The Shriver Brief : Poverty Law Commentary & Insights : Sargent Shriver National Center on Poverty Law : Affordable Housing, Healthcare Reform

The cost of a four-year college education is skyrocketing such that it is almost unreasonable to expect an average middle class family to afford without student loans. In fact, according to the Consumer Financial Protection Bureau (CFPB), 67% of bachelor’s degree recipients used student loans to pay for their education. As a result, the total outstanding amount of student debt surpassed $1 trillion in 2012. 

Students are not only borrowing more money than ever before, they are also defaulting more frequently than ever before. A new study by FICO found that in 2013 university student borrowers were at a much higher risk of defaulting on their loans than in previous years. According to this study the student loan debt was $17,233 and the default rate was 12.5% in 2005, but it grew to $27,253 and 15.1% in 2010. Due to the estimated $1 billion of defaulted federal loans in 2010-11, universities such as Yale, Pennsylvania, and George Washington are now suing graduates. These startling statistics bring to light the financial challenges students are facing both in terms of financing college and repaying their debt. 

Although the problem has many roots, the recent growth of for-profit colleges has exacerbated the issue. A study by the Senate Health, Education, Labor and Pension Committee revealed that students attending for-profit colleges have thousands of dollars more debt than students attending not-for-profit colleges. Another study showed that students who attended for-profit universities are much more likely to be unemployed compared to students who attended not-for-profit colleges. 

The CFPB, the consumer protection agency established by the Dodd-Frank Wall-Street Reform and Consumer Protection Act, has begun to examine ways to protect students from burdensome student loan debt. In 2012, the Federal Deposit Insurance Corporation (FDIC) and CFPB sued Higher One, a company that was handling financial aid disbursement in New Haven, Connecticut; the suit alleged that Higher One was charging students unfair insufficient-fund fees. Higher One agreed to $11 million in restitution to settle the agencies’ claims.

Recently, in order to protect university students from other unfair and/or predatory financial products, CFPB announced that it was launching an inquiry into the impact of financial products marketed to students through college and universities. Specifically the CFPB wants to learn about student identification cards that double as debit cards, cards used to access scholarships and student loans and school-affiliated bank accounts. CFPB is asking students, families and people affiliated with higher education institutions to provide input on their experiences. In particular, CFPB wants to know:

• What information schools share with financial institutions when they establish these relationships;
• How campus financial products are marketed to students;
• What fees students are being charged to use these products;
• How schools set up marketing agreements with financial institutions; and
• Student experiences using campus financial products in their day to day lives.

Additionally, CFPB has created a webpage that explains to students what to expect when shopping for loans and how to seek out the best value for a student loan.

While CFPB’s actions are steps in the right direction, they do not address the primary problem: crippling debt from student loans. When our societal path to success includes obtaining a bachelor’s degree from a prestigious university, it is no surprise that the total outstanding student debt is more than $1 trillion. Even the smartest, thriftiest, most careful loan seekers can wind up with overly burdensome debt post-graduation if they are unable to obtain high-paying employment. Higher education has become far too expensive. We cannot continue to allow such costs to exceed inflation if we want to have a highly educated workforce. Similarly, we need to ensure that there are more public colleges and universities that offer equivalent educations to those of private institutions. There also needs to be a focus on creating jobs with salaries that will allow graduates to repay their debt. Thus the question is not what to do, but how do we do it?

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The Consumer Financial Protection Bureau (CFPB) is well on its way to exercising its full power under its newly confirmed director Richard Cordray. Although the CFPB has been active since July 2011, it was until it had a confirmed director that it could exercise jurisdiction over nonfinancial institutions, payday lenders and other fringe financial markets.  

One new initiative the CFPB launched last week is the “Ask CFPB” page where consumers can post questions and read answers to 350 basic financial questions in categories such as credit cards, mortgages and vulnerable populations. This database will help further the CFPB’s mission to promote financial literacy and engage consumers on how to better protect themselves from fraudulent and predatory financial services and products. The answers, which are easy to understand and are written in a simple, concise language, also includes definitions, explanations, and situations in order to educate consumers about financial products and services. The page is interactive and users can rate whether the answers were “helpful”, “too long,” or “confusing.” 

