The "Financial Regulatory Relief and Economic Efficiency Act of 1997"
March 10, 1998
Presented by Margot Saunders, also on behalf
of Consumer Federation of America and U.S. Public Interest Research Group
Mr. Chairman and Members of the Committee, the National
Consumer Law Center1 thanks you for inviting
us to testify today regarding the impact of S. 1405 on consumers. We offer our
testimony here today on behalf of our low income clients, as well as the
Consumer Federation of America2 and the U.S.
Public Interest Research Group3.
There should be no misunderstanding: S. 1405 provides
no benefits to consumers. Although there are many updates and improvements to
federal consumer protection laws that are needed, not one has been included
in this bill4. Instead, in its present form S. 1405
would seriously undermine two of the most important federal consumer protections:
the Real Estate Settlement Procedures Act and the Fair Debt Collections Practices
Act:
I. Amendment to Real Estate Settlement Procedures Act.
Section 206 would have the effect of increasing the cost of homes and home lending
by allowing affinity groups to receive referral fees as a major exception to
RESPA's Section 8 prohibitions against kickbacks.
II. Fair Debt Collection Practices Act Amendments.
Section 207 would seriously reduce protections for consumers against unfair,
deceptive and harassing debt collection practices. This section proposes four
anti-consumer amendments which would 1) exempt any communication made under
state or federal rules of civil procedure from the FDCPA; 2) exempt the collection
of checks from coverage under FDCPA; 3) dismantle the protections from confusing
messages regarding the consumer's right to request verification of the debt;
and 4) exempt all efforts to collect loans made under the Higher Education Act
of 1965 from coverage under the FDCPA.
III.Truth in Lending Act Amendments. Section
401 would replace the historical table on APR changes for open end variable
rate home loans.
I. RESPA Amendment - Affinity Group Exception.
The main problem is that allowing affinity groups to receive kickbacks for referrals
and endorsements of settlement services would open the door for significant
consumer abuses, and would unequivocally have the effect of increasing the costs
of settlement services for consumers. The original purpose of RESPA was to ensure
fair and open competition in the marketplace to keep the costs of settlement
services as low as possible.
RESPA currently allows anyone to be paid for services
that are actually rendered. RESPA's section 8 only prohibits the payment of
"referral fees." Section 206 of S. 1405 would allow an affinity group
to be established -- for a common purpose -- by anyone other than a settlement
service provider. (Does anyone really know what an affinity group is?) Then
the affinity group could make endorsements of settlement service providers and
receive payment for the endorsements so long as disclosures are provided to
consumers.
The effect of this amendment would be to allow the payment
of a fee to an affinity group for something other than services actually rendered.
As a result, endorsement fees could be paid in large sums to anyone, (including
realtors) for referrals to lenders, title insurance companies, and others. While
home buyers might believe that the endorsement was a true recommendation about
the value of the services provided by the settlement service provider to whom
they were referred, in fact the only reason the referral would have been made
was because the referring party was receiving a kickback for making it. This
was exactly the reason for the original prohibition in RESPA’s section 8.
There are a number of problems with this proposal:
1) There is no requirement that the consumer receive the
benefit of, or indeed any benefit from the referral made as the result of the
endorsement. Given this, the consumer could believe that the endorsement is
made for his benefit, when the actuality of the situation could be that because
of the endorsement the settlement service is more expensive than it would have
been if the consumer had gone to the provider directly. For example, the referral
could be provided by a group (such as a church, an alumni association, a trade
association, an employer) -- in the guise of providing good advice to the consumer
-- that a certain settlement service provider is the best one to use. Yet under
the language in the amendment, if the referral were made by an affinity group,
there would be nothing to prohibit the settlement service provider from increasing
the price charged to the consumer and splitting the increased price with the
affinity group.
2) There is no prohibition against affinity groups being
established by affiliates, subsidiaries or parent organizations of settlement
service providers. So long as that loophole exists, the limitation against settlement
service providers setting up the affinity group is effectively meaningless.
So for example, an affiliate of a corporate realtor which is not itself a settlement
service provider could establish an affinity group. The realtor could then endorse
a particular lender. Once the consumer uses that lender, at the suggestion of
the realtor, the affiliate of the lender -- the affinity group -- would receive
a kickback, or referral or endorsement fee. Such a system would clearly undermine
the purposes for which RESPA was created: to protect consumers from unnecessarily
high settlement charges and certain abusive practices (12 U.S.C. § 2601). The
payment of a fee for steering should remain illegal, otherwise the referral
could still be made to the detriment of the consumer.
