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Debt Collection Industry Poised for Changes

posted by Dalié Jiménez

Like Pamela, I’m very delighted to join Credit Slips. As Bob mentioned in his kind introduction, I spent a year as a policy fellow at the Consumer Financial Protection Bureau. One of the most things I got to work on while I was there were the rules defining "large market participants" in the debt collection and credit reporting markets. After issuing final rules, the CFPB began to supervise these non-bank entities; marking the first time any federal regulator had the authority to do so. 

Recently, the Bureau published an Advanced Notice of Proposed Rulemaking on debt collection (comments are due by February 28). The ANPR marks the first time that a regulator will interpret the Fair Debt Collection Practices Act, a statute that has barely changed since its enactment in 1977. What's more, because of its UDAAP authority; the CFPB will be able to write rules defining unfair, deceptive, and abusive practices that apply to both collectors and creditors. I've written elsewhere about how the systemic problems in the collections ecosystem begin at the creditor, so this is exciting news. What might be surprising though is that the collections industry seems to share in this excitement.

Earlier this week, I participated in the Large Market Participant Summit where collection agencies subject to the CFPB's supervision met to discuss common issues. The ANPR was the hot topic at the conference; everyone was hard at work on their comments to the 162 questions posed by the Bureau. From the industry's perspective it seemed that the consensus was that regulation was long overdue and the industry (cautiously) welcomed it. There was even a sense that consumer advocates and collectors might actually agree on some issues. 

The organizers invited a group of consumer advocates to discuss where there might be common ground. The conference didn't end with Kumbaya, but I think it's fair to say that there was a recognition that regulation could be a win-win situation in a number of cases. The top point of aggreement from where I stood seemed to be that collectors need more information about the debts that they are attempting to collect upon. "Media," the industry term for account statements, contracts, and the like, needs to be easily accessible by collectors. 

This is where the CFPB's power to regulate many credit issuers will be particularly helpful: the Bureau can require banks to keep and pass information on to collectors or debt buyers. Items like account statements showing the date of last payment, the charge-off statement, or the original contract. While it some creditors are moving in this direction, this is a fairly recent occurrence partly brought on by all the attention these issues are getting.

Another point of agreement: both industry representatives and consumer advocates seemed skeptical of one of the CFPB's potential solutions to the debt collection problems: a central data repository as a way to establish chain-of-title and validity of a debt (question 12). In light of the Target/Neimann Marcus breaches, folks in the room seemed concerned that this solution might create more problems than it solves. 

My own view is still evolving, but I appreciate the apparent simplicity--and centrality--that a repository would create: a one-stop-shop where consumers could verify who to contact about their debt and where they could see an itemization of the charges they are being asked to pay. Another way to do this would be to require creditors to keep all of this information themselves even after they have sold the debt, and to make that information available to consumers.

In some ways, this could be a better solution for consumers since they are already familiar with their creditor and are most likely to remember who that was rather than a third party collector or a debt buyer they did not do business with (as long as they realize for instance, that Citibank issues Sears credit cards). Requiring creditors to keep track of subsequent owners of a charged-off account could have the consequence of decreasing account sales (and resales). This would be a good thing. Many debt collection abuses are tied to small firms that lack the resources to implement a good compliance program. Consolidation in the industry should diminish the number of abuses.

In addition, the added cost to banks might have the effect of a "distressed debt tax," forcing banks to internalize some of the costs of their customers' financial distress and thus incentivizing them to minimize those costs (something Ronald Mann proposed a few years ago). Of course, creditors might just outsource the work to another entity (at least two firms are trying to do this already), which would bring us back to a version of the CFPB's central repository. Nonetheless, imposing liability on the creditor should keep them more connected to the debts they sell and should at least mean that the sale of debts "as is, without representations, without recourse or warranties of any kind" might actually stop.

 

Note: There is still time to comment on the CFPB's ANPR either via regulations.gov or regulationroom.org (most will find the latter site easier to use).

 

Comments

Regarding question 12, isn't that basically what MERS is for mortgages? Didn't we already see that movie? I don't know about you, but I didn't like how that one turned out, seeing as how it was erroneously accepted in lieu of actual evidence of transfer by many courts in enforcement actions, and actually allowed servicers to enforce for their OWN benefit (sometimes multiple times) when they were never owed any money, leaving the real creditor with nothing. Thanks, but no thanks.

Matt - Great point on MERS. That is the elephant in the room, but I do think there are a few key differences between a debt registry and MERS. MERS was trying to co-opt an already existing registry system. But in this space there isn't anything else out there (the credit bureaus are sometimes mentioned but they really don't do anything close to what this would be).

The real issue as you point out is who is responsible for the information (and for the "truth"). A third party registry could be accountable for the chain-of-title information but they would know nothing about the veracity of the debt-level information reported to them. And yet, I do think that there is a MERS-like danger here: that in court registry agents would be allowed to testify about the amount of the debt, something they cannot have personal knowledge about.

