A new Federal Trade Commission report concludes that the system for resolving consumer debt collection disputes is broken, and recommends significant litigation and arbitration reforms to improve efficiency and fairness to consumers.
The report, “Repairing A Broken System: Protecting Consumers in Debt Collection Litigation and Arbitration,” reflects information gathered at roundtable discussions the FTC held throughout the country in 2009, as well as public comments and the FTC’s experience in debt collection matters. The roundtables followed a February 2009 report that identified some concerns with debt collection litigation and arbitration, but concluded that more information was needed about certain debt collection litigation and arbitration practices before further recommendations could be made.
The Commission therefore recommends state and local governments consider making a variety of reforms to service of process, pleading, and court rules and practices to increase the ability of consumers to defend or otherwise participate in debt collection litigation.
The FTC’s 2009 report found that debt collection litigation raised concerns about collectors failing to properly notify consumers of suits they have filed, collectors filing suits based on insufficient evidence of indebtedness, courts frequently granting default judgments against consumers who do not appear or defend themselves, collectors seeking to recover on debts beyond the statute of limitations, and banks freezing funds in bank accounts that are exempt from garnishment by law. In its new report, the Commission’s principal recommendations to address these concerns in litigation are:
States should consider adopting measures to make it more likely that consumers will defend themselves in litigation, decreasing the prevalence of default judgments.
Service of process may be inadequate or improper for many reasons. For example, process may fail to reach the consumer if it is delivered to an old or otherwise incorrect address or it is delivered to the wrong person, such as someone with a similar name. Some process servers may simply not serve the consumer but falsely assert that they have done so.
States should require collectors to include more information about the alleged debt in their complaints.
The FTC committed to closely monitor debt collection arbitration and evaluate whether creditors and arbitration forums provide consumers with meaningful choice and a fair process. The Commission also said that, as appropriate, it will report its views on new debt collection arbitration models to policymakers, industry, consumer groups, and the general public.
The FTC believes that reforms such as those discussed in the report should be made to ensure that the debt collection litigation and arbitration systems adequately protect consumers without unduly burdening the debt collection system, which helps to keep credit prices low and helps to ensure that consumer credit remains widely available.The Commission vote to issue the report was 5-0. Commissioner Julie Brill issued a concurring statement in which she urged Congress to enact a temporary ban on the mandatory arbitration of consumer debt collection disputes. “Such a ban should remain in place until the arbitration process can be shown to be fair, transparent, and as affordable as traditional litigation, and until consumers have a meaningful opportunity to opt out of pre-dispute arbitration without losing access to the credit services they seek,” she said.
Many consumer advocates and judges who adjudicate debt collection cases stated that inadequate or improper service occurs frequently. One local official reported that her agency’s comprehensive investigation of process servers in New York City revealed that “many are not performing service. They are filling out false affidavits of service. They are not going to the addresses. They are not sufficiently checking the addresses.” A Chicago judge explained similarly that one of his colleagues had conducted a “spot audit” of one process server and found that he “claimed to be in areas thirty miles apart in the Chicago-land area within minutes . . . . And we [asked,] ‘Is he Superman?’”
Nevertheless, the very high rate at which consumers do not appear and the service of process problems documented in some jurisdictions give the Commission a sufficient basis to conclude that efforts to improve service of process in debt collection litigation would benefit consumers in many locations.
An electronic version of the report text is available at http://www.ftc.gov/os/2010/07/debtcollectionreport.pdf