Between us, we have spent many decades in the upper precincts of American law. One of us went from being a U.S. Attorney to a district court judge to a judge of the Court of Appeals, while the other writes and practices in the heavily resourced domains of complex litigation. We observed and participated in the efforts, not always successful, of federal courts to engage the most pressing demands of our society.
But outside our gaze, and largely without our even really taking notice, the most dramatic transformation of the American legal system was unfolding with astonishing speed and with deep institutional implications. The state court system, in which 95 percent of legal disputes are handled, was being transformed into a massive debt collection operation. No longer the domain of the great common law of torts and property and contract, state courts across the country had been overrun by “assembly line” claimants, executing collection judgments against unrepresented defendants who for the most part have neither the incentive nor the wherewithal to even enter an appearance.Footnote 1 These defendants, quite simply, are being railroaded through a legal system characterized by an ever-diminishing pretense of adjudication.
In such courts, a shocking three-quarters of the cases involve an unrepresented party.Footnote 2 By contrast, our more familiar domain of federal courts is overwhelmingly populated by represented parties with roughly 70 percent of cases involving representation of both sides of the dispute, and the remaining 30 percent being pro se plaintiffs challenging some form of institutional grievance.Footnote 3 Even this distinction misses the nature of the transformation of state courts. Many of the unlawyered disputes involve routine small claims and family law issues.Footnote 4 These disputes are generally between parties with comparable resources, familiarity with the legal system, and stakes in the outcome. The problem, then, is not merely that state court litigants lack access to representation. It is that they lack access to representation in domains where the other side commands greater legal resources and strong incentives to press for full judgments.
Asymmetric aggregation, as we shall term this development, is the process of developing mass efficiencies of scale on one side of the “v.” in small-stakes disputes. One customarily thinks of aggregate litigation as raising the stakes for all sides, pitting a class action against an institutional defendant or gathering all claims in a multidistrict litigation format. Such aggregate proceedings balance the stakes at play and the potential preclusive effect of litigation across all or large parts of common disputes. Here, by contrast, the asymmetry emerges from the creation of a new species of litigant in cases that, on the surface, still look like the typical A v. B dispute over small amounts of money. This new litigant is a firm, not in the sense of the partnerships that organize lawyers but in the Ronald Coase sense of the firm as an institutional arrangement that provides economic gains from lowering the transaction costs of pursuing an economic objective.Footnote 5 But unlike customary aggregate litigation, there are no efficiencies on the other side, as when a class of plaintiffs sues an institutional actor such as a corporation or a government agency.
Under conditions of asymmetric aggregation, there is not a market for the combination of legal interests on the defense side of the “v.” If we think of the bulk of nominal parties in the state court system, they are small debtors with no common bond, no centralizing prospect for their defenses, and no possibility of joint gain that can be harnessed by an entrepreneurial legal agent, as with a class action plaintiffs’ counsel. Ordinarily, one may think of such small-scale debtors as being unlikely to represent a large percentage of the state court caseload because the small-scale creditors on the other side would find the cost of trying to litigate a judgment foreboding. But the inability to recover legitimate debt is not a sustainable position in a mass consumer economy, nor is it a desirable state of affairs.
Enter debt collection firms that can buy up the claims of creditors and who can in turn rationalize the process of enforcing debt obligations. Obviously, this is an area rife with the potential for abuse, memorialized in the cult classic, Repo Man. Economies of scale incentivize aggregation of these consumer debt enforcers into a few agencies,Footnote 6 including – potentially – third-party collectors outside the scope of formal federal debt collection regulation.Footnote 7 Economies of scale also result in downstream efficiencies in the use of form contracts, firms that specialize in litigating claims for the repeat client, and routinized processes for collecting judgments.Footnote 8 What is new since the time of Repo Man is the ability to capture the state court system as the means of debt collection with mass-produced judgments, rather than the furtive Repo collection approach to depriving debtors of their possessions, oftentimes with little regard for the merits of the competing claims.
The rise of “assembly-line plaintiffs,” to use Professor Daniel Wilf-Townsend’s term, exploits four features: (1) a collection of a few sophisticated and repeat plaintiffs, (2) a large volume of small value claims, (3) a high rate of no-show defendants, and (4) a passive judiciary.Footnote 9 Debt collectors and other financial services companies typify the assembly-line plaintiff.Footnote 10 Out of 200 possible “top filers”Footnote 11 across a sample of states, ten debt collectors or financial services corporations were responsible for 84 percent of debt collection filings.Footnote 12 In other words, only a few plaintiffs dominate state court dockets.
