As Elizabeth Warren says, "Nothing will ever replace the role of personal responsibility." Just as the FDA doesn't prevent overdoses, the point of consumer protection regulations isn't to come to the rescue of people who simply don't want to pay back the money they owe. But debt collection agencies have started using outrageous tactics to get payments on debt. These companies buy up bad debt from lenders -- credit card companies, phone companies, health care providers, you name it -- for cheap and then hunt down the money owed in order to turn a profit. And in doing so, some act more like organized crime than private businesses.
They harass consumers with threats and obscenities. Complaints about debt collectors filed with the Federal Trade Commission, the agency tasked with regulating these operations, rose by about 17% in 2010, which is nearly three times the number of complaints filed in 2002. They account for 27% of all those lodged with the FTC. And of the 54,147 consumers complaining to state level authorities in South Carolina, 4,182 said debt collectors had threatened violence. In 2005, 8,000 consumers told the FTC that debt collectors had used obscene or profane language, according to "Up To Our Eyeballs." But it's not always just about outright harassment. It's also a mind game. A former debt collector has anonymously blogged about some of the tactics he used, describing how he would "sound educated enough to perform some sort of legal action" by dropping four important phrases: office, file, client, and flat refusal to pay. This careful use of language was often enough to scare consumers into coughing up some money.
Debt collectors put people in jail. The Minneapolis StarTribune reported that "the use of arrest warrants against debtors has jumped 60 percent over the past four years, with 845 cases in 2009." The Wall Street Journal found similar numbers:
More than a third of all U.S. states allow borrowers who can't or won't pay to be jailed. Judges have signed off on more than 5,000 such warrants since the start of 2010 in nine counties with a total population of 13.6 million people, according to a tally by The Wall Street Journal of filings in those counties.
This has resulted in people being jailed for owing as little as $85, while the rising number of cases has clogged law enforcement computer systems, making it harder for police to work on hard crimes.
And in a sign of the times, debt collection agencies have started using social media as a weapon. One man reported that he checked in at a restaurant on foursquare, tipping the debt collectors off to his location, and they repossessed his car while he ate. They also sign up for accounts on Facebook and friend debtors -- and while Brad Klein, president of the Arizona Collector's Association, points out that they can't misrepresent themselves or send messages or comments without violating laws, they use it to find phone numbers and home addresses. Meanwhile, they can send emails without violating the Fair Debt Collection Practices Act.
Why is the industry deploying such aggressive, quasi-legal tactics to hunt down debt? Because it's a very lucrative business. The industry as a whole made $11.7 billion in revenue last year. Portfolio Recovery Associates, a debt buyer, alone made $44 million on $281 million in revenue, a 16% net margin. This is because that company pays about 2.5 cents for every dollar of bad debt it purchases, but it makes back about 7.5 cents. That profit has jumped from $402,000 in 1998, mostly because so many more lenders are selling bad debt in order to write it off. Even the business community sees this as a golden opportunity: in the third quarter of 2005, private equity firms and venture capitalists invested $1.6 billion in it.
Those who take out loans and lines of credit are responsible for paying back what they owe. But the debt collection industry has run amok in the practices it deploys to get repaid. We need some cops on the beat to rein them in.
Cross-posted from New Deal 2.0.