In recent remarks, CFPB Director Richard Cordray noted, albeit passingly, the significant role debt collection activities play in the healthy maintenance of consumer credit markets.  “Responsible debt collectors that do their work with care and treat consumers with respect are a natural and even an essential part of the financial marketplace.” (emphasis added.)  A Staff Report that was just released by The Federal Reserve Bank of New York (“FRBNY”) serves to highlight just how essential that role is.  In their Report, Access to Credit and Financial Health: Evaluating the Impact of Debt Collection, the FRBNY staff found that “restricting collection activities leads to a decrease in access to credit and a deterioration in indicators of financial health.”  The staff reached these conclusions after looking at the extent to which certain state statutes reduced collection activity and then looking at the impact that change in collection activity had on consumers.

At the outset, the Report examined two different state legislative schemes to determine their impact on debt collection activities.  Not surprisingly, both legislative schemes lead to an overall decrease in debt collection activities, having “a significant impact on the number of debt collection employees in the state.” (p. 10).  First, the Report found that state legislation increasing licensing and bonding requirements for debt collectors had a tendency to increase the number of small decentralized debt collection agencies, while overall decreasing the number of debt collectors in the state.  Second, the analysis showed that state legislation providing for stricter penalties and increased private remedies for non-compliance with debt collection legislation tended to wipe-out smaller collection agencies and concentrate the practice in establishments with 50 or more employees.

Next, the Report examined the impact of restricted debt collection practices on both access to credit and financial health.  On auto-loans, the report found that originations were “significantly reduced following a tightening in state-level collection legislation” particularly among younger borrowers with low credit scores.  (p. 13).  A similar sizable impact was found on the limits in non-traditional finance (a category of debt including retail cards, personal loans, and various other non-traditional loans).  As a result of these reductions to credit access, the Report found that financial health tended toward a “moral hazard channel.”  In other words, as collection activity and debt recovery decreased, consumer demand for credit increased and individuals who could do so took on more risk and/or over borrowed.  Restricting debt collection activities therefore resulted both in an increase in the number of people with delinquent balances and in the duration of their delinquencies.  While the report found the impact greater on individuals with poor credit, the results were consistent across the credit spectrum.

The Report provides strong empirical support for the position that debt collection, through allowing better enforcement of contracts and increasing the supply of credit at lower interest rates, is an essential part of a healthy consumer credit market.  We urge the CFPB and other federal and state regulators and legislators to be mindful of these conclusions.