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Reporter’s notebook: ‘Broken’ debt collection process getting a DC makeover

Fred Williams

At the Federal Trade Commission building here Thursday in Washington, D.C., a rare combination of people jammed a conference room.

Debt buyers and debt collectors sat at the same table with consumer lawyers, who would normally see them across the aisle of a courtroom. Consumer protection regulators, directors of trade groups and companies that manage data also pulled up chairs.

The FTC called debt collection a “broken system” in a report it issued three years ago, and Thursday’s conference was one way for the agency to stoke the fire of change.

It needs stoking.

”Unfortunately … in most respects very little has changed,” FTC Commissioner Julie Brill said in remarks opening the conference, “Life of a Debt: Data Integrity in Debt Collection.”

In January of this year, the agency detailed how unpaid credit card bills and other debts are sold off with little information to verify that collectors are hounding the right person, for the right amount. Debt collection continues to draw the most complaints of industries regulated by the FTC.

On Thursday, the job of fixing the broken system crossed a threshold.

”Our goal today is to move the ball forward, to try to reach agreement,” said Thomas Kane, senior attorney in the FTC’s division of financial practices.

The question is no longer whether there will be rules issued to govern the sale of billions of dollars of consumer debt. Everyone at the event took that as a given. Now the time has come to work out the details. The Consumer Financial Protection Bureau has rule-making authority over debt buyers, and it is already performing examinations of the larger ones. On the eve of the conference, Sen. Sherrod Brown, D-Ohio, called for the agency to implement new rules to end debt collection abuses.

”As an industry we want to have good data,” said Loraine Lyons, general counsel of debt collector FMA Alliance Ltd. and a board member of the collection trade group ACA International. ”We want to contact the right consumer and collect legitimate debts.”

There is wide agreement debt buyers need to be able to tell consumers:

  • Who the original creditor was.
  • The amount was owed when the creditor wrote it off.
  • How much has been added in late fees and interest.

Without those pieces of information, you are dealing with a company you never heard of and an amount you don’t recognize.

”I think this was a strong start,” said Richard Munroe, president of the debt buyers association and the head of a debt buying company, as the meeting broke up.’ ‘We’ll continue this dialog with everyone to find acceptable best practices.”

At Thursday’s meeting, Munroe and other debt buyers didn’t repeat the argument the collection industry has advanced in the past: That regulation will block collection of legitimate debt and injure the credit system. Instead, industry representatives pleaded that the new rules, whatever shape they eventually take, be consistent and nationwide.

There is still a big distance between the industry and consumer advocates. Advocates described a system where sold-off debts exist only as blips on a spreadsheet, without original account contracts or monthly statements that would verify the amount and the debtor’s identity. In that system, collectors demand payment or take the debtor to court using robo-signed statements attesting to the data’s  accuracy. There’s no proof, but since the consumer fails to show up 90 percent of the time, the debt buyer can usually win a judgment, which can then be used to garnish wages.

”The debt buying industry certainly understands that an overwhelming number of consumers won’t participate — that’s their model,” said W. Thomas Lawrie, Maryland assistant attorney general. ”The business wouldn’t work if 70 percent of people showed up.” Debt buyers protested that practices have already changed, but the consumer side seems agreed that court judgments must be based on more than one side’s say-so, even when the consumer doesn’t show up to dispute the debt buyer’s claims.

Data management companies are eager to provide a technological solution. Instead of passing around account records from creditors to debt buyers, they can warehouse the records digitally in a cloud-based system, tracking the account’s ownership as it changes hands and updating it with any payments made or disputes of the debt along the way.

There was also agreement on one other thing Thursday: The year 1977 was a long time ago. Brill remarked it was the year she graduated from high school. Someone else said the Clash debuted that year. And it marked the creation of the Fair Debt Collection Practices Act, the consumer protection law regulating debt collection. Meanwhile, cellphones and the Internet have transformed collection practices. An update is overdue.

Rheingold saw the throng of blue-suited industry representatives attending the conference as a sign of change. ”If they’re not reading the tea leaves now,” he said, ”they should be.”

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