Debt Collection in the Modern Economy

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I had the pleasure of attending the Loyola Consumer Law Review’s symposium, Debt Collection in the Modern Economy, interestingly featuring advocates from both sides of consumer law. Representing consumer advocates were Dan Edelman, Rand Bragg, and NACA Executive Director Ira Rheingold, among other distinguished advocates (see program here). I will include some takeaways from some of the sessions below. All proceedings will be published by the Loyola Consumer Law Review this summer.

Ira Rheingold delivered an impassioned luncheon address on the plight of the consumer in the face of growing income inequality. He addressed the previous middle class model of one earner earning enough to support a household,  and contrasted it with the increasingly common two-income household. While today’s middle class households earn more money, they have far less discretionary income as housing and education costs have skyrocketed. Further, consumers have more financial companies pressuring consumers with sub-prime and predatory loan products, often trapping consumers in a cycle of debt repayment. He urged the audience to read The Two Income Trap by Elizabeth Warren and Amelia Tyagi.

Dan Edelman gave update on the debt buyer industry. He expressed particular concern with the amount of charge-offs nationwide being two-three times the amount of debts purchased each year, meaning that debt is being sold multiple times. Financial institutions that sell debt are not getting the full average purchase price of four cents on the dollar as they do not profit when debt buyers resell debt downstream. This cuts against the argument that debt buyers play a meaningful role in the bottom lines of the companies from which they purchase debt. Even at 4%, the effective charge-off rate in 2009 was 9.02% instead of 9.4%, a nominal decrease. The paltry sums credit grantors get for selling debt do not justify the severe impact on consumers of debt collectors attempting to collect 100% and more on charged off debts.  Multiple sales of debt also exacerbate the problem of missing information and documentation. Mr. Edelman said, citing the recent 2013 FTC Report on the debt buying industry, “[i]n purchase and sale agreements obtained in the study, sellers generally disclaimed all representations and warranties with regard to the accuracy of the information they provided at the time of sale about individual debts -- essentially selling debts, with some limited exceptions, ‘as is.’” Overall, Mr. Edelman expressed deep concern over the divorce of the social cost of collecting from the credit granting process. Creditors’ need to protect their reputation with consumers at one time tempered their collection tactics, so as not to drive consumers to other providers once consumers were back on their feet. Debt buyers are not burdened with concerns about reputation and therefore collect far more aggressively with fewer consequences. Mr. Edelman’s report is extensive and will be available when  the symposium is published by the Loyola Consumer Law Review. The FTC report is available here.

Rang Bragg discussed the No Lawyer Involvement Disclaimer, which is an unsigned letter on law firm letterhead that states “at this time, no attorney with this firm has personally reviewed the particular circumstances of your account.” Consumer advocates are concerned that consumers will not understand the disclaimer, and believe they are being contacted by an attorney instead of a debt collector. There is a circuit split as to whether suggesting law firm involvement, even with the disclaimer, deceptively sends the message to the consumer that the “price of poker has gone up” when it has not. The least sophisticated consumer may believe that the law firm is acting as an attorney and that therefore, their “property and interests are in some potential jeopardy.” The disclaimer may not be enough to convince the consumer that the lawyer is only acting as a debt collector at that time. The Second Circuit held such a letter did not violate the FDCPA in Greco v. Trauner, Cohen & Thomas, L.L.P., 412 F.3d 360 (2d Cir. 2005). But the Fifth Circuit and the Third Circuit have held that an unsigned collection letter on letterhead of a law firm disclaiming any attorney involvement violated the FDCPA. Lesher v. Law Office of Michell N. Kay, P.C., 650 F.3d 993 (3d Cir. 2011); Gonzalez v. Kay, 577 F.3d 600 (5th Cir. 2009). Mr. Bragg described the use of survey data to establish the violation in those cases, expressing concern that such survey evidence may not be admitted in the Seventh Circuit, where the Symposium was held, and where no such case has reached the Court of Appeals.

The state of debt collection in the modern economy is poor. Consumers face economic pressures from both ends as disposable income drops while predatory lending grows by way of new products like internet direct deposit loans. As more players enter the chain of debt purchasers, more companies need to remove a profit, whether they are attorneys or debt collectors, or both. That profit comes directly out of the pockets of struggling consumers who would otherwise spend that money in their local economy. As Ira grimly pointed out, consumer advocacy continues to be a growth industry.

About the Author

Michael Wood has been a member of NACA since 2011, when he left Fortune 100 corporate management to attend law school in Chicago, IL. As a law student, Mike served as a legal extern for the Honorable Ruben Castillo in the Northern District of Illinois, a law clerk for the Attorney Registration and Disciplinary Commission, and has clerked with several legal aid organizations in the Chicago area. Mike practices as a senior law student under Ill. S. Ct. Rule 711, and is currently working with other consumer advocates to address the debt buyer problem in Cook County through a new project called Debtors Legal Aid, which provides direct legal services and education to consumers facing debt buyer issues. Mike can be found on twitter @mikewoodondebt, or by email at mike@michaeljacobwood.com.