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Thursday, June 22, 2017

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WOLFGANG DEMINO

Dubious premises
Why is access to risk-based and therefore costly credit by folks with poor credit scores simply assumed to be a good thing?
If credit is denied or simply known not to be unavailable, it will provide incentives for more thrifty living and avoidance of nonessential expenses. It may also create an incentive to look toward family and friends for help, and might encourage sharing, cost-avoidance, mutuality, and social cohesion.
Nonpayment of debts to family and friends may, of course, also lead to conflict with family and friends and severance of family or friendship ties, but it won’t be recorded on a credit report, and the informal debt might be forgiven or balanced off through nonmonetary services/chores even unemployed persons can perform, which is not an option when dealing with commercial lenders. And short of a mafia-type context (invoked by the photo accompanying The Economist article), family and friends won’t generally exact the staggering interest rates of payday and MV title loan companies. High-interest loan lenders get folks on the hook, and then suck them dry when the get a little money, take their cars, garnish their banks accounts (if any), etc.

Second, why should the lenders cut back (on making loans) based on whether third-party debt collectors are more or less regulated? The regulatory risk exposure is “suffered” by the third-party debt collectors, and the risks can be mitigated by better compliance. The rationale for the enactment of the FDCPA in the first instance was to counterbalance the advantages that would otherwise be enjoyed by the more unscrupulous collectors.

Third, the principal “regulatory” risk exposure for third-party debt collectors is the FDCPA as enforced by private parties/attorneys through lawsuits, mostly filed in federal district courts. The FDCPA is a federal statute that is invariant across all jurisdictions (except for some circuit splits on particular issue, e.g. whether an unfair collection claim based on an improper collection lawsuit accrues on date of filing or service on the debtor for SOL purposes). The state-law analogues of the FDCPA in large part simply provide an alternative legal basis for liability and recovery, and sometimes, as in Texas (TDCA), a longer limitations period. When both statutes cover the alleged violations, both statutes are routinely invoked in the same civil action against the offender.

It appears that the “tightening in state-level collection legislation” -- the key independent variable in the referenced paper -- apparently does not even involve state fair-debt-collection laws, at least not primarily.

It encompasses two categories of legislated changes: (1) bonding and licensing requirements that raise the cost of doing business (only marginally, I would submit), and (2) law providing for administrative penalties to be imposed by state regulators. Private remedies are also mentioned as part of (2), but no specifics are given for the population of states included in the study as to what the change in private state-law remedies actually involved (assuming there even was one).

The paper notes that in one state included in the research design, Florida, no penalties were actually imposed after the maximum per-violation penalty was raised from $1,000 to $10,000. So, either the law and the agency charged with enforcement is a paper tiger (thus rebutting the researchers' operating assumption that law-changes have a meaningful impact on the debt collection industry), or the collection agencies operating in Florida simply comported their conduct with the requirements of the law as amended, and thus avoided additional overhead in the form of penalties. How and why would that affect the availability of credit to consumers in Florida? It is, at best, a stretch.

"We see that prior to the 2010 legislation change which increased administrative penalties from $1,000 for repeated violations to up to $10,000 per violation, no penalties had been levied on collection agencies. We attribute this to the general absence of repeated violations among debt collection agencies in Florida."

But following the study authors’ line of reasoning, Floridians with poor credit histories were harmed because debt collectors in Florida started to behave themselves once they faced higher penalties. In other words, the prior lawlessness was a good thing, and people with poor credit were really beneficiaries of the collectors’ practice of violating the law then in effect and only incurring small fines when they got caught.

Why even conduct a sophisticated study with high-powered computers and a huge dataset the assess the impact of debt collection laws when the ultimate policy proscription is to either have no fair debt collection laws at all (since they have deleterious effects on access to credit and consumer’s financial health) or to make the existing laws safe for collectors to violate?

State-level vs federal-level regulation of debt collection conduct

To the extent a state-specific fair debt collection statutes encompass original creditors (as opposed to only third-party collectors), this state-specific attribute of the regulatory environment may provide plausible grounds for the hypothesis that it impacts credit approval/lending decisions at the micro and macro level in that state, but this hypothesis should be tested by collecting statistical information on how often original creditors are actually sued under it (relative to the state-specific number of FDCPA actions against collectors within the definition of the FDCPA), and what the outcomes of those suits are. That would at least provide some proxy indicator of whether a litigation risk at a non-trivial level even exists, and a basis for pricing that risk.

