Restricting Collection Activities Leads To a Decrease in Access to Credit : NY Fed Study

This is a link to a Federal Reserve Bank of New York study entitled Access To Credit and Financial Health: Evaluating the Impact of Debt Collection. The study claims to employ empirical data to analyze outcomes for consumers in states with increased debt collection restriction with those without such increased restrictions. The study claims that restricting collection activities leads to a decrease in credit  and "a deterioration in indicators of financial health" (whatever that means)

The study employs complex equations in coming to its conclusions that I was unable to fully comprehend. However, the study contained other observations: while restriction of debt collection allows borrowers to smooth negative debt shocks, thereby improving their financial health, restricting debt collection essentially lowers the cost of default. This is because a decrease in debt recovery may lead borrowers to take on more more risk and overborrow, and those who know they are likely to default may demand more credit. According to the study's authors, all of these factors correlate to a reduction in borrowing and an increase in delinquencies.

Regardless of whether the authors' conclusion is correct, it certainly has a common sense appeal. If lenders are not permitted to take steps to obtain payment they deem adequate, they may restrict their lending. By the same token, if borrowers know lenders will be restricted from taking acts to collect, they may feel more comfortable defaulting.

It appears there would be a limit to reductions in debt collection restrictions, of course. Should there be no restriction on debt collectors, so that debt collectors should be permitted to harass and intimidate defaulting borrowers? The authors claim they studied several states that passed more restrictive debt collection law than their neighbors and the states with more restrictive laws support their conclusions. But what, specifically, do they mean by restrictive? What were the laws in the states with 'less restrictive' collection laws? How much less restrictive, and in what ways? These seem like questions whose answers might skew the results of the study.

With the astronomical increase in regulation of debt collection in the past 10 or so years, this sort of study is very useful, if only because it supports the idea that government regulation, especially restrictive government regulation, frequently has unintended and negative consequences.