Friday, April 4, 2008

Cease and Desist

If one is planning to lend money as a business, it well behooves such a prospective lender to become familiar with the FDCPA (Fair Debt Collection Practices Act) (link, link, link, link). This is a gargantuan task, best left to professionals. For a small lender, it is nearly impossible to wrap his or her mind around all the complexities of said act. On top of that, many states have additional laws governing debt collection practices and many other aspects of lending money. We live in a highly regulated society when it comes to consumer debt. Which is why it is essential for lenders and for Prosper that the only party permitted to service and collect the loans on is Prosper and it's assignees in the case of debt referred to debt collection agencies. These people presumably knows the laws and can be trusted to operate fully within the confines of the legal system.

To prevent undue harassment by lenders of borrowers who have defaulted, the act provides a "cease and desist" clause whereby borrowers can inform lenders (or debt collectors and debt servicers) that they wish to have no further communications regarding their debt or attempts to collect the debt.

(c) CEASING COMMUNICATION. If a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease
further communication with the consumer, the debt collector shall not communicate further with the consumer with respect to such debt, except—

  1. to advise the consumer that the debt collector’s further efforts are being terminated;

  2. to notify the consumer that the debt collector or creditor may invoke specified remedies which are ordinarily invoked by such debt collector or creditor; or

  3. where applicable, to notify the consumer that the debt collector or creditor intends to invoke a specified remedy.

If such notice from the consumer is made by mail, notification shall be complete upon receipt.
This is usually taken as a declaration that the borrower has reached the end. The lender (or debt collector) has to either write off the debt or turn to the legal system to obtain a judgment to collect the debt.

Borrowers may do this for a variety of reasons. The most common (and the case the law anticipated, IMHO), is where the borrower has no ability and no reasonable foreseeable means with which to repay the debt. Further communication is meaningless and harassing. It is most likely that the borrower will be in default with a number of debts and heading for bankruptcy proceedings. Attempts to collect is futile and merely adds additional stress to what must already be a very stressful time.

A special case of borrower, may, however, have the means or assets to repay the loan, but choose this method to avoid collections activity. The only recourse left to the lender now is a costly and to some extent uncertain legal proceedings. If the sum is relatively small and the lender has deep pockets, they may simply write off the loan and inform the credit reporting agencies (Experian, Transunion, Equifax, and a host of smaller agencies) with whom they have a reporting contract. This is essentially free money to the borrower - for the blemish on their credit report, they get the money.

The lender may, in some cases sell the loan to a JDB (Junk Debt Buyer), who will restart the process. The borrower can then repeat the C&D waltz and continue to do so until the statute of limitations on the debt runs out. Overall, I would imagine it is a stressful process and not a path chosen by many borrowers. Also it cannot be performed too many times since the blemishes on one's credit report will eventually result in additional credit being made available.

If the sum is not that trivial, or if the lender wishes to send a message to borrowers in general that they will not tolerate such actions, they can sue. Now it gets complicated. The legal process is well-defined, but has a number of steps that must be followed and proofs that must be presented. Complicated matters such as standing to sue and ownership of the debt are all involved. (Perhaps I can get someone like IRA01 from to comment more fully on this.) Even after the case is won, some states are "debtor-friendly" and offers limited recourse in what assets can be attached to recover the debt and whether wages can be garnished for recovery.

Clearly, cases like this doesn't happen often, but they do. In a next installment, I will look at what happens when such a case happens to lenders of Prosper.

1 comment:

Chris said...

What? you mean lenders should not just fire off an indignant email to defaulted borrowers, what are you ? some kind of communist hippie?
Cease and desist may also be used if the debt collector is trying to collect debt that is well beyond the statue of limitations or released through bankruptcy or otherwise no longer owed and you're just tired of explaining to the person "no I don't owe that anymore, and here's why". Because some of them can get pretty upset when you read the law to them.