By Jane Adler
As voters size up the leading presidential candidates, the collections industry is assessing its prospects, taking a closer look at how each candidate's proposals might impact the business.
Not surprisingly, the candidates have not commented specifically about the business of collections and credit. That kind of detail at this point in a primary season would be highly unusual. But the general outline of various proposals does suggest how a new administration in the White House might approach the business.
Health care is a big topic, and how it is handled will surely impact medical collections down the road. Student loans, credit card reform, and, of course, the mortgage mess, are other subjects highlighted in the candidate's position papers.
Beyond how specific programs may play out, concerns are brewing that the industry could face more regulations and oversight in the years ahead. The subprime mortgage debacle already has caught the attention of regulators who want to tighten controls. A new president, especially a Democrat, might be receptive to new rules and regulations, too.
To wit: both Sen. Hillary Clinton, D-N.Y., and Sen. Barack Obama, D-Ill., in a late February debate, labeled the credit card brands "special-interest groups" and called for interest-rate caps on credit. Clinton noted that she voted for legislation to institute an interest-rate cap. Obama said Clinton suggested that he objected to credit caps because he voted against the bill. "Keep in mind, I objected to the entire bill," said Obama, who has supported other proposed legislation to limit card fees and interest.
Moreover, if the overwhelming voter turnout in the Democratic primaries foreshadows results in the general election this fall, the industry has reason to believe that the Congress will remain Democratic. Consumer groups could find an agreeable audience in Washington on collections abuses.
Adding to the uncertainty, the Federal Trade Commission is due to release its recommendations this spring on the reform of the Fair Debt Collection Practices Act. The long-awaited findings are the result of hearings held last fall at which the industry advocated for updates to the law. But some worry that the process could be stalled as the FTC awaits the appointment of a new chairman by a new president. "It is inescapable that the debt industry and collections will have adverse scrutiny over the next several years," says Robert R. Belair, partner at Oldaker, Biden & Belair, a Washington, D.C.-based law firm that represents DBA International. "It will be a tough road." He adds, however, that there will be a substantial gap between any proposals that have been made and the actual laws and regulations enacted. "It will take a lot of work to sort that out."
Another wildcard is the wobbling economy. As it unravels and the mortgage mess spreads to other credit markets, calls for regulations could intensify. "Congress will want ways to improve the economy and help people back home," says David P. Goch, partner at Webster, Chamberlain & Bean, a Washington, D.C.-based law firm that represents the Commercial Law League of America.
Of course, industry groups are wary of making predictions about the election. None is naive enough to make an endorsement. They know too well that it is best not to offend any candidate or political party by taking sides.
For example, campaign contributions by commercial banks in the recent election cycle are about evenly split between Democrats and Republicans (51% to 49%), according to the Web site OpenSecrets.org.
In general, the industry believes Obama looks the worst on paper for the business, though he remains somewhat of an unknown. Clinton, who has sponsored privacy legislation, has a history on Capitol Hill as being receptive to industry ideas. And though presumptive Republican nominee John McCain seems to be the best choice for the industry because of his pro-business positions, some observers worry about his unpredictability.
The banking industry frets about how the mortgage meltdown might slop over into other areas, resulting in more regulation. For example, the Emergency Homeownership and Mortgage Equity Protection Act now being considered by Congress would allow so-called "mortgage cram-downs" in Chapter 13 bankruptcy proceedings.
This means the value of the mortgage would be written down to match the current value of the home. If the bill passes, the Congressional Budget Office estimates a 4% to 5% increase in bankruptcy filings by individuals who would not otherwise seek protection.
One version of the bill (H.R. 3609) also allowed the discharge of student loan debt during a bankruptcy proceeding. (The amendment was voted down.) Currently, student loans cannot be discharged in a bankruptcy.
"The student loan industry is really vulnerable," says Fritz Elmendorf, a spokesperson for the Consumer Bankers Association. He explains that while such legislation might be well intended that it could actually hurt students by drying up loans or making them expensive because lenders would be taking on more risk. Industry observers also wonder how it might impact collections.
As college costs soar, student loans are a popular topic for the candidates. The Democrats promise to lower the cost of a college education through a variety of programs from tax credits to low cost loans.
