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Research shows negative impacts of debt collection regulation

Jan 07, 2014 Philip Burgess

Properly regulating an industry is essential for ensuring the existence of fair competition that is beneficial for consumers. However, too much regulation can often have negative impacts, as an industry of businesses ability to function may be compromised, doing little to help consumers and clients.

This appears to be the case for debt collection companies across the United States that have been targeted by overzealous lawmakers for years. From the federal government to the state level, regulators have been aggressively attempting to limit what collection professionals can do for years. Although there is a sentiment among many elected leaders that these policies are good for the economy and consumers alike, new evidence shows a different side of the story.

According to insideARM, a recent working paper from the Federal Reserve Bank of Philadelphia found that there is a correlation between the number of state collection laws and the number of revolving credit lines opened by consumers. The source reported that the paper was authored by Viktar Fedaseyeu, an assistant professor from Italy's Bocconi University and published earlier this year.

In the report, Fedaseyeu found that for each new collection restriction passed into state law across the U.S., the number of new revolving credit lines dropped 2.2 percent.

The report was constructed in such a way that each state was assigned an index score based on the tightness of debt collection regulations on the books. The higher the score, the more restrictive the state is regarding third-party collection, insideARM reported.

Moreover, the Fed paper noted that the recovery rate for outstanding accounts decreases 1.1 percent for each additional point on the restrictive index. As a result, the number of new revolving credit accounts declines 2.2 percent for each index point added. These numbers show that an over-regulated environment not only hurts the industry, it makes it more difficult for consumers to recover accounts and support the economy through spending.

Regulators still eyeing restrictions
Despite these numbers, Fox Business reported that the Consumer Financial Protection Bureau (CFPB) is taking steps to pass federal regulations against the industry that appeared to already be heavily constrained by state laws. In particular, the CFPB is attempting to overhaul the already complicated Fair Debt Collection Practices Act.

Instead of passing more regulations that limit debt collection operations, officials should consider loosening the grip they have on the industry. As the Fed data shows, it may be hurting the national economy.