Another step the CFPB has taken to improve consumer protection is filing its first annual report to Congress on complaints and enforcement actions under the Fair Debt Collection Practices Act (FDCPA). Complaints about debt collectors totaled over 27% of all the complaints received by the FTC in 2011. The FDCPA was created to protect individuals from abusive practices in the debt collecting industry; however, the market has changed substantially since its enactment 35 years ago. Players such as debt buyers and collection law firms have entered the scene and technological advances allow collection firms to use more sophisticated methods to identify and reach debtors. According to the report, approximately 30 million individuals, or 14% of American adults had debt subject to the collection process.  

To address the rise in debt collection complaints the CFPB has proposed a rule that would cover debt collectors with more than $10 million in annual receipts from debt collection activities. The CFPB estimates that this rule would cover 175 firms that collect over 63% of the annual receipts from debtors. The CFPB is in the process of reviewing over 10,000 comments from the public, including advocacy groups, elected officials, trade groups and consumers on the proposed rule and will issue the final regulations shortly. In the meantime, consumers can also turn to the “Ask CFPB” page for answers about debt, including what times debt collectors can and cannot call your home, what information debt collectors are required to give you and are forbidden from giving to others. 

This blog post was coauthored by Alison Terkel.

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Illinois Attorney General Lisa Madigan recently vowed to fight debt collectors use of arrest warrants to pursue money they are owned on credit cards, auto loans and other bills—a practice that is flourishing statewide. 

More than one-third of U.S. states allow borrowers who can't or won't pay to be jailed. Nationwide statistics aren't known because many courts don't keep track of warrants by alleged offense, but a tally of court filings in nine counties across the U.S. by the Wall Street Journal earlier this year showed that judges signed off on more than 5,000 such warrants since the start of 2010.

A debt-related arrest warrant is typically issued when a borrower who was sued for payments on an outstanding debt doesn't show up in court or fails to make payments ordered by a judge. Although debt collectors say the threat of jail is used only as a last resort, judges and consumer advocates have criticized the use of such warrants, comparing them to a modern-day version of debtors' prison. Some defendants, in fact, avoid showing up in court because they can't afford to pay and fear they will be sentenced to jail.

The use of debt-related arrest warrants isn’t even the most egregious tactic employed by debt collectors. One debt collection company in Erie, Pennsylvania, actually used fake court proceedings to deceive, mislead or frighten consumers into making payments or surrendering valuables without following the lawful procedures for debt collection. In this case, consumers received letters that were often hand-delivered by individuals dressed like sheriff deputies, implying that consumers would be taken into custody if they failed to appear at the fake court. The “courtroom” that consumers were summoned to was located on the debt collector’s premises and was equipped with furniture and decorations similar to those used in actual court offices, including “a raised bench area where a judge would be seated, two tables and chairs in front of the ‘bench’ for attorneys and defendants; a simulated witness stand; seating for spectators; and legal books on bookshelves.” It is reported that, during some proceedings, an individual dressed in black was seated where one would expect to see a judge.

Last year, Illinois enacted the Debt Settlement Consumer Protection Act (Public Act 96-1420) in order to curb unfair debt collection practices. The law requires a written contract that clearly indicates the terms of the debt settlement agreement and that must be signed by both the service provider and the customer. Most importantly, the new law caps the initial fee to $50 and forbids debt settlement companies from unfairly charging customers without having done any work. The settlement fee is capped at 15% of the savings and cannot be charged until the creditor has entered into a legally enforceable agreement with the consumer. Also, debt settlement service providers must warn consumers that debt settlement service is not suited for everyone and that it may have detrimental effects on the consumer’s credit history and credit score. Finally, companies must provide detailed accounting reports, and consumers are entitled to cancel the contract and receive a refund.

As millions of consumers struggle through one of the most difficult financial times in American history, repeated reselling of debt that has already been collected upon has also become a problem. One report on the debt buying industry revealed that debt collection abuses are on the rise. More debt is being bought and sold and there has also been an exponential growth of lawsuits against debtors, many of which are filed without any proof to back up the debt collection company’s claims.

While Attorney General Madigan can't force judges to stop signing off on debt-related arrest warrants, the Illinois Department of Financial and Professional Regulation, a state agency that licenses lenders and debt collectors, said it plans to introduce a bill early next year that would ban debt collectors from seeking arrest warrants.

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As millions of consumers struggle through one of the most difficult financial times in American history, debt collectors continue to expand their traps. Previously, the Shriver Center reported on the use of fake courts by debt collection companies to highlight the industry’s fraudulent and abusive practices. The latest fraudulent debt collection practice is the repeated reselling of debt that has already been collected upon. 

