How Collection Legislation Impacts Consumer Financial Health

Despite the significant impact of the debt collection industry on the economy as a whole, relatively little research exists as to the impact that state-level collection legislation has on consumer financial outcomes. Preliminary findings in a recent staff report from the Federal Reserve Bank of New York reveal “consistent evidence that restricting collection activities leads to a decrease in access to credit and a deterioration in indicators of financial health” for consumers.

It sounds strange, right? The report suggests that regulations on the collection industry correlate to negative financial effects on consumers. Of course, these regulations have been introduced to protect consumers and ensure that financial institutions treat them fairly. In other words, the system set up to help consumers in one way may be doing them a disservice in another. Regardless of the report’s findings, for IC System, the solution to this issue is not deregulation; rather, it is working within the regulated, consumer-friendly system to producing superior results in an ethical way.

The debt collection industry has a sizable impact on the national economy, with an estimated $55 billion recovered per year and over 6,000 firms nationwide engaging in debt collection. The Consumer Financial Protection Bureau (CFPB) estimates that some 70 million consumers have been contacted at least once about an account in collection. The industry plays a vital role in facilitating effective enforcement of contracts by limiting the losses of creditors in the event of consumer default. Given this broad impact on our economy, it comes as no surprise that debt collection is a heavily-regulated industry.

But the staff report finds that changes in collection laws at the state level have consequential effects on the industry. Most of these laws involve calling restrictions and regulations concerning the ways a consumer can dispute a past-due account. The first major assertion of the report is that restrictive state-level collection laws correspond to a statistically significant decrease in access to credit, especially those on the lower end of the credit score spectrum.

Secondly, the findings of the report suggest that stricter collection laws lead to deterioration in financial health indicators, such as credit card and loan delinquencies, and this negative impact is felt almost exclusively by those with low credit scores. The report finds that restrictive debt collection legislation leads to an increase in the number of delinquent consumer debts, and also an increase in the average value of each account in a delinquent status.

Given the report’s findings, it’s important to consider two factors: 1) The findings of this report seem to effect younger consumers and those with low credit scores, and may not be representative of the average American consumer; 2) there have been no acceptable solutions to the report’s findings as of yet.

So what is the answer? Should the collection industry be deregulated to ensure the financial health of consumers? Removing one set of protections to ensure the health of another seems like a curious, if not backwards solution. For IC System, the answer is not deregulation, but providing the consumer with a better experience and helping them through their financial difficulty. Through our intensive call quality auditing and compliance departments, as well as our extensive training of our consumer financial representatives, IC System seeks to provide positive financial outcomes by doing what’s right for the consumer and our clients. In the meantime, we’ll keep an eye open on how regulators and industry leaders respond to the report’s findings.

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