Does a consumer need to be “protected” from repaying his own debts? Can a consumer be “harmed” if he voluntarily makes a payment on a debt that he admittedly owes? The CFPB apparently believes that sometimes the answer is “yes.”
The CFPB and the FTC have forcefully argued that debt collectors should make an affirmative disclosure to consumers when they are seeking to collect debts that cannot be judicially enforced, and that the failure to make this disclosure may violate the FDCPA. This is necessary, according to the CFPB and FTC, because consumers are usually unfamiliar with the statute of limitations that apply to their debts, and a collector’s failure to disclose that the debt is no longer judicially enforceable could have “adverse consequences” to a consumer. In other words, the consumer might actually pay the debt he owes, unless the collector “protects” him by affirmatively advising him that the collector cannot sue to collect it.
The CFPB wants seriously delinquent consumers to know their debts are no longer judicially enforceable so they can make an informed decision to not repay them. But does this make for good “consumer protection” policy? Not really. If the CFPB discourages delinquent consumers from paying debts they admittedly owe, this raises the cost of credit for all consumers, and it may eliminate the availability of credit to low and moderate income consumers who need it the most. And if consumers stop paying on seriously delinquent accounts, this will force creditors and collectors to file even more lawsuits, so the creditor can be sure to collect before the limitations period has run.
But wait a minute, you say, why would the CFPB take this position? I thought it was important for consumers to repay their debts. And I thought that debt collection was critically important to the economy, because it helps to keep the cost of credit lower, and helps keep credit widely available for all consumers. When people repay the debts they owe, this makes credit more available and more affordable, and all consumers benefit, right?
You are right on all these points. Indeed, the FTC and CFPB have repeatedly told us that you are right. For example, in the February 2009 report issued by the FTC entitled “Collecting Consumer Debts: The Challenges Of Change” the FTC reminded us: “Consumer credit is a critical component of today’s economy. Credit allows consumers to purchase goods and services for which they are unable or unwilling to pay the entire cost at the time of purchase. By extending credit, however, creditors take the risk that consumers will not repay all or part of the amount they owe. If consumers do not pay their debts, creditors may become less willing to lend money to consumers, or may increase the cost of borrowing money.” See Executive Summary, pp. ii-iii.
The FTC was even more forceful on this point in its report in July 2010 entitled “Repairing A Broken System: Protecting Consumers In Debt Collection Litigation And Arbitration” where it stated: “Credit benefits consumers by allowing them to obtain goods and services without paying the entire cost at the time of purchase. . . . Because consumers sometimes fail to pay their creditors, debt collection plays a vitally important role in the consumer credit system. Debt collection benefits individual creditors, of course, who are repaid money they are owed. More importantly, however, by providing compensation to creditors when consumers do not repay their debts, the debt collection system helps keep credit prices low and helps ensure that consumer credit remains widely available.” See Executive Summary, p. i.
These same points were echoed by the CFPB on March 20, 2013 in its Annual Report To Congress on the Fair Debt Collection Practices Act, where it stated: “Consumer debt collection is critical to the functioning of the consumer credit market. By collecting delinquent debt, collectors reduce creditors’ losses from non-repayment and thereby help to keep consumer credit available and potentially more affordable to consumers. Available and affordable credit is vital to millions of consumers because it makes it possible for them to purchase goods and services that they could not afford if they had to pay the entire cost at the time of purchase.” See CFPB’s Report To Congress, p. 9.
Thus, CFPB and FTC have publicly stated that when delinquent consumers repay the debts they actually owe, all consumers benefit. And of course the economic benefit that comes from repayment of a debt does not magically evaporate when the statute of limitations on the debt expires. Why, then, has the CFPB so adamantly insisted that consumers must be advised by collectors when the statute of limitations has expired. What exactly is the “consumer protection” goal that is being met here? The answer is not clear.
