Charles Phelan

Consumer credit jumped by $10.3 billion in June 2006, according to the latest figures released by the Federal Reserve. Of that amount, $6.65 billion was in the form of revolving (credit card) debt. With most analysts predicting an increase of just $4 billion in June, these figures were much higher than expected. In addition, the May numbers were revised upward from $4.4 billion to $5.88 billion. Total U.S. consumer debt, not including mortgages, now stands at $2.19 trillion.

There’s no way to know for sure what prompted the large upward spike in use of credit, but the twin culprits of high gas prices and high utility bills seem like a sure bet to me, at least for a significant portion of the increase. Consumer spending usually slows down during the summer months. It will interesting to see if that trend continues this year, or if consumers keep piling on debt at unexpected levels.

The Boston Globe recently ran a scathing 4-part special report on abusive debt collection practices in Massachusetts. Part One, “No Mercy for Consumers” describes the tactics of two area collection agencies that purchase old delinquent debts and enforce collection by filing lawsuits in small claims courts. The preferred method of forcing payment is the repossession of vehicles under court order, a tactic which often leaves distressed consumers at their wits’ end and is extremely disruptive to their lives.

Part Two, “Dignity Faces a Streamroller,” documents the incredible abuse of the small claims court system in Massachusetts. Originally intended to facilitate small disputes without need for lawyers and costly public trials, the small claims court system in this state has been effectively turned into an extension of the third-party collection industry. The complete and total abandonment of the debtor — as described in the eyewitness testimony of the Globe’s reporters as they sat through court sessions — is utterly appalling. Humiliation of debtors by collection attorneys, court clerks, and even judges is common in the hopelessly overcrowded system. The article notes, “At a cost of just $40 to file a lawsuit for any amount up to $2,000, debt collectors find a bargain in Massachusetts small claims. A victory in court lets them pursue a debt for up to 20 years, and earn 12 percent annual interest on it – a rate that’s matched or exceeded in only five states. The Legislature hasn’t adjusted that rate since the 1980s.”

Part Three, “Enforcers’ Might Goes Unchecked” reports on the use of “constables” in the debt collection process. A leftover and obsolete office created in the Colonial era, constables are used as the foot soliders in the debt collection war, as they serve legal papers, repossess vehicles in the middle of the night, and even threaten people with arrest. Alarmingly, many of the Mass. constables themselves have criminal records. No training is provided for constables, and no state agency keeps track of their activities. In effect, they act as hired thugs for the debt collection industry.

Part Four, “Regulators, Policy Makers Seldom Intervene” describes the complete disregard toward collection industry abuses on the part of elected officals. Time and time again, regulators and policy makers side with corporate financial interests over the struggling American consumer. Stung by such criticism, Massachusetts Attorney General Thomas F. Reilly has announced that he will push for reforms to protect consumers from abusive collection practices.

Predictably, the collection industry fired back with an editorial that takes the usual anti-debtor stance. (Note: also predictably, the ACA has since deleted the web link to this editorial.) The editorial exposed the ACA’s arrogance, cynicism, and total lack of compassion exhibited by this particular industry representative in response to the Globe series. To my mind, the Globe series does not absolve debtors of responsibility, as this editorial seems to imply. Rather, the series focuses on the abuse of the legal system in Massachusetts, where notices of small claims lawsuits are often intentionally mailed to obsolete addresses. Many of the debtors interviewed for the series had no prior knowledge that they had been sued. They only discovered a judgment had been entered against them when a constable came to repossess their car in the middle of the night. The usual cynical response that “this wouldn’t happen if people just paid their bills” is a facile, ignorant, and grossly inaccurate representation of the what’s really going on here.

One final point: The antidote to such abusive collection practices is INFORMATION. Consumers have rights. Creditors and collection agencies can be sued for violation of debt collection laws. The one thing I kept thinking about as I read this eye-opening series is that if only these debtors had been properly educated about their rights and their options, then the “debtor hell” described in the series could have been avoided. So the message is clear: Get educated about your rights and fight back against abusive collection practices.

The debt collection industry is good for the U.S. economy! I’ll bet you didn’t know that, right? This conclusion was reported recently in a study commissioned by ACA International, the trade organization for the collection industry. Surprisingly, there has been very little media attention about the report.

