Senate Bill 1405 Section 207
The following is part of a testimony before the Subcommittee on Financial Institutions and Consumer Credit of the House Committee on Banking and Financial Services regarding the proposed The "Financial Institution Regulatory Streamlining Act of 1998" July 16, 1998 Margot Saunders Managing Attorney National Consumer Law Center Also on behalf of: Consumer Federation of America U.S. Public Interest Research Group
The National Consumer Law Center The National Consumer Law Center, Inc. (NCLC) is a nonprofit Massachusetts corporation founded in 1969 at Boston College School of Law and dedicated to the interests of low-income consumers. NCLC provides legal and technical consulting and assistance on consumer law issues to legal services, government and private attorneys across the country. Cost of Credit (NCLC 1995), Truth in Lending (NCLC 1996) and Unfair and Deceptive Acts and Practices (NCLC 1991), the testimony was on behalf of our low income clients, as well as the Consumer Federation of America and the U.S. Public Interest Research Group.
Problems with Anti-Consumer Amendments in the S. 1405
II. Fair Debt Collection Practices Act Amendments in Section 207 of S. 1405. When considering proposed changes to the Fair Debt Collections Practices Act (FDCPA), one should keep in mind that the FDCPA does not make it possible for consumers to avoid paying the debts that they owe. This law only stops abusive, deceptive collections practices by debt collectors. As Congress recognized when it passed the Fair Debt Collection Practices Act in 1977:
(a) There is abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors. Abusive debt collection practices contribute to the number of personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of individual privacy.
Further, the FDCPA only stops the bad actions of debt collectors:
(e) It is the purpose of this subchapter to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses.
15 U.S.C. § 1692.
Section 207 of S. 1405 would make it much easier for abusive debt collection practices to occur without redress throughout the United States.
1) Section (a) would exempt all communications made under state or federal Rules of Civil Procedure from the FDCPA. This is overly broad, and would clearly result in abusive and deceptive collections practice.
For example, currently in § 1692(e)(15) the FDCPA makes the "false representation or implication that documents are not legal process forms or do not require action by the consumer" a violation. This provision prohibits a collector from misleading a consumer who has been sued into believing that the consumer need only send payments to the collector, when in fact legal inaction will result in a default judgment.
Consider why it is so important that all communications from a debt collector be covered by the FDCPA, even those made pursuant to the rules of civil procedure. In one survey of judgment debtors in Washington D.C. a finance company was found to have frequently misled consumers into believing that they need not respond formally to legal process. Consumers reported that they called the finance company or its lawyer after a receiving a summons and offered to catch up on their payments if the suit was dropped. The consumers were assured that everything would be taken care of once the back payments were received. Then, after accepting the promised post-summons payments from the consumers and assuring the consumers that their payments would obviate the need to defend the creditor's suit, the finance company took default judgments against these consumers. Another survey found that this type of false advice was prevalent in the collection industry. This representation by a debt collector that the consumer need not respond to a summons violates § 1692e(15). Such activity would not be illegal under the FDCPA if § 207 of S. 1405 passes.
Further, it is violation under current law for collection agencies to file suit for an inflated amount, or to include an illegal fee, or to fail to rebate unearned interest or credit insurance premiums in the requested relief. This amendment would presumably make this activity perfectly legal, as well.
2) Section 207(b) would exclude the collection of bad checks from the FDCPA. There is no good reason for excluding the collection of bad checks from coverage under the FDCPA. Many courts have considered the issue, and have held that dishonored checks are debts covered by the Act. Moreover, even if one could distinguish between a check and a debt, there is no good policy reason not to prohibit abusive practices in the collection of bad checks.
Given the high potential for abusive practices during the collection efforts for bad checks, it is particularly important that FDCPA protections apply. For example, a well known, but troublesome collection tactic is to threaten consumers with prosecution under criminal bad check statutes. Some collectors even solicit checks from financially distressed consumers, with complete indifference to the sufficiency of funds to cover the check, knowing that the possibility of a bad check prosecution provides the collector with powerful collection leverage.
