Consumer Law & Policy Blog

Mary Spector Article: Where the FCRA Meets the FDCPA: The Impact of Unfair Collection Practices on the Credit Report

We had previously posted a link to a site from which you could purchase SMU professor Mary Spector's article, Where the FCRA Meets the FDCPA: The Impact of Unfair Collection Practices on the Credit Report, 20 Georgetown Journal on Poverty Law Policy (2013).  Now it's available for free on SSRN. Here is the abstract:

This Article explores the impact that contemporary practices in consumer debt collection litigation may have on credit reporting and scoring. In doing so, it pays particular attention to available data regarding the use of unfair collection practices in such litigation, and considers whether consumer reports of such litigation unfairly burden consumers’ ability to obtain housing, employment, insurance, or credit.  It highlights some of the obstacles consumers face at the intersection of the Fair Debt Collection Practices Act and the Fair Credit Reporting Act and considers alternative proposals to provide fair and accurate information relating to consumer debts while also preventing the harm that results from consumer reporting of unfair collection litigation.

Georgetown Journal of Poverty Law and Policy Issue on Consumer Protection

Here, with links to purchase the articles. The issue includes remarks from a program at the 2013 AALS Annual Meeting jointly sponsored by The Sections on Poverty Law and Clinical Legal Education, entitled  The Debt Crisis and the National Response: Big Changes or Tinkering at the Edges?  The list includes. The articles include:

"Owner Finance! No Banks Needed!" Consumer Protection Analysis of Seller-Financed Home Sales: a Texas Case Study 
Genevieve Hébert Fajardo 

Improving the Lives of Individuals in Financial Distress Using a Randomized Control Trial: A Research and Clinical Approach 
Dalié Jiménez, D. James Greiner, Lois R. Lupica, & Rebecca L. Sandefur 

Where the FCRA Meets the FDCPA: The Impact of Unfair Collection Practices on the Credit Report 
Mary Spector

Ensuring Justice: The Role of State Court Systems in Responding to the Consumer Debt Crisis 
Justice Fern A. Fisher

Consumer Law Clinics: Community-Based Lawyering—A Social Justice Response to the Financial Crisis 
Judith Fox 

Addressing the Foreclosure Crisis Through Law School Clinics 
Nathalie Martin & Max Weinstein 

Neil Sobol Article on Zombie-Debt Collectors

Neil L. Sobol of Texas A&M has written Protecting Consumers from Zombie-Debt Collectors, forthcoming in the New Mexico Law Review.  Here is the abstract:

The debt-collection business is booming, led by a dramatic increase in the sale and collection of defaulted debts. Currently, debt buyers annually purchase more than $100 billion in the face value of debts. In the typical purchase, buyers pay only a small fraction of the face value of the debts; in return, they receive extremely limited, often inaccurate information. Many of the debts that buyers seek to recover never existed or are no longer enforceable by operation of law. Consumers who receive communications from debt buyers often complain about mistaken-identity and identity-theft cases where the individuals contacted never incurred the alleged debts. Additionally, buyers may seek recovery of debts that have been paid, settled, discharged in bankruptcy, or have become time-barred because the collection period under the statute of limitations has expired.

By obtaining judgments or persuading consumers to pay a portion of these debts, acknowledge these debts, or enter into new agreements, collectors can transform these debts thought to be “dead” or non-existent, into “living” and enforceable debts. The media have labeled these resurrected debts as “zombie debts.” Just as the zombies in movies come back from the dead to terrorize individuals, dead debts may resurface to cause havoc for consumers. Even if a consumer successfully defeats one zombie-debt collector, the process may restart when the debt is resold.

Legal scholarship has only begun to address the issue. The scholarship has primarily focused on the collection of zombie debts through the court system; however, the abuses are not limited to litigation. Collectors are often successful in persuading consumers to pay dead debts without filing lawsuits. Moreover, efforts to make it harder for collectors to sue on unenforceable debts may increase pre-litigation abuses. Accordingly, this Article addresses zombie-debt issues before the onset of litigation. It identifies the failure of traditional methods to deal with this growing problem and proposes amendments to the federal Fair Debt Collection Practices Act to establish uniform standards for the transfer of information and documentation to debt buyers and consumers. Furthermore, penalties and limitation periods should be set to deter debt buyers from violating the Act. Finally, the Article emphasizes the importance of providing assistance and education to consumers and suggests that the recently formed Consumer Financial Protection Bureau coordinate a federal, state, and local attack to combat zombie debt.

