CFPB Debt Collection Rules May Move in Unprecedented Direction

WASHINGTON — The Consumer Financial Protection Bureau is considering new rules to govern debt collection practices that could for the first time include banks and other creditors that are collecting their own debt.

The agency announced an advance notice of proposed rulemaking early Wednesday that would seek public comments on how to regulate the multi-billion dollar debt collection industry that regulators have said is plagued with problems. The CFPB is looking to write rules that may establish new restrictions on originating creditors; require accuracy of documents shared between all collection parties, such as buyers and settlement firms; and update rules on how collectors communicate to consumers, including through text messages.

"Updating the legal framework to protect today's consumers and to allow fair and appropriate use of modern technology is a high priority for the Consumer Bureau, which motivates this advance notice of proposed rulemaking," said CFPB Director Richard Cordray in a call with reporters on Tuesday. "We are seeking to hear from the public — consumers, consumer advocates, creditors, debt buyers, and debt collectors — about what works and what does not in the current debt collection market."

Senior CFPB officials said on the call that creditors that originate and collect their own debt will be the most affected by the new rules since most existing regulations do not cover such firms. Instead, the Fair Debt Collection Practices Act places restrictions on third-party debt collectors.

CFPB officials said they are currently looking at whether first-party creditors should be subject to the same restrictions as third-parties or face separate rules.

Debt collectors have expected new rules since the CFPB began targeting a handful of debt-settlement firms through enforcement actions earlier this year. The agency has also finalized a rule allowing it to supervise large nonbank debt collectors.

Large banks are already under regulatory scrutiny on debt collection practices, which has spurred JPMorgan Chase to stop certain debt sales and cut its group that handles collection litigation services. Most observers expect a shake-out of the entire debt industry with federal agencies like the CFPB and state supervisors like New York's banking superintendent, Benjamin Lawsky, proposing rules to stop collectors from using shoddy documents to win cases against consumers.

"You can't ignore this. It's a freight train," said Paul Joseph, director of business development for debt collection firm, McCarthy, Burgess & Wolff, during an interview with American Banker in July. "I have no doubt they're going to eventually come after everything" with regard to consumer debt.

However, CFPB officials vowed on the call that they would listen to all parties before writing the rules to make sure consumers are protected without overburdening the industry. The agency pledged to conduct small business panels, likely with debt collectors, and ensure new proposed disclosures are put out for comment before finalized.

"We want to hear how we can better protect consumers and bring greater accountability to this multi-billion-dollar industry without hamstringing legitimate debt collection activities," Cordray said. "Collection of consumer debts serves an important role in the proper functioning of consumer credit markets. But certain debt collection practices have long been a source of frustration for many consumers, generating a heavy volume of consumer complaints at all levels of government — including at the Consumer Bureau. "

The agency started taking consumer complaints on debt collection in July and plans to begin making them public starting Wednesday, the CFPB said. So far, the agency has collected 5,000 complaints that collectors have responded to, which has played a big role in the agency's decision to seek further rules. Indeed, CFPB officials said one of the reasons they are considering including first-party creditors in the rule is because they received a lot of complaints that were directed at those creditors.

"Debt collection is quickly becoming the topic that draws the most complaints of all the consumer financial products and services covered by our consumer response team," Cordray said. "The best estimates are that 30 million Americans — nearly one out of every ten of us — came out of the financial crisis with one or more debts in collection, for amounts that average about $1,400 per person."

The agency is particularly concerned about the lack of data and wrong account information that creditors are passing on to debt collection firms and debt buyers. The rules may likely require some form of updated disclosures so consumers know exactly how much they owe and to what company in addition to clarifications on their legal rights. CFPB senior officials said they are also performing separate studies on how collections of medical debt relate to credit scores that will coincide with its rulemaking process.

"Consumers can be harassed over a debt that is not theirs or that they do not recognize because the information is wrong," Cordray said. "Our job at the Consumer Bureau is to root out bad actors that violate the law. Their violations hurt not only consumers, but also every debt collector that tries to operate within the law."

The CFPB is also seeking to expand the Fair Debt Collection Practices Act to include new restrictions on how collectors contact a borrower, particularly through mobile phones and other advanced technologies since the rule was written in the 1970s. Though deadlines are not set in stone for the proposal, CFPB officials said they expect to close the comment period mid-February 2014.

"It will take some time to change this industry in a lasting way. But we will work closely with all stakeholders to achieve a better marketplace," Cordray said. "Both consumers and responsible businesses stand to benefit by improved debt collection standards."