There are a variety of situations in which bad checks are written. They vary from the professional criminal check kiter, to the embezzling employee, to the financially desperate parent buying food without funds, to the consumer who gives a check not expecting it to be cashed, to the consumer who made an inadvertent error in balancing the checkbook and cannot immediately cover the check, to the person who expected their check to be covered by a deposited check that bounced. Surely, this Congress does not want to condone abusive collection tactics against all of these consumers.
Also, it is a violation of the FDCPA for a debt collector to collect "any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law." One example of a potentially illegal charge that is disallowed by this provision is a dishonored check fee. Despite the provision in the FDCPA, there are numerous cases holding collection agencies violated the law by attempting to collect illegal fees when collecting on dishonored checks. Should that activity now be made legal? Consumers would be considerably harmed if this amendment passed.
3) Section 207(c) would add language to the FDCPA specifying that collection activities and communications can continue during the 30-day period during which the consumer has the right to request verification of the debt. This amendment is the same as was added to and then deleted from the "regulatory relief" bill introduced in 1995 (S.650) and there are still the same problems with it. The proposed language is subtle but bad for consumers.
Currently, the FDCPA provides consumers the essential right to ensure that the debt which the collector is seeking them to pay is really owed by that consumer, or has not already been paid. This right is referred to as "the right to validation." The law requires that in the initial communication with the consumer, the debt collector must provide consumers with a statement that the consumer has thirty days to notify the collector and request verification of the debt. This is intended to minimize instances of mistaken identity of a debtor or mistakes over the amount or existence of a debt.
The problem arises when the information providing the consumer notice of this important right is accompanied by insistent demands for payment of the debt within that 30 days. In many cases, the overriding message the consumer receives is that the debt must be paid immediately, not that the consumer has 30 days in which to request verification of the debt to assure that the consumer really owes the requested amount.
In the leading case on the placement of a validation rights notice, the U.S. Court of Appeals required that the validation notice "must be large enough to be easily read and sufficiently prominent to be noticed--even by the least sophisticated debtor. Furthermore, to be effective, the notice must not be overshadowed or contradicted by other messages or notices appearing in the initial communication from the collection agency."
In that case the validation rights notice failed these tests because it was dwarfed and contradicted by the dunning message. As the court said:
The required debt validation notice is placed at the very bottom of the form in small, ordinary face type, dwarfed by a bold faced, underlined message three times the size which dominates the center of the page. More importantly, the substance of the language stands in threatening contradiction to the text of the debt validation notice.
Other examples in the courts of overshadowing and misleading notices include:
The front of the form demands "IMMEDIATE FULL PAYMENT" and commands the consumer to "PHONE US TODAY," emphasized by the word "NOW" emblazoned in white letters nearly two inches tall against a red background. The message conveyed by those statements on the face of the form, flatly contradicts the information about the right to verification of the debt contained on the back.
Demand for payment within the 30 day period to request verification with only a reference in smaller print to see the reverse side containing the validation notice printed in light gray ink which made it difficult to read.
The validation notice was sent on the back of a demand letter which contained conflicting deadlines and which overshadowed the notice by being in larger typeface.
The effect of the amendment in S. 1405 would be to overrule these cases prohibiting the overshadowing. The collection activities would proceed in such a way as to obliterate the consumers notice of the essential right to obtain validation.
While it would clearly be preferable for there to be no amendments to this section of the FDCPA, there is, however, a compromise possible. The debt collectors want to be able to continue to collect a debt during the 30 day waiting period. Consumer advocates want to ensure that while the debt collectors are pursuing these debt collection efforts, the notice of the right to validation is not overshadowed. Both these goals can be accomplished by rewriting the new subparagraph (d) of § 1692g as follows:
(d) except as provided in subsection (b), collection activities and communications may continue during the 30 day period so long as the activities and communications do not overshadow or contradict the information provided in subsection (a) of this section.
4) Section 207(d) would exclude from the FDCPA all communications to collect debts owed under the Higher Education Act. This proposed amendment to the Fair Debt Collection Practices Act (FDCPA) would exclude from coverage any collection abuse relating to a student loan made pursuant to the Higher Education Act (HEA), no matter how egregious that practice and even when the abuse is perpetrated by a private for-profit collector hired by a private enterprise.