The potential for abuse that could result from an affinity
group endorsement that section 206 would allow should be contrasted with the
allowable activities of affinity groups under current law. (See appendix I:
article from Saturday, January 24, 1998, Washington Post.) Under current law,
affinity groups make endorsements of settlement services which are generally
considered to be legal. Current law allows endorsements of settlement service
providers by affinity groups so long as the consumer receives the benefit of
the referral. In the Long & Foster- Costco relationship described in the
article, the consumer would have a received a rebate from the realty company
as the result of the referral from the affinity group. Clearly consumers will
benefit from this type of arrangement (although realtors may not). This arrangement
is considered to be legal because of the exception to the definition of "required
use" in 24 C.F.R. § 3500.2(b):
However, the offering of a package
(or combination of settlement services) or the offering of discounts or rebates
to consumers for the purchase of multiple settlement services does not constitute
a required use. . . . The discount must be a true discount below the prices
that are otherwise generally available, and must not be made up by higher costs
elsewhere in the settlement process. (Emphasis added.)
Given that this language is already in RESPA, and thus
endorsements by affinity groups which result in a discount to the consumer are
currently legal, the only reason to change the law would be to allow endorsements
by affinity groups which do not result in a benefit to the consumer. Passing
S. 206 will increase the costs of settlement services to consumers.
Additionally, the Mortgage Reform Working Group, comprised
of representatives of any industry and consumer group that wants to join, has
been meeting regularly and extensively for the past seven months in an effort
to comprehensively draft a rewrite of RESPA, as well as the Truth in Lending
Act. Section 8 protections are very much on the table in these discussions.
If the Working Group is to have any real hope of accomplishing reform, it does
not make sense for Congress to pass piece meal legislation amending either of
these two laws at this point. For that reason alone this amendment should be
rejected.
Finally, while eviscerating the major substantive protection
of the Real Estate Settlement Procedures Act (RESPA) -- the prohibition against
unearned referral fees -- this amendment would not even appear in the U.S. Code
within the statute it amends. As such, there would be no enforcement mechanism
to ensure compliance even with the minimal standards of the proposed amendment.
II. Fair Debt Collection Practices Act Amendments.
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 consumers5. Another survey
found that this type of false advice was prevalent in the collection industry6.
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
relief7. 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 Act8.
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 leverage9.
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 bounced10. 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."11
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 checks12
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 debt13. 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
notice14, 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."15
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.16
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.17
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.18
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.19
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) so long as they do not overshadow
or contradict the information provided in subsection (a) of this section, collection
activities and communications may continue during the 30-day period.
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 20 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 debts21. (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 school’s 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 collector’s 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 information22.
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-payment23,
as well as several telephone contacts24. The FDCPA
on the other hand, requires a collector to cease communications with a consumer
if the consumer requests it25.
The FDCPA requires communications to cease at the consumer’s request to
provide a sanctuary for consumers from the constant dunning efforts of collectors.
It allows the consumers a way to say "Enough, I’ve 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."26
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 consumer’s privacy.27
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.
III. Truth in Lending Act Amendments.
1) Section 401 would replace the historical
table on APR for open end variable rate home loans with the rather meaningless
statement that periodic payments may increase substantially. This change mirrors
that which occurred for variable rate closed end home loans in S. 650 (amending
TILA § 128(a)(14)) in 1996. While we have never maintained that historical information
provided for an imaginary $10,000 loan was all that valuable, it does still
provide some useful information to those consumers who are willing to study
it. The replacement language in S. 650 and in this bill, really serves only
one purpose -- to reduce creditor compliance burdens.
If one truly wanted to make the disclosure of the risks
involved in variable rate open end credit secured by the home meaningful to
the consumer, in addition to the change proposed in § 401 of this bill, subsection
(H)(ii) of § 127A(2) would be replaced with information about the highest annual
percentage rate, and the highest minimum payment based on the actual loan terms.
In addition, information about how long it could take to repay the outstanding
balance at the highest interest rates, as well as the total possible cost should
be included. To do this, the amendment would rewrite subsection (H) as follows:
(H) a statement of
(i) the maximum annual percentage rate which may be imposed
under each repayment option of the plan;
(ii) the minimum amount of any periodic payment which
may be required, based on a $10,000 outstanding balance the maximum amount
which can be withdrawn under each such option when such maximum annual percentage
rate is in effect; and.
(iii) the earliest date by which such maximum annual interest
rate may be imposed; and
(iv) the total number of payments, and the total amount
of the payments it would take to repay the outstanding credit if the maximum
amount were withdrawn and the maximum annual percentage rate were applied to
this amount under each such repayment option of the plan.
Thank you for your consideration of these issues on behalf
of low income consumers. I would be happy to respond to any questions.