The problem is, what is the alternative? The easy one would be if there were no debt sales (and perhaps no third party collectors). I don't that's within the realm of possibility (and it would not be wise in any event). So given that we'll have debt sales and third party collectors, how can consumers and courts follow the ownership/servicing trail in the kind of volume that we're talking about here?

Terrible idea.

Anything the DC industry LOVES is bad for consumers. Right now these guys can be sued, and consumers can win or get settlements even before suit.

Now that the govies are going to "fix" things, all that goes by the by.

I'm surprised you think this is a good idea.

Bob - I'm really not sure where I come out on the registry yet. I think there's potential for doing it well but I am concerned about some of the consequences. That said, the industry isn't all on board with the solution. Many collectors expressed privacy and cost concerns at the conference (keep in mind, this option has been available in the marketplace for years).

Whatever the CFPB does in rule making will not take away the ability of consumers to sue under the FDCPA, although by bringing clarity to the statue, the new rules may foreclose some arguments currently made by consumer lawyers. But that just means that they'll have to make other arguments.

My only interaction with a debt collector was a collector who somehow had my phone number associated with someone else's debt, a someone-else who apparently lived in a city with a different area code, and never lived here. My resolution to this problem was to block the debt collector's phone number...then block the next collector's phone number when the first collector sold the debt and failed to properly update the records. If this registry is meant to function as a public record, where any member of the public dragged into an incompetent collection attempt can access, then maybe it could help. If it's only meant to be accessible by the person who either owns or owes the debt, then I don't think it'd help my case.

LeftCoastTom - It sounds like you were the victim of a bad skip trace. Anecdotally this seems fairly common and very disruptive to the people it affects (some aren't able to block the number for example).

I think any registry keeping this kind of information would be a "consumer reporting agency" subject to the Fair Credit Reporting Act which means you could see your own record and get a free report every 12 months. A public record of the kind you're talking about would go against the Fair Debt Collection Practices Act which protects a consumer's right to privacy with regards to their debts.

What I recommend to people in your situation is to tell the collector you are not the right person and that they should delete your number and never call you again. Repeated calls after that are violations of the FDCPA and you'd be entitled to find an attorney and collect statutory damages of up to $1,000 and attorneys fees. You can also report them to the CFPB at www.consumerfinance.gov/complaint. Any good collector will stop after you tell them they've got the wrong person.

Now the rubber meets the road for consumer attorney (as opposed to consumer policy advocates), and -- speaking as one myself -- we really have to decide what we want. The status quo is terrible for consumers but great for consumer attorneys because finding and winning cases is like shooting fish in a barrel. If we make policy moves towards a system that would be better for consumers (defined as, one in which only the right people are being sued for only the right amount by only the right creditor who only has all the relevant documentation), consumers are better off but consumer attorneys have to totally change our business model.

Frankly I welcome our new CFBP overlords and wish them the best. There will always be work enough for those of us who are clever enough and sufficiently motivated to stay on top of new developments in the game.

Get a copy of a contract governing the relationship between any debt collector and the original creditor and show me where they actually buy debt. They do not buy debt. They buy a list of names, addresses, phone numbers and numerical amounts. Evidence of debt (but not the debt itself) like statements, cardholder agreements, contracts, etc. cost the poor debt collectors extra -- sometimes in extortionate amounts by the banks (anybody surprised there?) That's what this is about.

"They do not buy debt. They buy a list of names, addresses, phone numbers and numerical amounts. Evidence of debt (but not the debt itself)"

The difference between the two is perhaps too esoteric for me to comprehend. What is debt, if not the evidence of indebtedness?

I know. That's why the presumption of indebtedness is so strong. It took me a year to get my head around it.

Let's put it this way -- historical evidence of indebtedness is not PROOF of *valid* debt in the present.

Let's say I'm a bank that has charged off a credit card account. I receive tax benefits and insurance payments for the default. I accept them, and my interest in the debt is satisfied. There is no longer a valid debt for me to sell. But my debtor doesn't know that, so I can further mine that account for a few more dollars by selling the debtor contact info to a 3rd party debt collector hoping for a windfall of unjust enrichment, since the debtor still presumes there's a debt. Then I get to mine the debt collector for yet even more money by selling account information that I still own. That information itself is still not the debt, but once it's in a MERS-like registry, the presumption of debt is going to be even stronger.

Sniff around on the web. You can find cases where the debt collectors have sued the banks for not getting a *valid* debt for their 5 cents on the dollar!

Dalie

Here's what I'd like to see from the CFPB and Congress:

1. Reg or law in derogation of SCOTUS holding in Marx v. General Revenue. The court held that a consumer plaintiff can be compelled to pay costs even though the action was not brought in bad faith. CFPB filed an amicus brief, but has no intention of lobbying Congress to change the law. Bad move.

2. Amending FDCPA FCRA to allow for more than the $1,000/$2,000 statutory damage award PER CASE. Should be per violation. Consumers shouldn't have to bring multiple cases for multiple violations.

