The Future of Debt Collection

Financial Services Committee Holds Hearing on Interactions Between Consumers and Debt Collectors

On Thursday, September 26, the House Financial Services Committee held a hearing titled Examining Legislation to Protect Consumers and Small Business Owners from Abusive Debt Collection Practices. The committee hearing focused on the CFPB’s proposed rule related to the Federal Debt Collection Practices Act (FDCPA).

There were several interesting comments from Congressmembers and witnesses regarding consumer access to credit, protection of consumers in collections, and the likely consumer impacts of the CFPB’s proposed debt collection rule.

For Consumers’ Research’s thoughts on the CFPB’s proposal, please see our comment letter submitted to the CFPB.

Collecting Debts and Consumer Welfare

Ranking Member Patrick McHenry (R-NC) noted in his opening remarks that when some consumers fail to repay their debts – for whichever reasons – the price of credit necessarily increases for all borrowers. Various committee members and witnesses reinforced this point throughout the hearing.

Ms. Sarah Auchterlonie, former acting director of enforcement at the CFPB, testified that healthy collections markets help retain consumer access to demanded products and services. Mr. John H. Bedard, Jr., Owner of Bedard Law Group, P.C., reinforced this claim with examples. By helping ensure the back end of a credit agreement, debt collectors allow the local appliance store to sell the washing machine on terms and encourage the local dentist to provide braces on credit. Both outcomes make consumers better off, as they can smooth their consumption over time.

Ms. Auchterlonie also noted that, in general, it makes good business sense for debt collectors to offer flexible solutions for consumers with outstanding debt. Collectors often speak with compassion to consumers to reduce the likelihood of future disputes. Indeed, valid disputes are relatively rare, according to Ms. Auchterlonie, with 30 percent of outstanding debt being repaid after the first contact with a consumer. Ms. Auchterlonie argued that debt collection communications, especially early on in the debt’s life, can be more of a customer service call rather than a collections call.

There was consensus amongst the hearing’s participants that consumers required protections from harassment and abuse, and that collectors and the courts required clear rules of the road for appropriate conduct.

The CFPB’s Proposed Rule

Mr. Bedard argued that the CFPB’s rule is necessary because the FDCPA was written in the 1970s and, therefore, doesn’t address modern communication methods used today like email and text messaging.

Further, Mr. Bedard argued that the CFPB’s proposal was a necessary step away from prior CFPB practices of “regulation by enforcement.” By articulating clear rules and then adhering to them, the CFPB will institute more transparent enforcement standards and practices, which promises to produce better behavior from industry participants. According to Mr. Bedard, in the past, the CFPB had frequently used enforcement actions and investigations to set the rules implicitly, rather than through the required proposal and comment process. According to Mr. Bedard, this was wrong and unlawful.

Ms. April Kuehnhoff, a staff attorney at the National Consumer Law Center, argued that the CFPB should update the FDCPA to index penalties to inflation. While other witnesses claimed that debt collectors are incentivized to follow the rules in ways beyond punitive damages – for instance, through the threat of lawsuits – there was not a strong opposition to Ms. Kuehnhoff’s suggestion.

Ms. Dalie Jimenez, a professor of law at the University of California – Irvine, suggested that the CFPB’s final rule clarify that original creditors and debt buyers are also subject to the FDCPA. Moreover, Ms. Jimenez argued that the new rule should prohibit debt collectors from contacting consumers before performing due diligence on the debt. Similar to the comments from Mr. Bedard, Ms. Jimenez noted that consumers, collectors, and judges need simplicity in debt collection rules.

Representative Ayanna Pressley (D-MA) noted that she introduced an amendment that, as we understand, would prohibit the new CFPB debt collection rule from taking effect.

Calls for a Cultural Change

Both Ms. Auchterlonie and Ms. Jimenez noted that while most consumers want to repay their debts, there exists great societal shame and discomfort surrounding the debt collections process. These witnesses argued that we must help consumers become more comfortable with the debt collections process. In particular, Ms. Auchterlonie noted that consumers should be encouraged to engage with collectors, rather than allowing their “fight or flight” response to take over.

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