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A National Debt Registry?

posted by Adam Levitin

There's a fascinating long magazine piece in the NYTimes about consumer debt sales and collection. The piece ends by asking why we don't have a national debt registry, as if that were the solution to all debt collection problems.  Unfortunately, the author only asked the FTC about this issue (and acknowledges that it isn't in FTC jurisdiction), not the CFPB, and the author doesn't consider any of the problems with creating and implementing a debt registry.  (I'm guessing Dalie will have something to say about this...) As the case of MERS shows, it isn't so easy to create a well-functioning registry of property rights of any sort.  Let me illustrate a few challenges to creating a debt registry:  

First, there's the question of who gets to input information into the system. If the system is open to everyone, what stops me from claiming that Bob Lawless is a notorious deadbeat who owes thousands to me?  Perhaps a lawsuit from Bob, but I could make a lot of trouble for him before he gets the debt cleaned up.  If a system had only, say, debts created by national banks or the like, that might be one way of screening access, but it would carve out a lot of consumer debts, such as medical debts.  

Second, what ensures that information is accurately entered into the system? Local land records (excluding the handful of Torrens systems around) do not vouch for the accuracy of mortgage or sale filings.  Accuracy is both a matter of correct data entry and of timely data entry.  The MERS system has had problems with both--information isn't always entered correctly and often it isn't entered at all (or at least in a timely fashion). A big part of solving this problem is making sure that parties have incentives to register debt, but that goes to a question of what benefit comes with registration, which is discussed below. 

Third, who can view the system? This is a huge set of privacy concerns.  Right now, if I wanted to find out what debts Bob Lawless owes, I would not have any easy, legal way to do so. I have no right to obtain Bob's credit report or to open his mail or read his emails. My guess is that Bob likes it this way--he'd rather not have me and all of his blog-groupies and students knowing the balance on his credit cards or wondering what procedure he had done for which a certain doctor's office (with a revealing speciality title) says he owes money.  

Forth, what benefits would come from registering debt?  Presumably these would be legal benefits, but what legal force, if any, would a system have? Is a registry just for convenience and information, or is it meant to merely provide prima facie standing to sue on a debt or is it meant to serve as conclusive evidence of (1) ownership of a debt or (2) accuracy of a debt?  I suspect it would never be (2), but I don't know how it could be (1) absent legal rules deeming the registered holder to be the owner.  

Thus, if Bad Broker sold a debt portfolio to Colleen Collector and then later sold the same portfolio to Cory Collector, but Cory registered the debt first, Cory would be the owner.  This is similar to state law rules about mortgage and security interest priority, but notice that the priority rules are not about validity or ownership, but about priority, which is about distribution rights in a forced sale.  A first mortgage is not extinguished by a second mortgage's foreclosure--it stays with the collateral. In contrast, there can be only one satisfaction of a debt--if two parties could collect on the same debt, the second to collect loses everything. There are imperfect ways to mitigate the double-sale problem as a business matter, such as using warranties, but that's not the same as deeming a debt to be valid by force of law. 

These are just some of the big picture issues with creating a debt registry. It's an idea that sounds really good at first blush, but has some uniquely difficult challenges, particularly if it is applied to more than a narrow category of debts and is to provide conclusive legal evidence of anything.  

Comments

Adam - take a look at the video game version of the NYT piece (which is actually an excerpt from a forthcoming book). I linked to it in the post just below.

I agree with you that these are all big issues, and there are more too (like although I do see debt registries becoming a bigger deal. There are at least two companies that have been playing in this space for a while: Global Debt Registry, which the NYT mentions, and Convoke Systems. They market themselves as not providing conclusive legal evidence of anything other than (perhaps) evidence of the chain-of-title of an account.

The idea is that one of their representatives can talk about how, say, Chase is their client and as part of a transaction where Chase sold 10k accounts to Midland, they deposited account documents and other evidence (the contract, etc.) with the registry system. They then kept these records and can produce a witness who can say that these are (now) their business records which they have "incorporated/adopted" into their systems. The incorporation doctrine is not universal, but a number of courts have either adopted it explicitly, or seem to when they allow debt buyers to prove that they own an account with an affidavit from their own representative.

There are tons of problems with this, least of which is that it's completely unclear where the incorporation doctrine stops. It started as a way to let in evidence about business records acquired in a merger, but when you're talking about a select group of records of a company that still continues things get murky.

