The Conference of State Bank Supervisors (CSBS), a nationwide organization of financial regulators, released the newest chapter of its whitepaper titled "Reengineering Nonbank Supervision," and the new chapter is all about debt collection.
The whitepaper's new chapter covers an overview of the collections process, including the history of debt collection, the different types of debt collection entities, the types and volumes of different types of debts in collection, and federal and state supervision and enforcement efforts.
All About Debt
The whitepaper goes into detail about the different types of consumer debts that are at play. Citing a 2014 study by the Urban Institute, CSBS states that "roughly 77 million Americans, or about one third of adults, have a debt in collection status." A frequent source of delinquency in debts is either a divorce, an unexpected job loss, or a medical issue.
The types of debts that most frequently find their way to collections are student loans, credit cards, auto finance, mortgage lending, and medical debts. Student loan debt takes up a whopping portion of the unsecured debt marketplace, followed by credit card debt. The whitepaper references that secured mortgages account for the largest amount of debt at $11 trillion, but mortgages have a relatively low default rate and don't go into collections as often as the others.
CSBS specifically calls out—and dedicates an entire section of the whitepaper to—student loan debt due to its sheer volume, continued growth, and high rate of delinquency on its own as well as compared to other debts.
Debt Collection Entities
The whitepaper shows that CSBS clearly understands the difference between a third-party debt collector and a debt buyer, a distinction that is sometimes overlooked by advocates and regulators.
Editor's Note: In the same breath, the whitepaper states that "[d]ebt buyers are considered debt collectors even though they own the accounts." This is a legal issue that is making its way through the judicial system but has not yet been fully explored and decided by the U.S. Supreme Court.
Some benefits of creditors using third-party debt collectors include that they are "specialized and regulated," "experts in the legal method of communicating with debtors," "experts in state laws impacting the debt collection business," and that "they understand compliance under the FDCPA."
The whitepaper also discusses debt relief companies that offer different kinds of services, such as debt consolidation and debt management plans.
Future of Debt Collection Industry
CSBS believes that the number of debt collection agencies will decrease over time, largely due to the high barrier of entry. Smaller agencies, who can't keep up with the ever-growing licensing and compliance requirements, will likely either close shop or become acquired by larger agencies, who are better able to absorb the burdens.
At the same time, CSBS notes that "[t]he industry is struggling to keep pace with modern technology and changing consumer needs" and acknowledges that it is because of the lack of advancement in relevant laws and regulations.
Problems with Collection Litigation
CSBS calls out some problems related to the process of proceeding with litigation against a consumer for unpaid debts. Due to the high volume of collection lawsuits filed, court dockets have become packed, which led to more automated processes. Three specific issues were addressed:
- The difficult burden of proof for consumers.
- Consumers often don't appear in court because they didn't know the court date or were not properly served.
- Overwhelming evidence produced by collection attorneys leads to summary judgment motions.
Debt collection is a large and growing segment of nonbank financial services. The growth of all forms of consumer credit, and the too often unfortunate end state of that credit in delinquency will continue to fuel the need for debt collection and debt relief by both creditors and consumers. State regulation of debt collectors, debt relief and student loan servicing is an emerging area within the system of state supervision.
Greater effort in developing uniform and comprehensive standards for regulation throughout the state system would result in better supervision of debt collection practices. And as the need for consumer protection and industry oversight expands, regulators will undoubtedly sharpen their focus on this area and state legislatures will likely respond with new or enhanced laws focused on this important part of the nonbank marketplace.
The highlight of this whitepaper is that it seems that CSBS understands the industry, its benefits, and the challenges it faces. The whitepaper shows an understanding of: the differences in types of debt collection entities; how outdated laws prevent collectors from using modern means of communication; how there are legitimate debt collectors who genuinely try to comply with laws and regulations; and how the industry is expected to change over the years due to technology advances and consumer preferences. It's a good read.
Something interesting that comes to mind when reading the section about collection litigation is how these issues will only become more apparent if debt collectors are not able to communicate with consumers. If creditors can't collect on accounts using more less formal means like collecting through a third-party agency, then collection litigation or selling the debt are the creditor's last resorts. One great stumbling block in communication right now, as mentioned in the whitepaper, is how collectors are held back from modern forms of communication due to outdated laws and regulations. And now, as regulators like the CFPB look to clear some of those roadblocks, some consumer advocates put forward misrepresentations—or, at best, misinformed representations—that debt collectors will send "unlimited" text messages and emails. Without also mentioning that debt collection laws and regulations contain natural limits to how often a collector can communicate with a consumer, regardless of medium, this comes off as nothing more than a scare tactic. Just some food for thought.