Magazine | March 11, 2019, Issue

Ode to a Bagman

(Marcos Brindicci/Reuters)
On the necessity of debt collection

Black Mirror is a Twilight Zone–ish British sci-fi series that often explores the unintended social consequences of technology. One of its most famous episodes, “Nosedive,” is set in a near-future dystopia in which a crude social-media rating (one to five stars, calculated down to several decimal points) determines a person’s socioeconomic status like a kind of metastatic credit score: Lacie, the protagonist, is losing her home and wants to move into a new apartment, but she cannot afford the rent unless she raises her social score enough to qualify for a discounted “influencers” rate. In the world of “Nosedive,” it isn’t enough to be a Star-Bellied Sneetch — the best things in life are reserved for those with at least 4.5 stars upon thars. Lacie starts with a healthy 4.2 stars, but her rating crumbles after an angry confrontation with an airline agent who informs her that her flight has been canceled. By the time Lacie arrives to serve as maid of honor at her popular friend’s exclusive wedding (a social gathering of high-status Biffs and Muffys whose digitally confirmed approval she is desperately counting on to boost her score), her rating has crumbled to the point that she is ineligible for admittance to the fancy resort hosting the nuptials — 3.0 and over, no exceptions, a criterion enforced with barbed wire and gun towers.

That is a very 21st-century theme: the conflict between human life as narrative and human life as quantity: x number of Facebook friends, y number of Instagram followers, credit score better than z. And while social media are growing in importance, there probably is no better empirical marker of class in American life than one’s credit score and its subsequent effect on the ease and tenor of one’s interactions with the businesses that make their profits by standing at life’s most sensitive choke points — banking, automobile finance and other consumer lending, travel, utilities and residential services, telephone service, and, in some circumstances, employment — collecting a toll or putting up roadblocks based on that little three-digit number. The quantification of the consumer is baked right into the business model of such low-margin/high-volume concerns as consumer banks and cellular providers, who have a powerful economic incentive to automate their interactions with customers to the maximum extent possible, which necessitates standardizing and quantifying their relationships with their customers. Hence the ceremonial invocation of occult powers upon the lips of every customer-“service” agent in the Western world: “The computer won’t let me do that.”

The businesses that are most captive to that trend are, unsurprisingly, the ones most hated by consumers: banks and credit-card companies, cable and Internet providers, insurance companies — and their back-end enforcers: the debt-collections industry. Thanks to the ministrations of the world’s financial engineers, bill-collecting is now one of the nation’s leading low-margin/high-volume enterprises, with debts bought and traded among third-party collectors who may be many degrees of separation from the original transaction. The financial shape of the industry is easy enough to comprehend: Debt is purchased from creditors at a discount, and the delta between the face value of the debt and what has been paid for it defines the relatively narrow parameters within which a profit may be realized. It is not a business for the sentimental.

But spare a thought for the bagmen.

The Consumer Financial Protection Bureau (CFPB), the woolly and free-ranging regulatory yeti loosed upon the American economy by Elizabeth Warren, took over from the Federal Trade Commission (FTC) as the primary regulator of the debt-collections industry as a result of the Dodd-Frank legislation. It leans toward more-restrictive regulation, and the industry expects proposed rules to be released as soon as March. Consumer advocates, citing (not unreasonably) obviously abusive episodes in which consumers have been subjected to hundreds of calls in a matter of only a month or two, want debt collectors restricted to calling debtors no more than once a week; the industry wants more flexibility, which it says (not unreasonably) is necessary to enable communication with those seeking to work out payment plans or otherwise satisfy their creditors. The debt collectors want to be able to use email, text messages, and other modern means to communicate with debtors, but the legislation under which they operate, the Fair Debt Collection Practices Act, was written in the 1970s and does not contemplate such innovations; their adversaries do not wish to see the collectors’ theater of operations expanded. Debt collectors also find themselves restricted by decades-old laws aimed at limiting the operations of telemarketers taking a shotgun approach to their work through random or sequential dialing from enormous banks of telephone numbers, rules that the collectors argue should not apply to those who are trying to contact specific consumers about extant business; that currently rests on a question of interpretation about what constitutes an automatic-dialing apparatus. Collectors also find themselves encumbered by rules attempting to contain the plague of overseas scam artists who target Americans through mass campaigns of telephone calls and text messages.

The debt collectors also would like to be able to leave voice messages for debtors, which brings up a regulatory catch-22 all too typical of U.S. practice: One federal regulation requires them to positively identify themselves as collectors working to collect a debt, while another regulation forbids them to communicate, even inadvertently, to third parties about such debts, meaning that a message left where another person might hear it can put them on the wrong side of the law. As is the case with many other heavily regulated industries, the complexity of the relevant regulations and the uncertainty of how particular provisions will be interpreted is as heavy a burden on the industry as the content of the regulations themselves.

