CFPB Uses Aged Data in Report on Judgments and Why it's a Big Deal

Turning its sights to collections judgments, the Consumer Financial Protection Bureau (CFPB) recently published a blog post (Blog Post) to highlight its new Working Paper and report (Paper) analyzing collection judgments. The Paper addresses the racial distribution of collection judgments and the effect judgments have on consumers. Citing a suggestion by the National Consumer Law Center (NCLC), the Paper considers how increasing state and federal garnishment protections would affect consumers. It does not, however, discuss the impact a widespread change to garnishment exemptions would have on the overall financial ecosystem.

The Blog Post

The April 26, 2023, Blog Post, drafted by CFPB economists, begins by including an anecdote about a consumer whose wages were garnished to satisfy a judgment. While not including anything specific about this consumer's case, the authors indicate that if the garnishment did not satisfy the judgment, the consumer might be garnished again.

The authors acknowledge there is limited data about civil judgments; however, they assert they have filled the data gap by studying credit bureau data and its relationship to wage garnishment laws.

The Blog Post claims the Paper establishes the following new facts:

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Civil Judgments are about twice as common as bankruptcies.
Civil Judgments are 20 times more common in some states than others.
And Civil Judgments are more concentrated in areas with a higher percentage of Black Residents, even after adjusting for the rate of unpaid debts.

Though the Blog Post mentions, in passing, that there was a decline in suit rates in 2016 and that the 2020 pandemic caused a further decline, they use 2012 data to support the above findings. Referencing a chart that shows the 2012 judgment rate per 1000 people, the authors state they were surprised by the level of variance and opined, “[w]e find that states with more wage garnishment protections have fewer civil judgments. Further, we find that states with lower filing costs have far more civil judgments.”

Regarding racial distribution, citing the 2012 data, the authors indicate that “as an area’s share of Black residents increases, the incidence of civil judgments also goes up.” The authors claim their analysis and comparison of 90-day delinquency rates supports this finding. It does not appear the CFPB economists considered any other factors.

The Blog Post concludes the way it started, referencing a single consumer’s experience with garnishment stating, “civil judgments can have a profound impact on people’s lives.”

The Paper

The 45-page paper, which serves as the basis for the Blog Post, includes the following notable statements, findings, and claims:

Defendants in debt collection suits “frequently do not show up in court at all, possibly because they were never informed about the suit or thought it was a mistake” (Page 3)
“Most people’s experience with the civil court system is courts enforcing a judgment against them, not helping them start anew” (Page 3)
The “simple model of a profit maximizing creditor” shows why judgments are higher in some states than others (Page 4)
“Around three-quarters of civil judgments were never 'satisfied,' suggesting that collection is a problem even with the force of the state.
“Despite its importance as the primary legal recourse to collect consumer debts, relatively little is known about civil judgments. Yet judgments impose costs on defendants, courts, as well as employers and financial institutions who are ordered to help creditors garnish wages or seize assets.” (Page 7)
References to suit filing rates are based on 2004 data that was analyzed in 2008. (Page 7)
“Defendants rarely have representation and are often unaware of the civil litigation at all until their wages start being garnished.” (Page 7)
An analysis of debt lawsuits in New York City Civil Court from 2006 - 2008 shows debt collection suits cluster in black neighborhoods. (Page 8)
Based on a study with data gathered from 1994-2000, “greater wage garnishment is associated with a lower likelihood of credit card delinquency, but does not affect bankruptcy.” (Page 9)
For its analysis, the authors pulled data from 2012, which contains archives for a sample of records going back to 2001. (Page 10)
The NCLC’s Model Family Financial Protection Act proposes to quadruple current federal exemptions and is larger than any current state protections (except in states which do not allow garnishment). (Page 40)
“Decreases in the amount garnishable also appear to decrease access to credit, suggesting an important public policy trade-off,” (Page 40)

The Paper does not address:

Civil litigation and civil procedure outside of the collections context
State laws, regulations, and procedure that impact collections
The effect of the Fair Debt Collection Practices Act
Suit service rates

Finally, the list of resources included in the Paper includes several studies commissioned by consumer groups. No creditor, banking, credit bureau, debt buyer, or debt collection industry resources were cited.

