CREDIT AND COLLECTIONS LAW FOR ACCOUNTS RECEIVABLE PROFESSIONALS
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CREDIT AND COLLECTIONS LAW FOR ACCOUNTS RECEIVABLE PROFESSIONALS

INTRODUCTION

Often times we get so caught up in the day to day activities of our accounts payable work that we forget about our continuing education. As collection representatives, it’s important to keep up to date on best practices, new collection methods, new technology and industry input. Many different factors can have an impact on your likelihood to collect, such as local economies, industry habits and, more specifically, new laws.

Laws have a huge impact on our methods of collection, what time of day we do it, who we call and what we say. Unfortunately, these laws can change any day. If we are not staying up to date on laws that affect credit and collections we’re putting ourselves or our company at risk. Maybe you do not know the current credit and collections law to a T, you may be violating it now without even realizing it.

By violating these credit and collections laws, we could be setting ourselves or our companies up for hefty fines. Most credit and collections laws are not helpful to the collector. Instead, they put restrictions on the time of day you can call, what you can say and who you can accept as a customer on credit terms.

If your customers are aware of these laws as well, you could be at risk of losing these customers by violating the law. No customer wants to feel as though their rights and protections are not being respected, so it is important that all credit and collections laws are followed correctly in order to retain customers.

Finally, you want to maintain your reputation as a company that follows the rules. If people get wind that you are harassing customers in order to collect on unpaid accounts, new customers will not want to work with you.

In this whitepaper, we will be covering the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Truth in Lending Act and the Fair Debt Collection Act. Additionally, we will be covering best practices to ensure you are always following credit and collections law.

*DISCLAIMER: We are not lawyers, this is meant as a basic overview of the law. Please consult with an attorney for any legal advice or consulting

THE FAIR CREDIT BILLING ACT

The Fair Credit Billing Act affects invoice disputes in the accounts receivable department. This law allows consumers to dispute a bill sent to them if they believe a mistake was made. This law was created to protect consumers from being held liable for charges which are incorrect or for services you didn’t accept or agree on. For this reason, accounts receivable departments need to be aware of this law in order to guarantee they can comply and collect as much as what was owed to them. There are certain important dates and facts that can affect exactly how much you will collect in the end.

WHAT TYPES OF DISPUTES ARE COVERED?

The Fair Credit Billing Act only relates to certain types of billing errors. A customer does not get certain protections from the Fair Credit Billing Act for damaged goods or disputes on the quality of the product or service. The Fair Credit Billing Act covers:

  • Unauthorized charges
  • Charges that list the wrong date or amount
  • Mathematical errors
  • Failure to send the invoice to the correct address
WHAT YOU MUST KNOW ABOUT THE FAIR CREDIT BILLING ACT

There is a certain time line you must follow in order to take advantage of the law and collect as much as possible. The law requires that a customer notify you of the error within 60 day after you mailed the bill with the error. There are two actions you must take in order to collect what is owed to you, or the consumer automatically does not have to pay up to $50 of the bill.

  • You must send a written letter acknowledging the consumer’s complaint to the consumer within 30 days.
  • You must resolve the dispute within 90 days after conducting an investigation into the issue.

Even if the bill is correct, but you failed to acknowledge the dispute on time, the customer will not have to pay up to $50.

During the time that the bill is in dispute, the Fair Credit Billing Act requires that you may not charge interest on the payment during this time. Furthermore, you may not report delinquency to credit bureaus. If you do take action such as these, the customer automatically receives the $50 credit.

The Fair Credit Billing Act is extremely important for an accounts receivable professional to know because it can affect whether you collect on the full invoice or not. If you simply are unaware of these dates and caveats of the law, you may forfeit your ability to collect even on a correct bill.

THE FAIR CREDIT REPORTING ACT

The Fair Credit Reporting Act ensures that all credit information for a customer is accurate. It gives the customer an outlet to dispute information about their credit if they feel it is unfair or inaccurate. The Fair Credit Reporting Act ensures a customer’s privacy, so that their credit information cannot be shared without permission. It also gives the customer the right to check on their credit periodically and know what exists in their file.

