Passage of Debt Collection Bill Could Be a 'Slippery Slope' for Lenders

Despite objections from CUNA and NAFCU, the House of Representatives passed the Comprehensive Debt Collection Improvement Act on Thursday.

The bill, H.R. 2547, was sponsored by House Financial Services Committee Chairwoman Rep. Maxine Waters (D-Calif.) and passed the House with a 215-207 vote.

While consumer groups praised the bill for its recourse for consumers harassed by debt collectors, CUNA and NAFCU saw the bill as complicating the legal relationship between consumers, members and lenders.

In a letter sent to the leaders of the House and Senate, CUNA President/CEO Jim Nussle stated his objections to section 403 of the bill, which would amend the Fair Credit Reporting Act to prohibit credit scoring models from treating certain medical debt information on consumers’ credit report as a negative factor.

In the letter, Nussle stated, “Lenders rely on complete and accurate credit reports when underwriting loans. Restrictions on the reporting or consideration of certain debt prevents lenders from seeing borrowers’ complete debt circumstances and clouds lenders’ ability to fairly assess borrowers’ creditworthiness. An incomplete view of borrowers’ credit history reduces lender confidence in credit reports and scores, impacting pricing decisions and credit availability. The borrowers most impacted by the consequences of this provision will be low- and moderate-income borrowers whose financial well-being could benefit the most from access to affordable credit from a credit union.”

In a separate letter to lawmakers, NAFCU, CUNA and other organizations from the banking industry, including the American Bankers Association and the Independent Community Bankers of America, wrote similar objections to the bill. Specifically, the organizations opposed Title VIII of H.R. 2547, the Non-Judicial Foreclosure Debt Collection Clarification Act, which would reverse the unanimous decision made by the Supreme Court of the United States (SCOTUS) in 2019.

In March of 2019, SCOTUS unanimously held in Obduskey V. McCarthy and Holthus LLP that a business engaged in non-judicial foreclosure proceedings is not a “debt collector” under the Fair Debt Collection Practices Act (FDCPA).

“Our country’s mortgage lending system continues to rest on the foundation of enforceable security interests in real property. By allowing lenders to take possession of collateral through foreclosure when a borrower defaults, the law reduces the risk to lenders – which in turn allows them to make credit available to more home buyers at a much lower interest rate than available for unsecured credit. More than half of the States have designed their legal systems to provide for non-judicial foreclosures, which maintain significant state and federal procedural protections for borrowers while streamlining the foreclosure process. One purpose of non-judicial foreclosure is to avoid the costs and protracted delay of litigation, which inevitably result from judicial involvement in the foreclosure process. These states have made the judgment that this process also appropriately balances the needs of individuals through robust procedural protections and the benefits to communities of limiting blight or opening new home ownership opportunities,” the letter stated.

The consumer justice nonprofit National Consumer Law Center (NCLC) praised the passage of the bill stating it would provide the following reforms for consumers:

• Prohibit the use of confessions of judgment as an unfair credit practice that eliminate notice and the right to be heard.
• Prohibit certain abusive collection practices directed at service members, including threats to reduce rank or revoke security clearance.
• Require discharge of private student loans due to total and permanent disability.
• Prohibit collection of medical debt for the first two years and credit reporting of debt arising from any medically necessary procedures.
• Require debt collectors to obtain consent before using electronic communications and provide written validation notices.
• Amend the FDCPA to expand and clarify coverage, including extending coverage for all federal, state, and local debts collected by debt collectors.
• Adjust statutory damages in the FDCPA for inflation and indexing them to index for inflation in the future.
• Clarify FDCPA coverage for non-judicial foreclosures.

Continuing his objections to the bill, Nussle wrote, “Today, it’s medical debt; tomorrow, it could be student debt; in a decade, will Congress prohibit the reporting of home mortgage debt? This could represent the first step on a slippery slope that could fundamentally damage credit underwriting, making it harder for lenders to make safe and sound credit decisions.

Borrowers and lenders alike benefit from a credit reporting system that produces an accurate and complete record of a borrower’s credit situation. This provision undermines consumers’ financial well-being and jeopardizes the ability of lenders to make safe and sound underwriting decisions.”