With complaints against debt collectors rising every year, regulators, including the Federal Trade Commission and the Consumer Financial Protection Bureau, have made debt collection a top priority. In fact, back in June, the FTC began holding “Debt Collection Dialogues” to better understand the dynamics between creditors, consumers, debt collectors and other regulators.
As president of a national debt collection company, I was invited to speak at the FTC’s November dialogue. It was focused on industry regulations on the state level and featured a lineup of speakers that included representatives from the Attorneys General and Consumer Protection offices in Georgia, South Carolina and Tennessee.
The main point I wanted to get across to everyone in attendance was that there is a difference between legitimate debt collectors and criminals. It seems every day there is a story in the news about a debt collector doing something harmful to consumers, but most of these pieces, including ones that involve federal and state enforcement actions, pertain to bad actors. And little to no efforts are made to distinguish between law-abiding companies and criminals committing theft or fraud. To be clear, when I speak of a legitimate debt collector I am referring to one that is:
- Legally authorized to do business in the particular state they are collecting consumer debts from.
- Licensed, bonded and insured in those states that require them to be.
- A member of ACA International, the trade association for the credit and collection industry (of which I am a board member).
Regulators at the panel did acknowledge that because of the inconsistency in state licensing and lack of federal licensing, it is difficult for them to clearly identify legitimate debt collectors from criminals using the industry to perpetrate their crimes. One of the ideas I floated during the discussion was the possibility of creating a national registry of debt collectors that would identify legitimate debt collectors through a pre-determined process. Overall, the regulators were very receptive to the idea and felt this registry would help them make important distinctions. The FTC was also interested in what recent state regulations and enforcement actions the debt collection industry found important. It’s imperative to keep in mind three things when discussing regulations:
- What is the intended purpose of the regulation?
- What is the expected outcome the regulation hopes to achieve?
- What are the potential unintended consequences?
Most people may not realize that debt collection is one of the most extensively regulated activities in the country. There are overarching federal regulations that address collection activity and more than 30 states require licensing for debt collection agencies, adding more layers of protection.
The Wild West mentality the media often portray regarding the debt collection industry appears to necessitate more stringent laws, but that image is simply untrue. A 2014 study from the Urban Institute found one in three adults in America have a debt in collection — a pervasiveness that draws attention to industry practices. However, according to stats from the CFPB’s consumer complaint database, less than 5% of the 75 million consumers with a collection account have filed a complaint with the CFPB in the past three years. Furthermore, over 65% of these complaints are related to a dispute of the debt — not poor treatment.
Any new regulation considered should aim to fix the issues consumers are complaining about: disputes about the existence or balance of debts. (It’s important to note that attempting to collect on a debt the consumer does not owe or for an amount that is not owed is already illegal.) But new laws may focus instead on the types and frequency of communication debt collectors are permitted to have with consumers. The Fair Debt Collections Practice Act already imposes these types of limitations and further restrictions would likely lead to additional adverse consequences for consumers.
Debt collectors, first and foremost, desire to resolve debts with consumers on a voluntary basis, as this resolution is the most cost effective and mutually beneficial. However, when debt collectors are unable to communicate with a debtor either due to that consumer’s unwillingness or regulation barriers, involuntary debt collection action becomes the only other option to recoup what is owed. Involuntary debt collection action refers to negative credit bureau reporting, judgments, wage garnishments, liens, bank levies, or other measures state laws allow for recovery of unpaid debts. The reality is, as regulation grows, the level of involuntary measures to collect debt will likely grow as well.
Consider, for instance, the statutes of limitations states place on how long a creditor has to enforce legal action on a debt. These statutes vary from state to state, but generally range from three to 10 years. Some states have moved to shorten their statutes of limitations on debt collection lawsuits. The prevailing thought is that doing so will help consumers and prevent creditors from suing on “zombie debts” — debts that are very old and/or no longer owed.
But as an unintended consequence of shortening these timeframes, creditors may be forced to seek involuntary legal action against consumers sooner than they would like. Creditors understand consumers face hardships and that sometimes it could take several years for them to re-establish their finances and regain the ability to repay delinquent debts. Unfortunately, reducing statutes of limitations could easily increase the likelihood that collectors won’t wait for the consumer to rebound or agree to negotiate a repayment plan. Instead, they will simply move to legal action.
It’s important that regulators take these and other issues into account as they seek to better understand the debt collection industry. The FTC’s panels are a good start; free-flowing dialogues between all parties can help root out bad actors, which would benefit consumers more than additional regulations would.
By Nick Jarman