Does a
consumer need to be “protected” from repaying his own debts? Can a consumer be “harmed” if he voluntarily
makes a payment on a debt that he admittedly owes? The CFPB apparently believes that sometimes
the answer is “yes.”
The CFPB and
the FTC have forcefully argued that debt collectors should make an affirmative
disclosure to consumers when they are seeking to collect debts that cannot be
judicially enforced, and that the failure to make this disclosure may violate
the FDCPA. This is necessary, according
to the CFPB and FTC, because consumers are usually unfamiliar with the statute
of limitations that apply to their debts, and a collector’s failure to disclose
that the debt is no longer judicially enforceable could have “adverse
consequences” to a consumer. In other
words, the consumer might actually pay the debt he owes, unless the collector
“protects” him by affirmatively advising him that the collector cannot sue to
collect it.
The CFPB
wants seriously delinquent consumers to know their debts are no longer
judicially enforceable so they can make an informed decision to not repay
them. But does this make for good
“consumer protection” policy? Not
really. If the CFPB discourages
delinquent consumers from paying debts they admittedly owe, this raises the
cost of credit for all consumers, and it may eliminate the availability of
credit to low and moderate income consumers who need it the most. And if consumers stop paying on seriously
delinquent accounts, this will force creditors and collectors to file even more
lawsuits, so the creditor can be sure to collect before the limitations period
has run.
But wait a
minute, you say, why would the CFPB take this position? I thought it was important for consumers to
repay their debts. And I thought that debt collection was critically important
to the economy, because it helps to keep the cost of credit lower, and helps
keep credit widely available for all consumers. When people repay the debts
they owe, this makes credit more available and more affordable, and all
consumers benefit, right?
You are
right on all these points. Indeed, the
FTC and CFPB have repeatedly told us that you are right. For example, in the February 2009 report
issued by the FTC entitled “Collecting Consumer Debts: The
Challenges Of Change” the
FTC reminded us: “Consumer credit is a critical component of today’s economy.
Credit allows consumers to purchase goods and services for which they are
unable or unwilling to pay the entire cost at the time of purchase. By
extending credit, however, creditors take the risk that consumers will not
repay all or part of the amount they owe. If consumers do not pay their
debts, creditors may become less willing to lend money to consumers, or may
increase the cost of borrowing money.”
See Executive Summary, pp.
ii-iii.
The FTC was
even more forceful on this point in its report in July 2010 entitled “Repairing A Broken System: Protecting
Consumers In Debt Collection Litigation And Arbitration”
where it stated: “Credit benefits
consumers by allowing them to obtain goods and services without paying the
entire cost at the time of purchase. . . . 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.” See
Executive Summary, p. i.
These same
points were echoed by the CFPB on March 20, 2013 in its Annual Report To Congress on the Fair
Debt Collection Practices Act, where it stated: “Consumer
debt collection is critical to the functioning of the consumer credit market.
By collecting delinquent debt, collectors reduce creditors’ losses from
non-repayment and thereby help to keep consumer credit available and
potentially more affordable to consumers.
Available and affordable credit is vital to millions of consumers because
it makes it possible for them to purchase goods and services that they could
not afford if they had to pay the entire cost at the time of purchase.” See CFPB’s Report To Congress, p. 9.
Thus, CFPB
and FTC have publicly stated that when delinquent consumers repay the debts
they actually owe, all consumers benefit. And of course the economic benefit that comes
from repayment of a debt does not magically evaporate when the statute of
limitations on the debt expires. Why,
then, has the CFPB so adamantly insisted that consumers must be advised by
collectors when the statute of limitations has expired. What exactly is the “consumer protection”
goal that is being met here? The answer
is not clear.