Students are big supporters of Obama. On the campaign trail, Obama tells about his own student loans, noting that his loans and his wife's combined were bigger than their mortgage. Obama has proposed reforms to student loan programs by eliminating the subsidies to private lenders. Elmendorf at the Consumer Bankers Association says: "If you are trying to get students excited, loans are a hot button. It's a popular line in a campaign to cut the bank's profit in order to save a student money." Clinton has proposed a student borrower's bill of rights in an effort to crack down on predatory lending practices. The bill of rights says that borrowers would receive transparent information and an affordable repayment schedule based on income. Another provision would treat private student loans the same as all other consumer debt in bankruptcy. Those provisions could make private lenders exit the student loan market, says Mark E. Davitt, president at ConServe, a student loan collection agency in Fairport, N.Y. "It would only hurt the borrower because fewer funds would be available for lending."
Health care is a hotly debated campaign topic. Both Democratic candidates have big programs they want to roll out so more Americans have coverage. McCain's plan relies on market-driven solutions. His proposal offers a tax credit of $2,500 or $5,000 for families if they have health insurance. But he also agrees with the Democrats that too many Americans do not have insurance and should. His solution is to have a variety of insurance choices to meet individual needs.
Republican Mike Huckabee, who at press time officially remained in the race, also believes in private sector solutions, including using the states as laboratories for market-based approaches.
Clinton's plan is similar to the Massachusetts health care reform program signed into law in 2006 by former presidential candidate and Republican Mitt Romney. A look at that program offers a clue as to how Clinton's plan might play out for the industry.
Both programs mandate universal coverage. Though the Massachusetts program already has funding problems, it has increased co-pays and deductibles. "Out-of-pocket expenses go up," says Jay E. Gonsalves, president at Action Collection Agencies in Middleboro, Mass. As a result, "We've seen a little bit more of collections." He also thinks the program has helped to clear out some of the debts that people could not afford to pay, which means collectors are not wasting time chasing debtors without money.
The industry is carefully monitoring health care proposals and the impact on collections. No one wants a law passed that would prevent collection of medical debt. "We are watching health care," says Rozanne Andersen, executive vice president and general counsel at ACA International, based in Minneapolis.
But a uniform health care system could provide a benefit, Andersen says. Information would be available on more consumers, which could help collectors.
Overall, it is unclear how a big change in the health care payment system would work out for collectors. "It's a concern," says Michael V. Shoop, past president of ACA International and president at Professional Finance Co., Greeley, Colo. He foresees more taxes to pay for big government health care programs, which would mean people would have less money to pay the health care bills not covered by the government. Like others in the industry, Shoop also thinks higher taxes will stifle the economy and as a result hamper collections.
While the Republicans emphasize stimulating the economy with tax cuts and business incentives, the Democrats have proposals to curtail abusive practices.
Credit card reform is receiving new scrutiny. An economic advisor to Obama has said that the next subprime crisis is the issue of credit card debt. Obama believes the United States needs to improve oversight of the credit card market.
As far back as 2005, he was speaking out against late fees and other fees charged by credit card issuers. Obama has proposed a credit card rating system, modeled on the five-star systems used for other consumer products, so users can easily identify a card's features. He also has suggested a credit card bill of rights to prohibit interest on fees and to require prompt and fair crediting of payments, among other provisions.
Clinton wants to impose a 30% cap on annual interest rates for credit cards. She also would create a new regulatory body, the Financial Product Safety Commission, to ensure that lenders have fair rules and guidelines for their products. "The Democrats are going to pursue more government regulation," says Professional Finance's Shoop.
As the election unfolds, the industry's attention is mostly focused on Congress and the FTC. "The big thing is not who is in the White House," says Robert G. Markoff, partner at Baker, Miller, Markoff & Krasny, Chicago, and current president at the National Association of Retail Collections Attorneys. He thinks the industry's biggest priority is FDCPA reform. Recommendations from the FTC are due at the end of March. Markoff says reform is needed to update the FDCPA to account for new technologies such as cell phones. On the other hand, he says: "We believe proposals will favor consumers because the FTC is not there to protect the collections industry." Because of several court decisions, collectors are limited in how they can contact debtors under the FDCPA. That has resulted in a wave of lawsuits against debtors, according to Stuart R. Blatt, partner at Margolis, Pritzker, Epstein & Blatt, Towson, Md. "It's the only recourse. But the courts are inundated." ACA International testified at the FTC workshop and suggested a plan to modernize the FDCPA. Some of ACA's provisions include: a dispute resolution program, streamlining of complaint reporting, uniform standards nationwide, authorization of new methods of communication and retention of documentation of sold debt. ACA's Andersen attended the FTC workshop and underscores the fact that the sessions resulted in "positive dialogue among all the groups."
Meanwhile, the most important fallout from the upcoming election could be the appointment of a new chairman at the FTC. Says attorney Belair: "Whoever it is will make a huge difference."
