The old cliché relating to elected officials is that “all politics are local.” However, as our industry has learned with CFPB consent decrees and regulation by federal litigation, that adage seemed to have lost its meaning. Yet, Mike Mulvaney’s appointment and his recently leaked memo where he stated a legal truism, i.e. that “the people regulated should have the right to know what the rules are before being charged with breaking them…” it seemed that era was passing. In fact, even the recent PHH v. CFPB ruling which found the CFPB constitutional also found Cordray exceeded his authority and therefore struck down a $103 million fine.
So we can breathe easy, right? Not so fast! Because just as you say that, you look at the calendar and see yet another election cycle is underway which means once again, that all politics, especially relating to debt collections, are local.
The first hint that there might be a state-level reaction to the reduced enforcement role of the CFPB was a recent campaign ad which attacked a gubernatorial candidate for voting to allow garnishment of defaulted state-backed student loans. Imagine that – in a state that is nationally known to be in extreme financial distress, with unpaid bills and unfunded pensions, the responsible decision to allow recovery on state issued loans seems a no-brainer. Not so. Politicians routinely “pick the low fruit” during elections and attract voters by slamming legal debt collections.
Perhaps coincidentally, just as I sat down to write this, our trade association lobbyist provided me a legislative report of pending bills and I was flabbergasted. Out of nowhere, there were no less than five proposed bills relating to debt collection, the most serious of which would almost eliminate the value of certain post-judgment actions. The most damaging suggestion is to reduce the garnishment rate from 15% to 10% and increase the wages exempt from garnishment to 60 times the statutory minimum wage. If that were not enough, another bill would require banks to automatically apply a $4,000 exemption to bank garnishments, eliminating the requirement for consumers to come to court and assert it. Another would see the interest rate of judgments reduced to 2%, or less than the rate of inflation. Ironically, all of these proposed bills are labeled under “debtor protection” but I think it is more accurate to call them re-election protection. In return for votes, politicians making it more difficult to collect harms the consumers they claim to protect.
In a recent law review article discussing the impact of regulation on lending, it was noted that if lenders cannot accurately price the risk of a loan, because of regulatory limits, the lender reduces exposure by lending less money to the same borrowers, or limiting to whom it loans. Without question, these proposed bills would have the exact effect. Specifically, a lender, knowing a potential borrower’s wage is less than 60 times the minimum wage is also going to know that upon default, obtaining a judgment will not protect it, as the garnishment will never recover any money. Likewise, with a reduced interest rate post-judgment, inflation will simply devour the value of the loan, causing an even more significant loss if the loan is given and defaulted. With those twin limitations, why lend to that person at all?
Moreover, what is missing from this discussion is the broader macro-economic aspect. The same article noted that 95% of debt is paid on time and of the 30 million debtors in collections the CFPB reported, there are roughly 30,000 debt collection complaints. That is the definition of statistical insignificance. Adding to that, in instances where the complaint was that the debt was invalid, the FTC found that only 1-2% of those claims are valid, even among accounts bought by debt buyers.
These statistics just scratch the surface regarding the benefits of legal debt collection on the nation’s economy. Candidly, the truth doesn’t seem to attract voters! So what do those statistics mean in the real world? It means the real question that should be asked by politicians is whether the 95% of consumers who pay on time would be willing to pay higher interest to prevent creditors from being able to garnish the wages of the 5%? Although we know facts ought not get in the way of a politician’s reelection, studies from the 1970s through a 2013 Federal Reserve Bank of Philadelphia study have consistently shown lower income consumers are most negatively affected by restricting creditor remedies and, contrary to the politicians claims – interest rates are lower where there are fewer legal restrictions. Everyone pays less when there is a fair playing field for consumers and lenders.
At a minimum, all of us need to be aware of the trends in the election cycle and the likelihood of damaging legislation. It is imperative that you and your trade organizations be armed with skilled lobbyists and proper metrics to tell the true story.
Michael L. Starzec is a partner with Blitt and Gaines, P.C and is vicepresident of the Illinois Creditors Bar. He is a frequent speaker, writer and litigator on creditor’s rights.