By Kathryn Buckley
COVID-19’s Economic Impact: Can Amending the Fair Debt Collection Practices Act Help?
COVID-19’s impact on the world has been unsparing: it has taken thousands of loved ones and overburdened healthcare systems. Its economic impact has been no less devastating. Government-mandated shutdowns have forced many small businesses to shut their doors. Those lucky enough to remain open have seen a marked decrease in customers. A McKinsey & Company survey polling small and medium-sized businesses found that 59% of small or medium-sized businesses reported experiencing a “significant” drop in personal and business income. 25% had faced such a precipitous drop that they expected they would have to file for bankruptcy in the coming months. This impact will have a broad effect: these businesses represent 48% of the U.S. economy and employ over 60 million people.
COVID-19 has also been unsparing when it comes to consumers. Not only are those employed by small or mid-sized businesses losing their jobs, but even those working at large international companies are also losing their jobs or facing pay cuts. Self-employed individuals have seen their business opportunities vanish. Right now, because of moratoria on foreclosures, evictions, and debt collection, these issues are looming when the overall economy begins to resume. Without any intervening forces, a wave of evictions, foreclosures, repossessions, and bankruptcies is likely to come.
Currently, little protects consumers and small businesses during emergencies or disasters. While larger institutions are expected to have plans, even participating in stress tests with regulators, small businesses usually do not have such protective measures. Indeed, because so many operate on a thin profit margin, investing in plans to address something that seems unlikely to ever happen may seem like a waste of money. Moreover, consumers are not always going to be financially prepared either. The average American has $8,863 in their savings account. This number decreases with age: for example, young single adults under 34 have an average of $2,729 in savings. There are racial disparities too, with an average of $1,500 for Hispanic and $1,000 for Black savings account balances. (Note that this data does not include the unbanked, which is largely composed of Black and Hispanic households.)
In March 2020, Senator Sherrod Brown (D-Ohio) introduced the Small Business and Consumer Debt Collection Emergency Relief Act of 2020 (the “Act”). The Act amends the Fair Debt Collection Practices Act (“FDCPA”) to provide temporary forbearance periods after “major disasters or emergencies.” The Act could provide much-needed relief to small businesses and American consumers by expanding on current protections currently provided by the FDCPA.
Current Protections
The FDCPA became law in 1978. Its purpose was to crack down on abusive debt collection tactics. In drafting the law, Congress found that abusive debt collection practices led to “personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of individual privacy.” The FDCPA covers several types of consumer debts: mortgage, credit card, student loan, and medical debts, just to name a few. Debts owed by businesses are currently not covered by the FDCPA.
One of the biggest protections afforded under the FDCPA is limiting how and when a debt collector can contact a debtor. Debt collectors cannot harass debtors, misrepresent what can occur if the debtor fails to pay, or contact the debtor in the middle of the night. While the FDCPA is imperfect—consumers regularly report violations—it provides an avenue of recourse and is regularly enforced.
The Act’s Proposals
The Act seeks to amend the FDCPA in several ways. First, the Act amends section 3 of the FDCPA to restrict debt collection during a national disaster or emergency. The Act defines “national disaster or emergency” two ways: (1) one declared by the president under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act; or (2) “an emergency involving Federal primary responsibility that is determined to exist by the President” under section 501 of that act. Next, the Act prohibits debt collectors from numerous actions ranging from charging higher fees or interest rates to seizing the property or asset at issue. Moreover, the Act pauses any legal action against the debtor, even if the proceeding began before the disaster was declared. Finally and crucially, the Act extends FDCPA protections during national disasters or emergencies to small businesses.
The Act is a way of addressing some of the consumer protection shortcomings of the CARES Act. For example, there is a 120 day moratorium on foreclosures and evictions, but only for those who have federally-backed mortgages, live in buildings financed by federally-backed mortgages, or receive rental funding through a federal program. While this covers a significant number of individuals and homes, about 30% of Americans are left out of this provision. The debt collection moratorium under the Act would extend to those Americans. It also addresses the issue the COVID-19 pandemic has made clear: small businesses suffer when they are forced to shut down, as they may not always have the resources or option to continue operating virtually. Their financial troubles largely came as the result of a forced shutdown. More generally, the Act’s amendments can cover future national emergencies or pandemics.
While this is not an overall solution to COVID-19’s economic impact, it can provide some relief to consumers and small businesses. It may allow people to be more understanding of opening up gradually rather than quickly, too. While it does not solve a reduced or lack of income, having some assurance that the car will not be repossessed or a debt collector will not be regularly calling can provide some much needed relief in what has been a stressful time. Currently, debtors do not have such relief. Despite the pandemic, debt collectors have still been calling consumers. In Massachusetts, the Attorney General’s Office sought to ban debt collection during the height of the pandemic. However, a federal judge ruled against the state’s emergency resolution. FTC guidance is not particularly helpful either: it recommends talking things out with the debt collector and asking that they stop calling. Congress has already done a lot through the CARES Act to help consumers during the pandemic. To further assist them, Congress should pass Senator Brown’s bill.
Kathryn Buckley anticipates graduating from Boston University School of Law in May 2021.
The Comprehensive CREDIT Act: Taking Down Credit Barriers
A pivotal financial moment, like finding a new job, buying a home, or taking out a student loan, a person's credit history can become an obstacle to achieving what they want to do. Though credit reports and scores can be effective in determining whether to lend money to a borrower, they also tend to dictate where people can work or live. The Comprehensive Credit Reporting, Enhancement, Disclosure, Innovation, and Transparency Act (“Comprehensive CREDIT Act”) would change who could use a consumer’s credit information to make determinations and what impact, and for how long, other factors could have on one’s score. Congress should enact this bill. Not only is the Fair Credit Reporting Act (“FCRA”) outdated, but credit scores also tend to perpetuate discriminatory behaviors.
