Someone's Got To Pay

This year’s spring lecture was given by Daniel C. Kerrick, Esq. on the subject of evolving ground rules for debt collection. Mr. Kerrick is a partner in Ciconte, Scerba & Kerrick, a firm that specializes in creditor’s rights and personal injury litigation. He’s been active in the Commercial Law League of America, and is also a member of the American Bankruptcy Institute and the National Association of Retail Collection Attorneys.

When people want credit, said Kerrick, the expectation is that lenders will make it available. “No credit means no business,” and penalties may apply for loan screening criteria that are viewed as discriminatory. When loans go sour, however, there is a tendency to fault lenders for making them or going overboard in trying to collect.

Under the Fair Debt Collection Practices Act, a federal statute that dates back to 1966, consumers have traditionally been afforded protection from a variety of abusive collection practices. These provisions were not meant to apply for business loans, where the amounts involved are typically larger and borrowers haven’t been viewed as needing the same degree of protection.

Over the past 10 years, Kerrick has seen a “ton of changes” in the lending industry. Among the causes are the “great recession” of 2007-2009, an anemic economic recovery, and a continuing expansion of credit to individuals and businesses that are trying to keep their heads above water. A common reaction has been to find ways to help delinquent borrowers, while cracking down on lenders and collection attorneys.

One sign of the times is changing terminology. Debt collectors are now characterized as asset recycling specialists and seen as providing “customer service.” Delinquent borrowers are commonly viewed as “customers” versus “debtors.” And there is the industry analog of a Miranda warning: “This is an attempt to collect a debt and any information will be used for that purpose.”

Outcomes in favor of lenders are viewed with suspicion, which has led to the imposition of onerous procedural rules. In Delaware, for example, the Court of Common Pleas noted an 80% default judgment rate in debt collection and beefed up the pleading requirements.

A complaint in a debt collection case is now considerably more complicated than in personal injury litigation. And to the perplexity of the Delaware judiciary, the default judgment rate has gone up because the starting paperwork is now so exhaustive. There were also inquiries about the lesser number of cases being filed, which was cutting into court revenues.

Another trend has been a blurring of the traditional distinction between consumer and business debt, which has been facilitated by imprecise wording in the Fair Debt Collection Practices Act. The term “person” is used throughout the FDCPA; it was probably meant to apply only to natural persons versus business entities, but is not explicitly defined. There has been a trend to require personal guarantees for small business loans in the current business environment, which opens up the possibility that the collection of said loans will be deemed subject to FDCPA requirements.

Another factor has been the activities of the Consumer Financial Protection Bureau, a “brainchild” of Senator Elizabeth Warren that was created by the Dodd-Frank financial reform bill enacted in 2010. Endowed with sweeping powers and limited accountability, the CFPB has launched a series of attacks on various players in the financial services industry. No one is sure where the agency will strike next.

The CFPB’s approach is characteristically one-sided. They solicit information about alleged abuses in a given area without seeking input from the service providers. And their remedies (fines for alleged past misconduct, restrictions on future transactions) tend to be so sweeping that the firms in question will be forced to cease operations rather than being able to adapt.

Look out for unintended consequences. Commercial banks see the handwriting on the wall, and they are getting out of consumer lending. This means that borrowers with marginal credit will be forced into other lending arrangements at higher interest rates, e.g., credit card loans.

As for payday loans, car title loans, etc., the default option may be a loan shark rather than borrowing from a conventional lender. One way or another, high risk lending can’t continue unless the interest rate is high enough to make the operation profitable or the cost is subsidized by government, i.e., somebody must pay.

Getting rid of a federal agency once it’s been established is well nigh impossible, said Kerrick, so the CFPB is not going to be terminated. Perhaps Congress will find ways to make it more accountable, say by cutting its budget.

It’s also hard to fight adverse judicial decisions in the courts on a piecemeal basis, and the Commercial Law League is trying a different approach. Their idea is to lobby for amendments to the FDCPA that would prescribe reasonable rules for the collection of consumer debt and bar the extension of FDCPA standards to the business loan context.

As a member of the Executive Council of the CCLA’s Creditor Rights Section, Kerrick recently participated in a series of meetings in Washington to pitch their case. It was an instructive lesson in how to not only be heard but also get something done.

The key is the senior policy aides and staffers of the members of Congress, who actually work on the details of legislation. Kerrick found them very knowledgeable about the issues, and also – for all the talk about how Congress is hopelessly gridlocked these days – quite willing to engage. “They’re all looking for an angle to sell what you’re asking for, and the first idea out of the box is compromise.”

The Conservative Caucus audience was attentive and there was a lively question and answer session at the end. Good show!