Through its
Amicus Program, the CFPB has been an active supporter of consumer class action
attorneys who have sued collectors alleging that an offer to “settle” a
time-barred debt is a misleading and deceptive practice that violates the
FDCPA. For example, the CFPB filed an amicus brief
in support of the consumer in the Seventh Circuit Court of Appeals in Delgado
v. Capital Management Services, LP, No. 13-2030, where the CFPB argued that
“actual or threatened litigation is not a necessary predicate for an FDCPA
violation in the context of time-barred debt . . . Depending on the
circumstances, a time-limited settlement offer could plausibly mislead an
unsophisticated consumer to believe a debt is enforceable in court even if the
offer is unaccompanied by any clearly implied threat of litigation.” See CFPB’s Delgado Brief at p.2. The
CFPB acknowledged in its brief that: “[i]n most states, the expiration of the
statute of limitations on a debt does not extinguish the debt.” Despite the fact that time-barred debts are
not extinguished, however, the CFPB argued that “The running of the statute
[] works to the benefit of consumers who owe debts that become stale.” Id.
at p. 12-13. In other words, the seriously delinquent consumer will “benefit”
if the statute of limitations runs, because the creditor can no longer sue that
consumer to collect it. But do the rest
of us consumers also “benefit” if that consumer does not repay the money they
owe? Not so much.
In another
case that is now pending before the Sixth Circuit Court of Appeals, Buchanan
v. Northland Group Inc., No. 13-2523, the CFPB filed another amicus brief
in support of the FDCPA class action attorneys who lost that case at the
district court level. There, the CFPB
reiterated the FTC’s position that “consumers do not expect” that a partial
payment “will have the serious, adverse consequence of starting a new
statute of limitations” and that collectors may violate the FDCPA if they
fail to disclose “clearly and prominently to consumers prior to requesting or
accepting such payments that (1) the collector cannot sue to collect the debt
and (2) providing a partial payment would revive the collector’s
ability to sue to collect the balance.”
See CFPB’s Buchanan Brief at pages
17-18. Again, the “serious, adverse
consequence” to the delinquent consumer in this example is that they actually may
have to pay a debt that they owe. But if
these consumers refuse to pay because they are advised that the statute of
limitations has run, what about the “adverse consequences” to the rest of us,
the paying consumers, who the CFPB is also supposed to protect?
Surely the
courts will continue to recognize that there is nothing wrong with offering to
settle a time-barred debt, so long as the collector does not threaten sue,
right? Nope. In a setback for paying consumers everywhere,
the Seventh Circuit recently adopted the position urged by the CFPB in McMahon v. LVNV Funding,
744 F.3d 1010 (7th Cir. 2014), which held that a letter offering to “settle” a
debt violated section 1692e and 1692f of the FDCPA, because the limitations
period had expired. Relying in part on
the “well-reasoned position put forth by the FTC and CFPB” in their amicus
brief (the Delgado case was combined with McMahon on appeal), the
Court held that the running of the limitations period a “central fact” about
the “legal status” of a debt, and therefore will be important for a consumer to
know if the limitations period has run.
“The proposition that a debt collector violates the FDCPA when it
misleads an unsophisticated consumer to believe a time-barred debt is legally
enforceable, regardless of whether litigation is threatened, is straightforward
under the statute. Section 1692e(2)(A) specifically prohibits the false
representation of the character or legal status of any debt. Whether a debt is
legally enforceable is a central fact about the character and legal status of
that debt. A misrepresentation about
that fact thus violates the FDCPA. Matters
may be even worse if the debt collector adds a threat of litigation, see 15
U.S.C. § 1692e(5), but such a threat is not a necessary element of a claim.” Id.
at 1020.
In light of McMahon
and in view of the CFPB’s position on the subject, can collectors safely
collect on time-barred accounts? It will
not be easy, since any offer to “settle” those accounts could lead to a class
action lawsuit alleging that the collector implied the account is legally
enforceable. If creditors know they are
unlikely to collect on their accounts once the limitations period has expired,
the only sensible approach is to sue every consumer before the statute
expires. Is increased litigation the
best way to protect consumers? Or should
creditors simply stop collecting all their accounts once the limitations period
expires and then raise the cost of credit for the rest of us?
One basic
economic point that has been made by the CFPB and the FTC in their reports cannot
be disputed: the repayment of legitimate debts is good for consumers. This issue was discussed at length at the 2013 NARCA Legal Symposium
by a panel of economists and regulators, who pointed out the cruel irony of how
low and moderate income consumers are the more likely to be harmed by the
increasing cost of credit, and restricted availability of credit, which results
when consumer debts are not repaid.
All
consumers deserve the CFPB’s protection, not just the seriously delinquent
ones. The CFPB should consider the
unintended consequences of its position, which will encourage seriously
delinquent consumers to avoid payment of time-barred debts, and will increase
the cost and reduce the availability of credit for the rest of us.
