A recent Buzzfeed article reported that the federal government is considering a proposal to drastically increase the regulations on the consumer debt collection industry. These new regulations would make it exponentially more difficult for collectors to contact debtors with delinquent balances.
The idea of making it harder for collectors to get ahold of consumers is quite popular with consumers. At this point, almost everyone has had the unpleasant experience of being hassled by an unethical collector about a debt that was not legitimate.
However, these new restrictions will also make it more difficult for ethical collectors who are working on behalf of struggling companies that deserve to be paid for services rendered on a credit basis. With that in mind, let’s explore the downside of these credit and collector reform proposals.
Less Likely to Extend Credit
Any increase in the complications that come with collecting from delinquent accounts is going to make everyone who currently extends credit to their customers more cautious about who they extend credit to. In many cases, local small businesses that are struggling to get by will decide that it isn’t worth the hassle and stop offering credit terms to their customers altogether.
Higher Requirements for Credit
Increasing difficulty in collecting outstanding debts that are rightfully owed to them will also make both large and small businesses much more particular about who they extend credit to. Unfortunately, when the requirements to qualify for credit go up, the people who are left out are often the ones who need that credit the most.
Higher Costs for Credit
As with anything in the business world, an increase in difficulty in collecting outstanding debts is going to cost more money. And these types of increases in expenses are often passed right on through to the end consumer.
So when your local credit union has to pay their collection agency more money for the same results on a bad car loan, they are going to have to find some way to recoup those added expenses. It doesn’t take a banking expert to see that those added expenses are going to result in higher interest rates and service charges.
Less Credit Available to Weather Economic Downturns
Perhaps the most significant impact of these proposed credit regulations is something that actually won’t be visible until it is too late. The people who are likely to lose access to credit because of one of the previously discussed reasons are the same people who rely on credit to get through economic downturns.
With less credit available and higher requirements and costs, these people are simple not going to have the ability to weather the next economic downturn. Even a minor recession will likely bankrupt a large majority of these people, who would otherwise borrow money to get through it.
While the idea of strengthening the regulations is to help the government crack down on unethical and illegal debt collection practices, we should always be sure to remember that ethical debt collection is a necessary aspect of the credit industry. Without the ability to collect on delinquent accounts, there isn’t much motivation to extend credit to anyone with a less-than-stellar payment history…and those are the people who tend to need credit least.
