As we’ve noted previously on the blog, both the FTC and state attorneys general are stepping up their scrutiny of debt collection firms in this slow economy. Continuing that trend, the FTC recently released a report on the nation’s system for resolving consumer debt disputes, which concludes that the existing mechanisms for adjudicating and arbitrating debt claims are badly in need of reform.
Reflecting concerns expressed during a series of public roundtable discussions with industry, consumer groups, and other stakeholders, the report highlights two primary problems identified by the FTC: (1) the high percentage of default judgments in consumer debt cases (according to the report, between 60 and 95%, depending on the jurisdiction) and (2) the fairness and transparency of arbitration proceedings. The report contains a number of recommendations for debt collectors, arbitration forums, states, and Congress. The report also indicates that the FTC will focus enforcement efforts on debt collectors who attempt to recover time-barred debt without disclosing to the consumer that the statute of limitations has run. Debt collectors also may not accept partial payment on time-barred debt without informing the consumer that this may toll the statute of limitations on the whole debt owed. The report makes clear that both of these practices run afoul of the federal Fair Debt Collection Practices Act.
The report also noted that the National Arbitration Forum (NAF), the leading arbitration forum for consumer debt disputes, recently settled a suit filed by the Minnesota Attorney General. The complaint had accused the NAF of holding itself out as a neutral forum when in fact it had financial ties to the debt collection industry. In the settlement, the NAF agreed to stop conducting consumer debt arbitrations. After the settlement, the American Arbitration Forum also ceased such arbitrations, and a number of large banks removed mandatory pre-dispute arbitration clauses from their credit card contracts. This chain of events led Commissioner Julie Brill to issue a concurring statement urging Congress to ban mandatory arbitration of consumer debt disputes “until the arbitration process can be shown to be fair, transparent, and as affordable as traditional litigation, and until consumers have a meaningful opportunity to opt out of pre-dispute arbitration without losing access to the credit services they seek.”
Some of the reforms advocated by the FTC and Commissioner Brill are actually already in the pipeline. The newly enacted financial regulatory reform legislation empowers the SEC and the new Consumer Financial Protection Bureau to limit mandatory arbitration provisions (see sections 921 and 1028), and several states have recently passed their own reforms. The report states that the FTC will continue to closely monitor consumer debt collection, but the choice of whether and how to implement the report’s recommendations is almost entirely out of the FTC’s hands. Those decisions rest largely with other federal agencies, Congress, state legislatures, arbitration forums, and industry, and only time will tell how these groups will respond. Hopefully whatever reforms are ultimately put in place will not raise the costs of legitimate debt collection practices, preventing collection and settlement firms from lowering interest rates and benefiting businesses and consumers.
- Nancy Perkins and William Perdue
