Last week, the Consumer Financial Protection Bureau said it would begin regulating debt collection companies starting at the beginning of 2013. “We now find that debt collection is a central issue of our times,” director Richard Cordray said.
The stats are indeed sobering: Debt collection is projected to be nearly a $13 billion business this year, and 30 million Americans have an average of $1,500 in debt that collectors can come after.
Collection companies, meanwhile, are coming up with increasingly creative and heavy-handed ways to claw back those dollars.
The CFPB says it’s going to look at the disclosures that debt collectors provide; the accuracy of the information they use; whether or not they have a process for handling borrower disputes; and “whether debt collectors have harassed or deceived consumers in pursuit of debt.” It plans to focus on 175 of the industry’s biggest players, which together make up about 60% of the market.
In particular, the agency plans to examine three types of debt collection: when a company buys debt other companies have given up on collecting; when a company goes after outstanding debt on behalf of the creditor for a commission; and when a company litigates to collect debt.
This last category is important because many of the recent debt collection abuses have involved efforts to collect debts through the court system. The CFPB hasn’t said specifically what practices it will evaluate, but several are known to be on the radar of state or local prosecutors.
One notorious trick is “sewer service,” in which the collection agency begins court proceedings without properly notifying the debtors. (The collection agents don’t literally dump the paperwork into the sewer, but that’s where the term comes from.) The debtors — who of course doesn’t know to show up in court — first hear about such suits after default judgements are entered against them.
Other questionable practices include sending a debtor a deluge of court notices, requiring them to come to multiple unnecessary hearings in the hopes that they’ll miss one and be declared in default. Another involves using “robo-testimony,” boilerplate statements that don’t actually provide proof of the debt owed. One judge who handles collection cases told the New York Times earlier this year that 90% of the time, the creditor doesn’t have proof that the debtor actually owes the money under dispute.
Others debt collectors pretend to be medical professionals. Earlier this year, Minnesota Attorney General Lori Swanson settled a suit with a company that embedded collection agents in hospital emergency rooms and put the screws to sick people. People suffering acute emergencies like heart attacks and even women giving birth were told (illegally) that they couldn’t get care until they paid outstanding medical bills.
In some cases, local prosecutors have apparently been complicit in abusive and deceptive practices: A handful of debt collectors have reportedly been allowed to put district attorney logos on collection letters to make it appear that debtors will be hauled off to prison if they don’t pay up.
In this context, it’s little wonder that the CFPB has gotten involved.
Agency director Cordray did say last week that there are plenty of debt collectors who do follow the law and just try to collect what they’re rightfully owed. But when you have people threatening to deny medical care or throw someone in jail over as little as a couple hundred bucks worth of outstanding debt, you clearly have an environment where something needs to change.