Questions submitted to the CFPB

On May 8, 2023 (6 days before publishing this article), I sent the CFPB a list of questions regarding the Paper and Blog Post, which included the following:

Who is the target audience for the working paper upon which the blog post is based?
Whether they consulted with debt collectors, creditors, or other accounts receivable management people or organizations for input, reports, studies, data, or sources?
Did the authors consider any factors which lead to lawsuits, such as why accounts are not settled somewhere between charge off and lawsuit?
Regarding the age of the data: how are 2012 suit rates and 2017 credit reporting data relevant to 2023? What is the trajectory, and how do the authors know?
Was there an attempt to obtain more recent data?
What is the factual basis for the sentences regarding consumers' knowledge of the lawsuits against them and their experience with the civil court system?
Were the effects of the 2020 pandemic studied, such as significant pauses to litigation? If so, why are these effects not mentioned in the report?
How can the authors be sure their study is complete when a significant number of state courts are not online, and those that are online do not have a uniform reporting system?
When discussing race, did the authors consider any other factors besides population? For example, litigation challenges like high court costs in certain jurisdictions?
How does the NYC 2006-2008 study apply to the current trends? What was the racial makeup of NYC at that time?
Why does the statement which lists the adverse financial effects of garnishment omit the cost to the creditors?
Did the authors consider that judgments are a basic part of legal civil procedure?
What is the intended goal of publishing this Paper?

The CFPB did not provide a comment or response to these questions by the time this article was published.

insideARM Perspective

Creditors and everyone in the ARM industry should be concerned by the Paper and Blog Post. Though the Paper’s goal was not explicitly stated, there is a clue. On Page 40, it references NCLC’s “Model Family Financial Protection Act” and points out that NCLC’s proposal more than quadruples current exemptions and is more than most states' current garnishment protection. The authors explain the positive effect adopting this policy would have on consumers earning certain amounts.

Though decreasing the stress on consumers is a worthy endeavor, the Paper and Blog Post are deeply flawed.

The collections world moves fast. The old (perhaps ancient?) data speaks for itself. The authors did not attempt to reconcile 2017, 2012, 2008, and in some cases 2003 data, to 2023. All of these dates precede Reg F and the pandemic which each had, and continue to have, a significant impact on the collection industry as a whole, including lawsuits and judgments. Though the authors did say in passing that their data set is limited, they did not discuss the effects of Reg F or the pandemic, or explain why either is irrelevant to their data and resulting conclusions.

Further, several base facts concerning consumers and their involvement in legal proceedings are incorrect and cited in the Paper as “fact” without a data source. For example, the Paper states that consumers “frequently do not show up in court at all, possibly because they were never informed about the suit” and that “Most people’s experience with the civil court system is courts enforcing a judgment against them.”

This simply isn't true. This data is available and easily accessible with minimum effort.

To highlight the inaccuracy of these statements and the ease of gathering this information, I contacted a leading national process-serving company for some statistics about personal service (where a litigant is served directly with the lawsuit). Within two business days of my request, the process serving company confirmed that out of approximately half a million serves, 60% were personally served to the defendant (consumer). The remainder were served via acceptable substitute service methods.

Thus, contrary to the authors' assertions, and without even delving into methods of substitute service, nearly two-thirds of consumers served with lawsuits filed against them are served by someone directly placing the lawsuit in their hands. In other words, consumers know about the lawsuits filed against them. What they choose to do with it after service is a different question. Had the CFPB chosen to connect with creditors and the debt collection industry before publishing the Paper, the authors could have verified their claims and removed these factually inaccurate statements.

Finally, although the authors considered access to credit, stating “decreases in the amount garnishable also appear to decrease access to credit, suggesting an important public policy trade-off,” (see page 40), they did not consider other unintended potential economic consequences that would result from a wide-spread change to garnishment laws.

Collection agencies are a critical part of the financial ecosystem. They fill the gap between charge-offs and lawsuits. Though no one likes discussing past due debts, compliant collection agencies work with consumers to find ways to pay less than they owe, split their payments over time, or come up with other repayment options which original creditors don’t offer.

If the CFPB is genuinely interested in stopping judgments, they should meet with creditors and the debt collection industry to learn why it's so challenging to connect with consumers to discuss the resolution of their debt at the collection agency phase. They should look at the consequences and realities of collecting within the confines of a law as outdated as the FDCPA and the myriad other factors (like carriers blocking valid text messages) that are strangling lawful and compliant collection agencies and preventing them from resolving debt before lawsuits are filed.

Everyone with a stake in the ARM industry should consider contacting their Federal Representatives (particularly if those congresspeople sit on the House Financial Services Committee) to express their concern with the CFPB’s deeply flawed “new” facts. Debt collection is an integral part of the financial ecosystem. Wide-spread changes based on incomplete and one-sided data will have dire unintended consequences.