Pre-litigation forces drive part of this trend. Starting in the late 1990s and early 2000s, this form of aggregation on the plaintiff’s side of the “v.” became a standard business model for debt collectors.Footnote 13 One New Jersey lawyer, for instance, filed more than 69,000 lawsuits in a single year, averaging between 300 and 400 per day.Footnote 14 Such economies are crucial to the recent trend in state court litigation. Without them, it would not be profitable to collect on individual debt, which the Federal Trade Commission (FTC) estimates is around $1,600 on average per consumer account.Footnote 15 Once the machinery of state courts begins to churn, individual defendants cannot sustain the costs of litigation. Not surprisingly, most of them never appear in court.Footnote 16 Figures 17.1 and 17.2 give a sense of the transformation of the state courts into collection agents as contract and other small claims come to dominate the state court docket. The shocking part is not simply the decline of traditional areas of state competence such as torts but the speed with which this transformation occurred.
Figure 17.1 State court caseload breakdown 1992 versus 2010.
Figure 17.1Long description
The 1992 chart shows that Tort cases constituted the largest portion of state court cases at 49.4%, followed by contract cases at 47.8%. Real property cases made up 2.5% of the caseload, and other cases accounted for 0.3%. In contrast, the 2010 chart shows that contract cases formed the largest segment at 61.3%, followed by probate cases at 11.4% and small claims at 10.9%. Tort cases decreased to 5.6%, while real property cases declined to 1.9%. Other cases increased to 7%, and mental health cases accounted for 2% of the caseload in 2010.
(a) State court party representation status
Figure 17.2(a)Long description
The bar graph plots the following data. 1992 had 90% contract claims from both defendant and plaintiff groups and no values individually. Plaintiffs topped at 99% for overall claims followed by defendant and both together with 98% and 97%, respectively. In 2013, plaintiff topped, followed by defendant and both combined with 97%, 23%, and 22%, and 98%, 48%, and 47%, for contract and overall claims, respectively. Values are approximated.
(b) identity of top filers in state courts.
The result is not just a transformation in the docket but in the nature of how law is practiced. Over the same period of time, the bulk of cases in state courts involve no lawyer on the defense side. Meanwhile, on the plaintiffs’ side of the “v.,” we see the rise of debt collectors as the single greatest group of litigators.
Not surprisingly, we also see dominant individual firms, the so-called top filers, command a greater and greater part of individual state civil dockets (Figure 17.3).
Figure 17.3 State-by-state comparison of top filer burden on state courts.
Figure 17.3Long description
The top left graph depicts the average filer burden across the State, which generally increases from around 15% in 2005 to a peak of over 20% around 2015, before slightly declining and leveling off. California's trend starts below 10% in 2005, rises to nearly 20% around 2015, and then depicts a slight increase towards 2020. The District of Columbia exhibits a more volatile trend, starting near 20%, peaking above 30% around 2008, dropping sharply to below 10% around 2010, and then rising again to fluctuate around 25% by 2020. Illinois depicts a gradual upward trend from approximately 15% in 2005 to over 25% in 2020. North Dakota's burden increases from about 25% in 2005 to a high of nearly 35% around 2010, followed by a decrease to below 30% by 2020. Oklahoma's trend is relatively stable, fluctuating slightly around 25% throughout the period. Oregon's graph indicates an initial increase from around 15% in 2005 to a peak near 30% around 2012, followed by a decline and then a rise to approximately 30% by 2020. Tennessee's burden starts below 10% in 2005 and generally increases to around 20% by 2020. Finally, Washington depicts a relatively low burden, fluctuating from below 10% in 2005, to just above 10% around 2012, and then falling to below 5% in 2020.
We engage these legal developments primarily to address potential responses. Returning to the concept of asymmetric aggregation, the problem presented is one of the efficiencies of scale allowing aggregators of debt claims to amortize the costs of legal procedures across mass filings while the debtors themselves remain rationally incapable of hiring counsel, attending court proceedings, and contesting legal arguments. The early proposals for reform address these issues in three characteristic ways.
First, and most evidently, there is the problem that the bulk of defendants are unrepresented. The obvious response is to increase the availability of representation, as with more pro bono offerings or the expansion of law school clinics. There is, in our view, little likelihood of much redress here. The sheer numbers overwhelm any capacity to provide impecunious defendants with volunteer representation. Consequently, more attention is directed to expanding the concept of representation by allowing paralegals and paraprofessionals – the legal equivalents of nurse practitioners in medicine – to assume more of the role of qualified legal representatives. We address this as the most significant area for reform through expanding representation.
