FTC Wants to Eliminate Competition With Government Courts

by S.M. Oliva, Mises Economics Blog
Jul. 13, 2010

Yesterday the Federal Trade Commission staff issued a report declaring the nation’s debt collection system “broken.” The staff concluded this because “consumers are not adequately protected in either debt collection litigation or arbitration.” The staff is particularly down on arbitration, which is understandable. Arbitration competes with government-run courts, and the last thing the FTC -- the agency charged with protecting and promoting competition -- would want is to promote competition for the resolution of consumer credit disputes.

At the outset, I should note the staff report is based primarily on anecdotes compiled at a series of “roundtables” with interest groups. Although the staff concludes the system is “broken,” it doesn’t offer much in the way of evidence. Indeed, the report includes several passages emphasizing the absence of empirical data. For example:

There was a broad consensus among roundtable panelists that relatively few consumers who are sued for alleged unpaid debts actually participate in the lawsuits. Although no empirical data were presented or submitted, panelists from throughout the country estimated that sixty percent to ninety-five percent of consumer debt collection lawsuits result in defaults, with most panelists indicating that the rate in their jurisdictions was close to ninety percent.

Roundtable panelists and commenters differed widely on why there is such a high default rate in debt collection litigation. In general, industry representatives asserted that most debtors who default do so because they owe the debt and therefore recognize that disputing it would be futile. Consumer advocates, on the other hand, generally attributed the low participation rate to debtors not receiving notice of the action or to procedural hurdles that make it difficult and expensive for debtors to defend. The Commission is unaware of any empirical data bearing on this question, making it difficult to draw definite conclusions as to why consumers do not participate. Nevertheless, given how few consumers appear and the risk of adverse consequences from not appearing, the Commission believes that the public would benefit from efforts to increase consumer participation in debt collection litigation. (Italics added)

The single most prominent anecdote cited in the report the Minnesota attorney general’s 2009 lawsuit against the National Arbitration Forum, a debt collection arbitration firm. Minnesota forced NAF out of the business based on accusations that the company presented itself as a neutral arbiter while maintaining financial ties to “key members of the debt collection industry.” NAF settled Minnesota’s charges without trial.

The FTC staff -- which for some reason never pursued NAF itself -- claims this case proves the inadequacy of non-government arbitration, since the arbitrators may not, in fact, be impartial. The report demands “meaningful consumer choice” and strongly suggests the private sector cannot offer equal or superior alternatives to government courts:

The Commission concludes that, especially in the wake of serious concerns relating to NAF, it is imperative that arbitrators and arbitration forums take significant and concrete steps to prevent bias and the appearance of bias. No one who has matters before an arbitration forum should be permitted to have any ownership or other financial interest in the forum, and no one who has a direct financial interest in a matter or a creditor should be allowed to arbitrate the matter or disputes involving that creditor. Fundamental notions of fairness require no less.

More generally, the Commission concludes that rigorous standards of ethical conduct for arbitration forums, arbitration administrators, and arbitrators are sorely needed. It is not necessary that an arbitration forum be a non-profit, although having such a status could eliminate some bias and appearance of bias. The Commission also concludes that the private sector should try to develop debt collection arbitration standards, promote compliance with these standards, and vigorously enforce them. If the private sector cannot or will not take the action needed, then either the government should develop and enforce such standards or Congress should prohibit debt collection arbitration entirely and have these matters resolved in the public court system.

So the FTC proposes cartelization of the industry -- because of a single unproven case brought by one state attorney general -- or the outright abolition of competition. More notably, the FTC demands the private sector abide by ethical standards and practices that the Commission refuses to follow in its own proceedings. As I’ve long documented at Mises.org, the FTC assigns all of its cases to a judge who is an employee of the Federal Trade Commission -- and any appeal from that judge is heard by the commissioners, who have, as far back as I’ve reviewed, never ruled in favor of a defendant.

In recent years, the FTC has gone a step further and completely bypassed its employee-judges because of concerns they are too impartial and thus insufficiently deferential to Commission prosecutors. In one merger case, the FTC commissioner who directly oversaw the preliminary investigation appointed himself as the judge, forcing the companies to abandon their merger after concluding they could not receive a fair hearing. Alas, there are no “rigorous standards of ethical conduct” applicable to FTC commissioners and attorneys -- and no private-sector “competition” to worry about.

Now, I’m not accusing the FTC of hypocrisy, even though this appears to be a double standard. Actually, both the FTC’s internal process and the standard it wants to impose on debt-collection arbitration stem from the agency’s belief in “consumer rights”; that is, the FTC actively discriminates against producers and sellers while favoring consumers. The FTC wants consumers to enjoy a higher level of due process than producer-sellers. In FTC cases, where the Commission “represents” consumers, it provides only minimal rights to accused producer-sellers; similarly, when producer-sellers seek to enforce contracts against consumers, the FTC wants the process weighted towards consumers -- and by extension, the government.

Of course, it’s not even true that “consumer rights” benefit consumers. The FTC never explains why government courts are superior to private arbitration; it’s just a given. And let’s also remember that multiple government agencies, including the FTC, already regulate debt collection -- not to mention the fact that government-licensed attorneys frequently serve as debt collectors. Adding even more layers of government won’t improve matters. It will only serve to further complicate matters for consumers and debt collectors alike.