Why the CFPB's Position on Time-Barred Debt is Bad for Consumers

Tomio Narita

Does a consumer need to be “protected” from repaying his own debts?  Can a consumer be “harmed” if he voluntarily makes a payment on a debt that he admittedly owes?  The CFPB apparently believes that sometimes the answer is “yes.”

The CFPB and the FTC have forcefully argued that debt collectors should make an affirmative disclosure to consumers when they are seeking to collect debts that cannot be judicially enforced, and that the failure to make this disclosure may violate the FDCPA.  This is necessary, according to the CFPB and FTC, because consumers are usually unfamiliar with the statute of limitations that apply to their debts, and a collector’s failure to disclose that the debt is no longer judicially enforceable could have “adverse consequences” to a consumer.  In other words, the consumer might actually pay the debt he owes, unless the collector “protects” him by affirmatively advising him that the collector cannot sue to collect it.

The CFPB wants seriously delinquent consumers to know their debts are no longer judicially enforceable so they can make an informed decision to not repay them.  But does this make for good “consumer protection” policy?  Not really.

If the CFPB discourages delinquent consumers from paying debts they admittedly owe, this raises the cost of credit for all consumers, and it may eliminate the availability of credit to low and moderate income consumers who need it the most.  And if consumers stop paying on seriously delinquent accounts, this will force creditors and collectors to file even more lawsuits, so the creditor can be sure to collect before the limitations period has run.

But wait a minute, you say, why would the CFPB take this position?  I thought it was important for consumers to repay their debts. And I thought that debt collection was critically important to the economy, because it helps to keep the cost of credit lower, and helps keep credit widely available for all consumers. When people repay the debts they owe, this makes credit more available and more affordable, and all consumers benefit, right?

You are right on all these points.  Indeed, the FTC and CFPB have repeatedly told us that you are right.  For example, in the February 2009 report issued by the FTC entitled “Collecting Consumer Debts: The Challenges Of Change” the FTC reminded us: “Consumer credit is a critical component of today’s economy. Credit allows consumers to purchase goods and services for which they are unable or unwilling to pay the entire cost at the time of purchase. By extending credit, however, creditors take the risk that consumers will not repay all or part of the amount they owe. If consumers do not pay their debts, creditors may become less willing to lend money to consumers, or may increase the cost of borrowing money.”  (See Executive Summary, pp. ii-iii.)

The FTC was even more forceful on this point in its report in July 2010 entitled “Repairing A Broken System: Protecting Consumers In Debt Collection Litigation And Arbitration” where it stated:  “Credit benefits consumers by allowing them to obtain goods and services without paying the entire cost at the time of purchase. . . . Because consumers sometimes fail to pay their creditors, debt collection plays a vitally important role in the consumer credit system. Debt collection benefits individual creditors, of course, who are repaid money they are owed. More importantly, however, by providing compensation to creditors when consumers do not repay their debts, the debt collection system helps keep credit prices low and helps ensure that consumer credit remains widely available.”  (See Executive Summary, p. i.)

These same points were echoed by the CFPB on March 20, 2013 in its Annual Report To Congress on the Fair Debt Collection Practices Act, where it stated: “Consumer debt collection is critical to the functioning of the consumer credit market. By collecting delinquent debt, collectors reduce creditors’ losses from non-repayment and thereby help to keep consumer credit available and potentially more affordable to consumers.  Available and affordable credit is vital to millions of consumers because it makes it possible for them to purchase goods and services that they could not afford if they had to pay the entire cost at the time of purchase.” (See CFPB’s Report To Congress, p. 9.)

Thus, CFPB and FTC have publicly stated that when delinquent consumers repay the debts they actually owe, all consumers benefit.  And of course the economic benefit that comes from repayment of a debt does not magically evaporate when the statute of limitations on the debt expires.  Why, then, has the CFPB so adamantly insisted that consumers must be advised by collectors when the statute of limitations has expired.  What exactly is the “consumer protection” goal that is being met here?  The answer is not clear.