Cleaning Up Debt Collection

Release Date: 
March 24, 2014
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By: Ellen Taverna, Legislative Director, NACA and Rebecca Thiess, Americans for Financial Reform 

Fortunately, two federal agencies – the Consumer Financial Protection Bureau and the Federal Trade Commission – have the authority to address such problems. And both agencies have been gathering evidence on this market.

Debt collection, the bureau says, has quickly become its number one source of complaints. It ranks third at the FTC, where such complaints have increased more than 1,400 percent since 2000 -- from 13,950 complants to last year’s total of 204,644.

Abusive debt collection practices can take a terrible toll, emotionally and practically. Beyond the fear, stress and embarrassment they cause, families can have their bank accounts frozen, making it impossible to pay for food, housing, utilities and other basic expenses. Debt collectors frequently place incorrect information on people’s credit reports, impairing their ability to secure credit, housing and even employment in some cases.

Almost all of the millions of collection suits filed against consumers each year are uncontested and result in default judgments against the consumer. And while the industry would say that’s because consumers really owe the money, studies point to an array of other factors, including illness, injury, inability to take time off from work, lack of notice, misunderstanding of the requirements for filing a legally proper response, and confusion stemming from the obscure and complicated language of summonses. In short, under current rules and procedures, the courts are not a fair playing field once a debt collector decides to go after you.

Consumer bureau complaint data, according to a report released this week, indicates that the most common grievances are mistaken information, which comes up more than half of the time, and what the bureau calls “aggressive communication tactics and threats” – the theme of nearly a quarter of its complaints.

Appalling anecdotes abound. In Missouri, an employed woman who had simply forgotten about a $425 loan was arrested and spent three nights in jail, until her mother finally borrowed $1,250 to pay her bond. In Illinois, an elderly woman was repeatedly called and harassed over a debt allegedly owed by her ex-husband, from whom she had been divorced for more than 30 years. In another Illinois case, a woman who was caring for four profoundly disabled foster children nearly had her bank account frozen (despite the fact that it contained nothing but public-benefit funds designated for the children’s care) as a result of a judgment that had been vacated years earlier. Another woman, suffering from early-onset dementia, was harassed over a loan that belonged to her ex-husband; the frequent calls contributed to her need to move into a nursing home.

While debt-collection problems have a long history, the recent combination of aggressive lending and widespread economic distress has made them considerably worse. Household debt nearly doubled in the half-decade before the financial crisis of 2008; the reckless lending and deceptive loans of those years contributed to a sharp rise in payment delinquency, which was accompanied by an explosion of new debt buyers and a deterioration of industry practices.

Having paid pennies on the dollar for the right to go after a portfolio of supposedly delinquent debtors, many debt buyers fail to ascertain the validity of the information passed along to them. Often, years have passed and misinformation about the debt or the debtor has become embedded into the collection process. Rather than sort through such issues, collectors often adopt a shotgun approach, hoping to frighten a few people into paying, whether they owe the money or not.

A third factor may also have been at work: Although Congress had passed a Fair Debt Collection Practices law in 1977, and the FTC has ramped up its enforcement efforts in the last few years, no agency had been given the power to issue specific rules for debt collectors until the enactment of the Dodd-Frank financial reform law of 2010.

Under Dodd-Frank, the Consumer Financial Protection Bureau has rule-making as well as enforcement power; it has the authority not only to impose new and substantively stronger obligations on debt collectors, but also to create incentives for all industry players to improve the accuracy of their collection efforts and steer clear of harassment and abuse. With those powers, the bureau is in a position to improve things significantly.

The National Consumer Law Center, the National Association of Consumer Advocates, Americans for Financial Reform and other consumer groups have called on the consumer bureau  to take a number of steps to improve the world of debt collection. Some of the major recommendations include: strengthening consumer remedies against ongoing abusive practices; requiring debt collectors to verify information before they act on it; curtailing telephone harassment by limiting calls to a more reasonable number; creating an effective mechanism to help consumers enforce their right to request that collectors stop communicating with them; and making sure the relevant rules cover payday lenders, credit card companies and other creditors as well third-party debt collectors.