Fed Report Analyzes Debt Collection and Access to Credit

5/30/2017 12:39 PM

Federal Reserve Bank of New York staff research shows the impact of state and federal regulations in the debt collection industry as it relates to consumers’ access to credit and financial health.


A new Federal Reserve Bank of New York staff report, “Access to Credit and Financial Health: Evaluating the Impact of Debt Collection,” shows that limiting debt collection activities through state and federal regulation impacts consumers’ access to credit.

According to the report there is, “consistent evidence that restricting collection activities leads to a decrease in access to credit and to a deterioration in indicators of financial health—including a rise in delinquent balances and decrease in credit scores.”

The authors of the report, Julia Fonseca, Katherine Strair and Basit Zafar, provide an overview of debt collection, the impact of regulation at the federal and state level on the industry, access to credit and consumers’ financial health.

Some of the authors’ findings are consistent with ACA International’s research.

The U.S. economy is heavily reliant on credit, and consumers depend on the availability of credit to access a range of goods and services from health care and education to automobiles and home loans, according to ACA International’s January 2016 white paper, “The Role of Third-Party Debt Collection in the U.S. Economy.”

In 2013, third-party collection companies returned $44.9 billion to creditors.

Total household debt was $12.73 trillion in the first quarter compared to its peak of $12.68 trillion during the recession, according to the Fed’s Quarterly Report on Household Debt and Credit released in May.

Findings in the Fed’s staff report examine state and federal regulatory changes over time. Between 2000 and 2012, there were 29 changes in state regulations in 21 states and 22 were expected to “increase the difficulty of collections,” according to the report.

“Debt collection is an important tool at the disposal of creditors to recover on delinquent debt. Hence, restricting debt collection practices should lead to a decrease in the overall supply of credit since creditors will be less willing to lend,” the authors write.

They also find that limiting debt collection activities leads to a decline in indicators of consumers’ financial health.

“These results have important implications at the borrower level and suggest a wide-spread deleterious effect of changes in debt collection legislation on individuals who retain access to credit,” the report concludes.

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