States putting more restrictions on debt collection practices are affecting consumers’ ability to attain revolving credit. Also impacted is the number of people hired to fill debt collection agency vacancies.
A study from the Federal Reserve Bank of Philadelphia found that for every new restriction, revolving credit numbers dropped 2.2 percent. In the study, researchers looked at the various restrictions placed on third-party debt collectors throughout the nation and gave each state a rating based on those restrictions. The states with more restrictive measures had the lowest number of debt collectors per capita. The report spells out that account collections are impacted by state action.
Researchers found that a one-point increase in debt collection law value lowers the density by almost 16 percent. It’s mostly the biggest debt collection companies that see a drop in employment where state laws are stricter. Whenever a state sees a one-point increase in its collection law index, small firm actually grow by about 1.7 percentage points.
The study also found a follow-on impact in the number of debt collectors, which leads to reduced recovery rates. For instance, the account collections rate on charged-off unsecured cards falls by around one percentage point with each new restriction. However, also impacted are the numbers of new lines of revolving credit, which falls by 2.2 percent.
According to the report, “since collection is a human-intensive process, the likelihood that a debtor will be contacted by a debt collector should depend on the number of debt collectors: A higher number of collectors per capita translate into a higher probability that a consumer will be contacted by a debt collector.”
The lead researcher concluded in his report that if states place restrictions on the debt collection industry, they should also make changes that reduce the impact on consumers’ ability to acquire credit. He also noted that states that have fewer restrictions regarding their debt collection practices have an average interest rate on credit cards that is higher than in states with more restrictions. Also, consumers have lower average credit scores.
States’ take on the debt collection industry differ widely. For instance, Oregon in 1999 made violations of debt collection laws a criminal offense. In 2004, Minnesota allowed that individual collectors, not just the agency, be responsible for penalties.
Staying current on debt collection laws and the guidelines each state maintains for account collections is vital for collection firms large and small. While the industry is highly regulated, the Fair Debt Collection Practices Act is not always followed by debt collection agencies, which is why companies need to do their homework before they hire a collections firm.
Omega RMS, llc., is a company with decades of experience in lawful and ethical account collections practice. Omega collectors are trained to professional standards and are licensed and bonded to practice in every state. Omega stays ahead of the curve, and as a member of the Association of Credit and Collection Professionals, has a clean record and a fine focus on professionalism and ethics.