November 10, 2012
Lawsuits against bill collectors projected to drop
Lawsuits aimed at harsh or deceptive debt collectors have been setting records year after year -- until now.
For the first time since at least 2004, consumers will bring fewer lawsuits in federal courts this year under the U.S. Fair Debt Collection Practices Act (FDCPA), according to WebRecon, a firm in Grand Rapids, Mich., that tracks the cases. The law is the main consumer protection statute against collection abuses.
It's too early to conclude that the explosion of consumer outrage at debt collectors is cooling off. But even some consumer lawyers say that a kinder, gentler collection atmosphere is in the making.
"Through self-regulation, they've just violated a lot less," said Adam Krohn, managing partner of the consumer law firm Krohn & Moss, a major player in Fair Debt Collection Practices Act litigation. "There's just less cases to be filed."
This year, consumers are on track to file about 10,500 to 11,000 FDCPA lawsuits against collectors in federal courts, down from about 12,000 in 2011, WebRecon projects. The company tallies cases that are filed in federal courts or transferred there, and it has seen a steady increase in suits against collectors since it started tracking the activity in 2004. An undetermined number of other cases are heard in state courts.
Quirks in the legal system complicate the drop in lawsuits. Many potential suits against collectors are being diverted by pre-filing settlements, WebRecon CEO Jack Gordon said. In addition, collectors are seeing more lawsuits about other issues, like credit reporting problems and robocalls to cellphones.
However, the years-long barrage of lawsuits under collection law has prompted collectors to rein in abuses, he added. Speaking about large agencies in particular, he said, "I think there is a strong culture of compliance that has come out of those places."
Calls from bill collectors affect a wide swath of consumers, so changes in the collection environment affect many people. According to the Consumer Financial Protection Bureau, about 30 million consumers have debts subject to collection, or 14 percent of U.S. adults, with the average balance being about $1,500.
The Fair Debt Collection Practices Act sets out the rules collectors must follow when they're contacting debtors and carries a $1,000 penalty when they overstep. For example, calls between 9 p.m. and 8 a.m. are forbidden, and collectors may not make false threats or reveal your debt to others. Many FDCPA lawsuits are launched by credit card holders, who are a major target of bill collectors.
Even while the outbreak of lawsuits has come hand-in-hand with tales of outrageous collection abuses -- such as one Pennsylvania agency that set up a fake courtroomto intimidate debtors -- the collection industry disagrees with the notion that abuses have become widespread.
"We think the rise in lawsuits doesn't always reflect egregious conduct against consumers," said Mark Schiffman, vice president of public affairs for ACA International in Minneapolis, the collection industry's main trade association. Honest mistakes can result in technical violations, even when a collector is trying to comply, he said. For example, collectors are supposed to make it clear that their calls are debt collection attempts, but revealing the debt to the wrong person can also result in a violation. That puts collectors in a bind when they can't verify that they're speaking to the debtor.
That said, does the industry believe that the drop in consumer lawsuits reflects more upright behavior by bill collectors?
"I would sure like to think so -- it's very expensive when you don't (comply)," Schiffman said. The trade group receives about 2,400 inquiries a year from members about compliance, reflecting agencies' concern about following federal and state laws, he said. "We hope this drop in (lawsuit) numbers does show that we're working hard to comply."
Krohn also cited the costs of violating the law as a factor in cleaning up the industry. For firms that are small- to medium-sized, "when they have to pay a couple thousand dollars to settle out of these cases, that hurts." Attorney fees are typically added to the $1,000 penalty.
Not all consumer advocates agree that collection practices are improving. Peter Barry, a consumer lawyer in Minneapolis and national expert on fair debt collection, said he believes that reform of the collection arena requires a halt to the practice of debt buying. Lenders can sell their unpaid accounts into a debt market, a practice that he said encourages high-risk lending and increases the likelihood of hardball collections
"A lot of credit cards are issued with the idea in mind that a large percentage of the people will never repay them," Barry said.
The spike in lawsuits against collectors leading up to this year has come at the same time as a sharp rise in complaints lodged with the Federal Trade Commission, which have nearly doubled since 2004. In 2011, the latest year for which figures are available, the volume of complaints appeared to moderate, rising just 1 percent after a 17 percent increase the year before.
Complaint figures for 2012 to compare with the most recent trend in consumer lawsuits are unavailable, FTC representatives said.
Regulatory crackdowns prompted by consumer complaints may also have had an impact on abuses. In one recent example, the FTC accused Georgia-based West Asset Management of a long list of collection violations in March 2011. Collectors went so far as to withdraw funds from consumers' bank accounts or put charges on their credit cards without permission. The company, which had been the target of thousands of complaints, promised to clean up its act and end the abuses as part of its $2.8 million settlement with the regulator.
Then there is the improving economy, which may be affecting collectors' workload compared to the depths of the recession. Delinquencies on consumer debt have been falling since their peak in 2009, Federal Reserve figures show.
However, experts are unsure what role the economy might be playing in the collection environment. The improvement in consumers' finances might be shrinking the workload for bill collectors. On the other hand, consumers' improving ability to repay old debts may be giving collectors a boost.
"The economy is my favorite red herring in this whole thing," Gordon of WebRecon said. His tracking showed that activity was beginning to spike before the economy turned south in 2009. Changes at law firms that file the most cases far outweigh distant effects such as the economy, he concluded.
Schiffman of ACA International said that collection activity has not necessarily fallen as the recession eased. Although delinquencies are lower, past debts remain to be collected, and peoples' ability to pay may have improved, spurring collection attempts. "I don't think the economy has much to do with it," he said.
Krohn of Krohn &Moss agreed. He said he has seen more attorneys entering the debt collection practice in recent years, as consumers howled about being subject to abusive tactics. With the number of lawyers up and lawsuits down, he concludes that the opportunities to file lawsuits, the hardball collection tactics like threats and lies, are down. "Which is the point of the statute," he added. "It's why the government enacted the law."
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