Credit Reports and Scores
A credit report provides a history of a consumer’s credit activity, including bill payments, current statuses of credit accounts, and adverse records like foreclosures, bankruptcies, and civil judgments. Credit reports also provide personal information like addresses, points of contact, and the consumer’s social security number. Three companies dominate the credit reporting industry: Equifax, Experian, and TransUnion. Though they never receive a consumer’s outright consent to compile personal data, these three private companies are the main credit report providers. If there are errors on the credit report, the consumer (1) must have access to a credit report or find out about the error another way; and (2) notify the credit reporting agency rather than the creditor that reported the error. Once the consumer has done this, the credit reporting agency’s duties are triggered.
A credit score is an assessment of how likely it is a consumer will fulfill a debt obligation on time. Several factors go into determining a credit score: payment history, current debts, the types and number of accounts one currently has, how long those accounts have been open, and issues like debt collection or bankruptcy. Each of these factors, which are of varying weights, are used in a private company’s “scoring model” (i.e., a formula) to concoct a three digit number. Scores generally range from 300-850; the closer to 850, the more “creditworthy” a consumer is. Though credit reporting companies have disclosed generally which factors compose a credit score, they refuse to disclose the entire scoring model. Indeed, most use trade secret laws as a shield. Without disclosing the scoring model, credit reporting companies can engage in retaliatory and discriminatory behaviors. For example, predatory lending leads to Black and Hispanic homeowners to have higher mortgage payments. Because of historical racist policies leading to lower credit scores and less wealth among these populations, they are also more at risk of not being able to keep up with payments. The discrimination therefore feeds itself: borrowers with lower credit scores end up with even lower scores because of missed payments and foreclosures.
Who Uses Credit Scores?
Financial institutions are the biggest credit score users. Credit scores help them determine whether they should allow a consumer to obtain a line of credit or home mortgage, for example. The other major context where credit scores are important is employment. Employers conduct credit checks as part of a background check process. They usually look at the consumer’s entire credit report, not just her score. One argument is that if an individual is not “trustworthy” enough to make payments on time, they may not be trustworthy on the job, either. In certain positions, such as those involving accounting, this information would matter. But for most positions, the association between trustworthiness and creditworthiness can have prejudicial effects. (One study found that those with lower credit scores tend to have more “agreeable personalit[ies],” if anything.)
Comprehensive CREDIT Act
In January 2020, Congresswoman Ayanna Pressley (D-Mass.) introduced the Comprehensive CREDIT Act. The Comprehensive CREDIT Act, which amends the FCRA, proposes several reforms: (1) allowing for easier processes to fix credit report errors; (2) restricting use of credit scores for hiring and employment purposes; (3) providing relief for student loan borrowers with poor credit; (4) medical debt reporting wait times and bans for medically necessary procedures; and (5) reducing the amount of time adverse credit information remains on one’s credit report. Predictably, the House voted along party lines and passed the bill. However, it is now awaiting action in the Senate.
The chief reform involves what factors impact a consumer’s credit score. The Act proposes removing certain types of late payments, like student loan and medical bill payments. For the remaining delinquent or negative information, the reporting periods are shortened. For example, if an individual files for bankruptcy, the bankruptcy can appear on a person’s credit report for seven to ten years. Under the Act, the period would be shortened to four to seven years. The Comprehensive CREDIT Act also requires that when there are discrepancies in reports provided to the consumer and the requestor, those discrepancies must be explained to the consumer.
The bill also addresses credit score use for employment screening. The bill prohibits employers from denying an applicant solely because of her credit score. The bill may not go far enough, though: the employer can still request the information, and the job applicant can approve its use. While the employer’s decision cannot be made based on that information, they will nevertheless still have access to it.
The bill’s opponents say that the proposed reforms will undermine confidence in credit scores, which are integral to our financial system. By softening the impacts some credit events have, a creditor may not have the full picture of an individual’s ability to pay. The effects could harm more consumers than protect them, as riskier activity may go unreported or not have as much as a determinative effect. To be sure, credit scores are a pillar of our financial system. Any change to them will have a significant impact on how the financial impact operates. Even so, credit scores continue to have a discriminatory effect on certain communities of borrowers and only perpetuate disparate impacts. Rep. Pressley’s bill focuses largely on that impact. The purpose of the bill is to minimize the impact of credit-related issues. A credit report currently only provides a black and white picture a person’s debts and credit history; a credit score is a numeric representative of that history. It does not show that a medical debt incurred was for a life-saving procedure or that a foreclosure stems from a predatory lending process. The impacts of those events stay with the creditor for some time, further impacting their lives even though they have overcome the event. For example, a poor credit report tip the scales in favor of other candidates, especially for competitive positions.
The COVID-19 pandemic is already creating significant financial implications. Inabilities to pay credit card bills because of unexpected income losses will affect consumers for years to come, even when the financial system recovers. Because so many Americans live paycheck-to-paycheck, and because COVID-19 was largely unplanned for, consumers should not have to face the consequences. Provisions in Rep. Pressley’s bill would remedy some of those concerns. Now is clearly the time to enact the Comprehensive CREDIT Act.
Kathryn Buckley anticipates graduating from Boston University School of Law in May 2021.
