What is /etc/default/ directory called?

There is not a clear cut definition for /etc/default (the Filesystem Hierarchy Standard does not mention it) but it is used for "upstream configurations" and is specific to Debian/Ubuntu systems).

Debian Policy Manual:

Often there are some variables in the init.d scripts whose values control the behavior of the scripts, and which a system administrator is likely to want to change. As the scripts themselves are frequently conffiles, modifying them requires that the administrator merge in their changes each time the package is upgraded and the conffile changes. To ease the burden on the system administrator, such configurable values should not be placed directly in the script. Instead, they should be placed in a file in /etc/default, which typically will have the same base name as the init.d script. This extra file should be sourced by the script when the script runs. It must contain only variable settings and comments in SUSv3 sh format. It may either be a conffile or a configuration file maintained by the package maintainer scripts. See Configuration files, Section 10.7 for more details.

To ensure that vital configurable values are always available, the init.d script should set default values for each of the shell variables it uses, either before sourcing the /etc/default/ file or afterwards using something like the : ${VAR:=default} syntax. Also, the init.d script must behave sensibly and not fail if the /etc/default file is deleted.

Your problem is likely to remove itself ( ;) ): That directory is likely to get removed in the future since it is part of SyS-V init and systemd (what we use as of 16.04) does not use it. The only reason for it to still be there is compatibility.