Appendix 1
Appendix 2
FDCPA Student Loan Case History #1
Borrower took out student loans to attend university.
He was only able to go to school for a year, quitting in order to work and support
his family. He later suffered a disability that kept him from working for a
few years. During this time, he was unable to make the payments on the loan.
When he was able to return to work, borrower contacted the holder of his loan,
a California-based guaranty agency, and requested a reasonable and affordable
payment plan. The guaranty agency refused to deal with him and referred him
to a collection agency.
The collection agency would only agree to a payment plan
with monthly payments beyond what the borrower could afford. Even so, he tried
for a number of years to make the payments, sometimes sending the full amount,
sometimes a little less. This arrangement continued for a number of years. After
about four years, the collection agency suddenly began a series of escalating
demands and threats. Among other egregious threats, the collection agency claimed
they would turn the borrower over to the local authorities and cause him public
embarrassment. They contacted his wife at her employment, at times leaving messages
with fellow employees about her husband's debt. They also contacted borrower
at work, using threatening and insulting language, telling him he could be criminally
liable if he failed to pay back the debt. The collection agency incorrectly
claimed they could add over 40% of the amount of the debt as additional collection
costs.
FDCPA Student Loan Case History #2
Consumer was being dunned by collection agency on behalf
of a state guaranty agency. The consumer requested an application for discharge
of the debt based on the school’s false certification -- a right provided to
student loan debtors when the vocational schools they attended falsely or fraudulently
admitted them to the school. The collection agency advised the consumer that
there was no such thing as a discharge for false certification and told her
that she had better borrow some money from relatives to start paying off her
loan. The consumer’s legal services attorney then called the collector on her
behalf, and indentified himself as her attorney. He was told repeatedly by the
collection agency that they had never heard of the right to a discharge based
on a school’s false certification.
After repeated attempts to deal with the collector, the
attorney was referred back to the guaranty agency. The guaranty agency finally
agreed that the student loan regulations permit a loan discharge based on a
school's false certification, but consistently refused even to provide her with
an application. Without investigating the facts, the guaranty agency kept insisting
that she was not eligible for this discharge. Eventually, because of the demands
of her legal services attorney, she was allowed to apply.
_____________________
1 The National Consumer
Law Center is a nonprofit organization specializing in consumer credit issues
on behalf of low-income people. We work with thousands of legal services, government
and private attorneys around the country, representing low-income and elderly
individuals, who request our assistance with the analysis of credit transactions
to determine appropriate claims and defenses their clients might have. As a
result of our daily contact with these practicing attorneys, we have seen examples
of predatory lending to low-income people in almost every state in the union.
It is from this vantage point--many years of dealing with the abusive transactions
thrust upon the less sophisticated and less powerful in our communities--that
we supply this testimony today. Cost of Credit (NCLC 1995), Truth
in Lending (NCLC 1996) and Unfair and Deceptive Acts and Practices (NCLC
1997), are three of twelve practice treatises which NCLC publishes and annually
supplements. These books as well as our newsletter, NCLC Reports Consumer
Credit & Usury Ed., describe the law currently applicable to all types
of consumer loan transactions.
2The Consumer Federation
of America is a nonprofit association of some 250 pro-consumer groups, with
a combined membership of 50 million people. CFA was founded in 1968 to advance
consumers' interests through advocacy and education.
3 The U.S. Public Interest
Research Group is the national lobbying office for state PIRGs, which are non-profit,
non-partisan consumer advocacy groups with half a million citizen members around
the country.
4 Examples of needed
updates and improvements to federal consumer protection laws include 1) the
expansion of the jurisdiction limits of the Truth in Lending Act to cover extensions
of credit over $25,000; 2) an increase in the statutory damages recoverable
under the Truth in Lending Act to reflect the impact of inflation on the statutory
amount which was established in 1968; 3) providing protections from unfair,
harassing and deceptive collection activities of creditors, as the Fair Debt
Collection Practices Act only covers the efforts of debt collectors collecting
the debts of others; and 4) basic consumer protections for consumers from the
high costs of credit in rent to own transactions and pay day loans.
5 H. Sterling &
P. Shrag, Default Judgments Against Consumer: Has the System Failed?
67 Denver U.L. Rev. 357, 370-372 (1990).
6 D. Caplovitz, Consumers
In Trouble, note 3 at 205 (Free Press 1974).
7 15 U.S.C. §
1692e(2)(A): "The false representation of the ...the character, amount
. . . or any debt."
8See, e.g.Ryan v. Wexler & Wexler, 113 F.3d 91 (7th Cir.
