George Mason University Foundation Professor of Law and Senior Scholar of the Mercatus Center Todd J. Zywicki has published a Working Paper entitled “The Law and Economics of Consumer Debt Collection and Its Regulation.” The 69-page paper concludes that new government restrictions on debt collection may very well burden consumers.

Zywicki starts with the premise that the ability to effectively and efficiently collect consumer debts is crucial to the American economy,

“Without the ability to enforce contracts, consumer lending would be scarce and expensive. Everyone would be worse off.”

He urges the Consumer Financial Protection Bureau (CFPB) to consider the following factors before imposing new regulations in the debt collection market:

Consumer Debt Collection Is Already Subject to Extensive Regulation

  • Since the 1970s, consumer debt collection has been subject to extensive regulation at both the federal and state levels.
  • Most questionable debt collection practices have previously been outlawed or restricted. Concerning existing practices, it is challenging to discern whether further restrictions would create any new benefits for borrowers that would exceed their additional costs.

While Good Regulation Can Improve Economic Welfare, Bad Regulation Can Injure Consumers and the Economy

  • Restricting creditor remedies raises the risk of loss and the loss rate for lenders, leading to higher prices for loans and a reduction in supply. On the other hand, restricting creditor remedies reduces the total cost of borrowing for consumers, producing an increase in the demand for loans.
  • As a result, restrictions on collections simultaneously reduce supply and increase demand. It is unclear whether restrictions would actually increase or decrease quantity.

Riskier Consumers Tend to Be Injured the Most by Restrictions on Debt Collection Practices

  • Restrictions on debt collection may benefit consumers who are actually subject to the collection process, but this will come at the expense of other consumers who have to pay more for credit and gain less access to credit.
  • Because riskier borrowers are predicted to be the most likely to default, they will also bear a greater proportion of the cost of regulation than other borrowers, even though in most cases they repay their debts.
  • Restrictions on collections tend to adversely affect credit card lending relative to other types of lending. Higher-income consumers will be able to avoid some of these negative effects by making greater use of secured debt (such as home equity lines of credit), whereas lower-income users will be forced to turn to products such as payday lending and auto title loans.

Third-Party Debt Collectors and Debt Buyers Play a Unique Role in the Consumer Collections System

  • Third-party collection agencies provide liquidity and expertise in collection practices that reduce losses and increase efficiency for consumer lenders.
  • This reduction in losses may be particularly valuable to some types of creditors compared to others and may be useful for creditors that otherwise might be overly lenient in their collection efforts and pass on the costs to their other customers.

Regulation of Particular Collection Practices Can Have Unintended Consequences

  • Debt collection practices tend to follow a sliding scale of intensity, beginning with low-expense practices such as letters and phone calls and escalating to higher-intensity practices such as lawsuits.
  • Restricting the use of less-intense practices can interrupt this important economic calculation, leading to swifter invocation of more-intensive practices, such as lawsuits.

Regulation Should Not Disproportionately Burden Small Debt Collection Firms and Stifle Competition

  • Compliance with Dodd-Frank and other regulations enacted since the financial crisis is disproportionately costly for smaller firms in the financial services industry, including the debt collection and debt buying industries.
  • Smaller firms, however, have traditionally played an important role in the debt collection industry by providing knowledge of local economic conditions and promoting competition that can benefit consumers.
  • Regulation that disproportionately burdens small businesses with unnecessary regulatory compliance costs will promote unnecessary consolidation of the debt collection industry.

Many Restrictions on Collections Do Not Benefit Consumers

  • Even if restrictions on collection practices raise prices, consumers will still benefit if they value the ability to avoid those practices more than the creditor values the ability to exercise them.
  • In practice, however, many restrictions fail cost-benefit analysis, because consumers place less value on avoiding particular remedies in the case of default than the increase in price they would have to pay the lender to offset the loss of the remedy.

Regulations Should Be Based on Careful Cost-Benefit Analysis and Consideration of Changing Consumer Lifestyles and Communications Technology

  • Given the likelihood of unintended consequences arising from new collections regulations, the CFPB should conduct careful cost-benefit analysis before it imposes new regulations on debt collection.
  • The CFPB should consider consumers’ growing reliance on technologies such as cell phones, email, and text messaging, and modernize its rules to allow more flexible contact using those technologies while at the same time protecting consumers from intrusions on their privacy.


insideARM Perspective

Zywicki’s is the latest in a chorus of voices imploring the CFPB to consider the consequences of closing avenues to communication between consumers and collectors, rather than opening them.

The series of petitions (now up to ten) filed against the FCC’s July 10 Declaratory Ruling and Order demonstrates wide concern over regulators effectively cutting off good faith communications from businesses to their customers, particularly in the methods preferred by a majority of younger consumers.

The student loan market is a perfect example of this communications conundrum, as the typical borrower tends to be younger than the (current) average consumer. Earlier this year, Carlo Salerno, an economist who focuses on higher education, posted an article in the Huffington Post that argued for more – not less – communications between debt collectors and holders of student loans.

Also, if you’ve been paying attention to the growing trend of alternative lending options and app-based payment/debt settlement tools (insideARM will be writing more on this shortly), you’ve noted that the market is moving towards – not away from – technology based financial tools. Rules that inhibit their use will likely cause even more confusion and frustration in the future.

Zywicki’s report is thoughtful, well researched, and, as noted in DBA International’s announcement in support of the conclusions, grounded on extensive data.

Clearly, the CFPB is taking the debt collection rulemaking process seriously. They have extended their schedule twice since issuing the ANPR. They have met on multiple occasions with many industry and consumer groups, and have asked questions and gathered input even after the thousands of responses received to the ANPR. Bureau representatives have admitted that the market is more complex than originally anticipated.

We can only hope – and continue to engage, and offer evidence to support the argument – that they will ultimately hear the chorus and propose rules that reflect these real concerns.

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