Look for Key Attributes in Collection Agency

You can hope you never need the services of a collection agency, but it's likely that you will. Suppose a resident skips out without paying the share of his rent above his subsidy. You are entitled to pursue the resident within legal means to collect past-due debts. That's when a good collection agency can be invaluable.

HUD could reimburse your loss from past-due debt, via a special damage claim, but first you must demonstrate that you have taken “all efforts to collect the debt.” Working with a collection agency can show you are making that effort.

But the choice of a collection agency should not be made casually. A good collection agency can make the chore of collecting debt easier and more efficient for you. You want to be sure you select an agency that is experienced, reputable, and professional. You want to know how it goes about conducting business and how good it is at it.

“Important things to look into are the agency's rate of return, how quickly it can return bad debt to you, and what percentage it holds on to,” says Terrence Dawkins, director of financial services at Southern Management Corporation, a Virginia-based property management firm overseeing more than 70 communities in the mid-Atlantic region. “I also want to know how well trained the staff is—and how ethical.”

Training and ethical practice are essential considerations, agrees Ted Smith, senior vice president of American Collectors Association (ACA) International, a trade organization. ACA members show a commitment to staying abreast of best practices and maintaining professional ethics, he says.

“Our members agree to comply with all federal and state laws and regulations,” Smith says, “and with the ethical standards established by ACA. If an agency is an ACA member, that tells you a lot about them.”

Use Checklist When Choosing Agency

When you are looking for a collection agency, experts say you should establish selection criteria and consider several for the job. You may need to invest extra time to be sure you get sufficient information to make your final selection, but it will be worth it. Remember, this agency will be representing you.

Dawkins and Smith recommend that you conduct a thorough vetting of the collection agencies you are considering. You can use this checklist to help you get the right information you need to make your decision:

[] Experience in the rental housing industry. Collection agencies you consider should have a strong understanding of landlord-tenant laws and fair housing laws, at a minimum. But is it necessary for the agency to have a background in dealing with HUD leases? Does it need experience in locating lower-income residents who skip out? What about having an understanding of the habits of individuals who repeatedly try to evade responsibility as a renter?

“There are two schools of thought on that,” Smith explains. “Some think that experience is necessary; others do not. I've seen it work both ways.”

Dawkins is one who believes that experience in the industry is a must. “You definitely want the agency to have some experience in your industry,” he says. “It helps if they know the ins and outs of the industry and the extensive excuses they may hear from your former residents.”

You don't necessarily need an agency that specializes in collecting overdue debt in the assisted housing industry, experts says, but you may want to know what percentage of their business is conducted for rental property owners and managers.

[] List of references. Ask for a list of references. A reputable agency will have no problem providing this information. You'll be able to tell from that list whether they have helped other HUD-assisted site owners and managers.

“Ask for a list of all references with phone numbers,” Dawkins advises. “That way you can randomly pick and call their past clients. If the agency gives you only a couple of references, you know it's going to give you only ones who have been satisfied. I'd also want to talk with the ones who weren't happy with the agency to know why.”

Dawkins also suggests contacting the Better Business Bureau to see if there have been any complaints registered against the agency. “And ask how many new clients they've had in the past year,” he suggests, “as well as whether they've lost any. If they are not getting new clients or are losing clients, that should tell you something.”

[] State requirements. The operating requirements for collection agencies vary by state. Ask the agencies you are considering about their state licenses, registration, and/or bonding status. If you manage or own sites in more than one state, be sure the agency meets the requirements in all the states in which you need it to conduct business.

If your state does not have any special requirements for collection agencies, ACA recommends that you find out how long the agency has been in business. Experience, Smith notes, is often a good indication of quality.

[] Professional credentials. Inquire about the professional trade organizations the agency is a member of, such as ACA. Some collection agencies that work in the rental property and/or assisted housing industry also make it a point to become members of relevant housing industry associations. That's an indication that the agency tries to stay in tune with issues and trends in your industry.

[] Staff training. Dawkins says a lack of commitment to staff training would be a deal-breaker for him. Well-trained staff are less likely to violate the law and more likely to follow ethical practices in debt collection. “See how many of their representatives are certified,” Dawkins says. “Having trained staff cuts down on complaints and shows that the agency is compliant.”

Any collection agency you hire must comply with the federal Fair Debt Collection Practices Act (FDCPA) and any applicable state laws. You should ask for proof that the agency's staff is well versed in these laws. Dawkins suggests asking for proof that the agency's staff training is updated at least annually.

[] Policies and procedures. Investigate the agency's collection procedures. Ask for an outline of the standard steps the agency uses to attempt to collect on an account, what collection letters it uses, and any phone scripts its collectors might use. These standards and practices are subject to compliance with the FDCPA; if your collection agency isn't in compliance, you could face fines and legal action.

Also be sure to inquire about the details of how the agency will work with you. For example, how will it report the progress it makes on your accounts? Some agencies give secure online access so you can see debt payments as they come in. Others may send you regular reports by mail, fax, or email. Ask where it keeps the money it collects for you. The money should be held in a trust account separate from the agency's own general funds accounts.

“I recommend that you visit the agency and do a walk-through,” Dawkins says. “How many collectors does the agency have? Does it have the manpower to deliver what it claims it can do? What technology and other systems does it use? Get a first-hand look at the operation.”

Smith agrees that an on-site visit can be helpful. Beware of an agency that discourages you from visiting, he notes.

[] The worst cases. Check with the agency on how it handles the worst-case scenarios. For example, what about a former resident whose whereabouts are unknown? Some agencies use “skip-tracers” to track down such individuals. What if it becomes necessary to sue a former resident to collect on the account? What role does the collection agency play in handling the lawsuit? What is your cost if the agency's representative has to go to court?

“Establish an understanding of what the agency does if the person doesn't pay,” says Dawkins. “The agency may report him to the credit bureau or take him to court. You may want to require the agency to contact you first before it takes either of those steps.”

[] Recovery rate. Ask the agency about its average recovery rate, meaning what you can expect as a return on the accounts you turn over for collection. The rate can vary depending on many factors, including your local market and how old the debt is. Dawkins says that 10 to 20 percent is what he hears as an average. Others cite a 15 percent average for the apartment industry. Ask the question, but be wary if the agency cites a recovery rate that sounds too good to be true.

“Also ask about the length of time the agency expects your recovery period to be,” Dawkins says. “When will you see the money it collects? Is it 30 days? 60? 90? Within 30 to 45 days is what I would look for.”

[] Agency commission. Be certain you understand what percentage of money the agency collects that it keeps for its fee. This can vary widely, Smith and Dawkins say, anywhere from 30 to 50 percent.

ACA advises that you consider the commission rate in context with the recovery rate. A collection agency might charge a higher commission because its track record is such that it provides a higher recovery rate. It's a mistake to let the commission rate drive your decision about whether to work with an agency. “These rates are usually negotiable,” Dawkins says.

Insider Sources

Terrence Dawkins: Director of Financial Services, Southern Management Corp., 1950 Old Gallows Rd., Vienna VA 22182-3970; (703) 902-2000; terrenced@smcmail.com.

Ted M. Smith: CAE, Senior Vice President, ACA International, 4040 W. 70th St., Minneapolis, MN 55435; (952) 928-8000; smitht@acainternational.org.

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