The second reform approach aims not to provide representation but to lower the cost of individuals representing themselves in order to create systems that can be used with ease by people representing themselves. Many debt collection disputes turn on facts rather than law, such as whether the product actually performed, whether payment was actually made, or whether warranty obligations were actually met – all facts likely known by the debtor. Still another set of claims may be those in which there is a simple defense because the statute of limitations has run, the money has been paid, legal service was not properly done, or the claim has been discharged in bankruptcy. These are not complicated legal issues but may still require some level of legal assistance.
For litigants seeking to defend themselves, a further problem may not be so much the capacity to muster a legal argument but the problem of getting to court. A day off of work, the scramble to find child care, or even getting to inaccessible courthouses may put the ability to articulate one’s side of the story beyond the reach of working people. One of the fortunate by-products of the COVID pandemic is increased experience and comfort with remote court engagement that, by lowering aggregate costs, may diminish the impact of resource advantages for the debt aggregators. This is also addressed below.
Third, there is the underexamined possibility of direct regulatory oversight. If the problem here is a fundamental asymmetry in stakes that cannot be overcome by aggregation of the debtor (e.g., it is hard to imagine a class action of all consumer debtors), then the problem presents as a species of market failure inviting regulatory response. Two regulatory paths suggest themselves. The first is to rate the repeat filers in terms of the care they have taken to avoid exploiting the vulnerabilities of the debtors. An independent agency – the Consumer Finance Protection Board (CFPB) suggests itself – could require repeat litigants to register the time taken between acquiring debt and filing suit, the number of suits filed against parties who had previously obtained bankruptcy protection, the internal procedures of the firm for verifying whether there are existing complaints or other considerations that should be resolved before executing on the debt, and other such mechanisms of compliance with best practices. Our approach here derives from the literature on responsive regulation and would impose increased prices or limitation on filings for firms that are repeatedly noncompliant.
Alternatively (or perhaps additionally), the regulatory response could come from within the courts themselves. There is no evident reason that the filing of thousands of cases by a single firm, almost invariably yielding default judgments against unrepresented parties, should not attract some institutional scrutiny. Although it is not the custom in American courts, an ombudsman could be appointed to audit some number of claims filed, to investigate complaints about misconduct (such as harassing calls to parties already discharged in bankruptcy or improper service of process), or to secure representation for a sample set of claims. The approach here draws from auditing rather than advocacy and is intended as a regulatory mechanism for quality control.
We discuss these various approaches in turn.
17.1 Expanding the Pool of Representation
If the obstacle to defendants’ securing representation is cost, then states could respond by decreasing costs for people to defend their cases. This is the most conventional response, in that it disrupts neither the role of the court nor the way in which any particular litigation is processed through the legal system.
If the problem is identified as the expense of securing adequate representation, then the most obvious solution is to provide free counsel for all defendants. Creating an obligation to provide counsel to all litigants is unlikely to emerge as a litigated rights claim since the Supreme Court has declined requests to extend the 6th Amendment’s right to counsel to civil cases,Footnote 17 and states have only begun to guarantee access to attorneys in civil cases in limited contexts.Footnote 18 But beyond the doctrinal obstacles, the real problem (as in most mass litigation) is simply the sheer size of the challenge. Quite bluntly, it is hard to see the political will for a benefits program of the size required to provide representation in all debt collection cases in state courts.
Where public funds are unlikely to fill the void, private resources may enter the mix. Most often, pro bono representation is part of the expected social return from the highest rungs of the bar, and from the generations of law school entrants to the practice of law. But the scale of the problem outstrips any possible resolution by voluntary representation. One-by-one provision of free or discounted legal services cannot address the scope of the national problem, nor even the yearly filing of one entrepreneurial New Jersey lawyer.
An alternative route is to liberalize access to representation. States can permit paralegals and other certified specialists to represent people who would otherwise lack representation. Some states have already piloted such programs. For instance, Washington developed a program to license nonlawyers in specific areas of the law (Limited Licensed Legal Technicians or “LLLTs”).Footnote 19 The State of Washington chose to sunset the program but permitted the sixteen active LLLTs to continue practicing. Utah, Oregon, Arizona, and Minnesota have created similar programs.Footnote 20
A big question hanging over these experiments is whether nonlawyer representation works. The most exhaustive research addressing that question comes from several reviews of Social Security benefits cases, where federal law authorizes representation by nonlawyers,Footnote 21 creating a rich source of background material. The results indicate that paralegals have proven capable of representing claimants in front of administrative law judgesFootnote 22 and that “accredited representatives” have been effective before immigration judges.Footnote 23
More supply of legal representation provides a viable means of challenging claims, increasing their likelihood of success and increasing the costs of these debt collection plaintiffs’ business model. But it does not address all the issues discussed above. Individuals must receive notice of a claim against them before they can obtain representation, and repeat plaintiffs with resourced attorneys may be able to overwhelm paralegals who will likely be underfunded and overworked.
