N.Y.'s Lawsky Joins Debt Collection Crackdown

New York financial regulator Benjamin Lawsky is joining the crackdown on the debt collection industry, proposing new rules that would tighten record-keeping requirements and other collections practices for banks and third-party debt buyers.

Lawsky, the superintendent of financial services for New York state, unveiled his new set of rules on Thursday. The proposed reforms add to a groundswell of recent regulatory pressure on the debt collection industry, which is already facing scrutiny, lawsuits and potential enforcement actions from the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Trade Commission and state attorneys general.

Banks have historically filed lawsuits to compel borrowers to repay defaulted credit card loans, but they also sell such debts to outside collections agencies for pennies on the dollar. Those debt buyers then file their own suits seeking repayment. Consumer advocates have long raised concerns about the amount of documentation that banks keep or provide to third-party debt buyers to support such lawsuits, and allegations of "robo-signing" and incomplete paperwork have been rampant.

California Attorney General Kamala Harris in May sued JPMorgan Chase (JPM) over such alleged shortfalls in its debt collection operations. Other banks, including Bank of America (BAC), have sold charged-off loans to third-party collectors without providing adequate documentation of the debts, leading some borrowers to face repeat collections efforts on bills they have already repaid.

Lawsky's proposals would directly address such documentation and robo-signing concerns, by making it easier for borrowers to dispute the validity of debts that collectors claim they owe. Currently New Yorkers who dispute a debt must put their objections in writing and request verification within 30 days of being contacted by a collector. But under the proposed new rules, New Yorkers could dispute debts by phone, and debt collectors will be required "to provide documentation proving that the debt is valid, including a copy of the signed contract and final account statement, and that the collector has 'chain-of-title,' proving that the collector has the right to collect on the debt," New York said Thursday.

The state's other proposals include:

• Requiring that collectors provide borrowers with better information and disclosures about the amounts that are owed, including a breakdown of each charge added to the debt and each payment made after the debt was written off.
• Requiring collectors to inform borrowers in every communication if the statute of limitations has expired on a debt.
• Providing borrowers with written confirmation of any debt settlement agreement, and with written confirmation and acknowledgement when those agreements are fulfilled, to prevent borrowers "from being pursued for debts that they already paid off."
• Allowing borrowers to communicate with collectors by email.

The proposed regulation will be subject to a 45-day notice and comment period, the state said.
"Debt collectors frequently use abusive scare tactics to try to stack the deck against struggling families and squeeze outsized profits out of their financial misery," Lawsky said in a press release. "These reforms will help level the playing field for consumers."