Levin: GAO Report on Credit Card Debt Collection Problems Highlights Need for Consumer Financial Protection Agency
Wednesday, October 21, 2009
WASHINGTON - Sen. Carl Levin, D-Mich., Chairman of the Permanent Subcommittee on Investigations, today released a U.S. Government Accountability Office (GAO) report on credit card debt collection practices. The report describes the increasingly complex debt collection industry; indicates that the key federal law, the Fair Debt Collection Practices Act (FDCPA), is outdated and ineffective; and demonstrates that consumer protections against abusive debt collection practices need to be modernized and strengthened.
The report, Credit Cards: Fair Debt Collection Practices Act Could Better Reflect the Evolving Debt Collection Marketplace and Use of Technology, [PDF] was requested in 2008 by Levin, then-Sen. Norm Coleman, R-Minn., former ranking minority member, and Sen. Claire McCaskill, D- Mo. Sen. Tom Coburn, R-Okla., current ranking minority member, joined in requesting the report this year.
“With the economy in crisis and many people struggling to pay their bills, debt collectors have responded by becoming more aggressive,” said Levin. “The Federal Trade Commission receives more complaints about the debt collection industry than any other industry, logging in about 79,000 complaints on third-party debt collectors last year, which is almost 19 percent of all of the complaints it received. Ongoing abusive practices include trying to collect debt that isn’t owed or is beyond the statute of limitations, making harassing phone calls, threatening to make arrests that the debt collector has no authority to make, and collecting debt discharged in bankruptcy.”
Levin continued, “The GAO report released today makes it clear that the 1977 Fair Debt Collection Practices Act hasn’t aged well and is poorly enforced. The law was written before the advent of email, cell phones, and even fax machines, and doesn’t address modern problems. GAO also found that, despite receiving thousands upon thousands of complaints, federal agencies took only 32 formal enforcement actions over the last decade related to abusive debt collection activities. Debt collection abuses are not getting the attention they should.”
Levin said the report highlights the need for a Consumer Financial Protection Agency. “In today’s complex financial world, consumers need a federal regulator that is looking out for their interests, rather than the interests of the financial industry. As this GAO report shows, even well-intentioned laws like the Fair Debt Collection Practices Act can erode over time and offer less and less protection to consumers,” said Levin. “A Consumer Financial Protection Agency would have the authority to modernize consumer protections against unfair debt collection practices, monitor compliance, and take enforcement action to stop abusive debt collectors.”
Findings of the GAO report include the following:
- Increase in Delinquent Debt. GAO presented evidence that credit card delinquency rates have spiked since 2007, with more than $23 billion in nonsecuritized debt 30 to 180 days late in 2008. According to Federal Reserve data, between 1991 and 2007, delinquency rates averaged about 4.4 percent, but rose to 6.6 percent in the first quarter of 2009.
- Credit Card Issuers Outsource Collection Activities and Sell Debt. GAO found that credit card issuers typically use their own personnel, in internal collection departments, to collect on credit card debt that is less than six months old, but often hire third-party collection agencies or law firms to collect on older debt. In addition, issuers sometimes sell portfolios of delinquent credit card debt to third party debt-buyers, trading potential long-term cash flows for the short-term proceeds of a sale.
- The Debt Collection and Debt Buying Industries are Large and Growing. GAO reported that, according to the U.S. Census Bureau, in 2006, more than 4,400 debt collection companies in the United States employed approximately 143,000 people. Many of these companies were very small—43 percent employed four or fewer people, while about three percent employed 500 or more. GAO also reported that the debt buying industry has grown, by one industry estimate, from $57 billion of purchased debt in 2003, to $100 billion in 2006.
- The Price of Debt has Declined. GAO presented evidence that the price of delinquent debt has declined significantly in recent years. According to one industry source, “Fresh” debt—debt that is 91 days to six months past due and never placed with a collection agency—sold for about 15 cents on the dollar in March 2007; in January 2009, it sold for about six cents on the dollar. “Tertiary” debt—debt that is more than two years past due or previously placed with two collection agencies—sold for about four cents on the dollar in March 2007; in January 2009, it sold for between one and two cents.
- Many Complaints, but Little Enforcement Action. GAO found that the Federal Trade Commission (FTC) receives more complaints about the debt collection industry than any other specific industry, and received 79,000 complaints in 2008 alone, representing about 19 percent of all consumer complaints it received on any topic. The Better Business Bureau reported receiving about 16,000 complaints on debt collection companies in 2008. GAO found that, in the last decade, federal agencies took only 32 formal enforcement actions related to abusive debt collection activities, including 24 enforcement actions by the FTC against debt collectors, at least 13 of which involved credit card debt; and three formal enforcement actions by the Federal Deposit Insurance Corporation against banks involved in collecting credit card debt.
- Abusive Practices. GAO found that of the enforcement actions that have occurred recently, the violations alleged have included threatening and harassing consumers to pay debts they did not owe or that were beyond that statute of limitations; threatening consumers with arrest, wage garnishment, or the seizure of property; communicating with third parties about consumer debts in ways prohibited by law; and collecting on debts that had been discharged in bankruptcy.
- Burden on State Courts. GAO noted that the FTC has reported that the majority of cases on many state court dockets on any given day are debt collection cases. GAO reported that a study by the Urban Justice Center estimated, for example, that in 2006, 320,000 debt collection cases were filed just in New York City’s Civil Court. That study also estimated that, in Chicago’s Cook County Circuit Court, more than 119,000 civil debt collection lawsuits were pending as of June 2008, and that municipal court judges in Ohio handle as many as 1,000 debt collection cases per week. GAO also cited a review by the Boston Globe which found that at least 60 percent of small claims cases filed in Massachusetts in 2005 were filed by debt collectors. GAO reported that consumer groups, attorneys, and the FTC all agree that the number of debt collection state court cases has increased in recent years and is putting a strain on state court systems.
- Outdated Federal Law. GAO found that the FDCPA has not kept up with new technologies and evolving debt collection practices. GAO noted that communication technologies that are common today—mobile telephones, email, caller identification, answering machines, and fax machines—were not prevalent when FDCPA was enacted in 1977. In addition, GAO noted that the FTC was not given rulemaking authority to implement the FDCPA, which meant the FTC could not address such basic issues as how debt collectors should verify that particular debts are still owed. GAO indicated that most stakeholders involved in the process of debt collection with whom GAO spoke—representing consumers, state and federal agencies, credit card issuers, debt collectors, and debt buyers—expressed support for updating the FDCPA. GAO explicitly recommended that Congress amend the law to do so.
“The volume of complaints and general lack of enforcement show that abusive debt collection practices are a big and growing problem for many Americans,” Levin said. “GAO has identified some commonsense legislative steps that will update the FDCPA and benefit, not just consumers, but also honest debt collectors trying to follow the law. Congress should not only take up the task of updating the FDCPA, but also establish a new Consumer Financial Protection Agency and charge it with modernizing and enforcing consumer protections against unfair debt collection practices, among other responsibilities.”
The Government Accountability Office is the investigative arm of Congress. The report, Credit Cards: Fair Debt Collection Practices Act Could Better Reflect the Evolving Debt Collection Marketplace and Use of Technology, [PDF] is available online today.