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FTC: System for Consumer Debt Collection Is Broken

By Sherry L. Talton, Litigation News Associate Editor – October 5, 2010

The Federal Trade Commission has entered the fray over the effectiveness of consumer debt collection litigation and arbitration with the issuance of its report contending that “[t]he system for resolving disputes about consumer debts is broken.”

The FTC Report
The report, entitled Repairing a Broken System: Protecting Consumers in Debt Litigation and Arbitration [PDF], contends that consumer debt related lawsuits are often:

  • filed outside the applicable statute of limitations;
  • frequently based on insufficient evidence; and
  • improperly served, resulting in default judgments.

But not everyone agrees with these assessments. Bart L. Greenwald, Louisville, KY, cochair of the ABA Section of Litigation’s Commercial and Business Litigation Committee, does not “see any empirical data supporting the notion that there is a rash of default judgments due to failure to serve consumers.”

H. Hunter Twiford, III, Jackson, MS, cochair of the Consumer Class Action and Representative Actions Subcommittee of the Section of Litigation’s Consumer and Civil Rights Litigation Committee, says that his experiences do not match the assertions made in the FTC report. Twiford notes that the courts in which he practices “without exception” require “adequate proof under well-established rules of evidence to warrant the ultimate relief granted.”

The FTC’s main criticisms of arbitrations are that:

  • consumers lack meaningful choices about pre-dispute arbitration clauses;
  • there is bias and the appearance of bias in arbitrators; and
  • consumers do not regularly participate in proceedings.

These criticisms “appear to be largely contradicted by several private studies, including the Searle Civil Justice Institute study of several hundred consumer arbitrations,” says Twiford. The criticisms also seem “to be a bit out of step with recent court rulings, including several U.S. Supreme Court decisions enforcing the arbitration clauses to which the parties agreed in their contracts,” he notes.

Politically Motivated or Bipartisan Consensus?
According to Greenwald, the “FTC’s report seems to be very political—it is just going after the financial institutions and saying ‘it’s all your fault.’” Greenwald notes that the report makes these assertions “without giving any blame to the consumer.” “Banks and financial institutions are easy to blame right now,” Greenwald says. This report “is a way for the FTC to say it’s doing something about a perceived problem,” he says.

However, Deepak Gupta, Washington, D.C., a regular speaker on consumer issues at the Section of Litigation meetings and a participant in one of the several roundtables held by the FTC on these topics, disagrees with claims that the FTC report is politically motivated.

“The FTC is a bipartisan commission, and the vote on this report was unanimous,” says Gupta. “The report really speaks for itself in this regard; it is written in an even-handed tone and is well-sourced by data gathered at roundtable discussions, information from cases, and scholarly support. It just doesn’t read as a strident political document.”

“If I was a scrupulous debt collector, I would applaud the report because no one should get a competitive benefit from taking unfair advantage of consumers,” Gupta maintains. The “whole point of the FTC report and the recent legislation [PDF] passed by Congress known as the Wall Street Reform Act is to protect scrupulous collectors as well as consumers,” he notes.

Recommendations from the Report
The report includes a number of recommendations for dealing with the problems the FTC identified in both litigation and arbitration. As to litigation, the FTC generally recommends that states ensure that: (1) consumers receive adequate notice of the filing of a case; (2) the costs to consumers of participating in such actions are not prohibitively high; and (3) plaintiffs are not able to sue outside the limitations period.

The FTC also recommends making arbitration procedures more transparent, giving consumers meaningful choices about arbitration, explaining arbitration awards, and diversifying the pool of arbitrators.

But Scott Nelson, former cochair of the Section’s Committee on Consumer and Civil Rights Litigation, notes that the “FTC itself recognizes that tinkering with arbitration procedure will not be enough to solve the problems.”

According to Nelson, “the FTC deserves credit for recognizing that it may not be possible to fix the problems with arbitration as long as it can be imposed as a mandatory pre -dispute mechanism.” Nelson contends that a post-dispute arbitration option is much more likely to really be voluntary and would spur the kinds of procedures that would be satisfactory to both debtors and creditors.

F. Paul Bland Jr., Washington, D.C., a frequent speaker at Section of Litigation events on public interest issues, believes that the FTC’s recommendations regarding pre-dispute arbitration provisions “will spell the end of widespread use of arbitration for debt collection.” “Arbitration is not a natural forum for collecting most consumer debts—collectors must first file a case in arbitration, then a second one to confirm the arbitrator’s award.” Bland contends that the system only thrived in recent years because many arbitration awards were made to include whatever a creditor sought “without requiring meaningful substantiation.”

“If the FTC’s proposals are followed and arbitration must involve actual adjudication and not just rubber stamping, I doubt it will be economically feasible compared to one-step small claims court processes,” Bland argues.

Though it will certainly be some time before the ultimate impact of the FTC report can be known, it is clear that this report is adding to the debate already in full-swing on a national level over the propriety, effectiveness, and fairness of consumer debt collection.

Keywords: litigation, FTC, consumer debt collection

  • October 9, 2010 – I am a law student and mediator, and only discovered this year that it's possible for parties to look forward to arbitration.

    My previous understanding of arbitration was based solely around stories of rubberstamp proceedings and an article I read by former arbitrator, whose accrediting association refused to renew his accreditation essentially because he had found for the corporate party in consumer complaints only about 80% of the time.

    I think that if arbitration is to survive as a practice, the steps discussed in this report are necessary. As matters stand, the perception that arbitration exists only to disadvantage consumers places the entire practice at risk.


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