A new report by Human Rights Watch (HRW) titled “Rubber Stamp Justice—US Courts, Debt Buying Corporations, and the Poor” is likely to find readers at the CFPB, which is expected to move closer early this year to proposing debt collection regulations. In its Fall rulemaking agenda, the CFPB estimated that further prerule activities would occur in February 2016. Those activities are expected to involve the convening of a SBREFA panel to consider the CFPB’s plans for debt collection regulations.
As might be expected from its title, the report is highly critical of the debt buying industry and court system. For example, the report claims that “many debt buyer lawsuits rest on a foundation of highly questionable information and evidence” and purports to describe “the many ways courts across the US fail to stand up for the rights of disadvantaged defendants in debt buyer lawsuits, or put those defendants’ sophisticated corporate adversaries to their burden of proof.”
The report contains a series of recommendations directed at various parties, including federal and state governments, state courts, and debt buyers. Recommendations to state governments include considering the “lowering [of] statutorily mandated rates of post-judgment interest to a rate indexed to inflation.” State court recommendations include adopting rules “barring judges from encouraging or ordering defendants in debt buyer cases to engage in informal negotiations with plaintiffs’ attorneys unless under the active supervision of a judge, a neutral mediator, or other designated officer of the court.”
Among the report’s recommendations to the federal government are to “pass legislation mandating that consumer debts will no longer continue to accumulate interest at rates in excess of those set down in state usury laws after being sold to a third party,” amend existing laws to reduce the maximum percentage of a debtor’s income that can be garnished, and pass legislation that prohibits creditors from garnishing a debtor’s bank account below a prescribed minimum balance. The report asserts that federal law should recognize “that debt buyers are not in the same position as original creditors—they are seeking to appreciate an investment in bad debt, not to recoup money they have lent under agreed-upon contractual terms. There is no compelling rationale for allowing debt buyers to accumulate interest at credit card rates after they purchase a debt.” The report goes even further in recommending to debt buyers that they “refrain from adding interest to, and from collecting post-judgment interest on, the balance of purchased debts.”
The report seems to carry the suggestion that it would be better for debtors if banks stopped selling debts. However, it is unlikely debtors would be better off for the simple reason that banks would sue the same debtors directly (as they often already do on a daily basis). However, when suing debtors directly, banks are less likely to negotiate settlements on terms as favorable as those negotiated by debt buyers for the simple reason so often remarked upon by critics of debt buying–the debt buyer’s investment in the account is less than the amount lost by the bank.
While at first glance the report appears as though it might be a focused criticism of the debt buying industry, it is not. Its targets are, in equal parts, modern banking and consumer credit, lending money and charging interest, income inequality and, above all, capitalism. The methodology used by HRW is anecdotal. HRW conducted approximately 100 interviews before assembling this report. While HRW’s reliance on personal accounts seems appropriate when trying to uncover crimes against humanity in failed states where there are precious few tools to obtain information, there is an abundance of reliable, non-anecdotal information available regarding the U.S. debt buying industry.
As lawyers committed to a system of justice, we are as interested as anyone in understanding the societal and economic impact of debt buying. But we are convinced that this knowledge cannot be gained through a limited series of interviews or objectively explained with three graphs copied from a Google search. We hope that if our CFPB colleagues read this report, they will keep its biases and limitations in mind.