NCPA - National Center for Policy Analysis

Consumer Debt Collection and Its Regulation

October 7, 2015

The Consumer Financial Protection Bureau (CFPB) is considering new regulations on debt collection. Although stricter regulation of debt collection practices can benefit consumers who are in default and increase demand for credit, overly restrictive regulation can result in higher interest rates and less access to credit for consumers.

Before enacting new regulations, the CFPB should consider several factors.

  • Since the 1970s, consumer debt collection has been subject to extensive regulation and most questionable practices have been outlawed or restricted.
  • Restrictions on collections would simultaneously reduce supply and increase demand.
  • Because riskier borrowers are predicted to be the most likely to default, they will also bear a greater proportion of the cost of regulation than other borrowers.
  • Third-party collection agencies provide liquidity and expertise in collection practices that reduce losses and increase efficiency for consumer lenders.
  • Compliance with Dodd-Frank and other regulations is disproportionately costly for smaller firms in this industry, including the debt collection and debt buying industries.

The CFPB should also consider the growing reliance on technologies such as cell phones, email, and text messaging, and modernize its rules to allow more flexible contact using those technologies while at the same time protecting consumer privacy.

The CFPB should seek not only to protect consumers from overreaching creditor behavior, but to ensure access to credit at competitive prices. In addition, the regulations should avoid imposing disproportionate burdens on small firms that would reduce competition and promote further consolidation. Thus it should be careful to ensure that the marginal benefits of new regulations exceed any costs arising from unintended consequences.

Source: Todd Zywicki, "The Law and Economics of Consumer Debt Collection and Its Regulation," Mercatus Center, September 29, 2015.

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