Debt Collection Continues to Plague Consumers

By Dennis Cuevas, NAAG Consumer Protection Counsel

Dennis Cuevas, Project Director and Chief Counsel, Consumer Protection

The financial crisis five years ago put many consumers in financial distress as millions lost their jobs, homes, or suffered other losses. According to the National Consumer Law Center, approximately 4.4 percent of consumers historically have fallen behind on their credit card payments (one to six months late); yet this figure increased to 6.6 percent by early 2009. By the end of 2009, banks charged off delinquencies over 180 days as “uncollectible” for 9.1 percent of their credit card loans, nearly triple the 3.4 percent rate from 2006. As consumers fell behind on their credit cards and other debts, an explosion in the collection of these debts surfaced. In California, collection lawsuits increased by 20 percent statewide over the past five years. Debt collectors filed more than 450,000 lawsuits in New York City from 2006 to 2008, obtaining an estimated $1.1 billion in judgments and settlements. In the student loan area, about 5.9 million people nationwide have fallen behind on their payments, an increase of 30 percent in the last five years. As a result of the financial hardships encountered by consumers nationwide, the debt collection industry reported that it employed 217,000 collectors and posted annual revenues of $58 billion in 2007.

Debt Buying Industry

The past 10 years saw tremendous growth of an industry that feeds on defaulted consumer debts. Debt buyers purchase consumer debts that have been written off by the original lender, for pennies on the dollar. Debt buyers seek to collect on the full amount, as well as add interest, penalty fees, and attorney’s fees. Debt buyers purchase accounts in bulk, typically obtaining only an electronic spreadsheet with minimal information of the debt. The information they obtain regarding the debts rarely contain the credit application, account agreement, monthly statements, payment records, and customer service records that would reflect customer disputes. This lack of documentation can create a scenario where debt buyers and debt collectors pursue flawed claims. According to the U.S. Federal Trade Commission (FTC), the information received by debt collectors is often inadequate and results in attempts to collect from the wrong consumer or to collect the wrong amount. Some claims go into collection when they have been already settled or paid in full, others were created by identity thieves and others are beyond the statute of limitations. Other tactics include flipping consumers into new credit accounts to reactivate liability and refresh the debt or putting purchased debts onto consumers’ credit reports, which in turn, ruin their credit scores. Lastly, some debt buyers engage in “robo-signing,” the practice whereby employees sign affidavits to support debt collection lawsuits against consumers without making any effort to review or analyze the accuracy of the debt or claim.

Federal Efforts to Address Deceptive Debt Collection Practices

The U.S. Consumer Financial Protection Bureau (CFPB) published a rule in October that will allow the agency to federally supervise large consumer debt collectors. The CFPB also released a field guide that examiners will use to ensure that companies and banks engaging in debt collection are following the law. The CFPB’s supervision authority over these entities will begin when the rule takes effect on Jan. 2, 2013. Under the rule, any firm that has more than $10 million in annual receipts from consumer debt collection activities will be subject to the CFPB’s supervisory authority. This authority will extend to about 175 debt collectors, which account for more than 60 percent of the industry’s annual receipts in the consumer debt collection market.

Pursuant to the CFPB’s supervision authority, examiners will be assessing potential risks to consumers and whether debt collectors are complying with requirements of federal consumer financial law. Examiners will be evaluating whether debt collectors provide required disclosures by properly identifying themselves and properly disclosing the amount of debt owed; are using accurate data in their pursuit of debt; and have a consumer complaint and dispute resolution process. They will also check whether these complaints are resolved adequately and in a timely manner, whether the complaints highlight violations of federal consumer financial law, and whether the debt collector has a process in place to address consumer disputes. Lastly, examiners will be assessing whether debt collectors have harassed or deceived consumers in pursuit of debt.

The FTC stepped up enforcement of the Fair Debt Collection Practices Act in the last year by cracking down on collectors who allegedly used abusive tactics to intimidate consumers, misled consumers while seeking payment on time-barred debts, used faulty data to identify debtors and the amount they owe, used deceptive tactics to collect on payday loans, and otherwise committed egregious violations of the Act and other federal laws. The FTC brought or resolved seven debt collection cases affecting hundreds of thousands of consumers nationwide - the highest number in any single year.

State Attorneys General Efforts

State attorneys general have brought numerous actions in their own states against debt collectors that violate their state debt collection laws and state unfair and deceptive trade practices laws. For example, 19 attorneys general reached a settlement in February of this year with debt collector NCO Financial Systems, Inc., resolving allegations of deceptive and unfair debt collection practices. The multi-state effort arose from numerous complaints about NCO’s debt collection practices, including failing to verify disputed debts, making excessive numbers of calls to debtors, attempting to collect debts for which the statute of limitations had expired, and improperly disclosing information to third parties. Other actions include: Arkansas Attorney General Dustin McDaniel’s lawsuit against National Credit Adjusters LLC, alleging that it illegally sought to collect on payday loan debts in Arkansas, as well as Minnesota Attorney General Lori Swanson and West Virginia Attorney General Darrell McGraw’s separatelawsuits against Midland Funding, LLC and its administrative arm, Midland Credit Management, Inc., alleging that they defrauded courts and citizens by filing false and deceptive “robo-signed” affidavits. These are just a few of the actions brought by state attorneys general.

Future of Debt Collection

As technology continues to evolve and new means of communications develop, debt collectors have taken advantage of the latest available methods, such as cell phones, auto dialers and email. Concerns have also been raised about how new communication tools, such as Facebook and Twitter, will impact the future of debt collection. Clearly technology has outpaced the law. The rules governing consumer communications for debt collection have not seen a major update since they were written in 1977. What remains to be seen will be how the law enforcement and federal and state legislators fill in these gaps to protect consumers and weed out bad actors and unfair and deceptive practices. Consumer advocacy groups have urged federal and state legislators to 1) end robo-signing and attempts to collect without proper documentation; 2) establish a sell by date for all debt, making it illegal to sell or attempt to collect debt that is more than seven years old; 3) require debt collectors to identify the name of the original creditor and provide an itemized record of the total principal, interest, fees, and other charges that have been added to the debt, and to provide detailed records about the debt to consumers within five days after the first notification; 4) require debt collectors to submit more detailed information when filing suit, including the name of the original creditor and an itemized record of the total principal, interest, fees, and other charges that have been added to the debt, when they sue over a debt, so that the consumer can see if it is his or her debt, and in the right amount; and 5) increase oversight to ensure consumers are properly notified of lawsuits.

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