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Good and Bad of Government's Debt Collection Proposal

Earlier this month, the Consumer Financial Protection Bureau released a much-anticipated proposal to revamp the Fair Debt Collection Practices Act (FDCPA), a forty-two year old law regulating debt collection in the United States. Overall, the proposed rule is a mixed bag—some bad, some good. However, it is much better than what was expected out of the former Democratic administration, preventing much more sweeping changes.

The FDCPA was passed in 1977 to eliminate what was perceived to be widespread abusive practices in the debt collection industry, establishing certain minimum consumer protections. However, over time, tension between the enabling legislation, modern technology, and the preferences of consumers grew. It is uncertain, for instance, whether the use of communication technologies that did not exist in 1977, such as email and text messaging, are permitted under the act.

It is clear that the FDCPA and its implementing rules, known as Regulation F, need updating. And yet, until the creation of the CFPB, no regulatory agency had the authority to do so. Indeed, this is an area where the CFPB can be a force for good.

Below is a brief review of the four major changes in the proposed rule. CEI will have more to say on this topic when we file comments to the bureau.

  1. Establish a clear, bright-line rule limiting call attempts and telephone conversations.

The proposed rule generally would limit collectors to seven attempts by phone per week to reach a consumer about a debt. Once a conversation takes place, the collector must wait another seven days before calling. Further, the bureau would provide a safe harbor for a “limited content voicemail message,” resolving legal uncertainty on the topic.  

Establishing a bright-line rule limiting call attempts is not unreasonable in and of itself. Surely hundreds of calls per week, for instance, constitutes harassment—something already prohibited by law. But a bright-line limit of seven attempts per week is relatively few. On one hand, it is useful to establish some form of clarity. But a “one size fits all” approach for the entire collection industry seems unwise, given that different consumers and debts constitute different behaviors and collection techniques. It is also unclear how empirically justified the precise call limit is, opening up legal challenges for being “arbitrary and capricious.”

By attempting to establish contact, collectors are trying to inform debtors of their options for resolving the debt, including repayment plans or debt restructuring. If these options can’t be communicated, it will result in more debts being resolved through litigation—a worse option for both collectors and debtors.

  1. Clarify consumer protection requirements for certain consumer-facing debt collection disclosures

The proposed rule would require debt collectors to send consumers a disclosure with certain information about the debt being collected on, including an itemization of the debt and plain-language information about how a consumer may respond to a collection attempt.

Creating model disclosures to better inform consumers about contract terms and better protect lenders from litigation is an important role for the bureau. Collectors, for example, have been subject to litigation over “hyper-technicalities” in the content of communications, including over the placement of commas. Frivolous lawsuits help no one. This has also led to a proliferation of disclosures that discourage consumers from reading them entirely. Simplifying the disclosure regime and creating clear rules of the road is important for all parties.

  1. Clarify how debt collectors can communicate with consumers

The proposed rule would allow debt collectors to use modern communication technologies, such as voicemail, email, and text messaging, to communicate with consumers. It would also protect consumers who do not wish to receive such communications by, among other things, allowing them to unsubscribe to future communications and limit the ways debt collectors contact them. 

Updating communication methods is a commonsense reform. Indeed, the concerns that motivated the passage of the FDCPA are largely non-existent today, such as collection methods that constituted “invasions of individual privacy.” That is because modern technology is much more private and can be controlled by a debtor much more easily, such as by silencing a phone or controlling certain alerts. Very few, if any, other industries have such strict constraints placed upon communications.

Furthermore, collectors should be able to communicate in accordance with the preferences of consumers. Young people in particular appreciate being able to communicate electronically, and the updated rule would accomodate that preference. 

Negative reactions to this provision in the news media have been way out of proportion. Bess Levin over at Vanity Fair, for example, makes the absurd claim that “Trump wants to make it legal for debt collectors to text you “Hey, where’s my money, a$$hole?” This despite the fact that abusive and harassing behavior has been illegal, in statute, for forty-two years. None of that has changed.

Meanwhile, other outlets have focused on the fact the collectors can send an “unlimited” amount of texts or emails to consumers, which is the same, apparently, as a debt collector “show[ing] up at your house and pound[ing] on the door.” This is also not true. The bureau made clear that the provisions against harassment and abuse are still in place, which will put a natural cap on the number of electronic messages sent, while consumers also have the power to unsubscribe or request to not be contacted at any time. Meanwhile, consumers consistently subscribe to text messages and notifications from companies to remind them when a bill is due or past its payment deadline, for which I doubt anyone would consider this the same as “pounding on the door.”

No doubt there are bad actors in the debt collection space who engage in abusive and harassing behavior. But these actions are already illegal, and have been so for almost half a century. That is precisely the purpose of the CFPB, and it should pursue, to the full extent of the law, penalties against any and all collectors who engage in genuinely abusive and harassing behavior.

Clarifying that modern communication 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 both parties. It is actually an improvement for consumers over the system we have now.

  1. Prohibit suits and threats of suit on time-barred debts and require communication before credit reporting.

The proposed rule would prohibit a debt collector from suing or threatening to sue a consumer to collect a debt if the debt collector knows or should know that the statute of limitations has expired.

Indeed, the FDCPA’s purpose is to prohibit fraudulent or deceptive conduct in relation to debt collectors, while the bureau also maintains powers to prevent “unfair, deceptive, or abusive acts or practices.” To lead a debtor to believe that you can sue them for a loan that you know is unenforceable is deceptive conduct.

We need to remember the wider contect of the proposal, however. The statute of limitations for debt repayment is governed by the individual states. In numerous states, time-barred debt can be as short as 3 years. The statute of limitations is, in part, designed to prevent fraudulent litigation and avoid the deterioration of evidence. It is not designed to be a loophole to allow customers to wriggle out of paying their bills—for which a relatively short time period, such as 3 years, would provide. In addition, extinguishing debts after the statute of limitations expires would only incentivize collectors to ramp up collection procedures quicker, including filing lawsuits immediately before the expiration date—a much more expensive and disruptive process for everyone.

Fortunately, it appears that the bureau has not yet proposed going so far as to actively require the disclosure of a consumer’s right to not pay their debts when they are time barred. Instead, the proposed rule notes, “The Bureau plans to test consumer disclosures related to time-barred debt and, after testing, will assess whether a debt collector who collects a time barred debt must disclose that the debt collector cannot sue to collect the debt because of its age.” Not only should the bureau test consumer disclosures, but it should make use of rigorous cost-benefit analysis to ensure that the policy does not have unintended consequences.

Earlier this year, I discussed how restrictions on debt collection can impede access to credit. As I wrote, it is useful to think about the regulation of the collection of debt in the same way as the regulation of debt itself. Because credit is priced according to risk, a lesser ability to collect on a loan means greater risk of default, leading to higher prices and less access to credit for consumers. In this regard, the CFPB should carefully consider comments from groups on particular unintended consequences of its actions. It should also seek to make use of the newly established Office of Cost-Benefit Analysis, and give the proposal a thorough and rigorous economic assessment.