1997); Bass v. Stolper, Koritzinsky, Brewster & Neider, S.C. 111
F.3d 1322 (7th Cir. 1997); Draper v CRA Sec. Systems, Inc. 117 F.3d 1424
(9th Cir 1997); Ditty v. Check Rite, Ltd., ___F. Supp. ___, 1997 WL 471115
(D. Utah 1997); Johnson v. CRA Security Systems, 1997 WL 241861 (N.D.
Cal. 1997).
9See e.g.
United States v. Central Adjustment Bureau, Inc., 667 F.Supp. 370 (N.D.
Tex. 1986) (collector violated 15 U.S.C. § 1692f(3) by soliciting postdated
checks with the purpose of threatening criminal prosecution), aff'd per curiam,
823 F. 2d 880 (5th Cir. 1987); G.C. Services Corp., 83 FTC 1521 (1974)
(complaint alleged that collection agency solicited postdated checks and later
threatened criminal prosecution if the check was dishonored.
10 On a nationally
administered test, 99% of 17 year olds and 84% of adults were not able to correctly
balance a sample checking account. National Assessment of Educational Progress,
Consumer Math (GPO 1975). One percent of checks are dishonored; of those 71.2%
are for insufficient funds, 2.7% drawn on uncollected funds, 4.4% drawn on closed
accounts, 2.7% stop payment orders, 4.9% ,missing endorsements. and 14.1% for
other reasons, including bank errors. Statement of Preston Martin to House
Banking Subcommittee, 70 Fed. Res. Bull. 319 (1984). One of 5245 returned
checks (2 or every 1 million checks written) are a loss to a bank. W. Stafeil,
The Impact of Exception Items on the Check Collection System, A Quantitative
Description (Bank Admin. Instit. 1970).
12See, e.g.Newman v. Checkrite California, Inc., 912 F. Supp. 1354 (E.D. Cal. 1995)
(lawyers collecting debts for a check collection agency violated 15 U.S.C. §
1692e and 1692f by adding an $85 charge that was not authorized by the contract
or state law and labeling it a "legal notice" fee and misrepresenting
that the fee was legally due); West v. Costen, 558 F.Supp. 564 (W.D.Va.
1983) (imposition of $15 service charge on each bad check it collected violated
15 U.S.C. § 1692f(1) since there was no evident of contract providing for the
charge and the charge was not expressly permitted by state or federal law. Attempt
to collection such charges violated 15 U.S.C. § 1692e(2)); FTC Official Staff
Commentary § 808(11).
17Miller
v. Payco General American Credits, Inc., 943 F.2d 482, 484 (4th Cir. 1991)
.
18United
States v. National Financial Services, Inc., Clearinghouse No. 47,970 (D.
Md. 1993).
19United
States v. National Financial Services, Inc., 98 F.3d 131 (4th Cir. 1996).
20 15 U.S.C.
§1692a(6)(C) exempts "any officer or employee of the United States or any
State to the extent that collecting or attempting to collect any debt is in
the performance of his official duties."
21See Brannon
v. United Student Aid Funds, 94 F.3rd 1260 (9th Cir. 1996) holding
that student debtor may obtain damages from a guaranty agency for abusive collection
practices in violation of FDCPA. For other examples of allegations of abusive
collection practices of guaranty agencies, seeBeaulieu v. American
Nat’l Educ. Corp., CV 79-L-271, Clearinghouse No. 30892 (D. Neb. 1981);
Coppola v. Connecticut Student Loan Found., 1989 WL 33707 (D.Conn. 1989)
(holding student loan servicing agency was not a debt collector since it obtained
loan before default); Games v. Cavazos, 737 F. Supp. 1368 (D. Del. 1990)
(U.S.A. Funds, a private federal student loan guarantee agency, exempted by
§1692a(6)(C).
22 The §1692g
notice requires collectors to provide notice to the consumer of:
(1) the amount of the debt;
(2) the name of the creditor to whom the debt is owed;
3) a statement that unless the consumer, within thirty days after receipt of
the notice, disputes the validity of the debt, or any portion thereof, the debt
will be assumed to be valid by the debt collector;
(4) a statement that if the consumer notifies the debt collector in writing
within the thirty-day period that the debt, or any portion hereof, is disputed,
the debt collector will obtain verification of the debt or a copy of a judgment
against the consumer and a copy of such verification or judgment will be mailed
to the consumer by the debt collector; and
(5) a statement that, upon the consumer's written request within the thirty-day
period, the debt collector will provide the consumer with the name and address
of the original creditor, if different from the current creditor.
25 § 1692c(c)
provides: If a consumer notifies a debt collector in writing that the consumer
refuses to pay a debt or that the consumer wishes the debt collector o cease
further communication with the consumer, the debt collector shall not communicate
further with the consumer with respect to such debt, . . .
and NCLC