OBSERVATIONS ON THE FAIR DEBT COLLECTION PRACTICES ACT

On October 10^th and 11^th, 2007 I had the opportunity to set in on a webcast workshop “Collecting Consumer Debts: The Challenge of Change” presented by the FTC. The purpose of the workshop was to explore changes in the debt collection industry and examine the impact on consumers and business.

At the time that the FDCPA was passed, the primary reason that debts were not paid was loss of income, caused by either change in employment or illness. Although loss of income remains a significant factor in delinquent debts, abuses in the credit industry now bear a major responsibility for pushing consumers over the brink. Credit is pushed on Americans with little regard for ability to pay. Destructive high cost credit products that would have been criminal in 1977 are now legal and even widespread. Deceptive and abusive practices by creditors are often designed deliberately to lead consumers into default.

The 1978 Fair Debt Collection Practices Act (FDCPA) – a consumer-protection landmark act, passed with bipartisan and industry support. However, today’s debt-collection industry is different and its tactics often subvert Congress’ original intent. “Bad actors – and there are quite a few – break the law more often because they know they’ll get away with it in most cases,” says the NCLC’s Tripoli.

In 1978, there was no interstate banking, and credit card companies had to obey the laws of the borrower’s home state. Credit card deregulation and the related rise in credit card debt of Americans began at that time. In addition, a Supreme Court decision allowed banks to locate in states with lax or no usury caps and to take their home state interest limits across state lines. At the beginning of 1977, revolving debt was about $32 billion; by 2007, it had increased more than 27 times to $880 billion.

Three-quarters of all households now have at least one credit card, and over half of cardholders carry credit card debt from month to month. Credit card lenders have engaged in aggressive solicitation. In 2006 alone, credit card lenders mailed almost 8 billion card solicitations. There are now almost 1.5 billion cards in circulation—over a dozen credit cards for every household in the country.

Low-income consumers have become a lucrative target for credit card lenders, because those consumers typically carry and pay big balances at high interest rates. The largest increase in credit card debt is among households with a reported annual income of less than $10,000.

The harmful consequences of this escalating mountain of debt on individual consumers as well as the American economy cannot be minimized. Personal bankruptcy rates increase on an annual basis, and families become broken due to the financial pressures. Although not as well documented, foreclosures rise as a result. When a homeowner has big credit card balances, it is hard to resist the lure of mortgage refinancing or a home equity line of credit as a way to manage the debt.

A significant amount of debt load is increasingly aggravated by the punitive tactics of the credit card industry which keep consumers on a treadmill of debt, paying fees and charges, for as long as possible. The abusive list of credit card fees and charges seen today did not exist in 1977. In 1996, a Supreme Court ruling permitted credit card companies to avoid laws of the borrower’s home state governing a wide variety of fees. Removing the amount of fees that credit card banks can charge has resulted in the rapid growth of, and reliance on, fee income by the credit card lenders. It has also contributed significantly to the growth of credit card debt of the American consumers.

Credit card lenders no longer impose these fees as a way to curb undesirable behavior from consumers, which used to be the primary reason for imposing high penalties. Instead, these fees make up a significant source of revenue for the bank. Penalty fees now constitute about 10% to 13% of profits for issuers. The income from just three fees – penalty fees, cash advance fees and annual fees – reached $24.4 billion in 2004, and total fee income topped $30 billion.

Not surprisingly, this approach traps consumers into incurring added fees. Strict payment deadlines and short grace periods make late fees more likely. Issuers authorize over limit spending but then charge fees without warning. Credit card issuers have reported that 35 percent of their active U.S. accounts were assessed late fees in 2005 and 13 percent were assessed over limit fees. One major issuer has a practice of offering multiple low-limit credit cards to overextended borrowers in order to maximize over-limit fees. Most issuers will assess an over limit fee even if a payment during the cycle brings the balance within the consumer’s limit. Hair trigger default rates can more than double a consumer’s interest rates based on as little as a single late payment or a default on an unrelated account.

A bankruptcy decision sheds light on how high finance charges and junk fees, not irresponsible spending, may be the root cause of overwhelming credit card debt. The bankruptcy court forced a major credit card lender to break out principal versus interest and fees in its claims against 31 separate debtors. The court’s order reveals that on average, 57% of the debts consisted of interest and fees.

These fees magnify the problems of consumers who have hit hard times. Too often, they drive consumers into bankruptcy, resulting in mounting losses to individuals, families and neighborhoods—of lost savings, lost homes, and forced moves, with all of the far-reaching financial and emotional tolls.

The current combination of few FTC enforcement actions against only the most intentional violators, combined with private enforcement of both the Fair Debt Collection

Practices Act (“FDCPA”) and state laws, clearly does not provide sufficient restraints on the bad practices in the collection of debts in this nation.