One should take care to not allow the perfect to be the enemy of the good. Many of the specific abuses that have been identified with mass filers can be picked up by those who are specially trained, even without full legal certification. Known abuses ranging from harassing phone calls to sewer serviceFootnote 24 can be fitted onto a checklist of initial inquiries. There may still be a large number of legal issues missed, or the legal implications of conduct underexamined. But for many caught in the debt litigation cycle, this is undoubtedly better than going it alone.
Mostly, our reservations come from the initial framing of the current difficulties as being largely a product of asymmetric aggregation. Expanding representation, even for those capable of securing counsel or its substitute, would still not alter the vast disparity in resources and expertise across the litigation divide. Part of the problem may be addressed by lowering the cost of routine legal advice and expanding the pool of those who may provide less than full legal counsel. The medical profession encountered this with the creation of nurse practitioners and other professionals capable of delivering valuable medical services even without the full training of an MD.Footnote 25 While salutary, this approach still puts the burden on the disadvantaged defendant to figure out how to obtain legal services, even at a discount. That advances the ball but is unlikely to be the central answer to the current structural challenges to the courts.
17.2 Reconfiguring Going to Court
A second approach is to reconfigure what “court” looks like. One path is toward a more inquisitorial model of a supervening court, as opposed to the anything-goes autonomy of an unchecked adversarial model. Professor Jessica Steinberg draws on specialized drug and housing courts to outline a “naming” strategy for altering judicial conduct.Footnote 26 States can designate special courts for consumer debt cases that either largely draw upon traditional judicial models or depart significantly – for instance, judges in drug courts generally act as case managers for a rehabilitating party.Footnote 27
Even if state courts were to keep the adjudicatory structure of civil courts intact but develop a specialized bench or procedures for consumer cases, that classification may influence the outcome of many consumer debt cases. Heightened pleading requirements, for instance, might deter fraudulent claims that lack any reliable evidentiary support. Placing the burden on plaintiffs can increase the cost of pursuing claims, especially for claims that only succeed because of the abusive tactics available to plaintiffs in normal state court proceedings. Additionally, in creating special courts, the state redefines the judiciary’s nature from a “neutral justice” establishment to a “problem-solving” institution meant to confront the social ill assembly-line plaintiffs perpetuate.Footnote 28
Perhaps the area of most fertile recent development has been the technological innovations implemented in response to the COVID pandemic. The sudden need to permit remote access to legal proceedings occasioned by the need to avoid interpersonal contact quickly generated readily deployable practices, the simplest being Zoom proceedings that relieve working people and parents of the oftentimes impossible burden of missing work or finding alternative childcare. While remote proceedings would maintain the adversary form of apparent one-to-one litigation, it would transform the process of going to court into something more in keeping with the online exchanges that form the core of the consumer experience. Such experimental court settings will not address the asymmetry in access to information and the knowledge of legal processes between individuals and debt collectors, but they may significantly reduce the transactional barriers that at present serve to deter even meritorious defenses from being aired.
Alternatively, non-technological approaches could provide protection to vulnerable debtors. One government-centric approach would create an ombudsman-like process that would permit plaintiffs to file claims with a state agency, which would then conduct fact-finding from a neutral position. The ombudsman agency would review claims, perhaps collectively adjudicate claims, better understanding a plaintiff’s pattern of behavior and adjusting to evidence of fraud, abuse, or meritless claims accordingly.Footnote 29 Ombudsmen programs can improve the efficiency of state courts through careful review of systemic problems throughout state courts and by adjusting procedures to ensure access to justice.Footnote 30 Though these offices normally do not have final decision-making authority,Footnote 31 they can enable rapid response to challenges in alternative adjudicatory systems that states test, or they can begin to alter current practices in state courts of general jurisdiction.Footnote 32 Unlike providing legal counsel to indigent individual defendants, or facilitating judges to assume fiduciary-like roles in dealing with unrepresented defendants, an ombudsman introduces a nonjudicial actor with oversight review of the entirety of the court process.