Student loan debtors in default are many types of people with many reasons for their default. Perhaps the most common category is low income consumers who went to for-profit trade schools that swindled them and then closed down, leaving the students without any of the promised job skills and thus with no financial ability to repay the loans. Other borrowers in default are those who have become disabled, lost their job, or who are otherwise financially unable to keep up with loan payments. Those financially able should repay their student loans, but no American should be subjected to illegal debt collection harassment.
Private student loan collectors generally engage in some of the worst collection abuses. Consumers from all over the country report some of the worst collection abuses by private collectors hired on a commission basis to collect on student loans. These private bill collectors can have portfolios exceeding 100,000 loans; their only interest is to recover as much money at as little cost to them as possible.
Collectors are already flaunting congressional directives. The last reauthorization of the Higher Education Act and subsequent Congressional legislation created mechanisms to reduce defaults and also provided students in default with various rights, protections, and repayment plans. Private collectors typically are the only entities providing initial information to students about these rights and repayment plans. Unfortunately, we have seen evidence that private collectors are systematically misrepresenting and concealing these basic rights -- reasonable and affordable payment plans, closed school and false certification discharges, consolidation loans, the ability to avoid garnishment and tax intercepts through repayment plans, and the like. This is not surprising because collectors make little money if a student makes small affordable payments over a period of years or if the student receives a loan discharge because the school defrauded the student. These collectors instead try to squeeze out unaffordable amounts right away.
The effect of the amendment in S. 1405 would not be to protect the Student Loan Program, only abusive private debt collectors. Already the FDCPA does not apply to federal or state agencies, and there is thus no question of the FDCPA applying to the Department of Education or a state-run guaranty agency. The only parties who would profit by this amendment would be private entities who are in the business of collecting debts in default and who violate the standards set out in the federal statute. 31 United States Code § 3718(a)(2) requires that all private collectors hired by executive or legislative agencies of the United States must be subject to all federal laws relating to debt collection. There is no reason to provide special treatment to collectors hired by the Department of Education, when private collectors hired by other federal agencies must comply with the FDCPA. In addition, all private collectors in their contracts with the Department of Education agree to be bound by the FDCPA, and the Department has had no difficulty in finding collectors to sign such contracts. Why deprive Americans of this important protection from debt collection harassment when collectors readily agree to this liability?
There are a number of rationales offered for exempting communications made to collect loans made under the Higher Education Act, none survive close scrutiny:
a. It is argued that guaranty agencies are never abusive in their collection activities, and therefore do not need to be covered by the FDCPA. First of all, it is not just the collection activities of guaranty agencies which will avoid coverage, but the debt collection agencies collecting for these agencies will escape scrutiny as well. Secondly, governmental, non-profit guaranty agency are already exempt from the FDCPA Lastly, and most importantly, guaranty agencies have committed abusive collection practices in numerous instances such that it is clear that the consumers need the protections of the FDCPA when guaranty agencies or their collection agencies are collecting these debts. (See Appendix II for two recent case histories of the problems with student loans.)
b. It is argued that the FDCPA adds no meaningful protections for debtors beyond those already provided by the Department of Education regulations on collecting student loans. This is frankly absurd. The rules that lenders, guaranty agencies and collection agencies must follow when collecting student loans require certain numbers and types of telephone and written contacts, require threats to affect the debtors credit, require threats of and then implementation of prejudgment wage garnishment and tax refund intercept. Unlike most other debts, consumers cannot escape liability for student loans by waiting, as there is no statute of limitations. Student loan debtors also are generally prohibited from discharging student loans by filing bankruptcy. There are some defenses for debtors to payment of student loans, based for example on a schools fraudulent activity or other misdeed. There are also required notices and hearings prior to executing garnishment and tax intercept orders. However, there are no protections against abusive, or deceptive collection efforts in these regulations. The regulations provide instructions on how best to force debtors to pay their student loans. Given the broad powers that collectors of student loans have, consumers are even more in need of basic protections from their abusive collection activities than the general class of consumers.
c. It is argued that as the FDCPA validation notice does not provide information regarding the student loan collectors rights and obligations regarding the collection of the debt, that requiring the FDCPA notice is confusing to student loan debtors. This is disingenuous. While the FDCPA notice may not require that the collector of student loans provide this information, there is nothing to prohibit the collector from adding it to the required information. In fact, it especially important for student loan debtors to have the right to verification of the loan, because too often debtors are not informed what loan the collector is seeking, what school or time period the loan covered, or even whether the debtor was the student who incurred the loan.
