by Jeff Sovern
Our consumer law casebook strives to present a balanced approach, so I am always on the lookout for writings that present debt collectors favorably. In that regard, The Economist recently published In praise of America’s third-party debt collectors. Here's an excerpt:
A provocative new paper by Julia Fonseca, of Princeton University, and Katherine Strair and Basit Zafar, of the Federal Reserve Bank of New York, reveals that restrictions on debt-collection practices may, perversely, hurt some consumers more than they help. The authors * * * find that, after controlling for external factors, such as unemployment and income levels, borrowers in states where debt-collection practices are more strictly regulated find it moderately harder to access credit, because lenders cut back. Borrowers in states where debt-collection practices are less intense (owing to stricter rules) received on average $213 less in car loans and $136 less in retail and other personal loans than borrowers in states where debt collectors had a freer hand.
* * *
Without the deterrent effect of third-party collectors, consumers are likely to assume more risk and to overborrow. Default is perceived to come with lower costs. This is likely to lead to higher default rates, forcing lenders to reduce the supply of credit to mitigate losses. Those with low credit scores will bear the brunt, as they become even less likely to qualify for loans. * * *
Meanwhile, the Worcester Telegram ran an interview with debt collector John Tammaro, who explains:
Many of my clients have a default rate of approximately 5 percent. It doesn’t sound like a lot of money, but when their margins are only 10 (percent) to 15 percent, if they’re losing a third to a half of that money to defaults, that cuts right into their bottom line. When we get involved, we help recoup that lost money.