Todd Zywicki's Remarks at the NARCA Debt Collection Symposium

by Jeff Sovern

I've just been listening to the National Associate of Retail Collection Attorneys' (NARCA) symposium on debt collection held at GW on October 15 (the recordings are available here).  I was particularly struck by Todd Zywicki's remarks in the third panel; the panel was titled "Legal Collections - The Essential Link to a Successful Credit-Based Economy."  (Regular readers may recall a previous blog post on Zywicki's receipt of financial support from the credit industry in an article in The Nation headlined "Scholars Who Shill for Wall Street.").  Zywicki stated that his presentation was based on a chapter he authored in a forthcoming book about credit regulation; the chapter promises to be interesting reading. 

Zywicki's presentation could almost have come from an alternate universe from many of the academic presentations I hear.  While many of us embrace behavioral law and economics, Zywicki dismissed it as voodoo based on just-so stories and lacking much empirical support (my own view is that some of its findings, such as the endowment effect and the tendency of consumers to be overly optimistic, are indeed empirically supported, and I cite some of the relevant literature here and here. I gather that the people who award the Nobel prize for economics have been similarly impressed by the quality of the research).  I look forward to seeing the chapter in part because I'm curious if it will provide more support for Zywicki's claims than he supplied in his talk. 

Zywicki repeated the industry claim that consumer credit regulation--in particular, restricting remedies for defaults--increases the cost of credit and reduces its availability.  He mentioned a recent study by the Philadelphia Fed that found that the Credit CARD Act had reduced the availability of credit.  He didn't mention other studies finding that it reduced the cost of credit (see here and here) but perhaps he hadn't had a chance to learn of those studies as they were issued shortly before he spoke. As for reducing the availability of credit, the Credit CARD Act was intended to reduce access to credit by borrowers who were not capable of handling the demands of credit cards (think of the college students who borrowed too much and then tragically committed suicide). 

My favorite statement by Zywicki was when he observed that the legal regime of debtor's prisons was probably too harsh (only probably?).  If even Zywicki thinks that, then it is indeed unfortunate that we seem to have resurrected that regime, as Lea Shepard has written about. 

Peter Holland Op-Ed: Make Debt Buyers Disclose Forward Flow Agreements

by Jeff Sovern

Recently I heard an industry lawyer say that to know what regulators will do next, you should listen to consumer advocates. The only individual consumer advocate he mentioned was Peter Holland.  So what is Peter Hollland calling for?  He wants debt buyers, when suing a consumer, to disclose the agreement they entered into to buy the consumer debt.  His argument is here.

Jeff Gelles Column: A Victory in the Fight Against Robocalls

Here.  An interesting report on a third circuit case on whether consumers can revoke their consent to receive automated calls.  The case arose in the debt collection context and given the steep penalties under the Telephone Consumer Protection Act--$500 per call and $1500 for willful violations--could lead to a lot of litigation.

NCLC report: Urgent need for reform of state property exemption laws to free up courts and protect basic family assets

A new report from the National Consumer Law Center surveys the property exemption laws of the 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands that protect wages, assets in a bank account, and property from seizure by creditors. No Fresh Start: How States Let Debt Collectors Push Families into Poverty finds that not one jurisdiction’s laws meet basic standards so that debtors can continue to work productively to support themselves and their families.

States’ archaic exemption laws fuel the lucrative and fast-growing debt-buyer industry. For example, nine of the nation’s largest debt buyers purchased (for just a few pennies on the dollar) nearly 90 million consumer accounts with a face value of $143 billion, according to a January 2013 Federal Trade Commission (FTC) study. Consumers disputed at least one million of these debts, yet only half of the disputed debts were verifiable at all by the debt buyer. 

Despite the importance of state exempt property laws, this National Consumer Law Center report finds that not one state meets five basic standards:

• Preventing debt collectors from seizing so much of the debtor’s wages that the debtor is pushed below a living wage;
• Allowing the debtor to keep a used car of at least average value;
• Preserving the family’s home—at least a median-value home;
• Preventing seizure and sale of the debtor’s necessary household goods; and
• Preserving at least $1200 in a bank account so that the debtor has minimal funds to pay such essential costs as rent, utilities, and commuting expenses. 

