After conducting a series of roundtable discussions with industry experts in Chicago, San Francisco and Washington, D.C., the FTC recently released its report entitled: "Repairing A Broken System: Protecting Consumers In Debt Collection Litigation And Arbitration." A copy of the report can be read and downloaded here:
FTC Report.Repairing A. Broken System.Protecting Consumers In Debt Collection Litigation And Arbitration -
The Executive Summary to the Report acknowledges the critical role that collectors play in the health of the economy. The FTC states: "Credit benefits consumers by allowing them to obtain goods and services without paying the entire cost at the time of purchase. This lets consumers make purchases they might not otherwise be able to afford, and allows them to benefit from goods and services immediately while paying for them over time. Because consumers sometimes fail to pay their creditors, debt collection plays a vitally important role in the consumer credit system. Debt collection benefits individual creditors, of course, who are repaid money they are owed. More importantly, however, by providing compensation to creditors when consumers do not repay their debts, the debt collection system helps keep credit prices low and helps ensure that consumer credit remains widely available."
Having said this, however, the balance FTC's report is highly critical of the debt collection industry generally, and critical of the collection litigation and arbitration process specifically. While the report made a splash when it was announced, it is unclear whether the FTC will actually play any significant role with respect to the issues the report has raised. Will the report be a catalyst for change, or much ado about nothing?
For example, many of the recommendations made by the FTC would require wholesale changes to the rules of civil procedure and substantive rules bearing on state court collection litigation -- changes that state legislatures would need to enact. States would need to be convinced that it made sense to pass an entirely new set of rules that would apply to debt collection cases only, as opposed to other forms of civil litigation. States may conclude, contrary to the implicit assumption in the FTC report, that their existing rules governing civil litigation already provide consumers with sufficient protections.
The FTC also seems fixated on the notion that collectors throughout the country are routinely filing lawsuits that seek to collect on time-barred debt, though the report does not cite to empirical studies to provide support for this belief. The report recommends that collectors be forced to notify consumers and courts when the debt at issue may be beyond the applicable limitations period, and that collectors should advise consumers that subsequent payments may restart the limitations period. The FTC does not explain why any litigant should be required to disclose the existence of a potential affirmative defense to its adversary, or why a potential statute of limitations defense should be highlighted in collection litigation, as opposed to various other affirmative defenses that the consumer might possess. The FTC, of course, has no ability to enact state legislation, and its ability to influence rule changes at the state court level is far from clear.
The report also makes a number of recommendations with respect to debt collection arbitration proceedings that appear to be at odds with the policies underlying the Federal Arbitration Act and decades of jurisprudence favoring the resolution of disputes through private arbitration. The report is highly-critical of creditors who include mandatory pre-dispute arbitration clauses in their customer agreements, though it acknowledges that such agreements are legally enforceable. The report suggests that consumer arbitration awards should include reasoned opinions from the arbitrators. Yet there would be no precedential value in those opinions, and they would likely serve to increase the number of subsequent challenges to the awards, contrary to goal of creating a simple, streamlined process for reaching final adjudications of disputes. The report notes that consumers often do not participate in arbitration proceedings, and that creditors prevail in the vast majority of cases. From this, and from other anecdotal evidence, the report suggests that consumers are not being adequately notified of the arbitration process, and that the process is inherently biased or unfair to consumers. The FTC report cites liberally to the unproven allegations of bias that have been leveled against consumer arbitration providers by litigants and consumer attorneys.
The FTC does not have the power to amend the FDCPA in order to implement any of the recommendations in its report. The FTC can make recommendations to Congress about potential changes to the FDCPA. But the new Bureau of Consumer Financial Protection (formed by the Dodd-Frank Act) will be given concurrent authority with the FTC to enforce the FDCPA, and only the Bureau will also have rule-making authority under the FDCPA. This means that the Bureau can issue regulations that will graft on top of the FDCPA, but the FTC cannot do so. The Bureau will also have other broad powers over the collection industry. All the FTC can do is issue opinion letters (it has only done this a few times since the FDCPA was enacted in 1977), and bring enforcement actions against collection companies.
The following recommendations are contained in the FTC's report:
"States should consider adopting measures to make it more likely that consumers will defend in litigation. Very few consumers defend or otherwise participate in debt collection litigation, resulting in courts entering default judgment against them. States should take steps to ensure that: (1) consumers receive adequate notice when actions have been commenced; and (2) the costs to consumers of participating in such actions are not prohibitively high."
