Lots of Ideas at Final FTC Panel on FDCPA Reform

Among the suggestions for the legal ARM industry from a group of high-powered panelists: Debt collection lawsuit process should be served by private overnight mail, the statute of limitations should be no longer than two years for credit card debt and collection law firms should just simply stop suing debtors.

The Federal Trade Commission (FTC) Friday held its third and final roundtable discussion in Washington, DC on matters related to debt collection litigation and arbitration. The DC panel primarily examined litigation matters.

At an FTC conference center in downtown Washington, the federal agency assembled a couple dozen experts on debt collection litigation. Panelists represented major accounts receivable management firms, ARM industry trade groups, courts from around the country and consumer advocacy groups.

Charles Harwood, deputy director of the FTC’s Bureau of Consumer Protection, set the tone with his opening remarks. Harwood related an anecdote about a judge’s wife who had been embroiled in a long-running legal dispute with a debt buyer and the extraordinary steps the judge had to take to clear her. Harwood also explicitly noted that the purpose of the FTC panels were to protect consumers in court.

The opening was punctuated with the unveiling of a new video created by the FTC aimed at consumers that explains their rights when dealing with debt collectors. The animated video can be viewed at http://ftc.gov/multimedia/video/credit/debt/debt-collection.shtm.

The FTC’s February 2009 report, Collecting Consumer Debts: The Challenges of Change – A Workshop Report, recommended that the debt collection regulatory system in the U.S. should be reformed and modernized (“FTC Proposes Significant Changes to FDCPA in Workshop Report,” Feb. 27). The report also announced regional roundtables to further discuss issues surrounding litigation and arbitration practices in the accounts receivable management process. Events were held in Chicago (“FTC Collection Litigation Roundtable Sees Lively Debate on Legal Issues,” Aug. 7), San Francisco, and in Washington.

The discussion was broken up into four separate panels Friday: Initiating Suits: Service of Process and Consumer Participation, Statutes of Limitations, Evidence of Indebtedness, and Garnishment of Bank Accounts.

The first panel, Initiating Suits: Service of Process and Consumer Participation, started with an FTC moderator asking about consumer participation rates in cases initiated by an ARM company. Although there was no consensus on numbers, all panelists conceded that consumer participation in debt collection cases is very low and default judgments in these cases is very common.

It did not take long for consumer advocates to bring up the issue of “sewer service”; the deliberate mishandling of summons to prevent consumer defense. Larry Yellon, from the National Association of Professional Process Servers, defended process servers, noting that each state has their own standards for the practice.

Consumer attorneys said that it might not even matter if consumers get the summons, as it is a legal document and up to 40 percent of Americans are functionally illiterate. And many have very basic transportation limitations that prevent them from physically getting to court. They also blamed debt buyers for most of the problems.

Joann Needleman, from the National Association of Retail Collection Attorneys (NARCA), noted that consumers aren’t participating because many owe the money and don’t want to show up in court. Also, she pointed out that consumers get a lot of bad information, especially on the Internet, about dealing with their debt. “Many of these sites encourage debtors to ignore debt collectors,” she said.

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Donald Redmond, of Portfolio Recovery Associates, Inc., suggested that lawsuit notification should be provided by private overnight carriers, like UPS or FedEx. This way, there is a traceable trail for the documents.

In the discussion of statutes of limitations, Needleman pointed out that there was a vast difference in collecting on out-of-statute (OOS) debt and litigating on it. One consumer advocate seemed to suggest that OOS debt should not be sold or collected at all.

There was also passionate disagreement over the prevalence of debt collection litigation on OOS debt. ARM industry representatives insisted that the occurrence is uncommon, while consumer advocates, judges, and even some members of the audience insisted otherwise.

Much of the discussion centered around a hypothetical national statute of limitations (SoL) on consumer debt – specifically credit card debt – and what it should be. There was no common answer among the 12 panelists. In fact, when asked directly for a Yes or No answer on a national standard, with a hypothetical timeframe, the vast majority answered No and timeframes ranged from one to seven years.

Albert Zezulinski, from NCO Group, Inc., said that the legal collections channel “is not a remedy that is efficient.” He warned that if statutes of limitations on card debt were drawn back all over the country, courts would be overburdened by collection cases, as many ARM firms would have no other recourse. He also noted that a seven year SoL on card debt was appropriate, given that it is the standard for credit reporting agencies.

A popular suggestion from consumer advocates was a more onerous process of reviving the SoL “clock.” Instead of a payment automatically restarting the clock, consumers should explicitly agree that making a payment will restart the SoL clock.

But Joel Winston, Associate Director of the FTC’s Division of Financial Practices, in his closing remarks at the SoL panel rejected the notion that consumers would voluntarily restart the SoL clock. He said that FTC research indicated that consumers rarely understand very basic disclosures, much less one that would require the nuance suggested by some. He said that the message to consumers would basically be “You have this debt, but you have no legal obligation to pay. If you do pay, it will restart the SoL clock and you could get sued,” a proposition that nearly every consumer would reject.

The panel on evidence of indebtedness in legal proceedings produced some of the most visibly heated disagreements.

The panel opened with a lengthy discussion of the different state requirements for proof of debt in filing court cases. New rules in Arkansas, New York City and North Carolina were referenced. In Arkansas, the standard for proof of debt is the original credit application with signatures.

One judge on the panel liked this standard, since he noted credit is granted by a contract. “So produce the contract,” he said. But other legal experts, on both sides, argued that these documents were appropriate for discovery rather than filing.

This led to a heated discussion about paper vs. electronic credit applications. Because of the prevalence of online credit applications, including credit cards, where would the paper trail come from in those cases, asked Adam Olshan, of Law Offices of Howard Lee Schiff, P.C. A consumer advocate noted that under recent credit card reform legislation (the CARD Act), all cardholders under the age of 21 must sign paper applications.

In discussing new extraordinarily restrictive laws in North Carolina, consumer advocate Angela Martin proudly noted that since the law went into effect in October, there have been no lawsuits brought in the state by debt buyers. This comment sparked another heated debate over justice vs. debt avoidance.

The FTC will be taking public comments on debt collection litigation through January 2010. After comments are done, the agency will make recommendations for changes to the Fair Debt Collection Practices Act (FDCPA).