No doubt there are other technocratic possibilities looming on the horizon. Firms like eBay and Amazon have used AI tools to create electronic dispute resolution centers. It may be that broad swaths of consumer debt disputes lend themselves to low-cost pattern adjudication that removes human decisionmakers, and their associated costs, with the advent of “online dispute resolution” (ODR) technology. At their most ambitious, ODR proponents aim to “reimagine ‘going to court,’”Footnote 33 supplanting in-person interactions with judges, prosecutors, and other litigants with “asynchronous” communication, document submission, and dispute resolution, all done from an online user interface.Footnote 34 Online dispute resolution enthusiasts intend to “scale” the adjudication of small-dollar disputes,Footnote 35 thereby expanding the information garnered from the increasingly routinized nature of collection lawsuits into the adjudicative template for future cases. In some sense, this is a technological advance in the routinization of tort claims at the hands of insurance adjustors and the nascent plaintiffs’ tort bar many generations ago.Footnote 36
Online dispute resolution technology originated in online platforms and marketplaces, such as Amazon, eBay, and Alibaba.Footnote 37 On those platforms, ODR is the primary venue for adjudicating disputes over, for instance, whether content will remain online, whether a user account will be suspended, whether an online vendor will be delisted,Footnote 38 or whether a product delivered to a consumer is as described. These processes have started to make their way to the judiciary with initial uses in Singapore,Footnote 39 the Netherlands, Canada, the United Kingdom, and the Hague.Footnote 40 Pilot projects in the United States now exist in at least 113 adjudicative tribunals.Footnote 41 These experiments with ODR are generally at the local and state levels and use the technology for disputes over taxes, parking fines, and small claims.Footnote 42
The aim of ODR is to “triage the case into an appropriate resolution pathway,”Footnote 43 in the inevitable technojargon that one would expect. Most often, the parties can submit confidential “reserve settlements” they would be comfortable paying or accepting. If there is overlap in the reservation prices of the parties, a settlement agreement can be generated through an algorithm. Mediators can also be involved if there is no mutually amenable agreement between parties. If ODR is court-annexed, non-resolution then allows for more conventional court processes to follow. In private settings, as with airlines dealing with claims for lost luggage, the offer is final and, if refused, forces the claimant to initiate legal processes.
One prominent ODR firm describes its product as a “communications platform [that] … implements [a court’s] eligibility rules, workflows, and decisions.”Footnote 44 The firm stresses that its product “offers a neutral place for parties and stakeholders to share information and communicate,” and that the product “gives the public their ‘day in court’ from their own device and from anywhere.”Footnote 45 But the world is unfortunately not win-win. The benefits of speed and cost may compress legal rights. Streamlined algorithms may discount specific defenses such as the tolling of state statutes of limitations, allegations of identity theft, and invocations of the Truth in Lending Act.Footnote 46 Moreover, dispute resolution behavior does not stand still. Facilitating access to rapid resolution of claims may lead to more filings and may allow for process “capture” by deep-pocketed and sophisticated actors.Footnote 47
Early and quite preliminary empirical evidence suggests that ODR does in fact advantage defendants in cases filed by repeat filing plaintiffs. A study of ODR in six states found that ODR reduces the time required to resolve disputes, lowers default rates, and increases disputants’ compliance with court-ordered payments.Footnote 48 An additional study presents evidence that ODR decreases default rates and allows defendants to respond to and engage with disputes outside of business hours.Footnote 49 Competing and nuanced evidence on case duration using ODR suggests that ODR reduces case duration when disputants reach an agreement, but in turn increases duration when disputes are addressed on the merits, perhaps because the technology’s flexibility better allows defendants to vindicate themselves.Footnote 50 The jury is still out on how the technology will ultimately play out. Relieving human congestion is no small gain for citizen welfare.
17.3 The Regulatory Response
17.3.1 Deceleration
Perhaps the most direct way to control the advantages of aggregators of debt collection is to raise the cost of doing business. Professor Wilf-Townsend, for example, relies on an analogy to congestion pricing.Footnote 51 Certain plaintiffs would see their filing fees increase as they file more claims. Such pricing should change the economics for repeat plaintiffs. As their costs increase with the volume of complaints they file, the marginal profit on each additional case decreases, unless their prices go up. At least in theory, and in the absence of overwhelming market concentration, the market equilibrium point would shift to a lower volume, conserving precious judicial resources and protecting some individuals who might otherwise have been sued without the pricing regime.