Given the mountain of bad publicity that the collection industry has received in recent months, it’s interesting that this report didn’t receive more notice.

The survey, conducted by Pricewaterhouse Coopers LLC, reports that in 2005 the collection industry returned $39.3 billion to creditors. To drive the point home, it states that “…the $39.3 billion in debt returned to creditors on a commission basis is equivalent to an average savings of $351 per American household that might have otherwise been spent had businesses been forced to raise prices to cover the unrecovered debt.” Further, this translates to “…approximately 19 bags of groceries, 129 days of electricity or 155 gallons of gasoline.” A footnote informs us that a typical bag of groceries costs $18.79, the average monthly electricity bill is $81.42, and the average price of regular gasoline was $2.27 in 2005. (I’d like to know where they are shopping for groceries!)

The study cites numerous figures in support of the overarching claim that debt collection is a wonderful thing for our economy. Moreover, it’s a growth industry with nearly double the jobs (150,000) in 2005 versus 1990 (70,000).

Skeptical? Me too. I’ve little doubt that the figures cited in the survey are reasonably accurate based on the scientific sampling of collection companies that was conducted. The $39 billion figure is probably a pretty good measure of the size of the industry. But is it really so straightforward a relationship that it translates to $351 for every household? Not likely.

There are some serious flaws in the logic used to arrive at this conclusion. For starters, who’s to say that the $351 ever made it back to the American consumer? There’s simply no way to analyze this. We don’t know whether that $39 billion in revenue returned to American businesses was used to hold off on price increases, as the report claims with no supporting evidence whatsoever. How do we know the returned money simply didn’t go into corporate coffers, mergers and acquisitions, or executive compensation plans? Taking the figure of $39 billion and simply dividing by the number of American households is, quite frankly, an absurd thing to do, as it assumes even distribution across our society.

But that’s not even my main objection to the conclusion of this report. What about the offsetting costs in lost productivity due to collection activities? As anyone who’s been on the receiving end of a collection phone call knows, there’s no way to concentrate on getting anything useful done while a collector is haranguing you. This important factor is simply ignored in the report, as though there were no costs on the other side of the equation.

So let’s do some fuzzy math of our own here to provide a more balanced treatment of this issue. If there are 150,000 collectors working in the industry, that translates to 300 million person-hours per year, or 18 billion work-minutes per year. So I think it’s reasonable to say that it took 18 billion collection minutes to recover that $39 billion of debt. That works out to $2.16 per minute, which is why the collection industry is so profitable. But someone was on the other end of the telephone for those 18 billion minutes, presumably not getting any work done. That translates to 300 million hours of lost productivity to the economy.

What’s the value of an hour of labor? I’m sure there’s a statistic on this someplace, but I’ll pull a number out of the air and say $50 value per hour. Remember, it’s not the average wage that we’re comparing here, but the revenue generated by that wage. It’s probably higher than that, but if the average annual income is around $40,000, that’s $20 per hour. An employer had better be making 2-3 times in revenue what’s being paid out in wages or they won’t be around for very long. So this works out to at least $15 billion in lost productivity due to collection activity. It’s interesting when you look at both sides of the story, isn’t it?

Another flaw in the report’s conclusion is that the $39.3 billion was “returned” to the economy. So, where was that money in the meanwhile — in the twilight zone? Presumably, that money was sitting in banks across the country, being lent out by the bankers in loans. Or it was money that would have been spent on other things anyway, like groceries, mortgage payments, car repairs, home improvements, etc. By taking the raw number of dollars collected and not looking at the other side, the report gives the false impression that the $39 billion was sitting in offshore bank accounts, totally outside the U.S. economy. That’s simply not the case, and that money was already doing other useful work in our economy.

While I do think that creditors have a right to collect what’s owed them, and the collection industry serves that purpose with ruthless efficiency, I seriously doubt that this report paints an accurate picture of that industry’s value to the U.S. economy as a whole. Rather, it tells only one side of the story, as though American consumers had $39 billion tucked away in coffee cans until those wonderful debt collectors came along and “returned” it to the rest of us. I guess this is just another example of how statistics can be used to say just about anything one wants them to say.

The Buffalo News has run two articles highly critical of the local debt collection industry. The first article, “Merchants of Debt,”focuses on the large collection industry presence in the area. Many of the complaints made by consumers about collectors are against firms located in Buffalo, which is a major hub of the collection industry.