3. Provide for a 3 year statute of limitations re FDCPA FCRA.

4. Limiting a debt collector's recovery to 5 times the amount paid for the debt.

Fixing the above would fix a lot of the problems.

Joan

Can u contact me via email? I'd like to discuss further with you. You seem to know what you're doing.

Thanx.

Bob
GRG2615@gmail.

"Limiting a debt collector's recovery to 5 times the amount paid for the debt."

Or better yet: clarify that, unless the debt collector proves up every single penny of indebtedness and proves up the assignment per standard contract law and standard rules of evidence, it can only recover 100% of the amount paid for the debt under quasi-contractual or quasi-equitable remedies such as open account, account stated, unjust enrichment, etc.

What about periodic audits of major debt collectors' litigation practices, coupled with a presumption of fraud if a given debt collector voluntarily dismisses more than 50% of the cases where the debtor is represented by an attorney or otherwise actually mounts a defense?

The presumption of fraud would bear the result that the particular debt collector under than presumption could no longer obtain default judgments by affidavit, it would have to bring a live witness to testify and authenticate/lay foundation for documents.

Joan - Where do you find support for the proposition that once a bank has charged off a debt, their interest in it is satisfied? Under regular contract law principles I don't think that's true. But I'd definitely love to hear an argument otherwise.

Bob G. - I absolutely agree with most of your points. Marx was a bad decision all around (especially the part SCOTUS declined to weigh in on) and we need legislation overturning it. I'm not holding my breath though. Unfortunately the CFPB can't write rules overturning Marx.

SYSM - The CFPB now has authority to supervise the "large market participants" (debt collectors and debt buyers whose revenue is >$10m in debt collection of consumer financial products -- basically everything but medical debt) and it has already started to do so. I think the CFPB examiners would look very closely at the kind of situation you're describing.

I hope they will. I have been doing consumer debt defense for only two years or so, but every single Midland Funding case I've defended has resulted in a voluntary dismissal without prejudice (nonsuit, as our state calls it).

SYSM - I definitely encourage you to make a comment to the CFPB either formally or through regulationroom.org (those comments get aggregated by Cornell students and submitted on the public record).

Below are some of the questions the CFPB asked that you might want to specifically comment on. They relate to your experiences in litigation and to the documentation debt buyers/collectors have available:

http://regulationroom.org/rules/consumer-debt-collection-practices/discussion/debt-collection-litigation#nid-189

http://regulationroom.org/rules/consumer-debt-collection-practices/discussion/making-sure-debt-collectors-buyers-have-info#nid-131

Maybe if consumers who obtain credit repaid the debt then possibly some of the expressed comments would not be issues.

"Maybe if consumers who obtain credit repaid the debt then possibly some of the expressed comments would not be issues."

You wouldn't be saying that if you'd seen some of the files I've seen -- consumers making minimum payments for years and years after the last swipe of the card, then when they finally default and it goes into litigation, the balance is higher than what it was before they made all the payments...

I spent over 15 years in the credit card industry, out of the 50 years I have been in credit and collection. In those 15 years more consumers were helped internally with rate adjustments and fees waived versus those who chose not to help themselves. There is no doubt that exceptions have been made regarding minimum repayment that is reflected on monthly statements and reasons consumers were put into these options through no faults of their own.

Raymond - There will always be people who get in over their heads or have their life situations change and suddenly they are unable to pay their bills.

I firmly believe most people want to repay their obligations and most collectors I've talked to agree. However, sometimes they just don't have the money. If you are barely scraping by rate adjustments aren't going to help you.

I do agree that consumers who are not in the most dire circumstances (have some money to repay) and who have the wherewithal to help themselves and negotiate with their creditors will be able to get great deals. But this assumes that they have income to put towards their debt and that they overcome the shame/embarrassment/anxiety that is associated with having failed to pay in the first place. Those feelings are real for a lot of people and I think they explain why some people avoid talking to collectors or showing up in court when they are sued.

Dalie'- I could not agree with you more. I served on two PA Governor's Task Forces to help consumers with financial problems. I believe consumers who are indeed over their head regardless of how or why just do not know where and too whom they need to go for advice. Some visited with us having been served a summons and thought contacting the court would satisfy the obligation. Even though non profits or legal aid is available, their resources are over whelming and often cannot respond in time. I believe that consumers today are generational driven and adding the economy, housing and employment problems, isn't leaving much choice for anyone. While financial education is important and more is needed, when a consumer is faced with foreclosure or wage attachment it is hard to say that is the solution. To your example of shame, embarrassment, anxiety I have seen and experienced the same in bankruptcy courts and saw that probably 98% of consumers belonged there but as national figures show bankruptcy filings are declining. The problem today is consumers cannot afford attorney fees, filing fees,and are faced with the means test and of course the cost to receive financial counseling as a condition to file. Maybe the light at the end of the tunnel doesn't have to be a locomotive coming the other way for both sides so we all can start by laying the tracks.

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