"States should require collectors to include more information about the debt in their complaints. Complaints often do not contain sufficient information to allow consumers in their answers to admit or deny the allegations and assert affirmative defenses. To assist them in doing so, states should consider requiring that debt collection complaints include: (1) the name of the original creditor and the last four digits of the original account number; (2) the date of default or charge-off and the amount due at that time; (3) the name of the current owner of the debt; (4) the total amount currently owed on the debt; (5) the total amount owed broken down by principal, interest, and fees; and (6) the relevant terms of the underlying credit contract, if the contract itself is not attached to the complaint."
"States should take steps to make it less likely that collectors will sue on time-barred debt and that consumers will unknowingly waive statute of limitations defenses available to them. In circumstances where it is difficult to determine the correct statute of limitations, it would be advantageous if states developed more clear and uniform statutes of limitations. Consumers do not understand that in many states a statute of limitations constitutes an affirmative defense which may preclude collectors from successfully suing to collect, so they rarely assert this affirmative defense. These states should assign to collectors the burden of proving that debts are not time-barred and require that they include the date of default and the statute of limitations in their complaints. Consumers are not aware that collectors cannot lawfully sue to recover on time-barred debt. To prevent deception, collectors who seek to collect debt they know or should know is time-barred should disclose that they cannot lawfully sue the consumers. Consumers likewise do not know that in many states making a partial payment on a time-barred debt revives the entire debt for a new statute of limitations period. Collectors in these states should disclose to consumers that making a payment will revive such debt."
"Federal and state laws should be changed to prevent the freezing of a specified amount in a bank account into which a consumer has deposited funds that are exempt from garnishment. When banks freeze the accounts of consumers who receive government payments such as Social Security (which are exempt from garnishment), it may result in significant hardship for consumers, including many who are indigent. To alleviate such hardship, federal and state laws should be changed to limit the amount that banks can freeze in accounts receiving exempt funds."
"The Commission’s principal findings, conclusions, and recommendations relating to debt collection arbitration are:"
"Consumers should be given meaningful choice about arbitration. Consumers currently have little, if any, choice regarding mandatory pre-dispute arbitration provisions in contracts. Creditors should draft their consumer credit contracts in a way that ensures consumers are aware of their choice whether to arbitrate, and provides consumers with a reasonable method of exercising that choice. The public and private sectors should increase efforts to educate consumers, so that they have a basic understanding of arbitration and its consequences. They should evaluate whether, and under what conditions, options beyond the initial choice about arbitration must be offered in consumer credit contracts."
"Arbitration forums and arbitrators should eliminate bias and the appearance of bias. Especially in the wake of serious concerns relating to the conduct of NAF, arbitration forums should take significant and concrete steps to prevent bias and the appearance of bias. Forums should develop, adopt, and vigorously enforce standards prohibiting bias and the appearance of bias for themselves and their arbitrators. Forums should diversify their rosters of arbitrators, rotate matters randomly among arbitrators, and limit the number of matters each arbitrator handles. Forums should make the process and procedures they use for selecting arbitrators as transparent as possible."
"Arbitration forums should conduct proceedings in a manner which makes it more likely consumers will participate. Consumers frequently do not appear in arbitration proceedings. While it is not clear to what extent notification problems cause low participation rates, arbitration forums should adopt measures to increase the likelihood they have valid addresses for consumers, track and document delivery of notices, and use envelopes which make it clear that their contents are important while not disclosing consumer debts to third parties. Arbitration forums and arbitrators also should conduct a closer assessment of consumers’ assertions that they did not receive adequate notice."
"Arbitration forums should establish rules that limit the total cost to consumers of arbitrating a dispute to the cost that they would pay to defend against a similar proceeding in court."
"Arbitration forums should require that awards contain more information about how the case was decided and how the award amount was calculated. Arbitrators rarely accompany awards with an opinion setting forth a statement of the law and an application of the law to the facts, which makes it difficult to understand the basis for the award. Arbitration forums should require that arbitrators issue reasoned opinions setting forth: (1) the law applied; (2) how the law was applied to the facts; and (3) how the amount of the award was calculated, including how the amount of principal, interest, and fees awarded was determined."
"Arbitration forums should make their process and results more transparent. For the public to assess the costs and benefits of arbitration, and for consumers to decide whether to agree to arbitration, the process used and the results reached must be more transparent. To promote such transparency, Congress should consider creating a nationwide system requiring arbitration forums to report and make public arbitration awards and decisions."
"The Commission will continue to closely monitor debt collection arbitration, and evaluate whether creditors and arbitration forums provide consumers with meaningful choice and fair process. As appropriate, the Commission will report its views on new debt collection arbitration models to policymakers, industry, consumer groups, and the general public."