Although I see it less these days, at the height of media attention on the foreclosure crisis there was a widespread sentiment that people who owed a debt were morally obligated to pay, whether because of the alleged “sanctity” of the contract they signed or just by general ethical principles.
The abject failure of the lenders to live up to their own side of any such moral contract has been covered ad nauseam elsewhere but I think there is one particular mechanism that has been ignored, perhaps because it’s a bit more arcane and legal. It first came to my attention in researching MERS but lately I’m seeing what looks like a larger pattern.
Bare Legal Title
The central concept is “bare legal title.” The term comes from real estate law where (as I understand it, though I could be wrong) it provides the legal context that allows principals to outsource key functions to various agents by extending a set of their own legal rights to those agents. This bare legal title is key, for example, to the ability of mortgage servicers to process payments, pursue collections, and at the extreme, to initiate foreclosure, all on behalf of the original holder. The primary limitations to the servicers’ ability to act are twofold – the principal they work for must hold legal title, and the servicer can only act at the principal’s direction. Both limitations have been routinely flouted by the use of MERS and other means.
I know even less about consumer debt law than I do about mortgage law, but it seems reasonable to think that debt collection agencies are operating under some similar form of partially extended rights to pursue collection, as well as legal limitations on what they can do.
Modularity, Action and Liability
What all of this means in practice is that the system of debt and credit that underwrites almost all major purchases by individuals is corrupted by a warped form of outsourcing. Borrowing an idea from Herbert Simon, I see it as a form of modularity where individual companies are able to shift the legal right to pursue borrowers to unaccountable agents while remaining shielded from legal liability themselves, and all under the implicit protection of absent regulatory oversight and legal complexity.
The dynamic is clear in this article from the NY Times on medical debt collection:
Hospital patients waiting in an emergency room or convalescing after surgery are being confronted by an unexpected visitor: a debt collector at bedside.
This and other aggressive tactics by one of the nation’s largest collectors of medical debts, Accretive Health, were revealed on Tuesday by the Minnesota attorney general, raising concerns that such practices have become common at hospitals across the country.
The tactics, like embedding debt collectors as employees in emergency rooms and demanding that patients pay before receiving treatment, were outlined in hundreds of company documents released by the attorney general. And they cast a spotlight on the increasingly desperate strategies among hospitals to recoup payments as their unpaid debts mount.
To patients, the debt collectors may look indistinguishable from hospital employees, may demand they pay outstanding bills and may discourage them from seeking emergency care at all, even using scripts like those in collection boiler rooms, according to the documents and employees interviewed by The New York Times.
In some cases, the company’s workers had access to health information while persuading patients to pay overdue bills, possibly in violation of federal privacy laws, the documents indicate.
The pattern is of course not universal – there are collection agencies that buy the debt outright and thus become the principals themselves (and often behave especially badly) – but it does seem as though the combination of modularity, complexity and terrible governance is at the root of some serious social ills.