of “off balance sheet” financing and are frequently noted only in their footnotes. By not showing as a liability on financials, a lease will not limit future “borrowing” power with the banks. Additionally, rather than tying up your bank line of credit or using operating capital, you will establish an additional source of funds.

Little or No Down Payment
Leases typically only require one or two monthly payments in advance. A traditional bank loan will require a 10% to 30% down payment and is secured by all business and personal assets (often referred to as a “blanket lien”). A lease is only secured with the licensing, software or equipment listed on the contract.

It is widely recognized that collection agencies must invest the time and resource necessary to develop and implement a licensing strategy that not only protects them from state imposed sanctions and possible civil litigation, but also attracts high-volume and high-yield clients. Don’t put off obtaining the state licensing you need right now without looking into the possibility of using an innovative lease to make it happen today.

Micro-Captive Insurance for Collection Law Firms & Agencies

by Howard H. Potter, JD, MBA, Managing Director, ST Consulting, LLC

Debt collection law firms and collection agencies utilize Micro-Captive Insurance Companies for risk management of self-insured risks and wealth accumulation. Historically, only large companies formed captives. However, with the issuance of IRS Rev. Rulings 2002-89 and 2002-90 the awareness, acceptability, and utilization of Micro-Captive Insurance Companies, qualifying under IRC 831(b) became a reality for smaller businesses to use captives to fund and manage risks. There are now more than 1,000 micro-captives in the US with the majority of them formed in Delaware, Utah, Montana and Nevada. 

What is the concept of a captive insurance company?

The concept started as a solution to the need by businesses for insurance coverage regarding risks that are not covered by conventional insurance policies, such as deductibles, policy exclusions, coverages that are unavailable or exceedingly expensive in the conventional market, or other risks that are retained or otherwise self-insured. If a law firm or collection agency tries to establish a sinking fund and accumulate a reserve without a Micro Captive Insurance Company, it is funded with after tax dollars.

 

What is a Micro-Captive Insurance Company?

Micro-Captive Insurance Companies are structured to comply with IRS code section 831(b) that applies to small property and casualty insurance companies writing annual premiums less than $1.2 million. The principals of a law firm or a collection agency set up the Micro Captive insurance Company which is typically owned by the principals of the firm or agency, key employees or trusts. Insurance premiums are paid by the law firm or collection agency to a Micro-Captive Insurance Company and are deductible to the law firm or collection agency but received by the Micro-Captive tax free. Micro-Captive distributions to the owners can be qualified dividends, taxed at 15%.  Upon liquidation of the Micro-Captive, distributions are taxed at long term capital gains rates. All insurance premiums paid to a Micro-Captive Insurance Company must be actuarially supported by independent sources. Current property and casualty insurance coverages through third party carriers are sometimes modified by increasing deductibles and thereby reducing the cost of commercially placed insurance premiums. 

What's the Business Purpose concept?

For Micro-Captive Insurance Companies to be successful they must be conceived, structured, managed and treated as a risk management tool. A complete and thorough review and analysis is done for the uninsured/self-insured risks of the law firm or collection agency. Considering today’s Federal and State regulatory and economic environment that law firms and collection agencies are faced with, the uninsured or under insured risks are not difficult to identify. In optimizing risk management for a law firm or collection agency, traditional high frequency risks continue to be covered by conventional insurance policies and low frequency risk/high severity risks are transferred to the Micro-Captive Insurance Company, resulting is a more comprehensive insurance coverage for all risks.

What are the tax benefits?

The income tax benefits come directly from the Congressional intent of IRS section 831(b). The law firm or collection agency receives an ordinary income tax deduction for the insurance premiums paid to the Micro-Captive Insurance Company, with the Micro-Captive Insurance Company receiving the premiums tax free. Here’s a typical case in point: with a maximum premium of $1.2M the premium generates a $400K to $500K annual tax saving. Estate tax savings can also result from the structuring of the ownership of the captive, i.e. the Micro-Captive Insurance Company is owned by a trust for children or grandchildren.  Insurance premiums paid to a trust result in the transfer of ownership/wealth of the principals the law firm or collection agency to the subsequent generations, but do not trigger gift, estate taxes or generation skipping taxes. Think of it like writing checks to your largest vendor, only you are the vendor, and all the income is tax free.