Consumers Union and the East Bay Community Law Center’s February report on the debt buying industry revealed that debt collection abuses are on the rise. More debt is being bought and sold—industry estimates suggest that in 2005, debt buyers purchased debt portfolios valued at $110 billion, a dramatic increase from just $6 billion in 1993. There has also been an exponential growth of lawsuits against debtors. Debt collection agencies file thousands of lawsuits each month using automated software. Encore Capital Group, one of the largest debt buyers in the nation, filed 245,000 lawsuits in 2009 alone. In New York City, more than 450,000 debt-collection affidavits were filed by debt buyers from January 2007 to July 2008, resulting in over $1.1 billion in judgments and settlements.

Many of these lawsuits are filed without any proof to back up the debt collection company’s claims. Frequently, loan or other debt documentation is lost in during the passage of debts from one seller to another, and debt collectors take advantage of such situations to profit. Some debt collection agencies therefore use “robo-signers” who sign affidavits swearing that they have personally reviewed and verified the debtor’s records without actually having done so. This allows debt collectors to sue on debts that they claim are too old to verify.

Moreover, consumers rarely receive timely notice that they have been sued, which prohibits them from defending themselves. Even with appropriate notice, many of these individuals do not know their rights nor can they afford an attorney to argue on their behalf.

In fact, the Federal Trade Commission (FTC) received more complaints from consumers about debt collectors than about any other industry in 2009. Nearly half of those complaints involved debts that were not owed, amounts in excess of what was actually owed, debts that had been discharged in bankruptcy, or impermissible fees, interests, or expenses.

In its 2011 Fair Debt Collection Practices Act Report, the FTC reported receiving 140,036 debt collection complaints in 2010, an increase from the 119,609 complaints received in 2009. The top three categories of complaints were:

• calling repeatedly or continuously;
• misrepresenting the character, amount, or status of the debt (including demanding a larger payment than is permitted by law); and
• failing to send consumers a statutorily required written notice about the debt and their rights.

The FTC is investigating the debt buying industry and will issue a report with its findings and recommendations. The Consumer Financial Protection Bureau, will also need to utilize is authority to issue rules under the Fair Debt Collection Practice Act (FDCPA) to continue to rein in abusive debt collection practices.

The FTC’s animated video explaining consumer rights regarding debt collection is available on the agency's website and on YouTube.

This blog post was coauthored by Ji Won Kim.

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As if debt collectors preying on desperate consumers’ fears and financial troubles were not enough, debt collection companies have begun to actually take the law into their own hands. 

Unicredit, a debt collection company in Erie, Pennsylvania, used fake court proceedings to deceive, mislead or frighten consumers into making payments or surrendering valuables without following the lawful procedures for debt collection. Although there have been cases in which debt collectors threatened arrests if debtors fail to pay their debt, this might be the first time a debt collection company has been accused of setting up a phony court.

First, Unicredit filed legal judgments against debtors in improper venues. Although Pennsylvania rules require judgments to be filed in the debtor’s district court or where the debt was incurred, Unicredit filed many of its cases at District Judge DiPaolo’s Office, located in the same office complex as Unicredit.

Next, according to Pennsylvania’s Attorney General, consumers received letters that were often hand-delivered by individuals dressed like sheriff deputies, implying that consumers would be taken into custody if they failed to appear at the fake court. Specifically, these subpoenas summoned consumers to an office in Erie, which included a room referred by Unicredit employees as “the courtroom.” 

The “court room” was located at the Unicredit “Debt Resolution Center.” This space was equipped with furniture and decorations similar to those used in actual court offices, including “a raised bench area where a judge would be seated; two tables and chairs in front of the ‘bench’ for attorneys and defendants; a simulated witness stand; seating for spectators; and legal books on bookshelves.” It is reported that during some proceedings, an individual dressed in black was seated where one would expect to see a judge. These bogus court proceedings were used to intimidate consumers into providing their bank account information and giving up vehicle titles and other assets.

The Pennsylvania Attorney General’s Office spokesman said that 370 affected consumers have been identified in Erie County Court records thus far. Two lawyers are believed to have been involved in these fraudulent, misleading practices. Erie County Chief Deputy Sheriff Jon Habursky told AOL News that Unicredit seems to have targeted the elderly and the sickly.