Through its Amicus Program, the CFPB has been an active supporter of consumer class action attorneys who have sued collectors alleging that an offer to “settle” a time-barred debt is a misleading and deceptive practice that violates the FDCPA. For example, the CFPB filed an amicus brief in support of the consumer in the Seventh Circuit Court of Appeals in Delgado v. Capital Management Services, LP, No. 13-2030, where the CFPB argued that “actual or threatened litigation is not a necessary predicate for an FDCPA violation in the context of time-barred debt . . . Depending on the circumstances, a time-limited settlement offer could plausibly mislead an unsophisticated consumer to believe a debt is enforceable in court even if the offer is unaccompanied by any clearly implied threat of litigation.” See CFPB’s Delgado Brief at p.2. The CFPB acknowledged in its brief that: “[i]n most states, the expiration of the statute of limitations on a debt does not extinguish the debt.” Despite the fact that time-barred debts are not extinguished, however, the CFPB argued that “The running of the statute  works to the benefit of consumers who owe debts that become stale.” Id. at p. 12-13. In other words, the seriously delinquent consumer will “benefit” if the statute of limitations runs, because the creditor can no longer sue that consumer to collect it. But do the rest of us consumers also “benefit” if that consumer does not repay the money they owe? Not so much.
In another case that is now pending before the Sixth Circuit Court of Appeals, Buchanan v. Northland Group Inc., No. 13-2523, the CFPB filed another amicus brief in support of the FDCPA class action attorneys who lost that case at the district court level. There, the CFPB reiterated the FTC’s position that “consumers do not expect” that a partial payment “will have the serious, adverse consequence of starting a new statute of limitations” and that collectors may violate the FDCPA if they fail to disclose “clearly and prominently to consumers prior to requesting or accepting such payments that (1) the collector cannot sue to collect the debt and (2) providing a partial payment would revive the collector’s ability to sue to collect the balance.” See CFPB’s Buchanan Brief at pages 17-18. Again, the “serious, adverse consequence” to the delinquent consumer in this example is that they actually may have to pay a debt that they owe. But if these consumers refuse to pay because they are advised that the statute of limitations has run, what about the “adverse consequences” to the rest of us, the paying consumers, who the CFPB is also supposed to protect?
Surely the courts will continue to recognize that there is nothing wrong with offering to settle a time-barred debt, so long as the collector does not threaten sue, right? Nope. In a setback for paying consumers everywhere, the Seventh Circuit recently adopted the position urged by the CFPB in McMahon v. LVNV Funding, 744 F.3d 1010 (7th Cir. 2014), which held that a letter offering to “settle” a debt violated section 1692e and 1692f of the FDCPA, because the limitations period had expired. Relying in part on the “well-reasoned position put forth by the FTC and CFPB” in their amicus brief (the Delgado case was combined with McMahon on appeal), the Court held that the running of the limitations period a “central fact” about the “legal status” of a debt, and therefore will be important for a consumer to know if the limitations period has run. “The proposition that a debt collector violates the FDCPA when it misleads an unsophisticated consumer to believe a time-barred debt is legally enforceable, regardless of whether litigation is threatened, is straightforward under the statute. Section 1692e(2)(A) specifically prohibits the false representation of the character or legal status of any debt. Whether a debt is legally enforceable is a central fact about the character and legal status of that debt. A misrepresentation about that fact thus violates the FDCPA. Matters may be even worse if the debt collector adds a threat of litigation, see 15 U.S.C. § 1692e(5), but such a threat is not a necessary element of a claim.” Id. at 1020.
In light of McMahon and in view of the CFPB’s position on the subject, can collectors safely collect on time-barred accounts? It will not be easy, since any offer to “settle” those accounts could lead to a class action lawsuit alleging that the collector implied the account is legally enforceable. If creditors know they are unlikely to collect on their accounts once the limitations period has expired, the only sensible approach is to sue every consumer before the statute expires. Is increased litigation the best way to protect consumers? Or should creditors simply stop collecting all their accounts once the limitations period expires and then raise the cost of credit for the rest of us?
One basic economic point that has been made by the CFPB and the FTC in their reports cannot be disputed: the repayment of legitimate debts is good for consumers. This issue was discussed at length at the 2013 NARCA Legal Symposium by a panel of economists and regulators, who pointed out the cruel irony of how low and moderate income consumers are the more likely to be harmed by the increasing cost of credit, and restricted availability of credit, which results when consumer debts are not repaid.
All consumers deserve the CFPB’s protection, not just the seriously delinquent ones. The CFPB should consider the unintended consequences of its position, which will encourage seriously delinquent consumers to avoid payment of time-barred debts, and will increase the cost and reduce the availability of credit for the rest of us.