d. It is argued that a collector cannot comply with the communications provisions of the FDCPA and the due diligence regulations governing student loan collections. This may indeed be true, and with the addition of only one other, very minute detail (which will be addressed below in paragraph f) is the only example of situations where the two conflict. The appropriate response to this conflict is to address it specifically and narrowly, not to provide blanket exemptions for all student loan collections. The regulations governing collections of student loans mandate "due diligence" on the part of the collector by requiring several written notices that must contain specific information regarding the loan and consequences of non-payment, as well as several telephone contacts. The FDCPA on the other hand, requires a collector to cease communications with a consumer if the consumer requests it. The FDCPA requires communications to cease at the consumers request to provide a sanctuary for consumers from the constant dunning efforts of collectors. It allows the consumers a way to say "Enough, Ive got the message." If a consumer requests that communications cease, that should end collections communications. Nothing prevents the student loan debt collector from proceeding with the next step in the collection process: prejudgment garnishment, tax intercept or civil suit, according to the prescribed time schedule. The only difference is that the constant letters and telephone calls must cease in the interim. The FDCPA provides that after a cease communications notice from the consumer the collector can still communicate to advise, among other things, that the collector "may invoke specified remedies." The simplest and best way to resolve these conflicts is to provide that a collector of student loans is not required to continue the letters and phone calls after a receipt of a cease communication notice from the debtor. All other collection efforts can then proceed according to the prescribed time schedule.
e. It is argued that the requirement in the student loan regulations to make diligent attempts to locate a consumer whose location is unknown conflicts with the prohibition in the FDCPA to contact third parties. This is simply not true. There is a whole section in the FDCPA which allows collectors to pursue location information; it simply ensures that this activity is pursued in a manner which protects the consumers privacy.
f. It is argued that collectors of student debts need to communicate with consumers employers to effectuate wage garnishment, and that compliance with the FDCPA would disallow this. This is a very minor, but possible inconsistency between the two statutes. In FDCPA § 1692c(b) communications are only permitted with third parties for specific reasons, including those necessary to effectuate a postjudgment garnishment remedy. As collection regulations for loans made under the Higher Education Act allow prejudgment garnishment, conceivably communications made regarding prejudgment garnishment would violate the FDCPA (although there are no court cases or challenges of student loan collectors based on this very technical distinction). We would have no objection to amending § 1692c(b) to address this discrepancy as follows:
(b) Communication with third parties--Except as provided in section 1692b of this title, without the prior consent of the consumer given directly to the debt collector, or the express permission of a court of competent jurisdiction, or as reasonably necessary to effectuate a postjudgment judicial remedy, or a prejudgment administrative wage garnishment permitted under 20 U.S.C. § 1095a, a debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer, his attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the attorney of the creditor, or the attorney of the debt collector.
It would be unseemly for the United States to sanction worse collector behavior when these collectors represent the United States or a state guaranty agency then when these collectors represent credit card issuers, finance companies, and banks. The United States certainly wants to recover on defaulted student loans, but it need not do so by encouraging private entities to lie and harass America's youth and others seeking to improve themselves through education.
The FDCPA is the only federal control over private collectors collecting on student loans. The exclusion proposed in S. 1405 would provide carte blanche to these collectors. Even if the Department of Education could effectively regulate the collectors the Department hires when they collect on millions of accounts, the amendment also gives free reign to the even larger group of collectors hired by guaranty agencies, schools, and lenders.
The proposed amendment would exempt all private collectors collecting under the HEA, even those working for private entities. The exemption would insulate from liability for abusive, harassing, deceptive or unfair collection activities:
· the illegal practices of private for-profit collection agencies hired by trade schools and other schools to collect on Perkins Loans;
· the illegal practices of private for-profit collection agencies hired by lenders and other private investors to collect Family Federal Education Loans (FFEL) (the new name for guaranteed student loans) that have lost their guaranteed status because of lender impropriety;
· the illegal practices of private for-profit collection agencies that are hired by such private entities as USA Funds to collect on FFEL loans;
· the illegal practices of private for-profit collection agencies hired by state guaranty agencies and the Department of Education; and the illegal practices of private guaranty agencies.