There are a few rules and regulations to follow to provide loans to the prospective customers or for collecting the dues from a delinquent customer. These laws are designed to provide protection to both the consumers as well as the creditors with the primary focus on regulating the actions of the third party debt collectors.
To provide relief and protection to the consumers irrespective of the type and amount of debt the law prohibits the debt collectors to follow these specific acts:
- Not call at unreasonable hours
- Add additional fees or interest that were not there in the original agreement
- Deliberately delay posting of payments made by the consumers to their accounts to add more fees and interest and also to harm their credit even further
- Confiscate the property of the consumers in spite of not having any legal authority to do so
- Spread bad names about the consumer by telling about the debt to their employers, co-workers, friends and family members
- Lie about the actual amount the debtor owes
- Pretend or misrepresent a lawyer or law enforcement to intimidate the debtor
- Pretend to represent the government
- Lie about reporting the debt to the credit bureaus
- Make any false threats to sue the debtor or having arrested and sent to prison for non-payment
- Use any abusive language or
- Follow any means that will harm life and property of the debtor or their family members.
With all these regulations in place it is expected that the debt collection practice will improve making the debt market free from its bad name that such practices have provided to it as you will find when you go through different debt consolidation reviews and other articles.
The economic perspective
Looking at the economic perspective of these laws, experts say that it will develop the competitive market result only when there are two specific situations such as:
- There is an recognizable market failure and
- There is a regulation that can be implemented in practice to address other issues.
The economists say that, if harsh remedies such as debtor’s prisons are eliminated it will consequently increase the risk of loss for the creditors. They are also worried of other aspects as well apart from the above.
- They say that such elimination will also result in increase in the demand of the potential borrowers for credit as this will free them from the risk of such severe consequences in case they default.
- Moreover, providing more access to filing for personal bankruptcy will similarly increase the cost as well as the risk of money lending and at the same time it will also increase the demand for credit.
However, it is not clear as a priori matter whether such offsets and adjustments will result in higher or lower equipoise of credit.
About the analysis
The economic analysis of the debt laws seems to be oversimplified. This is because it does not consider the potential problems that may result due to the adverse selection as well as the moral hazard.
- However, the analysis tends to illustrate a few specific things such as the margin to which the lenders should be eager to trade off.
- It also indicates the inclination to capitulate the right to invoke definite remedies as long as these are adequately compensated for the amplified risk of loss.
- Apart from that, it depicts the market failure in such a manner that the benefits are more than the costs involved including all those unintended benefits and costs.
The effect of the debt laws with regards to the terms and conditions for consumer credit including the remedies available by default typically falls into two specific categories such as:
- The intended effects and
- The unintended effects.
Under the given situation, the intended ones are the easiest to observe because the law abiding lenders will reduce the use of it provided that the legislators and regulators prohibit or limit a term or a practice in the consumer credit contract.
On the other hand, such regulations on consumer credit terms may often have several unintended consequences. These unintended effects can be grouped under three given headings namely:
- Term re-pricing: This refers to the exercise of offsetting any terms and conditions that are controlled below the market levels by making adjustments in other terms of the contract in order to try to rebuild the equilibrium price and quantity.
- Product substitution: This defines the avoidance of credit regulations by shifting to those products that are usually regulated unequally.
- Rationing: This refers to the situation where the debtors either lose access to specific types of credit or have to deal with a reduction in the amount of available credit as well as in the credit lines.
Restrictions on creditors’ remedies
The debt law has put some restrictions on the remedies of creditors that usually have the same effect as any other types of supervisory control on credit terms. This is because making debt collection practices costlier and less effective will raise the risk of lending. This is because the creditors will now expect to offset these strict debt collection rules by making a variety of adjustments. These adjustments may include:
- Increasing the rate of interest
- Increasing the amount of down payments or
- Inducing the consumers to choose an alternative product.
All these adjustments will ration the access to credit which will in turn result in an overall decrease in the quality as well as the quantity of credit.
Several economists have summarized these effects in the National Commission on Consumer Finance studies that when sanctions are significantly restricted or prohibited, creditors tend to compensate for the increased risk burden. These market changes virtually affect all consumers but the most affected ones will be the poor and those who are least credit worthy.
Therefore, the economists say that if such restrictions and prohibitions must be imposed at all, it should not be against the net gain and benefit to the debt market on the whole. They say that all such prohibitions are subject to the cyclical unemployment that may not be necessarily resolved by curtailments in collections sanctions.