What about firms that help set up a Micro-Captive Insurance Companies?

Forming and managing a Micro-Captive Insurance Company by yourself is not easy. Selecting a Captive Management Firm to structure, form, and manage your Micro-Captive Insurance Company is important since it helps to insure the financial and tax integrity of both the structure and management. Captive Management Firms should be willing to provide detailed financial statements, management bios, and have a critical mass of captives under management (more than 100).  The Captive Management Firm should provide complete turnkey services for all aspect of the formation and management. You need a captive management organization with depth, expertise, a proven history and staying power. 

For further information on Micro-Captive Insurance Companies, contact:

Ben Johnson at Cornerstone Support, Inc. at bjohnson@integrityfirstinsurance.com

Office: 678-740-0491

Cell: 770-519-2252

Call for Backup!

by Christy Barger, 

Initial Licensing Project Manager

Nearly every organization is forced to deal with the unexpected departure of a member of their management team. While it does create somewhat of a fire drill, someone else can typically be ready to step in on short notice and take over the vacated position with little or no negative impact on the organization’s daily activities.

Unfortunately, changes like these are not as easily remedied in an industry as regulated as the ARM industry. Many agencies suddenly find themselves out of compliance by not understanding the impact that the sudden departure of a senior level employee may have on their debt collection licenses. Here is one example.

What if the person who is no longer with your organization is listed as your agency’s collection manager with the various state licensing departments?

In some states, the process of replacing a collection manager is as simple as notifying the appropriate state department of the change within a specified period of time. Please note that in most instances, if the state is not notified in a timely manner, your debt collection license will be immediately revoked. Any subsequent collection activity would then be unlicensed and subject to administrative, civil and/or criminal penalties. But in other states, the change is not that simple. Michigan, Nevada, and Tennessee, for example, each require collection managers to take an exam.

Michigan
In order to hold a debt collection license in the state of Michigan your organization must have a licensed collection manager that among other things has passed the Michigan collection manager exam. Should you unexpectedly lose your licensed collection manager, the state of Michigan provides 30 days to appoint a replacement manager, file the required manager application, and schedule the examination date. Failure to do these will result in the suspension of your agency’s license.

It should be noted that it is likely the agency will be permitted to continue operations under the direct supervision of the agency owner until the results of the exam are issued. But if the applicant fails the exam, your agency’s license will be immediately suspended.

Nevada
Nevada Revised Statutes 649.305 states that “no collection agency may operate its business without a manager who holds a valid manager’s certificate...” If your licensed collection manager unexpectedly leaves today, collection in Nevada must cease and cannot resume until your organization has an individual who holds a valid Nevada manager’s certificate. The state only offers the examination a few times per year, so it is imperative to be prepared in the event of your licensed collection manager’s departure.

Tennessee
Tennessee provides one full year to have a qualified replacement in place after the departure of your licensed collection manager. It seems generous compared to the previously discussed states; however, the state of Tennessee only offers their manager exam 3 times per year and the deadline to schedule it is generally 3 months before the actual examination date.

We always recommend that you have a fully qualified and licensed back-up manager in place (employed) in the event your agency finds itself without the service of your currently licensed collection manager. The importance of licensing and putting into place a back up collections manager for your agency cannot be overstated.

Should you have any questions or issues concerning these matters or should you wish to engage Cornerstone Support's assistance in setting up back-up managers, contact a Cornerstone Support licensing consultant today at 770-587-4595 or e-mail us at info@cornerstonesupport.com.

Managing Your TCPA Risk

by John H. Bedard Jr., Bedard Law Group, P.C.

The risk associated with dialing cell phone numbers has reached unprecedented levels. The Telephone Consumer Protection Act (TCPA) has become the weapon de jure among consumers and their attorneys. Unprotected debt collectors risk debilitating harm. Gone are the days where honest, hard working, ethical debt collectors may ignore the dangers of using dialing technology to contact consumers. The penalties available to successful TCPA plaintiffs are draconian, between $500 and $1,500 per call. It is not “if” the lawsuit happens, it is “when.” The time is now to put forward a deliberate effort to manage your TCPA risk. This article provides ideas on how to do just that.

