CFPB Targeting Firms with Broadest Consumer Impact

WASHINGTON — With its nonbank supervision program finally underway, the Consumer Financial Protection Bureau wants to bring debt collectors and consumer reporting firms under its oversight umbrella.

The agency released a proposal Thursday that would subject "larger participants" in those two markets to federal supervision for the first time. Observers said the proposal is yet another sign that CFPB intends to focus on markets, products and services that have the broadest impact on consumers, especially in the wake of the financial crisis.

"I think it's pretty clear that they were looking for industries that touched the largest number of Americans, which goes along with what I think has been their public relations strategy from the beginning," said Isaac Boltansky, an analyst with Compass Point Research & Trading. "They want to sell themselves as the protector of the working class in America. And an easy way to do so is to focus on debt collectors, given 30 million Americans have debt under collection."

The two industries are the first to be identified by the bureau for inclusion in its nonbank supervision program, which launched Jan. 5. Under Dodd-Frank, the bureau already has the authority to supervise mortgage, payday and student lenders of any size, but must establish parameters for identifying "larger participants" in other consumer markets.

The proposal must be finalized by July 21, and the comment period will be open for 60 days.

At a press briefing Thursday, CFPB officials said the proposal is only the first in a series of rulemakings – to be released on a rolling basis – that will identify other markets for supervision.

But it's no surprise they focused on debt collection and credit reporting first, said Alan Kaplinsky, a partner with the law firm Ballard Spahr, which represents some debt collection firms.

"I think what they did here is they honed in on two industries that I think are certainly going to be a priority for them to scrutinize," he said. "And remarks that Director [Richard] Cordray has made for the last several months and other people at the bureau, it became pretty clear to me that those two industries were a very high priority."

Cordray told reporters Thursday that debt collection and consumer reporting, in particular, have been greatly affected by the lingering economic downturn.

"It means many more people now have debts that are being collected against them than was true before and many people have more dollars in debt that are being collected against them," he said. "So the impact of the debt collection industry on America is … considerably greater in 2012 than it may have been in 2002."

The same is true of credit reporting agencies, which have grown larger and collected more information at a time when people are more likely to face adverse actions on their credit reports, such as a foreclosure, debt or unemployment.

"Coming out of the crisis, both of these industries are areas of particular focus because of their impact on the consumer, and I think that's relevant to our choices here," Cordray said.

Under the proposal, debt collectors with more than $10 million in annual receipts from debt collection activities would be subject to supervision. Credit reporting firms with more than $7 million in annual receipts would also be supervised.

The firms would be subject to the same supervision process that the bureau applies to banks, Cordray said.

Using these criteria, the plan would cover approximately 175 debt collection firms, only about 4% of all such companies, but representing approximately 63% of annual receipts from the entire market, according to CFPB's estimates.

It would also cover approximately 7% of all credit reporting agencies, about 30 firms, which represent 94% of the annual receipts from that market.

Keeping the thresholds above $7 million will allow the bureau to avoid a requirement that they convene special panels to examine a proposal's potential impact on small businesses, Kaplinsky noted.

"That would eat up a tremendous amount of time, and it's time that, at least in this context, they don't have," he said.

The larger participants will have to allow CFPB "complete access, unfettered access" to their books and other information, Cordray said, as well as answer any questions about their operations.

Smaller firms that are not subject to supervision would still be required to follow any applicable consumer financial laws, including any new rules adopted by the CFPB. They would also be subject to CFPB enforcement actions, Cordray said.

"We will be working aggressively with our partners at the [Federal Trade Commission] and, where appropriate, state AGs to make sure the laws are enforced against those [smaller participants] and they don't feel that they're somehow ignored and can get away with murder," he said.

Kaplinsky said his firm is already working with debt collectors and debt buying firms that it represents to do audits of their practices to make sure that, when the CFPB begins examining them later this year, they will be ready to identify potential issues themselves.

Peggy Twohig, the CFPB's assistant director for nonbank supervision, said the proposal is the first in a series of rulemakings that will define "larger participants" in other markets.

In a request for comment issued last summer, the agency said it was also considering money transmitters, prepaid-card issuers, debt-relief services and other kinds of consumer lenders for potential inclusion in the nonbank supervision program.

Twohig said the bureau will likely propose additional rules on a rolling basis, and would not necessarily wait for the current proposal to be finalized, but she did not provide a timeline for further announcements.

Boltansky said he expects the bureau's next proposal will focus on money transmitters and check cashers, then pre-paid card issuers. But he said it may have more trouble fully defining other kinds of consumer lending.

CFPB chose annual receipts as the criteria for debt collection and consumer reporting because it "approximates market participation" in those two industries, according to a press release. But Twohig said they may use different criteria and different thresholds for other markets.

The debt collection market is dominated by three kinds of companies: firms that collect debt owned by another company in return for a fee; firms that buy debt and collect the proceeds for themselves; and debt collection attorneys and law firms that collect through litigation.

About 30 million Americans have an average of $1,400 in debt under collection, according to data provided by the bureau.

CFPB also said there are 36 billion updates to consumer files each year, and three billion consumer reports issued, according to the Consumer Data Industry.