A High-Level Discussion of Debt Collectors, Involving no Debt Collectors

Stephanie Eidelman

NPR’s The Diane Rehm Show aired a segment yesterday called “Inside America’s Debt Collection Industry.”  Among the four guests, there were no representatives from the debt collection industry. What’s also interesting is that, in fact, most of the discussion was not about third party debt collectors, but creditors, debt buyers, and credit reporting agencies.

These were the panelists:

• Josh Boak - economics writer, The Associated Press
• Mark Calabria - director of financial regulation studies, the Cato Institute
• Peter Holland - consumer lawyer, adjunct professor at the University of Maryland Carey School of Law
• Margot Saunders - of counsel, the National Consumer Law Center

One of the topics covered was the distinction between a creditor and a debt collector. Margot Saunders explained the significant gap that exists in the laws governing collection activity in that the FDCPA regulates the actions of third party collectors but not creditors themselves. She added that many are hoping the Consumer Financial Protection Bureau (CFPB) will close this gap in its debt collection rulemaking effort.

In fact, much of the conversation really referred to the role that creditors play in debt in the first place. For instance, Saunders mentioned that some creditors build a business model around the expectation that consumers will not be able to pay back a loan, and therefore they will earn more on fees and charges than they would have on interest. This is certainly a financial services practice that’s now regulated by the CFPB, but I’m not sure how it crosses into the topic of “inside America’s debt collection industry.”

Additionally, she referenced a case that was recently decided in West Virginia in which the defendant – CashCall, a creditor – made a total of 84,371 calls to its 292 West Virginia consumers (sixteen of those consumers each received more than 1,000 calls; forty received between 500 and 1,000 calls; and eighty-six received between 200 and 500 calls).

John Rossman, attorney with Moss & Barnett, a law firm that represents creditors and collectors, offered his opinion on that point after listening to the segment. “It is important to note that this case involved a lender and not a traditional third party debt collector,” Rossman told me. “The Court relied on expert testimony to determine that the Defendant was the de facto or true lender of the loans in question under West Virginia law.  This is a critical distinction because stringent Federal and State restrictions on third party debt collectors prohibit the number of call attempts alleged in this case.  There are separate laws governing the collection conduct of lenders.  However, the Court in this case held that the West Virginia law regulating debt collectors also extends to lenders.”

Of course, the consumer doesn’t make (or care to make) the technical distinction about who is calling them regarding debt. To them, it’s simply a “debt collector.”

As Saunders noted, however, part of what the CFPB is contemplating in their new debt collection rules is closing this loop at the Federal level and holding anyone making a collection attempt accountable to the same regulations.

“Joe” emailed to say that he has a problem getting an erroneous tax debt from Washington, DC cleared up.  He says he disputed the debt and proved he didn’t owe it. But DC sold the debt anyway. In response, Peter Holland repeated the problem that banks will sell debt like this with poor information and poor warranties to debt buyers. Margot Saunders explained that collectors are obliged to investigate a disputed debt, but they often don’t, and they continue to report the obligation to credit reporting agencies.

Again…nowhere in the chain of the debt from this story was a third party debt collector involved. And I’m not sure that new rules established by the CFPB will apply to government agencies (I’m not sure they won’t, either). For instance, some current rules – like bankruptcy – don’t apply to Federal student loans. Other creditors lose in the case of a consumer declaring bankruptcy, but not the government. That student loan will follow you forever.

Peter Holland noted that 26% of Americans find errors in their credit report, and highlighted the problem inherent in the credit reporting system. He explained that the burden is on the consumer to prove the information is wrong vs. the creditor or credit reporting agency to prove it’s correct. This is another important topic being reviewed by the CFPB, but again…not really an issue caused by third party debt collectors.

The wide ranging (but high level) discussion also covered findings in the new study by think tank Urban Institute and debt buyer Encore Capital Group, which looked at credit report data to determine how many accounts in America are delinquent, and how many are in debt collection.

Callers to this program were mostly consumers asking for advice with debts they feel they don’t owe or can’t pay, but have been unable to resolve on their own. They were generally referred to attorneys in their area.

Diane Rehm asked a few questions about the forthcoming rules and what they would do to help the situation. Panelists responded of course that nobody has yet seen specific proposed rules and then offered a range of generalities, including the concern over privacy issues, and the consumer survey the CFPB is planning to conduct.

Had a representative from the industry been present, I wonder whether they might have taken an opportunity to offer a specific example that could have educated listeners on some specific challenges inherent in the current rules. For instance, that so many of those calls with no message left isn’t meant to harass, but simply to contact in order to resolve. And that often no message is left because of the catch22 in the law that requires a collector to provide meaningful disclosure but not third-party disclosure to someone who doesn’t owe the debt.

What also isn’t generally discussed — and wasn’t in this case –  is that the actions of collection agencies that are hired by creditors are pretty closely prescribed by contract. This includes how many call attempts an agency will make to a consumer. Collection agencies, generally a small fraction of the size of their creditor clients, have limited ability to dictate these terms.