NEW YORK (MainStreet) — The Consumer Financial Protection Bureau is about to get some teeth.
The agency was created as part of the 2011 Dodd-Frank Act to regulate the financial markets. Part of that duty includes management of America's debt collection industry, something which the CFPB has done relatively little of since its inception. That all may change, however, as the agency recently announced its first step toward large-scale consumer protection rules for the debt collection market. Experts in the field say this move is long overdue.
According to Megan Ryan, supervising attorney of consumer protection with the East Bay Community Law Center in San Francisco, her clinic gets hundreds of cases per year regarding debt collection practices.
"We watch carefully to make sure that our clients are not being victimized through abuses of the Fair Debt Collection Practices Act or its California equivalent," Ryan said. "We've seen all sorts of abuses, including them [debt collectors] calling someone's boss and telling him about the debt. We once saw a debt collector call someone's mom and tell her if that if she didn't pay her son's debt, they were going to take him to jail."
It is illegal, she added, to imprison someone for failing to pay off a credit card bill or any other kind of debt.
The collection industry has been long criticized for significant abuses and illegal collection tactics. Although the FDCPA was passed 1977 to protect consumers from abusive or harassing tactics, according to many attorneys it simply gets ignored by collection agencies.
"If [debt collection agencies] commit 100 violations," said attorney Daniel Edelman, "I think it would be high to say that two or three consumers would do anything about it, and the penalties would be such that they don't really provide much of a deterrent."
According to Edelman, a partner with the Chicago law firm Edelman, Combs, Latturner & Goodwin, a collection agency that violates the FDCPA faces fines up to $1,000 per individual, plus any money it actually costs the victim. Given how rarely people actually consult a lawyer about abusive or harassing tactics, that often amounts to no more than a few thousand dollars. The fines are low enough, he said, that agencies often just consider them a cost of doing business.
Congress hasn't revisited any of the fines or penalties in the FDCPA since it passed the law more than 35 years ago.
This has allowed an industry model of bulk collection activities, buying up hundreds and thousands of debts and then attempting to collect them en masse.
"We get involved a lot with ill-founded debt buyer cases," Edelman said. "Debt buyers purchase old debts for two, three cents on the dollar. Sometimes they own the debts, sometimes they don't, but they file lawsuits by the hundreds. The general business model is most people will default, then [the debt collectors] take their wages or assets. If someone resists, they just drop it. They have no real evidence of debts, they're just kind of using the court system."
It's a tactic which Ryan called "sewer service," named after process servers who claim to deliver notice of a lawsuit but instead dump the papers down the nearest storm drain. When the defendants don't show up for a hearing they never knew they had, the judge will declare a default and automatically rule in favor of the plaintiff -- in this case, the collection agency.
In this manner, debt collection agencies can manage thousands of cases at once, since they never actually have to prove the merits of any individual claim. It's the only way their system can work, according to Edelman, since they often lack documentation or proof that their claims are legitimate. In fact, in the rare cases where defendants do hire a lawyer, collection agencies often drop the suit outright.
"When debt collectors are filing collection lawsuits they will often dismiss them rather than attempt to prove anything," Edelman said. "When we're talking about $5,000, $10,000, $15,000 credit card debts, they buy them in enormous volume and basically hope that people will default, settle or pay."
Increased regulation from the CPFB can absolutely help, because the current system has to change.
"They should be treated like any other person who files a lawsuit under a contract," Edelman said. "You have to prove what you're entitled to. What they're doing is using the legal system in a manner in which it's not intended to be used. They're not interested in attempting to resolve disputes, they're suing to try and get a bunch of default judgments."
Even outside of the courtroom debt collection agencies have become known for aggressive, sloppy and occasionally illegal work.
"We see a lot of times people get sued who aren't the right person," Ryan said. "That comes up often, and a lot of times this happens to people with Spanish surnames."
Ryan noted one particularly stark example in which, shortly after championing a collection practices law, California State Senator Lou Correa had his senatorial wages garnished by an agency which had confused him with a different Lou Correa.
Consumers need to know their rights. Two issues Ryan sees come up often include time barred claims and necessities exemptions. The former, a state-by-state law, sets a statute of limitations on how long a creditor has to sue over a debt. If no one has attempted to collect the debt within the statutory period, it becomes uncollectable by law. Creditors can still request the money, but they lose any rights of enforcement.
It is important for consumers to know that if they make a payment, for any reason, on a time-barred debt, they become vulnerable to collection and enforcement once again.
A necessities exemption protects consumers from going broke, homeless and hungry while paying off their credit card bills. It limits the amount of money a debt collector can take if doing so would leave the consumer without enough to pay for the necessities of life. Debt collectors often refuse to honor these limits, or even to inform consumers about them in the first place.
"It's public policy," Ryan said. "We don't want people out on the street, because they can't afford to pay Capitol One, [but] we've definitely had people in here on welfare or in the food bank lines because they didn't know they could file a claim of exemption."
In response to these issues, the CFPB has begun circulating proposals for new rules to govern the industry. The agency website says that it was motivated by the extraordinary number of complaints it's received. "In July 2013," the announcement said, "the CFPB began accepting debt collection complaints, and it has quickly become one of the highest categories of grievances."
The new rules will focus on three main areas: information accuracy, consumer access to information and communication tactics.
The first issue, information accuracy, concerns the transfer of information from original creditors to debt collectors and buyers, "third party collectors." This issue comes up frequently as debt collectors often attempt to collect based on bad or incomplete information. In a relatively famous example, a repossession company recently destroyed the contents of a West Virginia woman's home after getting the wrong address. She had paid off her mortgage in 1988.
Consumer information and communication tactics will both focus on making sure that people are fully informed about their rights and are treated honestly by the industry. For example, according to the website, "the CFPB is concerned about some debt collectors falsely threatening to initiate a lawsuit or criminal prosecution, garnish wages, damage or ruin a consumer's credit rating, seize property, get the consumer fired from their job or have a consumer jailed."
The agency will explore regulations designed to make sure that people know their rights when contacted by a debt collector, and to help protect them from misleading statements.
This is only the first step of agency rulemaking, what lawyers call the notice and comment period. The agency's proposed rules are available in detail through its website, and will be available for anyone who wants to comment on them. target="blank">Comments can be left here. Once the comment period has closed the CFPB will, by law, read through each one and take them under consideration as it moves towards final drafts of the new regulations.
--Written for MainStreet by Eric Reed, a freelance journalist who writes frequently on the subjects of career and travel. You can read more of his work at his website www.wanderinglawyer.com.