Top 10 Reasons Debt Collection Licenses Get Rejected
If you think a “do-it-yourself” process of licensing a collection agency is a walk in the park, then I have some terrible news for you. The application process can be extremely daunting, requiring the coordinated participation of every owner, officer, and manager of the agency.
The process requires highly detailed forms, financial and otherwise, containing both current and historically information. Once the process starts, the clock is ticking; it must be completed in a timely manner. The person on your team who is tasked with this job will deal with great stress as they seek to get all the agency team members to work in unison to get the application done.
I sat down with some of Cornerstone Support’s seasoned licensing specialists, Gina Martin and Wanda Furmanek, who annually walk hundreds of collection agencies through the application process across the United States and Canada. I asked them a simple question, “What are the top reasons that debt collection licenses get rejected?”
The specialists defined that “being rejected” in licensing terms is broken into two distinct terms: “deficient” and “denied.” Deficiencies are the initial rejection of the application or some part of the paperwork filing as it has been presented. A deficiency gives an additional time allotment, which varies by state, to address the deficiency and allow it to be changed, refiled, and found acceptable. If an agency fails to correct the deficiency, and/or doesn’t respond in time, the application can be denied. Being denied by a state is a big deal because most states ask on their applications, “Have you ever been denied a debt collection license from any other state? If so, Why?”
A denial will cause both new and renewal applications to be flagged and put under a microscope. The state regulators are diligent to investigate these reasons and weigh whether or not the same reason could impact their state. So, a denial from one state can set into motion a much bigger mess across many states. Some states will allow an agency who fails to correct a deficiency to file a withdrawal of the application before it is denied, but not every state. Nebraska, for example, is one state that you must complete successfully, or you will be denied.
Now that the expert specialists had my attention, they began to give me the top reasons why an application can be declared deficient. Having established the distinction between “deficient” and “denied,” here are the top 10 reasons an application can be declared deficient, leading to debt collection license denial.
- The net worth of the agency can be found unacceptable to the state regulator. The financial status of the company from the balance sheet is scrutinized by the regulator. Many times, the regulator doesn’t count every item that companies list in the asset column. This generally makes the liabilities outweigh the assets impacting the company net worth. This is a red flag.
- The balance sheet, income statement, and cash flow statement must be current within a certain amount of days. Many agencies don’t update these forms as often as the state requires for the numbers to be “fresh” at the time of filing the application. Timing is everything, because outdated financial information will lead to a deficiency.
- It is also mandatory for many states that these financial statements are independently audited by a CPA. Sending in unverified financial statements along with the application will trigger a deficiency. Paying a CPA to verify everything in a timely manner so that the financials are “freshly” submitted is all part of the dance to keep away from a deficiency.
- Making a false answer to a question, such as, “Have you ever been denied a license?” or “Do you have any pending/former lawsuits?” will trigger a deficiency. The application process for some states is very personal and some would say “invasive.” The regulatory offices do their homework and research correct answers that can uncover falsehoods on an application.
- New and renewed criminal background checks and/or fingerprint cards (some states accept electronic, but others use paper) must be completed by every owner, officer, and manager. Many states won’t share another state’s background check/fingerprints and require their own. This can cause everyone to have multiple trips to a place to be fingerprinted by an authenticated source. The clock is ticking on this team-wide process so coordinating individual schedules and getting all to participate willingly are difficult hurdles to overcome. Failure to do this within a time-frame can result in a deficiency or the necessity to file a withdrawal and start the application process all over again. Also, the fingerprint work must be legible, or it will be a deficiency.
- Filling out an outdated application can trigger a deficiency. States are constantly updating their application forms and their bond forms. You may have started filling out an application, and a few weeks later, the state revised the application with a new revision date on the bottom of the form. Only the most current form will be accepted. Even if the form is revised while correcting a deficiency, the application, including new signatures, etc. will need to be completed on the form’s most current edition. The same is true of bond forms that may be updated during the process of filing paperwork.
- The licensing compliance person must be specifically detailed on the application or his/her insufficiently detailed answers may trigger a deficiency. Each state wants a business plan that is specific to that state. The temptation is to write a “one-size-fits-all” business plan for every state. Many regulators will flag this because they want more details about the business plan that is specific to their state. Similarly, states require agencies to provide a list of their business activities and a detail lacking summary will not be enough. In addition, dunning letters, the letters sent to the debtor, must be submitted for pre-approval according to the state’s guidelines containing specific language, correct and current company information, etc.
- Maintaining a website that agrees with the filed paperwork is imperative. Some regulators will visit the company website to make sure the website entity name matches the name on the paperwork. They also look for the NMLS ID# and to ensure that the mini-Miranda is correctly posted. Not having the website in complete agreement with filed paperwork could trigger a deficiency.
- Some states require a trust account that is specific to that state with regard to collection in that state. Other states will accept a general trust account. Setting up these accounts require extra work of officers/managers according to the individual bank’s requirements, in addition to federal and state requirements. Connecticut requires a trust account to be set up even if the collection agency is not going to collect in CT. Failure to set up these accounts properly and in the right timing of the application can trigger a deficiency.
- In order for a debt collection license application to be filed, some states require a certificate of good standing from the state. All tax filings and annual reports must be up to date within the state to be eligible to file for a debt collection license application.
Completing the debt collection license application is a difficult and challenging process. Cornerstone offers agencies the opportunity to lean on the expertise of specialists who know how to avoid the pitfalls of licensing.