As the FTC has noted, the abusive activities of debt collectors have consistently been the leading cause for complaint year after year to the FTC. The sheer number of these complaints has skyrocketed in recent years, from 13,950 in 2000 to 69,204 in 2006 – a 500% increase in just six years.

Debt collection has become a hugely profitable business. There are few meaningful restraints on the abuses in this industry. As is evident from consumer complaints, many debt collectors believe they can make more money when they intimidate, threaten criminal prosecution, harass, and collect fees and charges far in excess of the real debt. Even more startling, debt buyers have learned to work the system to win judgments and coerce payments even when they have the wrong person or lack any evidence that the consumer owes the debt. Even when a debt collector violates the law, the chances of being caught are minimal and the consequences are cheap.

While a number of critical updates to the FDCPA need to be made, critical, new protections also must be established for future debt collection. Some of these protections are appropriate as additions to the FDCPA; others might be better fitted into other federal statutes.

No debt collection activity should be permitted unless the collector possesses basic information to verify the debt and to resolve disputes.

• No collection activity without proof of indebtedness by the consumer, date

of the debt, identity of the original creditor, and itemization of all fees,

charges and payments;

• Collectors should respond to verification requests by a reasonable investigation responsive to the consumer’s specific dispute.

• The creditor and each subsequent holder of the debt must retain and pass on to the next holder all communications from the consumer concerning the debt and information about all known disputes and defenses.

• Before seeking a judicial or arbitration judgment, debt collectors should certify that they possess admissible evidence of the essential facts concerning the debt and hold any license required by state law.

Collection of ancient, time-barred debts should be prohibited or discouraged,

and certainly should not be conducted deceptively. Collectors make rampant, unlawful threats of litigation that they have no intent or legal right to pursue. At a minimum, collectors pursuing debts beyond the statute of limitations should be required to disclose to the consumer that the debt is time barred and the consumer cannot be sued.

Reforms are needed against certain creditor and collector practices:

• Banks should be prohibited from freezing or permitting garnishment of exempt funds.

• Payday lenders should be barred from check holding and other abusive collection methods.

• Protections are needed against abuses by mortgage servicers.

• Better disclosures are needed to stop abusive practices like deceptive settlement agreements, putting old debt on new credit cards, and cross collection by refund anticipation lenders.

The FDCPA needs critical updates to ensure its effectiveness. The following simple but important amendments will ensure that consumers will receive the protections that Congress originally intended:

• Consumers need notice of their right to cease communications and should be able to exercise the right orally.

• Consumers should be able to record abusive telephone calls.

• A collector’s initial communication should identify the original creditor and should itemize fees and interest.

• Collectors cannot plead ignorance of the law as a “mistake.”

• Consumers need effective remedies including injunctive relief and damages and class relief adjusted for inflation.

I realize that debt collection is a tough business. In a petition before the Federal, Communications Commission, the ACA’s petition states, in 1999 debt collectors only recovered about $30.4 of the $216 billion in debt referred for collection, or just about 14%. Congress realized that when it passed the FDCPA in 1977…”the vast majority of consumers who obtain credit fully intend to repay their debts. When default occurs, it is nearly always due to an unforeseen event such as unemployment, overextension, serious illness, or marital difficulties or divorce.” Faced with these tough odds, debt collectors sometimes cross the boundaries of legal behavior and engage in abusive collection tactics, which resulted in their close regulation by Congress. In a dramatic example, the FTC”…charged that as much as 80 percent of the money that a company called CAMCO collects comes from consumers who never owed the original debt in the first place.”

In conclusion, I have provided the following “news advisory” that illustrates 34 examples of debt collection abuses from 17 states.

NEWS ADVISORY

October 9, 2007

“WE’RE GOING TO TAKE YOUR MOMMY AWAY FOREVER”:

Debt Collection Horror Stories Available To Back Up

Federal Trade Commission October 10-11 Workshop

The Federal Trade Commission is holding a two-day workshop October 10-11, 2007 on “Collecting Consumer Debts: The Challenges of Change.” The National Consumer Law

Center submitted extensive comments to the FTC on behalf of its low-income clients about abuses in the debt collection industry, and three NCLC attorneys, Bob Hobbs, Lauren Saunders and Margot Saunders, are among presenters at the workshop this week.

The NCLC comments include 34 examples of debt collection abuses from 17 states. The appendix with these stories, as well as the NCLC comments, is available on our website at: http://www.nclc.org/issues/debt_collection/content/June07NCLC_NACA_FTC_appendix.pdf

Contact information is available for the attorneys who represent the consumers described in the stories by contacting NCLC, above.

One story came from John Fugate, a Texas consumer attorney, (254) 756-2424. “I thought I had heard it all,” he said. The debt collector “told the nine year old child of my college friend, who is the victim of identity theft that they were going to take her mommy away forever.”

Sources:

1. Comments To the Federal Trade Commission Regarding the Fair Debt Collection Practices Act, June 6, 2007

2. National Consumer Law Center, Inc News Advisory- Oct. 9, 2007