Even apart from the heroic economic assumptions and the practicalities of such a simple regulatory response,Footnote 52 such wholesale deterrence runs up against due process values that encourage open courts. There is nothing unlawful about the aggregation of claims and plaintiffs, even repeat play plaintiffs, are entitled to their “day in court.”Footnote 53 Such congestion pricing might have the beneficial effect of forcing repeat plaintiffs to internalize the negative externalities their filings create.Footnote 54 But the lack of fit between raising the price of admission to the courts and collateral consequences remains a source of concern. More fundamentally, congestion pricing introduces a user-fee approach to public justice. The problem of mass filings does present a vision that reduces the state judiciary from adjudicators to paper pushers. If this is the sole concern, then perhaps the best we can do is a system that generates more revenue to expand the state judiciary and distributes the burden of public funding to those who deserve it.Footnote 55
More targeted efforts would look to license debt collection, a move that many states have already made.Footnote 56 Licensing begins the process of identifying the players in debt collection activities, the scope of their activities, and the likely areas of potential abuse. By requiring debt collectors to be licensed, states can proactively gain knowledge about who is behind the massive number of debt collection actions filling its courts rather than leaving the courts to merely react to the enormous influx of civil actions filed. As a rule, the licensing statutes prohibit anyone from engaging in the business of debt collection in the state without one.Footnote 57 Once licensed, the debt collectors are subject to rules governing their conduct and extensive reporting requirements for their activities in the state.
The licensing statute’s standards for conduct seek to address the problems most often encountered by courts on account of bad actors in the debt collection industry.Footnote 58 The most common of these problems are (1) suits filed based on inaccurate or insufficient information about the debt, (2) insufficient notice given to the consumer being sued, (3) unacceptably high rates of default judgments being entered against consumers, (4) actions filed or threatened to be filed based on debts that are time-barred, and (5) once a judgment is obtained, improper garnishment of exempt funds. One category of rules established for licensed debt collectors is designed to address these abuses.
Many states are now using licensing requirements to address the risk of abuse in new forms of debt collection.Footnote 59 For example, in California, licensed debt collectors are required to comply with all aspects of the Rosenthal Fair Debt Collection Practices Act.Footnote 60 This statute, which existed before California began licensing debt collectors, prohibits a debt collector from making any written statement to a debtor unless it is the sole owner of the debt or is acting on behalf of all owners. Further, any communication must include the debt balance at the time the debt was charged off, together with an explanation of the amount, nature, and reason for all post-charge-off interest and fees, if any, imposed by the charge-off creditor or any subsequent purchasers of the debt. The debtor is also given the name of all parties who have had an interest in the debt being collected and the state registration number of the debt buyer.Footnote 61 Once suit is brought against a debtor, the complaint must include this information as well.Footnote 62
California also increased the information necessary to file suit, requiring, for example, that the court receive a copy of the contract from which the debt arose.Footnote 63 Also, the debt collector must submit an affidavit attesting to all facts alleged in support of the amount and the ownership of the debt.Footnote 64 The statute establishes procedures by which debtors (who have had a default judgment entered against them) can reopen and set aside the judgment based on lack of notice of the suit filed, mistaken identity, or identity theft.Footnote 65 The statute establishes rules for collecting debts that may be time-barred or obsolete. And finally, penalties garnish funds that are otherwise exempt from garnishment.
California’s Department of Business Oversight existed before the state began licensing debt collectors, but it gained new responsibilities under the licensing scheme. The Commissioner of the Department of Business Oversight is designated as the recipient of the broad range of information required from the licensees. Generally, each California debt collector must now file an annual report disclosing the following information from the previous year: the total number of California debtor accounts purchased or collected on, the total dollar amount of California debtor accounts purchased, the face value dollar amount of the California debtor accounts held in the licensee’s portfolio, the total dollar amount of debt collected, the total amount of debt still outstanding, the total dollar amount of proceeds generated by the debtor accounts, and the case number of any action in which the license holder was held liable (by way of final judgment) for failing to meet the conduct requirements imposed by California’s Rosenthal Fair Debt Collection Practices Act.Footnote 66
No state receiving the type of information required by the California licensing scheme needs to remain in the dark about who is behind the massive debt collection actions being filed in its courts. While we are aware of no licensing statutes that require licensees to report this data to the courts, the courts would benefit from having access to it in aid of the management of debt collection cases. For example, since the California licensing statute requires the licensees to self-report when they have been sanctioned for violating the reporting or collection procedures required by statute, bad actors should be more quickly and easily identified. But for a judge handling a busy docket, information identifying bad actors can take years to become apparent. Even if a single debt collector engages in identical misconduct across numerous dockets assigned to different judges on the same court, there is no established common repository of knowledge reflecting the experience of individual judges. Giving judges access to information gained through the licensing processes can help judges to identify bad actors and thereby expedite either reforming or removing those actors from the marketplace.
