| Consumers whose past-due debts are sold by banks to third-party debt collectors enter what can be a Twilight Zone of collection efforts, often founded on poorly-documented or dubious claims of indebtedness. When they seek help to pay acknowledged, legitimate debts or to challenge erroneous claims, such as those due to identity theft, they may instead fall into the hands of opportunistic “credit repair” enterprises which take their money and offer little or no service in return.
There has been a bad credit recovery problem among lower-income people since at least the 1900s, but after this century’s housing crisis, it got kicked upstairs to a critical mass of mortgage-holders of real property. A whole new class of debtors discovered the consequences of falling out of credit favor. The newly established Consumer Financial Protection Bureau (CFPB) took notice. So did the Office of the Comptroller of the Currency (OCC).
In the spring 2014 issue of the Federal Reserve Bank of Boston’s Communities & Banking, Peter Holland, director of the University of Maryland School of Law Consumer Protection Clinic, called for the establishment of national standards and best practices for data integrity, and a ban on the sale of certain types of past-due debt accounts. In his article, Holland noted that the elderly, poor and low-income families are most often targeted in debt-collection accounts bought from banks for pennies on the dollar. The consequences have negative impacts on family life far beyond the disputed debt, including impaired credit scores and lack of access to a job or housing. This creates a family problem that can grow into a neighborhood problem.
Holland wrote that the OCC had issued a “best practices memorandum to deal with some of the issues but at the time of publication, no reform had called for disclosure of contracts of sale between a bank and a third-party debt buyer. The consequences include consumers getting sued twice on the same debt, affidavits falsely represented on personal knowledge, failure to ensure compliance with the Servicemembers Civil Relief Act, and more.”
Helping Where It Makes A Difference
Bill Bartmann, CEO of consumer financial recovery firm CFS2, says that little of the recovery in the real estate and financial markets has benefitted the consumer middle class (much less the rung below). He calls for a one-time tax credit, estimated at $6.8 billion, to induce lenders to donate their delinquent loans to qualified nonprofit 501c3 organizations, rather than selling them cheaply to collection agencies. The lender would receive a tax credit equivalent to the fair market value of the donated loan. Projected economic benefits of the program: an estimated $121 billion due to the reduction in garnishments and repossessions, as well as a decline in civil lawsuits and foreclosures.
The tax consequences under the proposal might be simpler for lenders than the existing tax formula that currently addresses write-offs. It would also make repayment more manageable for borrowers. Critical to the proposal is the notion that the non-profit organizations would take an active role in helping affected consumers to rebuild their financial lives.
Bartmann notes that lenders don’t currently have a materially significant tax incentive to write off bad consumer loans, so they wouldn’t be giving up an existing tax advantage. Consumers helped under the proposal would retain or regain their access to jobs and housing, a critical first step on the ladder to social mobility.
“All the remedial steps are focused on healing bank and residential real estate [problems]. Nobody has done anything to help consumers,” Bartmann says.
Email: coneill@thewarrengroup.com
