Debt Collectors Keep Credit Market Flowing

Debt collecting is a profession that gets little love, but given the social good done by debt collectors who operate ethically and follow the rules, maybe it’s time that we show them some affection. If not that, we should at least give them reasonable rules to play by—rules that would also benefit consumers and entrepreneurs who participate in the credit market.

This is the message my former colleague Daniel Press and I sent to the Consumer Financial Protection Bureau in our comments on its proposed debt collection rule. This wil be the first major update to implementation of the Fair Debt Collection Practices Act (FDCPA) in more than 40 years. We began the comments by pointing out:

In a market economy that is based on private property and the rule of law, the efficient and effective enforcement of contracts is indispensable. Without the ability to enforce the promises made between individuals and businesses, any form of transaction, especially concerning credit products, would be more difficult and more expensive, if possible at all.

Therefore, services and mechanisms to settle debts are a vital aspect of a market economy. They are a part of the ‘plumbing’—the underlying architecture—that makes our modern credit markets possible. Whether it is a bank, a local gym, or a medical facility, a creditor’s ability to offer services is dependent upon enforcement mechanisms that allow them to pursue a defaulting borrower’s income or assets.

While stressing that the CFPB should swiftly punish debt collectors who harass or give false information to debtors, we encouraged simplifications that would likely benefit both parties. We noted, for instance, the legal status of using text messages or emails to communicate about debts is unclear, and praised the proposed rule’s clarification that these can be used with the consent of debtors.

Clarifying that modern communications technologies can be used to inform debtors of a collection against them is a commonsense reform aimed at facilitating a more effective and efficient process for all parties. For instance, many forms of electronic communications, as opposed to phone calls or in-person meetings, create a paper trail that can better protect consumers against potential rights violations. Allowing collectors to communicate with debtors via the methods they prefer would be an improvement over the current system.

We cautioned, however, against the proposed rule’s limit of seven communications per week to debtors, arguing that this may be overly restrictive and hasn’t been tested empirically. We wrote that this limit “may have unintended consequences that outweigh any perceived benefits,” and that “solid empirical evidence is needed before the Bureau proceeds with these provisions of the proposed rule.”

We also reiterated our caution about the CFPB relying on its flawed consumer complaint database for information about debt collection or other issues. We have urged the CFPB to fix this database since the problems with it first surfaced under Obama-appointed Director Richard Cordray. As an example, we pointed to complaints in the database against Navient, the student loan servicing firm. In litigation against Navient that began under Cordray, the CFPB called 15 witnesses, who had said they were harmed by the practice of steering in the consumer complaint database. In response to the witnesses, Navient produced its own records on each borrower, including phone call recordings and customer notifications, demonstrating that the firm had not inappropriately steered any of the 15 witnesses, thus proving all of the complaints to be false.

We concluded the comments by applauding the CFPB “for its fresh look at the vital role of debt collection in fulfilling a robust consumer credit market in the 21st century.” So go ahead and hug—or just “heart” in a text or email, should the CFPB rule allow these communications methods—your friendly debt collector. It may not reduce what you owe, but it will acknowledge the role that collector plays in ensuring you and others have access to credit on competitive terms in the future.