17.3.2 Responsively Regulating
Another response to the problem of asymmetric aggregation might be to stimulate aggregation on the other side of the “v.” Given the dispersed nature of creditors and the small stakes of each disputed claim, private ordering through a defense-side class action does not seem viable.Footnote 67 If there were to be a regulatory response instead, it would optimally reflect the nationwide reach of contemporary debt collection actors and would be federal in scope, perhaps lodged in the CFPB. Some academics have proposed mechanisms to police assembly-line plaintiffs. Professor Yonathan Arbel suggests a claim sampling strategy – labeled “adminization” – for debt collection cases.Footnote 68 Essentially, a state agency would sample plaintiff filings, audit them for evidence of fraud or abuse, and then penalize plaintiffs with a failing track record.
Certain practices clearly stand out for regulatory response. Start with the brute fact that most defendants never appear in court.Footnote 69 Such cases invariably result in a default judgment. The Federal Trade Commission estimated default judgments on debt collection lawsuits occurred at a rate between 60 and 95 percent, and it suggested most jurisdictions trended toward the higher end of that range.Footnote 70 This high rate of default is not wholly caused by a mass of inattentive individuals. Rather, inadequate notice likely has a significant effect. Debt collectors employ various sewer service tactics to advance collection lawsuits without properly appraising defendants of the action.Footnote 71 These include falsifying affidavits for service of process or waivers of notice, which allows creditors to work around normal due process hurdles to swiftly obtain a default judgment. A survey of around 450 New Yorkers who called a hotline to seek advice about debt collection lawsuits discovered that around 70 percent of them had not been served with process or had been served improperly.Footnote 72
Next is the problem of harassing phone calls inviting a debtor to pay only $10 toward an outstanding debt that might be protected by the statute of limitations or by bankruptcy discharge. For example, Georgia limits the debt collection period to six years from the date of the last payment.Footnote 73 Yet the renewal of any payment, even for a trivial amount, reopens the collectability of the debt. This invites abuse as sophisticated creditors induce payment of a “good faith” amount from unsophisticated parties with no understanding of the legal implications of their actions.
We believe the problem to be more deep-seated than these specific abuse practices would address. The literature on debt collection issues focuses heavily on the lawyerless aspects of state courts and the passivity of judges in the face of the growing social problem. The core of the problem, though, reflects what Marc Galanter set out in his seminal article, Why the “Haves” Come out Ahead.Footnote 74 Galanter’s insight was to “look through the other end of the telescope” and “think about the different kinds of parties and the effect these differences might have on the way the system works.”Footnote 75 Galanter concluded, a half century ago, with the need for moving responsibility to the state: “[u]tilizing the criminal law or the administrative process to make it the responsibility of a public officer to press claims that would be unmanageable in the hands of private grievants.”Footnote 76
In the intervening period, more subtle regulatory models have fleshed out this picture. John Braithwaite and his colleagues developed the concept of responsive regulation to help government tune into the differing motives of regulated actors.Footnote 77 Some actors – the “good guys” – place an inherent value in rule-following so long as it is economically viable, but others – the “bad guys” – attempt to exploit any opportunity to increase profit and respond only to carrots and sticks.Footnote 78 Carrots may be just as important as sticks because a strategy based mostly on punishment fosters resistance to regulation, especially where regulation is incorporated into industry socialization.Footnote 79 The core feature is “a minimal sufficiency principle in the deployment of the big and smaller sticks: the more sanctions can be kept in the background, the more regulation can be transacted through moral suasion, the more effective regulation will be.”Footnote 80
As applied here, the key is to force repeat-player plaintiffs to disclose information about their activities, providing aggregate statistics and information on individual cases. In some situations, disclosure alone may be sufficient to deter wrongdoing.Footnote 81 Yet, as wrongdoing continues, regulators should ratchet up the “stick” side of regulation. When regulators – either some appointed ombudsman or the plaintiffs’ bar – discover a pattern and practice of unconscionable collection practices, they file the civil fines and lawsuits that make up the middle of the pyramid. Finally, in the worst cases, the regulator can initiate criminal actions or, more likely, enjoin the debt collector from engaging in further collection activity. In effect, the result would be to experience rate firms based on the quality of their internal process protections and the consequent history of abuse or error.