The industry is seeking, in the inevitable corporate-speak, regulatory “clarity” on these issues.

ACA International (the Association of Credit and Collections Professionals) represents some 3,000 collectors, agencies, lawyers, and others with a financial interest in the dunning trade. Leah Dempsey, the trade group’s senior counsel for federal advocacy and one of its vice presidents, argues that — as unwelcome as a bill collector’s call may be — easing communication between collectors and consumers ultimately is in the interest of businesses and debtors both. Nearly half of their business comes from health-care providers, who benefit in obvious ways from being able to collect unpaid debts and who are most likely to respond to diminished collections by passing on costs to paying patients or by declining to see those patients they deem unlikeliest to pay. Other businesses face similar pressures. For debtors, communicating with collectors can help avoid a hit to one’s credit rating or a court date — as Dempsey points out, the usual alternative to initial collection efforts is litigation.

“The 1991 law was meant to address abusive telemarketers,” she says, “these random or sequential dialers calling at all times of the day, during dinnertime, trying to sell you things. It was never meant to limit calls from banks, credit unions, debt collectors, or other businesses trying to call consumers. But, over time, different orders and interpretations muddied the waters.” One problem is that these rules apply to virtually all automatic-dialing technology, taking no account of how business is done in 2019. (The example offered in the regulatory literature of something that definitely does not count as “automatic dialing” is a rotary telephone.) There is a considerable difference between telemarketers trying to reach large volumes of undifferentiated consumer telephone numbers acquired en bloc and collectors trying to reach specific debtors, but the rules conflate the practices. “The fine is $500 per call, which can be a nail in the coffin of small businesses,” Dempsey says. “The settlements can easily be in the multimillion-dollar range. But even if there isn’t a lawsuit, these complex compliance and regulatory burdens may be more than it is possible for them even to understand.”

Third-party collectors are subject to much more stringent regulation than are original creditors. For instance, the Fair Debt Collection Practices Act applies only to third-party agents. Debt collectors and credit-card companies may be among the least sympathetic figures in all of business, but at the other end of those debts are doctors, dentists, apartment managers — and taxpayers, too. After health care (at 47 percent of collections), the biggest sectors in debt collection are student loans (most of which are now federally guaranteed, thanks to the Obama administration), at 21 percent of collections and other government-related debt, at 16 percent. A study by Ernst & Young puts credit-card debt, telecom, utilities, mortgages, retail, and all other debt — combined — at less than 10 percent of collections. The same report finds that collections are equal to 5.3 percent of profits at all nonfinancial corporations and 12.7 percent of profits at financial corporations. A little under 2 percent of all outstanding consumer debt is in collections.

The CFPB reports that debt collection is the source of more consumer complaints to the agency than any other activity under its purview, and that most of those complaints have to do with third-party collectors. Industry advocates counter that the number of complaints is tiny compared with the number of outstanding debts and contacts with consumers, and that many of the complaints that end up with the CFPB do not in fact have anything to do with debt collectors, e.g. consumers’ complaining about health-care debts resulting from expenses they had expected to be covered by their insurance. The FTC estimates that between 1 percent and 2 percent of all debts in collection are disputed and found to be invalid for some reason — not a trivial figure, but not an enormous one, either.

Debt collection is an inherently adversarial and emotionally fraught activity, which makes it tempting to take a moralistic approach to the issue. But the most useful way to understand such regulation is to consider its economic effect in context — including the most important but often ignored question: Compared with what?

In “The Law and Economics of Consumer Debt Collection and Its Regulation,” Todd J. Zywicki, of the Antonin Scalia Law School at George Mason University, argues that regulation that diminishes the effectiveness of collection efforts — especially methods short of litigation, which is more expensive for consumers and collectors alike — would most likely result in higher costs for everyone and fewer services for high-risk consumers as businesses sought to mitigate the risk of loss.

“One element of the risk of loss is the ability to collect from a debtor who defaults,” Zywicki writes:

If collection powers are weaker, the loss rate will be higher, for two reasons. First, if the creditor is more limited in its ability to collect, it will recover less from the defaulted debtor, and collection efforts will be more costly. Second, if the consequences of default are less severe, borrowers will be more likely to default. As a result, greater restraints on the ability of creditors to collect will tend to increase their losses. In turn, lenders will respond to this increased risk of loss by raising prices to compensate or by reducing risk exposure. . . . Although consumers who are already in default generally will benefit from greater restraints on collections, the benefit will come at the expense of other consumers who may end up paying more or obtaining less access to credit (including the borrower currently in default, who may want new credit in the future). Because at the time of making a loan a lender cannot perfectly predict which particular borrowers will eventually default, all potential borrowers will be forced to pay higher costs for credit, but especially riskier borrowers.

Which is to say: Somebody will pay. The question is whether the debtors will pay or whether everybody else will.

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