CONSUMER FINANCE LITIGATION AND CREDITORS’ RIGHTS IN THE UNITED STATES: LEGAL AND ECONOMIC IMPLICATIONS OF DEBT COLLECTION REGULATION

Abstract

Abstract. Debate on the regulation of consumer debt collection in the United States is usually conducted as a single argument: protection of the consumer against preservation of credit supply. This article shows that the argument is mis-specified, because the empirical literature does not in fact disagree about whether regulation has a price. It disagrees about which regulatory margin carries that price. Fedaseyeu finds that a one-point increase in a state index of structural restrictions reduces third-party collector density by 62.8 employees per million people, about 15 per cent of the sample mean, lowers credit-union recovery rates on charged-off credit-card loans by 1.038 percentage points, and reduces new revolving accounts by 1.849 per 1,000 consumers per quarter. Romeo and Sandler, examining conduct restrictions adopted in four states, report that such rules reduce credit-card access and raise interest rates but that the effect is very small. Fonseca finds that restricting collections reduces mainstream credit and increases payday borrowing, so that part of the cost falls on the households the rules were written to protect. Against those economic findings the article sets the procedural record: the Pew Charitable Trusts report that debt collection cases rose from about one in nine civil cases in 1993 to about one in four in 2013, that more than seventy per cent of such suits end in default judgment, and that fewer than ten per cent of defendants are represented while almost every plaintiff is. The article concludes that the most defensible reform is procedural rather than structural, because the measured credit cost of conduct and documentation rules is small while the measured procedural defect is large, and it proposes four measures on that basis.