Recent high-profile settlements and a New York Times article have drawn fresh attention to problems in the debt collection industry. Many of these could be resolved with the deployment of a trusted national database for consumer debt.
In December, the Consumer Financial Protection Bureau charged the law firm of Frederick J. Hanna & Associates $3.1 million with illegally filing debt collection lawsuits against consumers. The bureau accused the firm of using "deceptive court filings and faulty evidence" to churn out such suits. In July, JPMorgan Chase agreed to pay more than $200 million to settle claims by federal and state regulators that the bank wrongfully collected credit card payments from hundreds of thousands of consumers. The regulators said the bank "subjected consumers to collections activity for accounts that were not theirs and in amounts that were incorrect or uncollectable."
The Times article tells the story of a retired electrician with multiple sclerosis living on Social Security who suddenly realizes a debt collector has garnished his bank account after suing him for an old debt. The victim never knew the lawsuit had been brought against him until the money was gone.
Other, similar examples abound.
American Banker has written about this issue several times, and Jake Halpern's book "Bad Paper" spelled out in detail just what a hot mess the collections industry remains, with lost and missing paperwork, wrongful collections, double collections, harassment, business models based on default judgments against debtors (with no room for actual research on debt cases), mandatory arbitration and little recourse for debtors or former debtors who long since paid off their loans but can't prove it.
There are at least two ways technology could solve or reduce these problems. One is better communication and negotiation with borrowers, perhaps accompanied by a self-service portal through which debtors can adjust their payments, like BBVA Compass has. (Such efforts would help the original creditor get repaid, without feeling compelled to turn the debt over to a collections agency.)
The other is better recordkeeping and documentation, to help eliminate fraud, double-dealing and other forms of abuse.
The Federal Trade Commission, which examined 5,000 debt portfolios purchased by the nation's largest debt buyers in 2013, found that only 12% included documentation.
Many collectors work debts for which they've never seen the charge-off statement or prior statements. They don't know the collections efforts that have already taken place, and they don't even know the terms and conditions of the original paper.
If there were a central place where consumers and collectors could quickly check the records, the process could potentially be smoother and fairer to both parties.
Two centralized databases for consumer debt exist, run by Convoke Systems and Global Debt Registry. Once banks register credit cards and other consumer loans in one of these databases, the registries maintain an audit trail of the debt buyers and collections agencies that trade the paper.
Global Debt Registry also lets consumers look up their own records and receive "extinguishment reports" when they've paid their debt.
"This is a centralized utility for the purposes of clarifying rights that would help facilitate commerce and be better for consumers," said Ben Kahrl, general counsel at Global Debt Registry. "And hopefully avoid a lot of the litigation and confusion that surrounds what should be a basic practice of collecting on small-dollar debt. It would clarify who owns collection rights and make this information available to consumers."
A national registry is one way to make sure that when debt is transferred from owner to buyer, the documentation stays authentic and current, with change of title and appropriate documentation, saidJan Stieger, executive director of DBA International, an association of debt buyers.
"The industry is in full support of making sure there's no degradation of documentation integrity when debt is transferred from an originating creditor to a buyer," she said.
Waiting for the CFPB
The CFPB, several state attorneys general and trade groups have supported the concept of a national debt registry. But, although some debt collectors and banks have signed up for and use the debt registries, most haven't. They're in a holding pattern, frozen by the knowledge that regulators like the CFPB are planning to release guidance.
In November 2013, the CFPB came out with an advanced notice of proposed rulemaking that would update regulations under the 1977 Fair Debt Collection Practices Act.
"That was a double-edged sword," said Kahrl. "On one hand, it created a spotlight and an acknowledgement of what we do, and that this is a possible means of solving debt collection problems. But the flip side has been that because there's an expectation that this rulemaking is coming, a lot of the feedback we've gotten from the big banks is that while they're interested in this, they're not ready to adopt anything until they know what comes out of that rulemaking."
Banks especially don't want to adopt a new solution before being told it will be acceptable or sufficient to meet the regulatory requirements, Kahrl said. Yet, he said, "much of what the CFPB has been concerned about would be solved by adopting what we do."