Secret History of the Credit Card
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when the debt collector comes calling... by mark chediak

There are some lessons to be learned from the Glenn family's experience after they got behind paying their credit card bill and the debt collector started phoning. This report looks at their story, the growth of the debt collection industry, how debt collectors work, the controversy over abusive practices and the consumer protection laws that are in place, and new ones being proposed.

Mark Chediak is a student at the Graduate School of Journalism at the University of California, Berkeley. His articles have appeared in San Francisco magazine, Red Herring magazine, the South Florida Sun-Sentinel and the San Francisco Business Times.

Darlene Glenn remembers crying so hard that she couldn't breathe. It was less than a week before Christmas and the 40-year-old Alabama schoolteacher had just recently returned home after a hospital stay when she received a phone call from a credit card debt collector. The man on the phone, she says, threatened to send the police to her house if she didn't pay off her outstanding credit card bill.

"I hung up the phone thinking the sheriff was going to come knocking on my door," Darlene says. "I was bawling on the floor, thinking 'Oh my gosh, how embarrassing.'"

Darlene, who works with mentally disabled teenagers, and her husband, Thomas, 40, a Baptist minister, had run into financial trouble after each had undergone emergency surgeries within the span of four months in 2001.

The couple, who have three boys and live in a modest house in Gadsden, Ala., say they could not keep up with all of their bills on a annual salary of less than $50,000.

"We are not fancy people," says Darlene. "We were not trying to live above our means. We were just trying to get by."

The Glenns say they had made payment arrangements with other creditors and had returned their leased Ford van to the dealership. But collectors hired by a credit card company wouldn't stop calling.

"We were trying to be reputable and pay everyone back," says Darlene. "It's embarrassing. Humiliating. You lay down at night feeling like a horrible person, when in fact, circumstances overtake people every day."

With consumer debt and personal bankruptcy soaring over the last decade, the Glenns are just one example of a growing number of Americans struggling to stay on top of their credit card bills. Nearly one out of every two families holds some amount of credit card debt.

Further, the amount of money lent by credit card companies has skyrocketed over the past two decades. According to the Federal Reserve, the total amount of outstanding revolving consumer credit, which is primarily credit card debt, reached $743 billion this year, nearly nine times the amount recorded 20 years ago.

As card issuers hand out more money, collecting on outstanding balances has become even more critical to the financial health of the credit card business.

"This [collection] industry has evolved from a red-headed stepchild into a necessity," says Mike Ginsburg, CEO of Kaulkin Ginsburg, an advisory firm to the debt collection industry.

Credit card debt collection has not only become essential, it has become very profitable. The most recent data indicates credit card debt collectors generated $1.2 billion in revenue, according to a report issued by Kaulkin Ginsberg. And that figure is likely to grow as consumer debt is expected to rise, analysts say.

Some economists say lower-income families like the Glenns are more likely to struggle with payments, as consumers become more comfortable using credit cards to pay for essential needs such as food or medical bills.

"From a collection point of view, the problems are really with the low-income people," says Allen Grommet, senior economist with the Cambridge Consumer Credit Index, part of the Debt Relief Clearinghouse, a Massachusetts-based consumer credit advisory group.

"They are mainly responsible for the growing number of delinquencies, defaults and bankruptcies," he says.

Debt collectors have become more sophisticated in their approach. New tools make it easier to monitor telephone and mail contacts with consumers and track down debtors.

The typical collector makes an average of 20 phone calls an hour, reaching six debtors with at least two promises of payment, according to ACA International, the largest association of credit and collection professionals.

The Glenns say they received at least 20 phone calls from a credit card debt collector within the span of a few days. "You're going to continue to get these calls," said a collector in a phone conversation recorded by Thomas Glenn. "Pay your bills and you won't get these calls," the collector demanded.

Some consumer advocates say that collectors are increasingly turning to abusive and illegal tactics to get reluctant debtors to pay.

"I see people all the time who are frightened, scared and get threatened with things that they don't realize that [collection] companies don't have the power to do," says Steve Tripoli, consumer advocate for the National Consumer Law Center, a non-profit consumer law advocacy group in Boston, Mass.

Frustrated by the constant calls, the Glenns say they ended up hiring an attorney to get the credit card debt collector off their backs. This was after the collection agency made threats to Darlene's boss and placed several calls to Thomas' church, says Darlene.

Collection industry officials say it is in a debt collector's best interest to obey the law and most collectors do not resort to such abusive behavior. Rozanne Andersen, general counsel and senior vice president of ACA International, says her organization "absolutely denounces those bad practices." She says collectors who resort to intimidation and threats are the rare exception rather than the rule. "The association would like nothing more than to curtail that activity because it ultimately hurts the entire profession," she says.

