Courts Should End Debt Buyers’ Litigation Assembly Line Lawsuits That Target Unaware Consumers and Increase the Racial Wealth Gap

By Nadine Chabrier, Senior Policy and Litigation Counsel, Center for Responsible Lending

April is Financial Literacy Month – dedicated to raising awareness about financial literacy and promoting financial education. It’s a good time to note that there is an entire debt collection industry in the US that benefits from consumers either taking on too much debt or having a hiccup in their personal lives that leads to default.

Already-vulnerable consumers then are subjected to confusing and sometimes illegal collections processes that further deepen the racial wealth gap in the US.

The pandemic has only accelerated the growth of the $15 billion collections agency industry. Five large collection companies alone are estimated to have generated $3.5 billion in sales in 2021, according to a Market Research study. Among those, only two companies are public, Portfolio Recovery Associates (PRA) and Encore Capital.

PRA currently is at the center of a North Carolina legal battle poised to be heard by the state Supreme Court. The case was brought against the debt buyer by Pia Townes, who alleged that PRA violated North Carolina’s Consumer Economic Protection Act (CEPA) when it obtained a default judgment against her with only partial information to substantiate its claims.

Townes' case is unfortunately all too common in the debt-buying industry, where companies purchase debt from creditors for less than the amount claimed to be owed, and then attempt to collect on the debt for profit. Even small debts are worth pursuing through the courts because of economies of scale.

The court vacated the default judgment originally entered because it said PRA failed to provide an itemization of the charges and fees and failed to authenticate account statements or other business records necessary to establish the amount and nature of the debt, both of which are required by North Carolina statute.

The Center for Responsible Lending (CRL), along with Charlotte Center for Legal Advocacy, Financial Protection Law Center, Legal Aid of North Carolina, Inc., National Association of Consumer Advocates, and Pisgah Legal Services, submitted an amicus brief in support of Townes. The brief urges North Carolina courts to enforce existing statutory protections — and interpret laws as they were written — to prevent harm to vulnerable consumers.

Meanwhile, PRA boasts that it achieved record cash collections, record revenue, record cash efficiency and record net income in 2021, pandemic notwithstanding. In Q4 2021 alone, the company collected $474 million globally and its year-to-date global cash collections were a record $2.1 billion, 3% ahead of its previous record from 2020."

Minimum Standards Must Be Established and Enforced

North Carolina has significant consumer protections in place and was the first state to pass such laws in 2009. CEPA strengthened consumer protections by imposing debt collection requirements on debt buyers. It specified that debt buyers must provide records for payments received from consumers, including the original creditor’s information, and barred them from collecting on debt past the statute of limitations or without valid documentation. The act also prevents a debt buyer from suing or initiating an arbitration proceeding to collect on debt without written notice to the consumer at least 30 days before filing.

Without these minimum standards, vulnerable and marginalized consumers — including people of color, women, servicemembers and seniors — are pushed deeper into debt. Debt buyers and collectors routinely add unauthorized fees and charges to contracts, as well as claim inaccurate amounts and pursue the wrong person. If judgment is entered, consumers also may be on the hook for court costs, interest, and attorney fees, which are added to the underlying debt.

An Assembly Line of Litigation Ending in Default Judgment

Debt buyers use the US court system to bring tens of thousands of cases against consumers, challenging the efficiency of the system and, in many cases, gaining default judgments when the consumer doesn’t respond to the suit.

Consumers frequently don’t formally defend themselves for a number of reasons, from the inability to afford counsel, to collectors serving notices to the wrong address (sometimes intentionally), or confusion over the creditor’s identity and misunderstanding of the court process. Because consumers don’t appear in most of these cases, debt buyers easily obtain default judgments without any substantive court review of the evidence or claims. Studies have shown that more than 70 percent of debt cases end in default judgments, and courts and judges enter default judgments as a matter of course.

As with Townes, debt buyers tend to dismiss their cases when defendants, especially those with counsel, appear. Further, consumers with legal representation “are more likely to win their case outright or reach a mutually agreed settlement with the plaintiff,” according to the Pew Charitable Trusts.

Debt Buyer Practices Expand the Racial Wealth Gap

Federal regulators and state attorneys general have initiated multiple investigations and numerous enforcement actions against debt buyers, including PRA, for unfair and deceptive practices and for various procedural and substantive failings that plague debt buyer litigation.

Low-income consumers, and particularly Black and Latino consumers, are more likely to be targeted by predatory lenders and debt buyers. This exacerbates the racial wealth gap and further prevents people from building wealth.

In addition to taking funds needed for basic living expenses through the court process and garnishments, debt buyers damage a person’s credit score, which impacts their ability to do everything from renting or buying a house to gaining employment.

Consumers Need Protection from Debt Buyer Goliaths

State-level protection for consumers varies widely and has significant gaps that enable unfair practices to continue. That’s why CRL has called for changes at the federal level, starting with wage protection. The federal government should protect $12,000 in bank accounts and an associated $1,000 per week in wages to help families develop savings that could cover three months of basic expenses.

The number of low-income Americans is on the rise, as at least 8 million families have fallen into poverty since May 2020. No one should have to choose between paying a debt collector and buying essential items like food and medicine. Protecting funds from garnishment would help our most vulnerable citizens establish and build financial security.

Further, the court system should not enable the assembly line of lawsuits and rubber-stamped default judgments. Courts should interpret consumer protection laws in a just and fair manner, and debt buyers should have to meet minimum standards of proof and validation of the debt. State-level protections should be strengthened with, at minimum, proof of debt requirements, and states’ ability to enforce statutes to protect consumers should be expanded.