Balancing Innovation and Obligation: The Promise and Privacy Pitfalls of AI in Debt Collection

Balancing Innovation and Obligation:

The Promise and Privacy Pitfalls of AI in Debt Collection

By Stephanie Iyayi

Legal Counsel, ConvergentDS

Artificial intelligence (AI) is rapidly transforming the legal and financial services landscape. From predictive analytics to automated customer communications, AI presents real opportunities for law firms and creditors’ rights professionals to enhance efficiency and accuracy. However, as these tools proliferate, so too do the privacy and compliance challenges associated with their use - particularly in a field as sensitive as debt collection.

For members of the National Creditors Bar Association (NCBA), who regularly operate at the intersection of financial regulation and legal ethics, navigating this evolving terrain requires a thoughtful, privacy-forward approach.

A Risk Multiplier

AI can streamline routine tasks such as sorting case files, identifying high-probability recovery targets, and even drafting routine correspondence. Chatbots can handle basic debtor queries, while machine learning models may help firms predict payment behavior.

But these systems rely on data - often highly sensitive financial and personal information - to function effectively. When that data is mishandled, overused, or improperly secured, the consequences can include regulatory scrutiny, reputational harm, and legal liability.

As we integrate AI into practice, we must ask:

• Who trained the algorithm?
• What data was used?
• How is it retained and shared?

Emerging Regulatory Pressure

U.S. regulators are increasingly focused on the use of AI in consumer finance. The Consumer Financial Protection Bureau (CFPB) has signaled concern over the opacity of AI decision-making - especially when it comes to automated denials or debt prioritization. Meanwhile, state privacy laws such as the California Consumer Privacy Act (CCPA) and its successor, the California Privacy Rights Act (CPRA), introduce new obligations around data minimization, transparency, and algorithmic profiling.

The European Union’s AI Act and the growing conversation around “AI bills of rights” in the U.S. point to a future where AI-enabled decisions must be explainable, auditable, and fair - a tall order for many of today’s black-box models.

What Should Creditors’ Rights Attorneys Be Doing Now?

Creditors’ rights attorneys are in a unique position: they are both users of AI-powered tools and advisors to clients who deploy them. In turn, they must lead by example. As the American Bar Association has made clear, attorneys remain fully responsible for the accuracy and integrity of any work product generated with the aid of AI, just as they would for work done by an associate or paralegal, underscoring that the duty to supervise rests squarely on the lawyer’s shoulders. Consider these best practices:

• Conduct Data Impact Assessments: Before adopting AI tools, evaluate the types of data involved, potential privacy risks, and legal obligations.

• Implement Algorithmic Transparency: Ensure AI decisions affecting consumers - such as prioritization of cases or outreach frequency - can be explained and justified.

• Limit Data Inputs: Use only the minimum data necessary to achieve the task. Over-collection increases risk and often violates data minimization principles embedded in modern privacy laws.

• Monitor Third-Party Vendors: Many AI tools come from vendors who may not share your legal or ethical obligations. Conduct due diligence and insist on contractual privacy and security safeguards.

• Stay Educated: Laws governing AI and privacy are evolving quickly. Attend CLEs, subscribe to regulatory updates, and engage with NCBA working groups on emerging technologies.

Progress Without Compromise

AI is not a trend - it is a permanent fixture of the legal and financial services toolkit. But innovation cannot come at the cost of consumer privacy or professional integrity. As stewards of both the law and personal data, NCBA members must adopt AI in a way that upholds the highest standards of compliance, ethics, and transparency.

ConvergentDS is uniquely positioned to help creditors' rights firms navigate the intersection of AI innovation and data privacy compliance. As the landscape continues to evolve, ConvergentDS can provide the strategic guidance and practical tools firms need to stay compliant, competitive, and trusted.