The article quotes Federal Trade Commission official Peggy L. Twohig as saying, “The whole nature of the industry is there are incentives to be aggressive.” Talk about understatement! The $1,000 federal penalty for violation of the Fair Debt Collection Practices Act has not changed in decades. Many agencies view the occasional fine as a cost of doing business. Meanwhile, the amount of debt available for such agencies to work has grown enormously in recent years.

Collection industry spokespersons routinely claim that many of the complaints are groundless and that real abuses only happen in a small percentage of the cases. Yet ex-collectors say that the pressure to produce is always top priority, while managers look the other way on compliance issues.

Some of the worst offenses seem to be by collection law firms. Lenahan Law Offices went bankrupt last December under the weight of regulatory fines. And Giove Law Office was banned from collecting debt in Idaho for threatening debtors with criminal charges. But non-attorney agencies have also come under fire. Top industry agency NCO Financial paid $300,000 in a settlement with Pennsylvania’s Attorney General to resolve more than 800 complaints against the firm.

The second article, “Wide-Open Market for Debts Feeds Abusive Tactics,” focuses more on the industry practice of purchasing delinquent debts for pennies on the dollar and then dunning debtors to make a profit. In the past, debt purchasing was not as common as it has become in recent years. Banks would continue to retain ownership of the debt and hire third-party collection agencies on a commission basis. Since the banks did not want their own reputations damaged by abusive collection tactics, there was at least some oversight to maintain compliance. Now, however, it’s more common for the bank to sell off bad debts and turn a blind eye to collection tactics. The courts have ruled in several cases that banks are not liable for collection activity that occurs after the debt has been sold. So it’s open season for debt purchasers.

I personally do not object to the concept of debt purchasing or even third-party debt collection. I happen to think that the debt collection industry provides a necessary function in our economy. I do feel, however, that regulations need to be enforced to a much greater degree than they are at present. In addition, tighter rules need to be established for the collection of purchased debt. That end of the industry is the main source of the increase in consumer complaints. More than 40% of the complaints received by the FTC about debt collectors allege that consumers were being harassed over debts they did not owe. That’s not surprising, given that purchased debt is often several years old. Junk debt comes with very little documentation. Often, the purchaser takes a shotgun approach and duns everyone in the nearby area with the same name that’s on the account. Stories are multiplying about people being hassled and threatened over debts that aren’t theirs in the first place.

It’s clearly time for Congress to take a fresh look the Fair Debt Collection Practices Act, with an eye to increasing penalties for violations, and the addition of rules that pertain to debt purchasing.

A new national survey was released today showing that Americans are more worried about not being able to pay their bills than they are about terrorist attacks. The survey was co-sponsored by the Center for American Progress, a non-partisan think tank. “Public Recognizes Debt as a Fast Growing Problem in U.S.” discusses the survey in more depth and contains a link to the actual publication in PDF format.

Several interesting facts jump out immediately from the published report:

1. Nearly half (47%) of those surveyed reported household debt as a serious problem, and more than 80% reported debt as a somewhat serious problem for their household.

2. Nearly everyone surveyed (86%) believes that the number of Americans having trouble with household debt has increased in the past 5 years.

3. The public is more worried about falling into debt, particularly from medical bills, than about being the victim of a terrorist attack or a natural disaster, with 48% of respondents stating their top worry as “not having enough money to pay bills.”

4. Credit card debt is the leading type of debt among senior citizens, to a greater extent than for any other generational subgroup.

5. Only 51% are able to pay off their entire credit card bill every month.

This survey publication comes on the heels of an announcement last week by the Federal Reserve that revolving debt had climbed to $813 billion in May. The increase in May alone was $6.7 billion, up 10% from the prior month’s increase. (Note: Revolving debt is primarily credit card debt.)

Clearly, the debt burden on the American consumer is mounting relentlessly, month after month.

MP Dunleavy, columnist for MSN Money, just published an article that ZipDebt readers may find of interest. The article is titled, “Losing at Balance-Transfer Roulette,” and it tells the story of two 25-year olds struggling with credit card debt. Both of the women whose stories are told in the article played the balance- [Read more…] about ZipDebt Quoted in MSN Money Article