The TCPA, 47 U.S.C. §227, makes it unlawful “to make any call (other than a call made for emergency purposes or made with the prior express consent of the called party) using any automatic telephone dialing system [ATDS] or an artificial or prerecorded voice . . . to any telephone number assigned to a cellular telephone service, . . . ” This section of the TCPA is commonly recognized as the “cell phone prohibition” – collectors simply may not use an ATDS to call a cell phone. The two exceptions to this general prohibition are calls made for an emergency purpose and calls made with the prior express consent of the called party. Yes, most debt collectors firmly belief paying their account immediately is very much an emergency, but that is not how the courts have interpreted this section of the law! This leaves the only remaining exception, prior express consent, for collectors to work with. Or does it? There are more ways to skin this cat to reduce your TCPA risk than simply relying on consent. This author’s approach to managing risk is an “arrow and quiver” approach – the more defense arrows contained in a collector’s quiver the better equipped he’ll be to ward off attacks and protect the village. Here are some arrows for your quiver:

Know The Source: The Federal Communications Commission (FCC) has determined prior express consent exists if the source of a telephone number is the called party. This makes it important for collectors to know the source of each telephone number in their collection system. Collectors should have the ability to immediately identify all telephone numbers included in the original placement file from their clients. Special phone fields should be used to identify these numbers versus the numbers a collector may discover through the skip tracing process or from third party data vendors. A debt collector should always be able to easily determine the source of each telephone number he is calling.

Flagging: Collectors can easily mark an account as “disputed.” They should just as easily be able to mark a telephone number as “consent,” meaning they have consent to call the number using their dialer. No matter how consent is obtained, dialers should be prohibited from dialing cell phone numbers unless the telephone number has a corresponding consent flag associated with it.

Scrubbing: The very first step in preventing a dialer from calling a cell phone number without proper consent is to know the number is a cell phone number. A collector must be able to identify cell phone numbers in his database. The marketplace is replete with vendors who can analyze all telephone numbers in a collector’s portfolio and identify each cell phone number. Some hosted dialer companies do it for free. Collectors can create separate fields for cell numbers, flag them, create screen pops, or identify cell numbers a variety of other ways using existing functionality in their collection software. The key is knowing which numbers are cell phones.

Know Who: Collectors need to know who they are calling. Collectors should demand from their clients and data vendors the proper identity of the subscriber of each telephone number in the collector’s portfolio. Considering the extreme sophistication of today’s dialing systems, data sources, phone number porting capabilities, cell phone identification services, and even global positioning services, there is simply no good reason a debt collector should have to place a call without knowing who is going to answer. Cell phone calls to unintended recipients are a growing source of lawsuits against debt collectors across the country. Recycled and ported cell phone numbers are the cause. Know who you’re calling – before you call.

Human Intervention: The FCC believes predictive dialers fall under the TCPA’s definition of ATDS. This interpretation of the law has gotten some traction in the courts as well. See, Griffith v. Consumer Portfolio Serv., 2011 U.S. Dist. LEXIS 91231 (N.D. Ill. Aug. 16, 2011). Despite the actual language of the TCPA, the FCC has suggested a machine that has the capacity to dial telephone numbers without human intervention falls under the definition of ATDS. No matter the name, power dialer, predictive dialer, progressive dialer etc., the FCC believes human intervention in the dialing of the telephone number makes a difference in determining whether the machine a collector uses to dial telephone numbers falls under the definition of ATDS. Introducing an element of human intervention in the process of dialing a cell phone number gives collectors another arrow in their quiver of defenses, so they may argue they are not using the kind of machine described in the statute.

Dialer Lobotomy: Give your dialer a lobotomy. The term automatic telephone dialing system means “equipment which 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.” A key ingredient of an ATDS is the use of a “random or sequential number generator.” Despite how the case law is developing in this area, see Griffith, a machine which does not contain a random or sequential number generator should not fall under the definition of ATDS. Collectors do not use random or sequential number generators. Removing this functionality from a dialer gives collectors yet another defensive arrow to argue they are not using the kind of machine described in the statute.