And as with third-party debt collectors, the creditor could mitigate that risk (if any) by complying with the law when collecting on its own loans.

To the extent the argument is that lenders are deterred from extending credit to a marginal applicant because the lender cannot send goons to collect with the aid of a shotgun, the creditor could simply raise the price of credit instead, i.e. the interest rate. That might raise the question of whether state-usury laws restrict access to credit because they impose an upper limit on risk-based pricing of loans, but such state-specific limits do not apply to most credit card issuers (and many other lenders serving consumers) in any event thanks to federal preemption and choice of home state in a usury-free state.

Finally, the settlement value (and court awards) in run-of-the-mill FDCPA cases is relatively meager, and the deterrent effect therefore moderate. The statutory damages are capped at $1000 ($100 under the Texas Debt Collection Act), so it’s all about the attorney’s fees, and those can be kept low by early settlement or managed with a Rule 68 offer of judgment. In a significant number of collection cases, the amount of the median FDCPA settlement or judgment amount will be lower than the amount of the debt sought to be collected. And those are also the most profitable cases, assuming the defendant/judgment debtor does not file for bankruptcy and has non-exempt assets or some ability to pay. So, the risk of incurring liability for violating the FDCPA with dubious collection practices is not particularly high.

Not to mention that only a small fraction of violations will result in legal action by the targeted consumers. The mean dollar recovery by the plaintiff in an FDCPA action (i.e. the cost of a violation by the collector) would therefore have to be discounted by the (rather small) statistical probability of such an action being filed.

Compared to the volume of defaulted debt and aggregate amounts of default judgments obtained by debt buyers/debt collectors, the aggregate dollar value of the settlements and court awards in FDCPA cases is minute. They are merely a cost of doing business as a third-party debt collector.

This marketplace reality might be characterized as a “moral hazard” too, and would entail a policy prescription for increasing the maximum statutory damages, rather than relaxing the code of conduct (as it currently applies to collectors under the FDCPA) under the pretense of helping the folks with poor credit scores access credit.

As for high-profile and high-impact enforcement actions, they are typically either undertaken by federal regulators, or by state AGs, often in concerted/copycat fashion. So, they do not provide a good test as to how the regulatory regime at the state level affects the business climate for debt collection, not to mention lending, and the availability of creditor to folks with poor credit.

And sometimes, an enforcement action will have a much more significant impact on the target of the action than any statutory changes enacted by state legislatures: Through consent orders, agreed judgments, settlement agreements, and assurances of voluntary compliance.

Midland Funding, LLC, Midland Credit Management, and Encore Capital Group, Inc., for example, had to clean up their act as a result of having been sued by the Texas Attorney General in 2011. It is hard to see how that enforcement action against a major out-of-state debt buyer and collector would have any effect on consumers’ access to credit in Texas. But it did provide some token relief to Texans sued by Midland who had default judgments entered against them that were obtained with robo-signed affidavits: A $500.00 credit toward their balances. See Agreed Judgment signed Dec. 28, 2011 in State of Texas v Midland Funding, LLC, et al, Cause No. 2011-40626 by 165th District Court, Harris County, Texas. (Docket sheet and unofficial versions of documents viewable on the website of the Harris County District Clerk’s website at http://www.hcdistrictclerk.com/eDocs/Public/Search.aspx (registration required).

WOLFGANG DEMINO

John

Yet another article presupposing that access to credit is an unalloyed good thing. Diminishing access to (often expensive) credit is not necessarily harmful to consumers.

Matthew Bruckner

And a PDF of the full article is available here: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0ahUKEwiy7OGH9tLUAhWCPD4KHaSQDvMQFggsMAE&url=https%3A%2F%2Fwww.newyorkfed.org%2Fmedialibrary%2Fmedia%2Fresearch%2Fstaff_reports%2Fsr814.pdf%3Fla%3Den&usg=AFQjCNHso5Tuy9UZH4li-n07iKi2fyHATQ

Matthew Bruckner

Perhaps I should read the whole thing but I find the assertions contradictory.

First, in more regulated states, there is less credit and people borrow less. Yet the next paragraph states that consumers are more likely to overborrow in those states. Perhaps the first paragraph is referring to a median borrower and the second to particular individuals?

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