CFPB issues rules for governing debt collectors

The Consumer Financial Protection Bureau on Tuesday unveiled new rules for supervising large debt-collection firms, marking the first time that industry will be subject to federal oversight.

Starting Jan. 2, the government watchdog will regulate 175 debt-collection firms that each bring in more than $10 million in annual receipts — accounting for 63 percent of the market.

Examiners at the bureau will begin assessing whether debt collectors are complying with requirements of federal consumer financial law, including providing consumers with disclosures and accurate information. They will also investigate whether debt collectors have harassed or deceived consumers in the pursuit of payment.

The bureau estimates that about 30 million Americans have an average of $1,500 in debt subject to collection. Debt collectors typically report consumers’ collection status to credit bureaus, meaning any inaccuracy could affect the ability to get a mortgage, car loan or credit card.

“Millions of consumers are affected by debt collection, and we want to make sure they are treated fairly,” CFPB Director Richard Cordray said in a statement. “We want all companies to realize that the better business choice is to follow the law — not break it.”

The $12.2 billion debt-collection industry has routinely come under fire for the tactics used to get consumers to settle their balances.

A report last year by Consumers Union found debt collectors filing an increasing number of lawsuits against borrowers without proper documentation. In some cases, companies were suing consumers over debts that were already paid or winning court judgments without proof they owned the debt.

One of the largest publicly traded debt buyers, Encore Capital Group, filed 245,000 lawsuits in 2009 alone, according to the report. Meanwhile, an employee of debt collector Asta Funding testified a few years ago that she churned out affidavits attesting that debtors’ records had been reviewed every 13 seconds.

Sheryl Wright, senior vice president of external affairs at Encore, said: “Litigation is a last resort for our company when a consumer has the ability to repay their debts but refuses to do so. And when we do litigate, we pledge to be fair and reasonable.”

Officials from Asta Funding declined to comment for this article.

“Larger companies tend to be the ones routinely filing mass cookie-cutter lawsuits, having huge databases of information that might be inaccurate, which is part of what causes all of these problems,” said Suzanne Martindale, a lawyer with Consumers Union. “The CFPB did cast a pretty wide net and should be capturing those companies.”

The CFPB’s authority extends to three types of debt collectors: companies that buy defaulted debt and collect the proceeds for themselves; firms that recover defaulted debt owned by another company in return for a fee; and lawyers who collect through litigation.

The Federal Trade Commission shares responsibility for enforcing the Fair Debt Collection Practices Act, a federal law enacted in 1978 to protect consumers from abusive practices. The agency can investigate complaints and levy fines but does not have supervisory authority.

“CFPB examinations of large collectors are a valuable new tool for the government to use in addressing unlawful conduct by debt collectors,” said Thomas Pahl, an assistant director at the FTC. “When examinations are combined with a continuation of the FTC’s history of enforcement...the result will be a more comprehensive and effective protection of consumers.”

The added layer of regulation and compliance may hurt collection companies, 85 percent of which have 50 or fewer employees, said Mark Schiffman, a spokesman for the Association of Credit and Collection Professionals, a trade group with 5,000 members.

“We’re an industry of small businesses, so the cost of additional regulation for some of these companies will be difficult,” he said. “We are subject to so many laws and regulations that vary from state to state. It’s a very challenging operating environment.”

The association would like the bureau to raise the threshold for supervision to $250 million in revenue. The trade group also takes issue with the bureau’s use of receipts, rather than revenue, to determine supervision as collection agencies earn a percentage of the money they collect for clients.

“There needs to be balance between protecting consumers and the ability to do our job,” Schiffman said. “What our members do is important to the economy; we can’t have a credit-based economy without it.”

Danielle Douglas covers the banking industry for The Washington Post.
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