There are two entities that have to follow the law of the Fair Credit Reporting Act; a CRA and an information supplier. A CRA, or credit reporting agency, is typically a credit bureau such as Dun and Bradstreet, Experian or Equifax. An information supplier is usually what a businesses’ accounts receivable department falls under as an entity that reports information about a customer to a CRA.

WHAT YOU SHOULD KNOW AS AN INFORMATION SUPPLIER

As an information supplier, there are rules you must follow according to the Fair Credit Reporting Act:

  • You cannot report any information to a CRA that you have reason to believe is inaccurate
  • You are obligated to update and correct any inaccurate credit information about a customer as soon as it is known as inaccurate
  • You must inform the customer about any negative information you may be reporting to a CRA within 30 days of notification
  • You must notify a CRA when a customer closes an account with you
  • You must maintain a “reasonable procedure” for handling identity theft issues

Knowing these rules under the Fair Credit Reporting Act is important because violating them opens you up to the possibility of a customer suing you. Each state may have different regulations to additionally remedy the situation for a customer.

As an accounts receivable department offering credit terms to customers, the team should be aware of the stipulations of the Fair Credit Reporting Act. Without it, you may be opening the company up to fines and legal issues. Further, it can help you to gain the trust of your customers to keep them coming back.

THE EQUAL CREDIT OPPORTUNITY ACT

If you’re a company that extends credit to customers, it is important to be aware of the Equal Credit Opportunity Act. The Equal Credit Opportunity Act contains, what some would assume are obvious, rules in order to discourage racism, sexism, ageism and other discriminatory acts. The reasons that you would or would not give credit to a company can range from what their trade references said about their payment history to how much money they currently have in their accounts. However, you never want a customer to think that you may have denied them based on discrimination reasons.

WHEN A CUSTOMER APPLIES FOR CREDIT YOU MAY NOT:
  • Discourage someone from applying for credit based on discriminatory reasons
  • Use their race, sex or national origin to make your decision on their credit or credit terms
  • Create their terms based on race, color, national origin, sex marital status or age. For example, imposing a higher interest rate
  • Consider the racial composition of the neighborhood of the business
UNDER THE EQUAL CREDIT OPPORTUNITY ACT YOU MUST:
  • Tell the customer the specific reason for the credit rejection within 60 days if they ask, and give them specific reasoning
  • Tell the customer why you offered less favorable terms than they applied for if they rejected those terms
  • Tell the customer why their account was closed, unless the account was closed because they failed to make payment under the agreed terms failed to make payment under the agreed terms

If you are selling to customers using credit terms it is of the utmost importance that the Equal Opportunity Credit Act is followed. Not only is it against the law to discriminate against an individual or a business because of race, religion, color, sex or age, but it is also immoral. When deciding whether to extend credit or choosing credit terms, the only factors that should come into play are trade references, payment history and the company’s good standing on paying back other debts.

THE TRUTH IN LENDING ACT

The Truth In Lending Act is a protection for consumers to know exactly what they are getting into before they take out a loan, agree to credit terms or open a credit card. As the name implies, it ensures that the company that is offering the loan is truthful in all terms. The main point of the Truth In Lending Act is to allow consumers to take the terms of one credit loan and compare them to other available loans to find the best fit for them.

As an accounts receivable department, this affects your job because you must lay out all information about your credit terms to a customer before they sign on. This includes what the interest will be, any additional fees, finance charges, annual percentage rates and your policies. If your consumers are covered by the Truth in Lending Act, a customer has three days to reconsider and back out of the loan process without losing any money.

If you’re not following the Truth In Lending Act, you could find yourself facing hefty penalties and fines. Furthermore, it is not good practice to not be up front with customers about what your credit terms entail. Without a doubt, if you are not completely transparent with customers, you will have many that are unhappy with your company in the end.

THE FAIR DEBT COLLECTION PRACTICES ACT

The Fair Debt Collection Practices Act is quite possible one of the most important credit and collections laws for an accounts receivable professional to know. This act determines exactly what you can and can’t say to a customer when calling to collect on a past due account, as well as when you call them. Many of the stipulations in the Fair Debt Collection Practices Act would also be considered best practices by the accounts receivable professional industry.