Beefy Contracts: The written agreement between a debt collector and its client can be a good source of risk reduction, or at the very least some anesthetic to ease the pain. Collectors should insist on certain representations and warranties from their clients about the telephone numbers the client provides, such as: (1) the source of the numbers, (2) whether the client has proper consent to call the number, (3) that such consent has not been revoked, and (3) the type of phone number. Fair and balanced indemnity and defense obligations are also important to the collector’s overall risk management plan. If a client’s warranties or representations turn out to be incorrect, the agreement needs to provide adequate remedy to the collector for the consequences caused by a collector’s reliance on that incorrect information. Collectors may also consider requiring creditors to provide a copy of the underlying credit agreement with the consumer as an exhibit to the collection agreement. For the reasons described in the next section, collectors can find many sharp arrows hidden in the underlying credit agreement between the creditor and consumer.

Credit Agreements: The underlying credit agreement between the consumer and the creditor can also be the source of considerable risk reduction. Collectors should educate and encourage their creditor clients to include prior express consent language in the very agreement which forms the basis of the debt. The FCC has suggested this very same approach. The idea is the consumer’s credit contract includes terms which clearly and expressly give the creditor consent to call the consumer’s cell phone. Ideally, consent would be introduced into the origination process of the credit obligation, through language in a cardholder agreement, a separate medical services intake form, by a separate consent document or contract addendum, or by any other tangible method by which the consumer’s affirmative prior express consent can be memorialized. Strong arbitration clauses and class action waivers contained in a consumer’s credit agreement also serve as deadly sharp arrows in a collector’s quiver. Collectors might encourage their clients to include properly written arbitration clauses and class action waivers in credit agreements with consumers.

Vendor Dialing: Collectors who outsource their dialing function should know how their vendors are dialing cell phone numbers. Generally speaking, the behavior of an “agent” can get the “principal” in trouble. To the extent dialer vendors are considered agents of their collector (or creditor) clients, the vendor’s behavior can very possibly get the collector (or creditor) in trouble. If collectors do not understand how their vendors are dialing cell phone numbers then it will not be very easy for them to assess risk and manage it. If you are not dialing your own telephone, then know how your vendors are dialing for you.

State Considerations: In addition to the TCPA, some states have their own versions of the TCPA or other state laws which regulate the use of dialing technology under certain circumstances. Risk managers should identify these states, know those laws, and make sure their company’s processes accommodate the nuances of state laws which regulate the use of dialing technology.

Consent: Last but certainly not least, obtain consent! Sounds easy. But how? The number of ways a collector can obtain proper consent from a consumer to call their cell phone using a dialer is limited only by their own imaginations. From inbound IVRs, to live agent scripting, to click through web site consent, to screen pops on collection platforms, risk managers should consider how their organization can best incorporate a mechanism for obtaining consent into their own workflow processes. Perhaps the most important element of any “consent campaign” is documenting the consent. The most effective consent is (1) properly given by a consumer, (2) easy for a collector to know whether they have it, and (3) easy for risk managers and executives to know where it came from based on the regular documentation processes used by their organization. Almost as important to a collector is knowing what consent is not. Just because a consumer calls a collector from their cell phone does not mean the consumer is consenting to be called at that number by a collector’s dialer. Train your people and program your system to recognize telephone numbers which do not yet have consent associated with them and ask the caller for consent. In general, third parties i.e. family, friends, commanding officers, neighbors etc. may not be the source of consent to call a consumer’s cell phone.

The thought of scrubbing out half (or more) of the phone numbers contained in a debtor collector’s dialer queue as “no consent cell numbers” is enough make any collector immediately run to the edge of the nearest tall bridge. The thought of being liable to consumers for at least $500 for every call made to each of those telephone numbers; however, will most certainly cause that same collector to jump! Don’t be caught off guard with TCPA risk. Take steps now to assess your TCPA risk and reduce it. It’s not “if,” it’s “when.”