The NCLC report recommends that state exemption laws should be reformed to:

• Preserve the debtor’s ability to work, by protecting a working car, work tools and equipment, and money for commuting and other daily work expenses.
• Protect the family’s housing, necessary household goods, and means of transportation.
• Protect a living wage for working debtors that will meet basic needs and maintain a safe, decent standard of living within the community.
• Protect a reasonable amount of money in bank accounts so that debtors can pay commuting costs as well as upcoming rent and utility bills.
• Protect retirees from destitution by restricting creditors’ ability to seize retirement funds.
• Be automatically updated for inflation.
• Close loopholes that enable some lenders to evade exemption laws. For example, states that allow payday lending enable these lenders to evade state laws that protect wages and exempt benefits from creditors. States that allow lenders to take household goods as collateral enable these lenders to avoid state household good exemptions.
• Be self-enforcing to the extent possible, so that the debtor does not have to file complicated papers or attend court hearings.

Model language for states to achieve these goals is provided in the National Consumer Law Center’s Model Family Financial Protection Act. The model law also includes steps that states can take to reduce the pervasive abuse of the court system by debt buyers. Seizure of debtors’ wages and property would not be such a problem if debt buyers did not churn out such an endless stream of judgments on old, poorly documented debts—many of which are based on mistaken claims. 

By updating exemption laws, states can prevent over-aggressive debt buyers from reducing families to poverty. These protections also benefit the state by keeping workers in the work force, helping families stay together, and reducing the demand on funds for unemployment compensation and social services.

The report includes each state’s overall rating and ratings for the five primary asset-preservation standards as well as appendices with specific exemption information on all 53 jurisdictions. Also included: Recommendations for the minimal exemption amounts that will allow a debtor to continue to work to support a family. 

Paper Explains and Critiques the Account Stated Cause of Action

International & Comparative Law Fellow Emanwel J. Turnbull at Maryland has written Account Stated Resurrected: The Fiction of Implied Assent in Consumer Debt Collection.  Here's the abstract:

When are modern American consumers like 17th century merchants? The answer is “now”. Often, in collection lawsuits, creditors allege that consumers in debt are liable for an “account stated.” This “account stated” is a theory of liability that dates back to the medieval period. Today it is used precisely because it offers to treat consumers in debt like Renaissance merchants. The core rule of an account stated claim today is that if a debtor receives a statement of what he owes and he does not object to the statement, he is assumed to have agreed that the statement is correct and to have promised to pay the debt. This rule began as a custom between merchants in the 17th century. It became part of English law and was received into American law with the rest of English common law. The rule, which I will call “implied account stated”, was extended to non-merchants in the United States in the 19th century. In the 20th century, account stated began to fall into obscurity.

Surprisingly, account stated has been resurrected in recent years by debt-collectors, for the purpose of collecting consumer debt. Today, the primary function of account stated is to reduce the evidence plaintiffs must provide to obtain a judgment. Implied account stated, at its worst, requires no more than evidence that the plaintiff sent the debtor a bill and the debtor failed to object to the bill. Account stated is particularly attractive to businesses which purchase defaulted consumer debts: “debt buyers” because it allows them to collect with little evidence in hand.

This article will trace the history of account stated, from its medieval origins to the implication of accounts stated from the trade practices of merchants in the 17th and 18th centuries, and extension of implied account stated from merchants, to any person with legal capacity. Analysis of the current position of account stated claims in New York, Maryland and West Virginia will follow, showing how New York has accepted the extension, Maryland has no definitive case and West Virginia explicitly rejected the extension.

After establishing the history and current use of account stated, this article will argue for reform, on grounds of both policy and principle. Account stated is generally justified as a consensual relationship. Yet the implication of account stated violates one of the simplest rules of contract law: that silence does not amount to assent. Thus the consensual nature of account stated in modern consumer collection actions is no more than a legal fiction. To consumers, it is merely a harsh and archaic technicality, which allows collection actions to proceed on scant evidence.

These problems call for a change to account stated doctrine. I argue that account stated must be brought back to conformity with the normal principles of contract law. Account stated should be implied only where there is evidence sufficient to imply, as a matter of fact, that real assent was given by the consumer. Significantly, these changes would remove a theoretical inconsistency from the law. More importantly, they would prevent the abuse of account stated as a vehicle for collection when the plaintiff cannot or will not present adequate evidence to succeed upon a breach of contract claim. By narrowing account stated, whether it is through regulation or through judicial rediscovery of its origins and its relationship to ordinary contract law, consumers can be further protected, courts can be relieved of the burden of grappling with this ancient cause of action and the broken collection system, at least in one aspect, can be mended.

