Cleaning Up Debt Collection in the U.S.

> Posted by Jeffrey Riecke, Communications Assistant, CFI

Thirty million Americans are currently being pursued by debt collectors. During 2012, the Federal Trade Commission (FTC) received 180,000 complaints about the practices of these companies – a 13 percent increase over 2000 levels and more FTC complaints than from any other industry. Troublesome practices seem to only be limited by the imagination, but some of the more reported-on ones are incessant calling at all hours and issuing unsubstantiated, misleading threats. Today the U.S. debt collection industry stands at over 4,500 companies and $12 billion.

To make matters worse, many of those being pursued don’t even have the debt in question. About one-quarter of the collection-related complaints the Consumer Financial Protection Bureau (CFPB) received last year were from individuals who were being wrongly pursued.

Debt collection happens, with some variation, in one of three ways: lenders carry out the collection in-house; third-party companies are hired and paid to complete the collection; or third-party companies buy a lender’s debt and independently complete the collection. In the latter case, collection companies buy individual’s debts from lenders for as low as a few cents for each dollar of debt and in return they receive a spreadsheet with basic information like names, phone numbers, and debt amounts. Collectors pocket the difference between what they paid to the lenders and the total they collect. It’s not uncommon for this spreadsheet information, intentionally or not, to be inaccurate or faulty. And even when a person is wrongly pursued, the consequences can be serious.

A popular debt collections practice brought to public attention in recent years thanks to legal suits centers on collectors taking debtors to court without their awareness (giving new meaning to the phrase blind judgment). Collections agents fail to serve a debtor a notice of complaint, produce a false affidavit claiming the individual has been properly served, and then proceed with a court hearing. The defendant, of course, does not attend, and so most often the debt collector wins the case and a default judgment is issued. (More than 95 percent of credit card lawsuits end in a default judgment, an automatic win for the collector or lender.) Such rulings could include the freezing of bank accounts, garnishing of wages, and they are very likely to reduce credit scores.

However, with the help of legislative and regulatory changes it looks like the industry is poised for change. Through the Dodd-Frank Act for financial reform in 2010, the newly-created Consumer Financial Protection Bureau was granted the authority to supervise and regulate banks and non-bank financial services providers – like payday lenders, mortgage services, and debt collectors.

The debt collections space has until now been policed by the Federal Trade Commission under the Fair Debt Collections Act (FDCA) of 1977. The Act prohibits the use of deceptive, unfair, and abusive debt collection practices. These include using obscene or profane language, threatening violence, calling consumers repeatedly or at unreasonable hours, misrepresenting a consumer’s legal rights, and disclosing a consumer’s personal affairs to third parties. There are concerns that the law is out-of-date. Moreover, the FDCA applies only to third-party debt collectors, exempting those that process collections directly – which is often the chosen method for banks and department stores. The Dodd-Frank Act lets the Consumer Finance Protection Bureau cover this gap. The Bureau now supervises lenders carrying out collections directly and third-party collectors. Under the Dodd-Frank Act, the primary responsibility of administering the FDCPA was transferred from the FTC to the CFPB, though both entities share enforcement authority.

In the past year the CFPB has been busy. It released bulletins advising companies within its jurisdiction that they will be held accountable for unlawful debt collections conduct. It began collecting and processing consumer complaints (you can see visualizations of the complaints’ content here). It sued one of the largest payday lenders over its debt collection practices. And it published action letters for consumers to use when corresponding with debt collection companies. One concern over the current jurisdiction of the CFPB is in regards to collector size. As it stands, the CFPB only oversees companies with more than $10 million in annual receipts from collections. This portion makes up 60 percent of the industry’s revenue, but it only encompasses about 175 firms.

The CFPB is currently considering new rules for the collections industry. It released an Advance Notice of Proposed Rulemaking (ANPR) in November, seeking comment and data from the public to inform its next steps.

When considering debt collections practices, it’s important to consider the other side of this issue: overindebtedness trends, and the underlying lending practices and product designs of financial services providers. But that’ll have to be a blog post for another day. To point you in the direction of data, here’s the latest Household Debt and Credit Report from the Federal Reserve Bank of New York.

Image credit: iStock 

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