Study: Over-Regulation of Debt Collectors by CFPB Could Harm Consumers and Credit Economy

Regulation of the credit and collection industry is essential, but it could go too far in harming consumers and businesses, especially small agencies, according to a report on the law and economics of consumer debt collection.

A new study on the Consumer Financial Protection Bureau’s regulation of debt collectors shows why the CFPB should consider the impact of further regulation on legitimate collection businesses, consumers and the economy.

In the study “The Law and Economics of Consumer Debt Collection and its Regulation,” Todd Zywicki, senior research fellow for the Mercatus Center at George Mason University, notes that the CFPB should avoid creating regulatory burdens on small firms that would reduce competition in the credit and collection industry and prompt additional consolidation of agencies.

Zywicki notes that small debt collection firms play an important role in the industry and that the regulations from the CFPB should not create a disproportionate burden for smaller agencies. Compliance is more costly for smaller agencies and any “unnecessary regulatory compliance costs” could cause consolidation of those agencies within the industry, according to Zywicki.

Additionally, Zywicki reports that while regulations of debt collection are essential to the credit-based economy, rules that go too far will result in higher interest rates and less access to credit for consumers, especially low-income and high-risk consumers.

“Therefore, before enacting any new regulations, the CFPB should be careful to ensure that the marginal benefits to consumers and the economy of new regulations exceeds any costs arising from unintended consequences,” Zywicki writes.

“Rules intended to protect consumers from some credit collection practices could lead creditors to use alternatives that consumers prefer even less.”

According to Zywicki, the CFPB should consider the following factors in its rulemaking:

  • Extensive regulation already exists in the consumer debt collection industry.
  • “Good” regulation can improve economic welfare, but “bad” regulation can harm consumers and the economy. “Restrictions on collections simultaneously reduce supply and increase demand,” according to Zywicki. “It is unclear whether restrictions would actually increase or decrease quantity.”
  • Restrictions on collections can lead to adverse impacts on credit card lending relative to other forms of lending. Also, restrictions in the industry may benefit consumers who have debt and are contacted by a collector, but “this will come at the expense of other consumers who have to pay more for credit and fain less access to credit.”
  • Regulation of some collection practices can have unintended consequences. Restricting the use of practices such as calling consumers or sending letters that are less costly, according to Zywicki, could lead to “swifter invocation of more-intensive practices, such as lawsuits.”

Progress on the debt collection rulemaking continues to move more slowly than the CFPB anticipated, ACA International reported after the CFPB issued an update to its regulatory agenda in May 2015. The rulemaking will not occur before December 2015.

ACA submitted comments to inform the rulemaking process after the CFPB issued its Advance Notice of Proposed Rulemaking for debt collection in November 2013.

Citing the ACA International and Ernst and Young study on The Impact of Third Party Debt Collection on the National and State Economies, Zywicki also reports that the credit and collection industry returned $44.6 billion to creditors in 2010 and $44.9 billion in 2013.

“By recovering tens of billions of dollars in delinquent consumer debt each year that would otherwise go uncollected, the third-party debt collection industry generates important benefits to the U.S. economy,” according to the ACA and Ernst & Young study.