A Comment on the CFPB's Debt Collection Bulletin

by Jeff Sovern

As Deepak pointed out last week, a lot has been going on in debt collection, and one item is that the CFPB has issued a bulletin stating that people subject to its jurisdiction may not commit unfair, deceptive, or abusive practices in collecting debts.  The Fair Debt Collection Practices Act generally does not apply to creditors collecting their own debts, but the Bureau is clearly willing to use its UDAAP power to, in effect, apply some of the FDCPA's provisions to creditors.  This is terrific news for consumers who are being hounded by creditors as opposed to independent debt collectors, but it still provides more limited protection than the FDCPA itself for two main reasons.

First, there is no private claim under the Dodd-Frank Act to enforce the Bureau's UDAAP powers.  By contrast, the FDCPA provides for a private claim with statutory damages of up to $1,000 and attorney's fees to prevaliing plaintiffs.  Because the Bureau's resources are finite, it will surely not have the funding to pursue every possible UDAAP claim.  Consumers who can persuade the Bureau to pursue their complaints will undoubtedly find the Bureau's intervention helpful, but only so many will be able to take advantage of that opportunity. 

It may be that some consumers will be able to convince courts to find conduct that the Bureau has labeled unfair, abusive, or deceptive a violation of state UDAP statutes.  States often follow FTC interpretations in construing their UDAP statutes; perhaps they will find CFPB interpretations equally persuasive.  State UDAP statutes are sometimes called "little FTC Acts;" one of my co-authors has observed that they may come to be known as little FTC/CFPB Acts as well.  But such a strategy may not work in every state.  Many state statutes explicitly provide that FTC interpretations are relevant in construing their statutes; I'm not aware of any state that has bestowed a similar status on CFPB interpretations.  And many state statutes do not mention unfair conduct, much less abusive. On the other hand, other statutes refer to illegal conduct, and since the Bureau has labeled the conduct in question illegal, that should go a long way to supporting a UDAP claim in such states.

Now I turn to the second reason.  The Bureau Bulletin listed specific behaviors that could be unfair, abusive or deceptive (though it says "could" rather than "are," I would not be so brave as to suggest that the Bureau will not view the listed conduct as unlawful).  The Bulletin carefully noted that the list was not exhaustive and consisted just of examples.  Still, the list consisted largely of examples of misrepresentations (e.g., claiming that something is from an attorney or the government when it wasn't) or unfair conduct (e.g., telling co-workers of the debt). But the FDCPA goes beyond these protections. For instance, in section 1692g, it requires collectors to tell consumers that they have the right to seek validation of the debt and in 1692e(11), that the collector is attempting to collect a debt. Section 1692c(c) largely bars collectors from further communications with the consumer once the consumer has made a written request that the collector stop such communications.  If creditors fail to live up to these other FDCPA provisions, are they committing a UDAAP violation? My guess is not as to the disclosure requirements, but I'm not sure.  I believe the Bureau has the power to define UDAAP as including these protections, just as the FTC has--and has used--its UDAP power to require door-to-door sellers to give certain notices to consumers.  But I think the Bureau would be clearer if it intended creditors to provide these protections, and perhaps some day it will be. On the other hand, if I represented creditors, I would recommend that they cease communicating with a consumer if the consumer so demanded. That's because the Bulletin mentions that telling employers or co-workers about the debt would be a UDAAP violation.  If the Bureau thinks one privacy invasion barred by the FDCPA is a UDAAP violation, why not another? 

Don't get me wrong: the Bureau has provided consumer-debtors significant protections in its Bulletin.  It is a major step forward.  But it's not quite the same as the FDCPA protections.

 

More on Debt Collection: CFPB To Go After Banks' Collection Practices

Suddenly, there's a lot going on the in the world of debt collection regulation. On the heels of yesterday's announcement by the FTC of a huge debt-collection settlement (discussed in the post below), the CFPB is announcing today that it will use its UDAAP authority to regulate the collection practices of banks. “It doesn’t matter who is collecting the debt — unfair, deceptive or abusive practices are illegal,” says CFPB director Richard Cordray in a statement. And the OCC, too, is investigating how JP Morgan and other banks collect credit card debt. Jessica Silver-Greenberg and Ed Wyatt have a story in today's TImes that takes a broad look at the developments at all three agencies.

The CFPB published two bulletins on debt collection today. The first makes clear that any entity subject to the Bureau's jurisdiction under the Dodd-Frank Act, whether a third-party collector or a creditor collecting its own debts, can be held accountable for any unfair, deceptive, or abusive practices in collecting a consumer’s debts. The second warns companies to avoid deceptive statements concerning the impact of paying a debt on a consumer’s credit score, credit report, or creditworthiness.