In my blog post yesterday, I shared my concerns regarding the potential consequences of the CFPB’s proposed 30-day hold on all collection contacts after the date of a consumer’s death.  A 30-day holding period in which collectors are prohibited from contacting a surviving spouse about a debt would, standing alone, have little impact on the way that decedent debt is collected today at the major agencies that specialize in this work.  However, combining the 30-day hold with the radical proposal to prohibit all collector contact with the tens of thousands of personal representatives who regularly administer the majority of probate estates would completely change the way decedent debt is collected.

Informal personal representatives who have not been court-appointed manage most decedent estates.  This has been true for decades.  The CFPB’s proposals would prohibit collectors from contacting these people.  Decedent debt collectors could only contact people who have “state- approved documentation,” showing that they are formally appointed to administer an estate.  Such a rule would not only gut the FTC’s enforcement policy, it would make informal estate administration useless.  The FTC’s research concluded that most estates do not go through formal probate and thus no executor or administrator is appointed.  Although precise data is difficult to ascertain, today no more than roughly 11% of decedent estates go through a formal process.  The overwhelming majority of personal representatives would thus be off-limits to collectors under the CFPB’s proposals.

The 30-day hold would not help informal representatives; it would complicate and impede their ability to pay creditors.  Nor would the hold protect surviving spouses.  Instead, it would expose them to difficulties that informal probate already resolves.  Here’s a typical example:

Dad passes away leaving an 87-year-old widow. The couple has 61-year-old son who is a CPA. The son is taking care of dad’s estate informally because there is no reason to incur the time and expense of formal probate.  Under the CFPB’s proposals, collectors could not communicate with the CPA son. Collectors would be required to communicate only with the widow.

A 30-day hold would also have the unwanted effect of encouraging collectors to use the option of forcing open estates.  Here’s what a typical scenario might look like:

Mom, who was a widow, passed away. She leaves a 55-year-old daughter who has an MBA. It took a creditor about five months to learn that mom has passed. The daughter is taking care of matters informally, and does not plan to open a formal estate. Collectors cannot legally contact the daughter, so they have no way to determine whether their bills will get paid.  They decide to force open the estate and appoint an executor.

The FTC’s enforcement policy is the principal reason why both above examples above are currently resolved differently.  Collectors can talk to the CPA son and not trouble his widowed mother.  Or they can contact the MBA daughter, get the information and cooperation they need and resolve her deceased mother’s debts without forcing open an estate.

The CFPB’s proposal to require collector contact only with formally-appointed executors and administrators is also inconsistent with existing CFPB rules implementing the CARD Act.  Under Section 504 of the CARD Act, credit card issuers must have procedures in place so that an “administrator” of an estate can timely resolve credit card balances.  The official staff commentary to Regulation Z (Comment 1026.11(c)-1) defines the term “administrator” as “an administrator, executor, or any personal representative of an estate who is authorized to act on behalf of the estate.” (Emphasis added). Thus, the definition recognizes that persons without a formal appointment can act on behalf of an estate.

The CFPB’s proposals would thus create a muddled scenario where a person acting as an informal personal representative has the right under the CARD Act to contact a credit card issuer and receive information about the decedent’s credit card balance, but the creditor’s collector could not follow-up and communicate with that same individual about payment.  The creditor would be forced to open an estate to get its bill paid.

Both the FTC in its policy statement and the Federal Reserve Board in adopting the CARD Act regulations (authority for which was later transferred to the CFPB) sought to spare consumers from the time and expense of having formal estates forced open against their wishes.  The FTC cautioned that it hoped to avoid “a hyper-technical reading of the [FDCPA] that allows contact only with statutorily mandated, but in reality, non-existent administrators or executors.”

Cost to Consumers.  The American Public has been turning away from the considerable expense of probate court ever since Norman Dacey wrote his best-selling book in 1965, How to Avoid Probate.  That’s why the overwhelming majority of estates are settled informally.  Thousands of families make this economically sensible rational and practical choice every week.  Congress, the FTC, and every state legislature all recognize informal estate resolution is a choice the public needs to be able to make.  The CFPB’s proposal takes this option away.

I don’t think the CFPB understands the magnitude of the cost shifting from debt owners and collectors to consumers that would result from its proposals.  What Dacey wrote more than 50 years ago is as true today as it was nearly 165 years ago when Dickens wrote Bleak House—probate court is the greatest engine for fees the legal profession has ever created.

If the CFPB is acting out of distaste for the decedent collection industry and thinks that a rule eliminating contact with informal representatives is going to deter collections, they are completely incorrect.  Their proposal will enrich creditors and shifts the entire cost of collection to consumers.

Currently, here’s how the economics of deceased collections play out:

Assume the decedent had a credit card bill of $1200.  The collection agency contacts the personal representative and they agree on a settlement of $1000.  The collection agency has a contingent fee arrangement of 20%–so the agency keeps $200 and sends the creditor $800.  The estate has paid $1000.  The creditor has incurred collection costs of $400: $200 in fees and $200 as a settlement discount.  The estate has saved $200.

Now let’s take the same scenario, except the CFPB has prohibited the collection agency from contacting the informal personal representative:

An attorney is retained to force open an estate and appoint an executor.  The attorney is not going to negotiate with himself over a $1200 bill, so he will send the executor a bill for the full $1200.  The attorney will then resolve other estate issues and receive very typical court-approved fees of $5000.  The creditor has paid collection costs of $0.  The estate has paid $6200.

Let’s assume that only 50,000 cases a year shifted from the current informal paradigm to forced administration.  That’s a very modest estimate, only a fraction of the annual new inventory of new deceased accounts.  Assume that the average fees for attorneys, accountants, appraisers and other professional involved in each formal estate are a frugal $5000.  The result would be an annual additional cost to consumers of $250,000,000.  In its introduction to the SBREFA outline, the CFPB states that it has recovered over $300 million for consumers.  Under its proposals for decedent debt collection, that amount of money would be disgorged from consumers in about fifteen months.

The current state of affairs in which informal probate administration is recognized is beneficial to all concerned.  The CFPB’s proposals would throw that system out of balance, if not destroy it.  Today, creditors, collectors, and personal representatives have managed to create arrangements where collection costs are kept low and estates are resolved quickly.  Time is of the essence for creditors when filing probate claims.  For example, in California there is an absolute deadline of one year from the date of death for filing a claim seeking payment from an estate.  If a collector cannot contact persons acting informally and there is a 30-day hold on contacting a surviving spouse, there will be an industry-wide shift towards creditors and collectors forcing open estates.

Once the economic benefits of that approach are understood, there will be no turning back.  The work of collection agencies will become much easier— if they cannot quickly settle the account with the surviving spouse or file a claim if there is an existing probate estate, they will take the next step of forcing open an estate.  Creditors will adjust because the delays they will experience in receiving most payments will be offset by the fact that they will have collection costs of near zero.  There will be no shortage of lawyers available to do this relatively simple and highly remunerative work.  Only the general public will suffer.