» The Regulators

The collection industry is regulated by the Fair Debt Collection Practices Act (FDCPA) of 1977, a federal act that limits how and when collectors can contact a debtor about past-due amounts owed to their clients. The Federal Trade Commission is primarily responsible for enforcing the act.

Before passage of the bill, most states lacked consumer protection laws that adequately shielded borrowers from unreasonable debt collection behavior, says Robert Hobbs, deputy director of the National Consumer Law Center in Boston.

Debt collectors in the past "had a lot of leeway," Hobbs says, and it wasn't uncommon for collectors to embarrass, harass or humiliate debtors. "It was a little bit like the Wild West," he says.

Now, under the Fair Debt Collection Practices Act, it is illegal for third-party collectors to threaten violence or harm to a debtor, use obscene language, or repeatedly use the phone to harass a consumer. In addition, third-party collectors cannot threaten to arrest a consumer for an unpaid debt or threaten to seize or garnish a consumer's property or wages unless the collector intends to do so and it is a legal cause of action.

The passage of the FDCPA placed certain constraints on a third-party collection agency. For example, a collector now must stop all contact with a consumer about a debt if the collector receives a written notice requesting no further contact or a written notice of a refusal to pay a debt. This, however, does not prevent a collector from filing suit against a debtor. In addition, it is illegal for collectors to talk to a third party, such as consumer's employers, relatives, neighbors or friends about a consumer's debts.

Darlene Glenn says she was relieved when she discovered that many of the tactics used by the collector calling her were illegal. At one point, she says, a collector had told her boss about her outstanding debts. "He was just humiliating me to my employer," she says of the collector.

Still, the FDCPA only applies to third-party collectors. It does not cover creditors (the bank that extended the credit), and it is unclear how it applies to the increasing number of debt purchasers. Courts have ruled that debt purchasers are covered under the act, according to Hobbs.

Debt buyers who attempt to collect on debt are considered "debt collectors" and must comply with the FDCPA, says Darren Bowie, assistant director of the Division of Financial Practices at the Federal Trade Commission.

While creditors are not covered under the national FDCPA, the Federal Trade Commission can file suit against creditors under Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive practices. Some states have laws that protect consumers from creditors. The Federal Trade Commission also can seek remedies against creditors through restitution, refunds to consumers or by forcing creditors to give up profits from illegal activities, says Bowie.

When a consumer files suit against a debt collector, the maximum fine that can be imposed under the FDCPA is $1000, says Bowie. However, consumers may win far more in damages, such as for emotional distress. If they retain private counsel, they may also be able to recover their attorney's fees. In addition, violators of the law are subject to class action lawsuits. And under the act, the Federal Trade Commission can issue injunctions against collectors to stop illegal behavior or obtain civil penalties.

The suit filed by Darlene and Thomas Glenn against their credit card collector took more than two years to resolve, Darlene says. The couple eventually won the dispute, with the collector's attorney issuing a formal apology to the couple.

"We pretty much made it clear," says Darlene, "that all we wanted was some time" to pay off the debts.

» History

Prior to the 1980s, most collection agencies were small "mom and pop" operations. "You could set up a collection agency if you had a phone and knew how to use it," says Hobbs, of the National Consumer Law Center.

It was the federal government's decision in the 1980s to farm out the collection of student loan debt that transformed the industry into what it is today, according to Hobbs. "This was billions and billions of dollars and millions of accounts," he says. Small agencies simply could not handle these large government contracts, he says, so larger collection firms started to emerge.

In the 1990s, small and specialty agencies continued to consolidate into conglomerates backed by Wall Street and private equity firms. Since 1995, the combined revenues of the top 10 players in the debt collection industry, which includes all forms of debt collection -- credit cards, mortgages and others -- has skyrocketed from $910 million in 1995 to $2.5 billion in 2000, according to the Kaulkin Report.

"Today's [collection] industry is radically different and its tactics are radically different," says the National Consumer Law Center's Tripoli. He argues that despite the passage of laws designed to regulate the collection industry, some collectors still use tactics that harass, threaten and frighten debtors.

Michael Flannagan, a former collector who ran a 30-person debt collection operation in Washington state, says the most effective collectors knew how to "bend or break the rules." "If you genuinely install fear into the consumer," he says, "they will generally pay you out of fear of the unknown."

But industry analysts say most collectors understand that abusive practices are bad for business. "The debt collection industry has the image of nasty leg breakers that will come after you if you don't pay," says James Daly, editor of Credit Card Management, a trade magazine that covers the credit card industry. Now, Daly says, " there is a feeling in the industry that threatening people is not going to work."

