A new report from the Center for Responsible Lending (CRL) finds that the debt buying and debt collection industries have grown rapidly in recent years – and with them, a suite of predatory and abusive collection practices that could cause consumers financial havoc. Today, one in seven Americans is being pursued by a debt collector.
Despite their recent growth, the debt buying and collection industries are still largely unregulated; this allows debt buyers and collectors to take advantage of financially-distressed consumers and extract billions of dollars in judgments for debts that may not even be owed. In many cases, the sale of debt is accompanied with limited and questionable data about the debts and debtors. Often times, the only information transferred is a name, last known address, and purported amount owed.
The report, Debt Collection & Debt Buying, is the newest installment in CRL's ongoing series of reports, The State of Lending in America and Its Impact on US Households. State of Lending offers an across-the-board survey of financial products that Americans use in everyday transactions, buy homes and automobiles, and build savings and wealth.
"The sheer lack of accountability in this industry is astonishing," said Lisa Stifler, CRL policy counsel and co-author of the report. "There's no requirement to verify debt information or inform a consumer about the transfer of debt. Sometimes, a consumer learns about a debt only after an onslaught of collection attempts or – worse – a judgment is entered and wages are garnished or a bank account is seized."
Unpaid debts are sold by the original lender – often banks. They're bought by private debt buyers at a discount; the company earns a profit by collecting the full amount from the debtor. However minimal and nebulous the debt information may be, it's all that's necessary to begin collection attempts. Common complaints from consumers pursued by debt collectors include misrepresentation about the amount or legal status of the debt, harassment and excessive contact, obscene or abusive language, and unlawful threats to sue.
Debt collection cases can escalate quickly; the report shows that more and more debt buyers are turning to the justice system, suing consumers for debts owed and obtaining default judgments in their favor when consumers fail to appear in court. More often than not, consumers fail to appear because they never received notice of the lawsuit, can't afford legal representation, or simply don't understand the need to appear. And with a default judgment, a debt collector is legally empowered to freeze a consumer's bank account, garnish wages, report the judgment to a credit reporting agency, and pressure a consumer into a payment plan. In some states, collectors can have consumers arrested for lack of payment or seize personal property to satisfy a default judgment. The consequences are decidedly dire.
Unsurprisingly, this behavior disproportionately affects financially vulnerable consumers. Research suggests that low- and moderate-income communities experience higher rates of debt buyer lawsuits and abuses. Military service members and senior citizens, often living on fixed incomes, are also frequently victims of abusive debt collection practices.
What's needed, the report outlines, is firmer oversight at both the federal and state levels to ensure that debt collection happens fairly and responsibly. While debtors should be required to pay back their debts, debt collectors and debt buyers should likewise be prohibited from any abusive and illicit collection practices and prevented from obtaining court judgments against consumers based on unverifiable and inaccurate information. To that end, the report suggests holding banks responsible for debt sold, requiring more information about outstanding debts, regulating the flow of information in the debt collection market, and tightening evidentiary standards for debt collection cases. Significantly, the Consumer Financial Protection Bureau (CFPB) recently started the process to issue the first-ever rules overseeing the debt collection industry.
"We are not suggesting the dismissal of debt," said Mike Calhoun, president of CRL. "Ensuring that debt is collected when owed is an integral component of the American financial system, and makes access to credit possible. What we're seeing is a pattern of predatory practices when it comes to some kinds of debt buying and collection – and that's what is concerning. Just as a lender has the right to collect debts owed, borrowers should have the right to information about their debt and how it's being handled and collected. With prudent oversight at the federal and state levels, there's no reason why this problem can't be fixed."
For more information, contact Catherine An at 202-349-1878 or catherine.an@responsiblelending.org