FAIRFAX, Va.–A new white paper from the Mercatus Center at George Mason University calls for the CFPB to think hard about proposed new rules for debt collection to ensure there is benefit to consumers.
The paper, by Mercatus senior research fellow Todd. J. Zwicki and titled “The Law and Economics of Consumer Debt Collection and Its Regulation,” suggests that government restrictions on debt collection will burden consumers, and further states that before imposing new regulations the CFPB should consider the following factors:
- Since the 1970s, consumer debt collection has been subject to extensive regulation at both the federal and state levels.
- Most questionable debt collection practices have previously been outlawed or restricted. Concerning existing practices, it is challenging to discern whether further restrictions would create any new benefits for borrowers that would exceed their additional costs.
- Restricting creditor remedies raises the risk of loss and the loss rate for lenders, leading to higher prices for loans and a reduction in supply. On the other hand, restricting creditor remedies reduces the total cost of borrowing for consumers, producing an increase in the demand for loans.
- As a result, restrictions on collections simultaneously reduce supply and increase demand. It is unclear whether restrictions would actually increase or decrease quantity.
According to Zwicki, any new rules will most likely hurt some borrowers.
“Restrictions on debt collection may benefit consumers who are actually subject to the collection process, but this will come at the expense of other consumers who have to pay more for credit and gain less access to credit,” Zwicki wrote. “Because riskier borrowers are predicted to be the most likely to default, they will also bear a greater proportion of the cost of regulation than other borrowers, even though in most cases they repay their debts. Restrictions on collections tend to adversely affect credit card lending relative to other types of lending. Higher-income consumers will be able to avoid some of these negative effects by making greater use of secured debt, such as home equity lines of credit, whereas lower-income users will be forced to turn to products such as payday lending and auto title loans.”
The paper further argues that third-party collection agencies provide liquidity and expertise in collection practices that reduce losses and increase efficiency for consumer lenders.
According to the white paper, regulation of particular collection practices can have unintended consequences, including:
- Debt collection practices tend to follow a sliding scale of intensity, beginning with low- expense practices such as letters and phone calls and escalating to higher-intensity practices such as lawsuits.
- Restricting the use of less-intense practices can interrupt this important economic calculation, leading to swifter invocation of more-intensive practices, such as lawsuits.
- Compliance with Dodd-Frank and other regulations enacted since the financial crisis is dis-proportionately costly for smaller firms in the financial services industry, including the debt collection and debt buying industries.
- Smaller firms, however, have traditionally played an important role in the debt collection industry by providing knowledge of local economic conditions and promoting competition that can benefit consumers.
- Regulation that disproportionately burdens small businesses with unnecessary regulatory compliance costs will promote unnecessary consolidation of the debt collection industry.
Zwicki stated that even if “restrictions on collection practices raise prices, consumers will still benefit if they value the ability to avoid those practices more than the creditor values the ability to exercise them. In practice, however, many restrictions fail cost-benefit analysis, because consumers place less value on avoiding particular remedies in the case of default than the increase in price they would have to pay the lender to offset the loss of the remedy.”
- In conclusion, Zwicki said that “from its inception, the CFPB has described itself as a “data-driven agency” that applies sound economic and empirical analysis to craft consumer protection policies. The CFPB should seek to follow this goal for consumer debt collection rules and consider rules that can be shown to protect consumers from overreaching creditor behavior, ensure access to credit at competitive prices, and avoid burdening consumers with unnecessary restrictions and compliance costs.”