Andersen of ACA International says her association is "tired of that old stereotype" of threatening collectors that harass debtors. She says collectors in her association adhere to high ethical standards and the vast majority of collectors treat consumers in a fair and respectful manner. "We are really working hard to denounce bad practices," she says.

When a complaint is made to the ACA International's ethics committee that suggests a debt collector has "abused, harassed or deceived a consumer," says Andersen, "such an agency will be sanctioned, which may include probation, suspension or expulsion from the association."

» How it Works With Credit Card Debt

Collection of credit card debt is carried out in a variety of ways. Credit card companies initially try to recover an outstanding balance through its in-house collection department or through a third-party firm that collects debt under the name of the creditor. If the creditor is unable to collect, the debt is either handed over to an outside agency that makes a percentage on collections or the debt is sold outright for pennies on the dollar. The sold debt is then written off against the amount of outstanding debt.

An estimated $166.7 billion in charged-off credit card debt was available for purchase by collection agencies and debt buyers in 2003, according to the March 2004 issue of The Nilson Report, an industry newsletter.

According to The Nilson Report, credit card companies are selling off more of their bad accounts to debt purchasers because they can recover an amount close to the amount generated by a collection agency.

"Basically it comes down to a 'time is money' factor," says Daly, editor of Credit Card Management. He maintains a lot of credit issuers would rather have their bad debt converted into cash paid off up front, rather than wait for consumers to pay up over months or even years. So they're selling off more of their bad debt.

According to the Glenns, the collectors who contacted them said they had purchased the couple's outstanding credit card debt. In all likelihood, the collectors paid considerably less than the full amount owed; however, Darlene says they demanded immediate and full payment of the bill including late fees and other penalties.

"He wanted check [payments] over the phone," she says. "We were going to be left without being able to pay for groceries or power bills."

Since debt purchasers pay a fraction of the amount of an account's total outstanding debt, buyers only need to recover a modest percentage to turn a profit. Now, collection lawyers also see debt purchasing as a good investment opportunity and more lawyers are getting into the debt-buying game, says Charles Pona, president of the National Association of Retail Collection Attorneys, an association of debt collection law firms based in Washington, D.C.

Certain state laws prohibit law firms from buying debt, so firms are setting up subsidiaries or limited liability companies that purchase debt and contract with the firm, Pona says.

In many cases, a law firm's debt collection subsidiary becomes the firm's best client, he adds. "In essence, you're collecting your own debt and it assures you of continuing business," he says.

In the case of Darlene and Thomas Glenn, the threat of legal action and the fact that the collection call came from a law firm was particularly effective.

"I was a nervous wreck," says Darlene, recalling the first time she heard the collector say he was with a law group. "I said 'Oh my, an attorney called and we have to do something.'"

Later, the Glenns discovered that the collector was not an attorney but simply worked for a collection agency that was a subsidiary of a law firm.

» Industry Reform?

Consumer advocates say that unless the FTC institutes tougher punishments, efforts to curtail debt collection abuse are merely cosmetic. "The penalties aren't big enough or tough enough," says Steve Tripoli of the National Consumer Law Center.

But collection industry officials disagree. "Under the Fair Debt Collection Practices Act, consumers have a cause of action that entitles them to actual damages and attorney fees," said Andersen. "The industry believes that provides consumers with very strong protections and remedies."

Tripoli is skeptical about consumer protection laws being strengthened in the near future. "We can't play offense in this legislative environment because the forces of industry in Washington right now are more strongly aligned, sometimes on both sides of the aisle," he said.

Andersen says the claim that the collection industry is trying to undermine legislation designed to protect consumers is "shocking, in light of the work we have done with consumer groups over the past two years." She says in 2003, her association strongly backed passage of a bill (HR 3066) that called for clarification of various provisions of the Fair Debt Collection Practices Act. The bill has not yet been passed, and Andersen looks forward to continuing to work with consumer groups to achieve passage of a bill in the 109th session of Congress that is mutually satisfying to all parties.

The bill, which has received bipartisan support, says Andersen, requires debt collectors to submit the same written notice of consumer rights to all consumers. Collectors are required by law to send this notice to consumers within five days of their initial contact with the consumer. Andersen says that the majority of "frivolous lawsuits" filed against collectors are based on disputes regarding the language of this written notice.

"We would resolve hundreds of consumer complaints if everyone used the same notice," Andersen says.

As for the Glenn family, Darlene says that thanks to help from a credit counselor and a favorable settlement against the debt collector, the couple is "back on our feet." "We don't claim to have made all the right decisions," she says, but "we're rebuilding good credit and life is totally different now."

Links to Debt Collector Associations

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posted nov. 23, 2004

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