In October, the Attorney General’s Bureau of Consumer Protection filed a lawsuit against Unicredit America, Inc., and a petition for special and preliminary injunction, asking the court to prohibit the company from engaging in any debt collection and immediately stop all fake hearings or depositions.

At the first hearing, Unicredit agreed to put an end the tactics at the center of the government’s complaint and to stop sending letters threatening consumers with arrest. Judge Michael E. Dunlavey also ordered the mock courtroom to be torn down within 30 days. At the second hearing the judge ordered the entire Unicredit operation closed in order to reinforce the actions of the Attorney General’s office.

As discussed in a previous blog, Illinois recently passed the Debt Settlement Consumer Protection Act (Public Act 96-1420). The new law requires a written contract that clearly indicates the terms of the debt settlement agreement and that must be signed by both the service provider and the customer. The Illinois Department of Financial and Professional Regulation has accepted public comments on proposed rules implementing the law and is expected to announce the final rule within the next few months. This law will help protect Illinois residents as they consider whether or not to utilize a debt settlement company and does not include any new protections for consumers regarding debt collection practices. Given, however, the new debt collectors’ new schemes, it may be time to consider more regulation in this area as well.

This article was coauthored by Ji Won Kim.

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A person who has done time in prison or jail often finds that he still owes a debt to society. Well known are the collateral consequences that abound in areas such as employment, housing, and voting rights. Debts for people with criminal records, however, are not only figurative. Literal debts can also come from the numerous financial obligations imposed within the criminal justice system and scattered through state statutes. These financial obligations can be difficult to identify, and yet, when a person exits the criminal justice system, they can often converge to create a significant barrier to successful reentry.

With generous support from the Public Welfare Foundation, the Shriver Center has begun to explore ways to reduce this type of debt and its negative impact on people who leave – and intend to stay out – of the criminal justice system. Last month, the Shriver Center released a report entitled “Debt Arising from Illinois’ Criminal Justice System: Making Sense of the Ad Hoc Accumulation of Financial Obligations.” The report is part one of a two-year study of how this system works as well as how it compares to systems in other states. The report focuses on identifying the different types of financial obligations that exist within the criminal justice system, any mechanisms that might relieve low-income defendants from debt that they cannot pay, and the devices that government agencies use to collect overdue debt in Illinois.

The numbers can be striking. For example, if a person is convicted for class four felony drug possession for the first time in Cook County, Illinois, he will incur a minimum of $1445 in financial obligations. Because this figure includes only financial obligations whose amounts are fixed by statute, it does not reflect those whose amounts are variable, such as the mandatory fine equal to the street value of the controlled substance or the additional $14 imposed for every $40 already assessed in fines. Nor does the $1445 figure include correctional fees, such as monthly probation fees and fees assessed by jails and prisons.

Compare the amount that a class four felony drug possession conviction triggers to the frequency with which it occurs in the Illinois criminal justice system. It may be the lowest level drug offense in Illinois, but class four felony drug possession also accounts for the highest percentage of the Illinois Department of Corrections’ incoming population. In 2004, for example, more people were sent to Illinois prison for possession of controlled substance than for any other single criminal offense. A high dollar amount assessed against a large number of people with convictions, however, does not necessarily mean increased revenue for the state, especially given that many of the people within the criminal justice system are poor.

The report also found that the numbers are not only high, but in some cases, they are also rapidly growing. Take the fees that people convicted of a criminal offense in Cook County must pay to the clerk of the circuit court. Today, a felony defendant owes over four times as much in these fees as he would have owed in 2004. Where he would have paid $35 in 2004, the amount due today would be $165. This growth is the result of a trend of imposing more fees on people with convictions. Out of the nine fees that Cook County imposes, four were created between 2005 and 2008, while a fifth was expanded to cover all criminal convictions, thus essentially acting as a new fee. During that same time period, the sixth and seventh fee tripled, while the eighth fee increased by 66 percent. Only the ninth fee remain constant. These increases, though, are not limited to Cook County. Rather, they reflect a trend in the state as a whole because Cook County cannot increase these fees without authority from the Illinois General Assembly to do so. Each of these increases, therefore, reflect a decision by the General Assembly to impose more fees on people in the criminal justice system.  Given that the trigger for these fees is a conviction for any offense, it is time for both legislative bodies to consider the cumulative impact of these fee increases.

To learn more about these and other findings from the Shriver Center regarding debt arising from the Illinois criminal justice system, see its report here.

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