The Boston Globe’s excellent analysis into the actual workings of the debt collection world brings up at least two points worth policy reflection.
First, it should not be surprising that as consumer debt explodes, so too does consumer debt default. That means ancillary markets, such as those for debt collection services, will also explode. (If people start driving more cars, then there will be more mechanics, not to mention more lawyers bringing tort lawsuits.) The question, therefore, is do we want to regulate this emerging market? After reading the Globe’s series, how can anyone seriously interested in civil society not answer yes? Indeed, we do have
federal regulation on debt collection, such as the fair debt collection practices act, so the real question is do we want to make enforcement meaningful and back it up with necessary funding? The Massachusetts experiences shows what happens when, in the necessary and commendable effort to balance deficits, states cut back on court services and the Attorney General’s oversight capacity. (One almost pities the assistant-magistrates’ crushing debtload and perhaps sees some explanation to their routinized treatment of grinding debtors through a legal mill.) So the first call to order is to meaningfully police this debt collection market. We need to revisit the constable oversight system, just as we need to enforce legal requirements on creditors using the courts to help collect their debts (such as seriously sanctioning those who ignore bankruptcy laws and holding plaintiffs to their required standards of proof in court).
The second point is even more troubling. This is not just about the need to regulate a market as prospectively sound policy, but about the development of a market that is fundamentally dysfunctional. The problem is that what should be, ideally, a way to deliver state services (the public execution of debt) competitively (by farming out to delegated constables) has turned into a profitable business for collectors that is utterly divorced from the amount of the underlying debts. Making $600 on hooking a car (not the tow company, this is the constable, for his official oversight "time") is a quick way to make a buck by feeding off a legal system. And, moreover, it is one that creates the sorts of incentives that result in the story of the lady whose car was re-hooked three times, or the constable who doublecharged for one tow on the theory that he was "entitled" to a separate fee for each creditor’s judgment he was enforcing (2 creditors warranted 2 oversight fees in his mind for the 1 tow). This should give us broad, worrisome pause about what happens when well meaning local politicans see a quick fix to budget shortfalls by outsourcing public work to private entities (which is what the constables essentially are, their glorified appointment by public officials notwithstanding). The Globe’s pieces serve as a sobering lesson of how privatizing sheriff’s levies has worked out so far in the Bay State: great for the private constables, not so great for the debtors in the system, and ambiguous for the initial creditors.
Comments
5 responses to “The Debt Collection Market”
Where to begin? I must first express great concern about a proposal which is based on a series of articles done by the Boston Globe. The series is limited to anaylsis of a single state, and cites only the most egregious cases to support the proposition that the collection industry is dirty. For good measure, the series suggests (and Mr. Pottow seems to agree) that the idea that people can profit from collecting money is evil. Mr. Pottow’s condemnation of an industry and identification, at least partially, of a course of corrective action based on the Globe’s series is, at the least, suspect. To be sure there are problems with parts of the consumer collection system. But Mr. Pottow’s calls for regulation and funding are premature and misguided.
Back to the Globe. I did not read the entire series. I read enough, however, to confirm my expectations – the Globe looked at only the most egregious instances of abuse and glossed over the fact that the people involved did owe the money. In the parts I read, I also saw no examples of abuse from a state other than Massachusetts. I do not doubt that there are idiots in Massachusetts running amok in the “collection” industry. But you can be assured that only the most egregious cases were included in the story – it makes for better headlines. I understand the need for such sensationalization. In Ohio I was involved in a compaign against predatory lending which relied on the same techniques. It must be remembered that raising public awareness of an issue is quite different from making policy decisions about it.
I am further troubled by the condemnation of the collection industry as a whole. Many of the abuses cited by the Globe, and many I see here in Ohio, are really those of the debt purchasing industry. Yes, these companies must collect the debt to make a profit, but it is a different industry. Until this distinction is fully understood, any analysis and conclusions of “the problem” are premature.