Peter Holland (consumer lawyer who also used to run the UMaryland debt collection clinic) has a hilarious example pointing out the absurdity of the doctrine. As law professors, we might say we're in the business of downloading documents and papers from the internet, and then incorporating them into our own records to examine/process etc. That's really a big part of our "business." Well, one day, while investigating some legal issue around what would happen if President Obama was actually born in Kenya, I downloaded from the internet a copy of Obama's Kenyan birth certificate. I incorporated into my records (saved it on my computer) and I am now ready to sign an affidavit saying that I have records that say that Barack Obama was born in Kenya because (paraphrasing from one of many debt buyer affidavits): I am a custodian of records, this record was kept in the regular course of business, and it was the regular course of business for me to make these types of records, etc.

Anyway, it's a bit absurd but these kinds of affidavits are filed in courts every day and most of the time are deemed sufficient (not saying anyone reads them, but they carry the day).

The debt registry might actually be *slightly* different in that it would seem more reliable (maybe) than the way the incorporation doctrine is currently being used (by debt buyers' agents testifying as to their own records). At *least* we'd have some kind of certification from the bank to the registry.

But that doesn't speak at ALL about data accuracy (though I fear that courts would take it as if it does, because, "bank records are inherently reliable" some courts have said). And the issue with accuracy and integrity of the data is that we have all these systems (even within the banks sometimes) that don't talk to each other. And when you add multiple debt buyers and debt collectors hired by debt buyers you're really in trouble if everyone is using their own "system of record" (and I put it in quotes because it's not a given that everyone has the data management capability to run a proper system of record that is *the* authoritative source of information).

So why do I think there'll be more use of registries? Because the OCC has already told banks they better start giving account documents when they sell debts, and the CFPB is likely headed in that direction with draft rules later this year, and I think there'll be a number of buyers who will be happy to outsource the data management part. If the CFPB holds the banks to a higher standard than the OCC has indicated it would, then even banks would have an incentive to use a registry so that they can have only one vendor to really deal with.

Depositing account documents is fairly easy with a close-end loan: there's the contract/promissory note plus the payment history. It seems a lot messier with a revolver, which is a lot of what gets sold. There's the whole payment/purchase history, plus interest, fees, etc. That seems an utter mess to transfer all of that information in a standard form (consider that not every bank calculates interest the same way).

I can imagine greater use of registries as a way to ensure better chains of title (and I think this may be an outcome of the reforms the NY Chief Justice is pushing that would mandate chain-of-title affidavits), but I just can't see registries accomplishing much more than that. As you note, there are still problems with the incorporation doctrine and with data accuracy. (Consider the problems with e-notes and proving an electronic original as a parallel problem.) Registries aren't a complete solution for the problems with debt collection.

I worry that any regulatory response will result in costs that make it commercially impractical to buy/collect small dollar debts, and that may limit the availability of credit to more marginal borrowers.

Custodial affidavits can, and should be, challenged. Maybe we're due for new term of "robo-custodian" (or have I already missed it?).

See Yang v Sebastion Lakes Condominium Association out of FL 4th DCA.

"As to the management company's records, the witness employed all of the 'magic words.' She testified that the ledger entries were made at or near the time the charges were incurred, by a person with knowledge of the information, and were kept in the course of business as part of the Association's business practice. On cross-examination, however, the witness testified that the records prior to the 2008 takeover were maintained by the prior accountant, that she started with an account balance from outside records, that she did not know the prior
accountant's practice and procedure, and that she never worked for that accountant. She could not testify as to the accuracy of the starting balances."

Full opinion here:

http://www.4dca.org/opinions/August%202013/08-28-13/opinions%20released.shtml

If there was ever a problem that cried out "don't fix," this is it. Why on earth should anyone care about protecting a debt buyer from an unscrupulous debt seller? They are all going to hell, anyway. Next you'll tell me to feel sorry for Peter Singer. Best way to fix the problem described in this article: (i) tell debtors to hang up, and hang up again; (ii) tell debtors to demand proof that the caller owns their debt, proof of the amount, and proof that the claim is not time-barred; (iii) establish pro bono clinics nationwide, like the EBCLC in Berkeley, that can defend debtors in debt-collection lawsuits and do simple chapter 7s when appropriate.

Ach! I meant Paul Singer, of course.

Here is the 100% remedy going forward...Stop selling and re-selling charged off debt. Here is a 50% plus solution...Require seller and buyer to report the account transaction to credit reporting agencies. Oops, maybe another 100% solution...repay what you borrow.

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