WHAT COLLECTORS MUST DISCLOSE

According to the Fair Debt Collection Practices Act, there are a few things that an accounts receivable professional must disclose to the customer before they start the collection process. This includes; the amount of the debt, the name of the creditor, the ability of the customer to dispute the debt within 30 days, or else it is considered valid, and that the customer has the right to ask for verification of the debt.

WHAT CONSTITUTES HARASSMENT AND ABUSE

The Fair Debt Collection Practices Act defines what would be considered “harassment” to a consumer when you are attempting to collect. Whether this is law or not, it is best to follow these as a best practice if you’re an accounts receivable professional. Below defines what harassment and abuse is according to the Fair Debt Collection Practices Act:

  • Using or threatening to use violence to harm the consumer
  • Threatening to harm the consumers reputation
  • Using obscene, profane or offensive language
  • Calling the consumer repeatedly
  • Annoying calling behaviors, such as calling and hanging up repeatedly, calling their family members or anonymously calling the consumer
  • Publishing lists of those who have no paid their debt, unless that is a list to send to a credit bureau
  • Calling at hours that are inappropriate, such as in the middle of the night or early in the morning
  • Claiming to be someone you are not, such as a lawyer, attorney or credit bureau in order to collect on the debt
  • Threatening to arrest, file suit, garnish wages or seize property, unless you actually intend to take steps towards these actions
PENALTIES

If an accounts receivable professional violates any of these stipulations in the Fair Debt Collection Practices Act, they can be sued by the consumer. If the consumer wins in court, they can be awarded damages for actual losses incurred, any court costs or attorney fees and up to $1,000 in additional damages. If your customers file a class action law suit, they can recover up to $500,000 or 1 percent of the net worth of your company.

The Fair Debt Collection Practices Act has a huge impact on exactly how and when you can call a consumer. If you are following best practices, you probably are already following these rules. However, we all can get frustrated with customers sometimes, so it is good to remember to stay calm in order to stay within the bounds of legality.

CREDIT AND COLLECTIONS LAW BEST PRACTICES

In order to stay compliant with all of the laws that affect accounts receivable professionals, you have to stay on top of and aware of all the current laws. A best practice for this would to stay educated. Never stop learning about your industry and what the latest trends are. However, if you simply don’t have the time to go to every educational session on how law affects the accounts receivable field, there are some best practices you can enact to ensure you are staying compliant.

RECOGNIZE AND KEEP TRACK OF DISPUTES

As we highlighted in the Fair Credit Billing Act, your days are numbered to collect on the full amount of disputes. You must respond to a customer within 30 days recognizing the dispute and then resolve it in 90 days. A best practice to avoid losing out on your disputed invoices is to keep track of every dispute by assigning a dispute code to it. One easy way this is possible is by using an automated accounts receivable software. You can easily search for disputes by date, so no invoice slips by without being addressed. You can even set reminders to be sure you respond by the required date.

HAVE A DEFINED CREDIT PLAN

Following the Equal Credit Opportunity Act is a best practice in and of itself. The only reason a person should be denied credit it based off of their credit history. As an accounts receivable department, it is best to create a defined credit plan to ensure every credit professional is following this law. Your defined credit plan will state exactly what questions should and shouldn’t be asked of a potential customer when they are being considered for credit terms. If you create a business credit application, every customer will be asked the same questions and their credit worthiness will be decided by the points they score on the application. This keeps the process unbiased and clear cut.

USE TEMPLATES

There are many situations where this could apply to ensure you stay compliant to all the credit and collections laws. The Fair Debt Collection Act states that you have to disclose to the customer specific information pertaining to their debt before the collections process begins. If you don’t you could lose out on collection of the invoice. Using a template forces collectors to fill in all the specified information so they will stay compliant. For the Truth in Lending Act, the credit and collections department is required to disclose all details of the credit terms. By using a template, you can ensure all the details are filled in.

HAVE A COLLECTION PLAN

Using a collection plan ensures everyone in the accounts receivable department is following the correct way to collect on past due accounts. This collection plan can outline what they should say when faced with difficult customers, when and how often they should call a customer who is past due, how they can deal with frustrating situations and sample call scripts for common disputes. The Fair Debt Collection Act outlines a lot of what a collector can and cannot say. By including this in detail in a collections plan that every collector is required to follow, the department will be sure to follow all the stipulations in the Fair Credit Debt Collection Act.

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