Moreover, the problems cited in the Globe series, and further recounted in Ms. Littwin’s post Small Claims Courts: The New Debt Collectors (8/4/06), are more an issue of the court system in Massachusetts, than the collection industry. For example, in Ohio, no person may file more than 24 small claims cases in a year. Also, I think the criticism of the use of small claims courts for debt collection is misplaced. First, the atmosphere is more relaxed, so the defendant (alleged debtor) is more able to present a defense. Second, because the defendant (if the loser) pays the court costs, the lower cost small claims court actually benefits the debtor.
One of the biggest criticisms I heard was that judges and magistrates aren’t doing there jobs, i.e. not protecting the debtors. Well, I suppose the taxpayers only recourse is . . . vote the bums out. Your elected officials are not part of the collection industry. Do not confuse the two. That line of reasoning might permit you to conclude that the government is responsible for drug dealers because the dealers stand on public sidewalks when doing business.
Here in Ohio, I recently spoke at a judicial seminar. Most of the attendees were municipal court judges and magistrates. The topic of collections cases filed by debt purchasers came up. Uniformly, the judges voiced concern about the whether these debts were legitimate. Many judges shared views on how best to ensure that the debts were due and the debtor received proper notice. Many require strict proof of the debt, even when granting default judgments. So, although the system in Massachusetts may be broken, do not assume that it is the same in other states.
To summarize, the Globe articles, and Mr. Pottow’s post, group together three distinct industries, one of which public. Although they interact with one another, they are not a single entity and cannot be regulated or reformed as such.
The Globe’s discussion of constables reminded me of the compensation for justices of the peace and magistrates in some states at the beginning of the twentieth century. There is a fascinating article by Mark H. Haller, a former history professor at Temple that mentions this. [Haller & Alviti, Loansharking in American Cities: Historical Analysis of a Marginal Enterprise, 21 Am. J. Legal Hist. 125, 135 (1977)] But, more recently, it seems to me that arbitrators also have similar compensation incentives. All three examples point to the dangers of using labor markets as a tool for creating social justice.
By the way, great blog. Congratulations to all.
-Chris Peterson
U. of Florida
I’d suggest that proof hearings would be the solution for many of the abuses identified by the Globe.
But, the District Court would need to be expanded and radically change its practices. No longer would the clerk magistrates be permitted to handle small claims sessions. (Shades of Judge Morse saying “You paid for a Judge. You oughta get a Judge” when he sat in the small claims session instead of the Clerk Magistrate). Moreover, the system only succeeds with the minimal staffing it gets because defaults occupy no time beyond the call of the list. The Justices of the District Court have no law clerks, no secretaries, no staff to review written proofs, and often no lobby to call their own. Each proof hearing would therefore mean an actual hearing in open Court. Even if each hearing was reduced to a few minutes, multiply that by hundreds of cases, and the result is a crash of the system.
If PSP’s description of the Massachusetts small-claim system is accurate, then it has many more problems than just out-of-hand collection actions. For crying out loud people, get out of the dark ages. For all of the criticism that the Mid-west gets (Red states, bunch of hicks, etc.), a small claims case gets a Magistrate (our magistrates are fully judicially trained, and can even hear jury cases), in a real courtroom, with a real bailiff, and a real staff – and a real hearing. Cases are heard in an orderly and formal manner. The magistrates take their time to explain things to pro se parties. The magistrates and judges are very concerned about their court being used to abuse the unsophisticated.
I am concerned that there is a “call to arms” against the debt collection industry based on these Boston Globe reports. Unfortunately, the Globe reporters based their information on what they were told by those who owe creditors (also known as “debtors”–an FDCPA term), and reported that as a sort of gospel. Rather, researching, or chosing to publish research, that is found in public court records of these cases would have revealed vastly different information in many cases. In particular, I am referring to claims that notice service was purposefully served at an incorrect address. I believe that the Globe article was biased against the collection industry, of which I am a part, to the point of being inflamatory.