An administrative ombudsman or other regulators within the state judiciary could enforce the pyramid on the frontlines. They would ideally have access to the information required by licensees and would be enabled to use that information to help the courts manage the massive filings. Such programs can improve the efficiency of state courts through careful review of systemic problems throughout state courts and adjustment of procedures to ensure access to justice.Footnote 82 Though these offices normally do not have final decision-making authority,Footnote 83 they can enable rapid response to challenges in alternative adjudicatory systems that states test or they can begin to alter current practices in state courts of general jurisdiction.Footnote 84
Nationally, the CFPB has been battling the bad actors in the debt collection business as well. However, like judges managing their own busy dockets, the CFPB takes on bad conduct by debt collectors only after receiving and investigating complaints about that conduct. During the delay associated with the complaint process and the investigation that follows, the bad actor is free to continue with the offensive (or illegal) conduct.
The CFPB has authority to investigate and undertake enforcement proceedings.Footnote 85 Agency action has been enormously successful in rooting out and punishing bad actors in the debt collection industry, and it plays an important role. Yet, because of the reactive nature of its work in this area, bringing bad actors to justice can be a long and arduous process.
An example of this delay comes with a March 2023 press release explaining the CFPB’s enforcement action against a large debt collector based in Virginia. The 2023 complaint describes the widespread and abusive practices engaged in by this debt collector for more than a decade, leading to a consent order in September of 2015.Footnote 86 The 2015 consent order was a result of debt-collector misconduct that occurred between July 21, 2011, and the date of the consent order signed on September 9, 2015.Footnote 87 Then, a complaint against this same debt collector, filed in March 2023, alleged that after entry of the 2015 consent order the same debt collector “made at least tens of thousands about unsubstantiated debt whose amount or validity a consumer had disputed” without following the procedures it agreed to follow to verify the debt obligations it seeks to collect.Footnote 88 And, according to the CFPB complaint, this (post-2015 consent order) misconduct took place between March 2016 and September 2020. Thus, while the CFPB has effectively wielded its regulatory power in this area, its process is necessarily reactive and therefore takes years.
In contrast, our proposed licensing regime is more proactive. Placing current and prospective debt collectors on notice of recordkeeping, reporting, and, crucially, disclosure requirements may have an immediate beneficial effect on those considering illicit practices. Annual review of account and complaint-level data provides a more routine outlet for scrutinizing collectors’ patterns and practices. And, our suggestion that such information be shared with the courts, specialized ombudsmen, and the public might enable more effective reactionary regulation. Simply, such a regime enlists more guardians in debt collection cases: Judges can readily assess the credibility of a plaintiff’s pleadings and enforce the state’s heightened pleading requirements; ombudsmen can alert courts of illicit practices, intervene in cases, or levy fines; and an entrepreneurial private bar will quickly bring civil actions against violators of state consumer-protection statutes.
Developing a clear recordkeeping matrix does two things. First, it allows some basis for private enforcement against repeat violators, something akin to the role of regulatory filings with the SEC in the domain of securities fraud. Clear regulatory obligations to disclose debt collector interactions with debtors can help “create the legal conditions that would permit the emergence of an entrepreneurial market in agents willing to ferret out consumer harm.”Footnote 89 Second, it allows a regulatory agency to relieve good actors of some burdens or regulation and allow them increased market initiatives and, presumably, some competitive advantage against nonconforming competitors. To be effective, such reporting and enforcement practices need to be standard, which probably indicates that the oversight must be federal in scope, most likely through the CFPB.
Again, it is important that the perfect not be the enemy of the good. National-level regulatory response is at best a lumbering creature. Much of the information necessary to demand more certification from miscreant actors and to ease the regulatory burden on rules followers is in the hands of state courts or could be generated through court filing requirements. The courts would then have to create a process of administrative review of specific areas of litigation, wholly independent of who wins or loses in any particular case. This may not be the customary judicial function. But nor should the stamping of endless default judgments against absent and overwhelmed defendants.
17.4 Conclusion
For consumers to be able to take advantage of markets, they must be able to contract for themselves and to assume the responsibility of debt. They will no doubt make errors, find themselves more deeply in debt than is reasonable, and face the wrath of bills coming due. Any system that offers credit to consumers has to have some mechanism of collecting on debts; otherwise, the system will collapse. We take all this as a given.
The current debt collection system is not a reasonable mechanism to balance the needs of creditors and debtors in consumer markets. In particular, the discovery of an effective means of asymmetric aggregation leaves the state court system complicit in a process that only resembles legal adjudication. We join the ranks of the concerned and offer some observations as to how to conceptualize possible responses. At the end of the day, it is hard to imagine how the evident current deformities in debt collection “litigation” can be addressed short of a regulatory response, whether generated by administrative action or whether developed from within the courts themselves.
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