NCLC’s Flawed Debt Collection Report

Listen to the AFSA Extra Credit Podcast EXTRA for AFSA Senior Vice President Danielle Fagre Arlowe's take on the NCLC Report.

Last week, the National Consumer Law Center (NCLC) released a report provocatively titled No Fresh Start in 2019: How States Still Allow Debt Collectors to Push Families into Poverty.

This report grades state exemption laws, those that shield certain wage levels and property – a car or home – from garnishment or seizure for debts owed to creditors.  Perhaps not surprisingly the report recommends that states adopt reforms advocated by NCLC in its Model Family Financial Protection Act. 

Beyond the nice little bit of self-promotion and cross-marketing reflected in this report, the NCLC and its report-writers fall into the trap of many so-called “consumer advocates.”  Their antipathy for entities like “big business” or “corporations” or “Big Banks” or “lenders,” blinds them to the point that they fail to consider the very real affects their policy approaches will have on the people they claim to want to help … in this case, consumers, as well as the rule of law.   

The report uses specious anecdotes, misleading statistics, and extreme standards to advocate for rules that in the long run would actually limit consumers’ access to credit.  Here’s why:

It is critical that state laws on debt collection strike a balance between consumers’ needs and the ability of creditors to collect on debts they are legally owed, and NCLC’s proposed reforms would leave creditors with little room to operate.  For example, the model legislation would tie the homestead exemption to the median home price in an area, which would fully exclude half of all homes. But the figure is based on no data or research that would indicate this is a reasonable exemption. The proposed exemption level for vehicles is similarly extreme, relying on the average retail price of all used vehicles. While the report reduces the proposed exemption to approximate the price for low- to mid-priced vehicles, it fails to account for the significant difference between retail price and true market value, which tends to be lower and is how vehicle values are typically assessed.

The report also fails to acknowledge that responsible lenders work with their customers the best they can to ensure they are in a position to make the payments on their loans.  Reaching a point that requires a court-ordered judgement for any wage garnishment or seizure of assets, such as a car, is a costly last resort for creditors seeking to recover loan proceeds long past overdue. Creditors do not seek these orders on a whim and only turn to them when other options have come up short. As a result, it’s imperative that states preserve the right of creditors to recover debts.

For example, an unpaid loan that reaches a point requiring wage garnishment or other forms of restitution typically reach that point after months of effort by the lender to get their customer to begin paying some amount of the loan.

Lenders evaluate consumers on their ability to repay their loans. They take into account the risk of nonpayment and part of that evaluation includes their legal options should a loan go unpaid.  There are tens of thousands of consumers with limited or poor credit histories who would not have access to credit were lenders unable to balance risk of lending with the knowledge there was reasonable legal recourse to collect an unpaid debt. 

To NCLC’s credit, the report does include one point on which we all can agree. The report highlights the problem of “archaic and outdated” state laws, pointing to Michigan, as one example, which exempts five swine, two cows, and five roosters. AFSA agrees that state collections laws should reflect the modern world in which we live. AFSA and its members have been involved in past efforts to modernize state laws and would participate in such efforts again. However, any effort to update state exemption laws must balance the needs of debtors and creditors and preserve the right of creditors to recover debts they are legally owed.