November 30, 2021, is the kick-off date for modifying Regulation F, which governs collections’ dos and don’ts. The change comes at a time when credit card collections are at an all-time low. Credit card issuers are not directly affected since the Fair Debt Collection Practices Act (FDCPA) covers third-party collectors, but issuers must follow some essential documentation requirements.
The American Banker summarizes:
Banks, credit card companies, and debt collectors pushed for an overhaul of federal debt collection rules, and they are poised to reap the benefits of unlimited contact with consumers by email and text messages.
But with the Consumer Financial Protection Bureau’s rules set to take effect November 30, many creditors and collectors are scrambling to make changes that require a high degree of coordination with each other.
Though the rules do not apply specifically to banks and other lenders seeking to collect debts, they do require technology changes and the sharing of information for third-party debt collectors to take advantage of certain “safe harbors” that will protect them from legal liability.
The update modernizes the Fair Debt Collection Practices Act of 1977, passed long before the days of mobile phones and email. There are two significant changes, the first covering texts and emails, the second covers aged debt. The statute of limitations often outlaws aged debt, but the customer must raise an affirmative defense.
Communications with Texts and Emails
When Jimmy Carter was in the White House, the internet concept was never considered. Back then, cellphones were elite products, and a Motorola mobile cost $3,995 in 1970’s dollars and weighed more than 2 pounds. But I digress.
Under the new ruling, as the National Consumer Law Center summarizes:
- Collectors cannot call a consumer more than seven times a week
- Consumers can stop all collection calls
- Collectors must provide an itemized breakdown of the debt
- Collectors must contact consumers before reporting to a credit bureau
Time-Barred Debt
Credit card collection goes through a cycle internally; after write-off, credit card accounts usually get placed with collection agencies, who earn commissions for each dollar collected. The standard practice is that credit cards will pass through three collection agencies over two years, then get pulled back and placed into a warehouse. Credit card companies will often sell the warehouse debt for pennies on the dollar. For example, according to ProPublica, the largest debt buyer in the U.S. is Encore Credit: “Last year, on average, the company paid 8.6 cents on the dollar for each account. So for a typical debt of $3,142, Encore paid $271.”
“To earn a profit on that investment, Encore and other debt buyers pursue debtors in near perpetuity. As a result, Encore is still collecting tens of millions of dollars each year from debts it bought in 2009 or earlier. The key to that persistence is the courts.”
What happens with Time-Barred Credit, sometimes called “Zombie Credit,” is that many debts become uncollectable after a certain period. For example, the term is six years in Massachusetts, but in Florida, the time is four years. Unlucky for those in Rhode Island, the term is ten years, but the term is only two years in California. (Here is a link by state.)
The tricky part about the statute of limitations is that it is an affirmative defense. In consumer credit, most judgments are won by creditors because consumers fail to appear. If they do not appear, they can not claim that the debt is time-barred.
Now, under the revised FDCPA Code, lenders will need to advise the consumer that the debt is time-barred.
See this Mercator classic report for a deeper dive into the art and science of third party collections.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
