Report by consumer group attacks debt collection industry

Ballard Spahr LLP

It’s not necessary to read more than the cover page to know that the debt collection industry does not fare well in the report issued this week by the New Economy Project (NEP). The cover page reads: “The Debt Collection Racket in New York: How the Industry Violates Due Process and Perpetuates Economic Inequality.” The report follows closely on the heels of the joint FTC-CFPB roundtable on the debt collection industry held last week in Washington, D.C. at which documentation used by the debt collection industry was a significant focus.

The NEP report indicates that its findings are based on statewide data concerning debt collection lawsuits filed in New York City and New York county courts, which it supplemented with a “detailed analysis” of 90 lawsuits filed by debt buyers across New York State. Among the report’s findings are that (1) debt collection lawsuits accounted for 8 out of 10 of all default judgments entered, (2) 42% of debt collection lawsuits resulted in default judgments but debt buyers obtained default judgments in about 62% of their cases, (3) no application by a debt buyer for a default judgment complied with New York law but the courts nevertheless granted default judgment on 97% of the applications, and (4) debt buyers rarely prevailed in contested cases but relied on winning cases by default or by intimidating unrepresented people into reaching settlement agreements. (The report does not attempt to determine whether the defaulting debtors had any defenses to the debts.)

The report contains a series of recommendations that include:

•             Enactment by the New York legislature of the Consumer Credit Fairness Act  (The Act includes a three-year statute of limitation on consumer debt collection actions, a new notice to the debtor before entry of a default judgment, pleading requirements for consumer debt collection cases, and evidentiary requirements for a debt buyer to obtain a default judgment.)

•             New court rules imposing evidentiary requirements on debt buyers

•             New regulatory requirements for debt collection by debt buyers

Documentation requirements for debt collection by creditors, debt collectors and debt buyers and evidentiary requirements for debt collection lawsuits by debt collectors and debt buyers were also part of the Model Family Financial Protection Act proposed by the National Consumer Law Center last year.

The NEP report is likely to further increase the already heightened scrutiny  the debt collection industry is facing from federal and state regulators, including the CFPB and FTC, state courts and legislators and attorneys for debtors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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