The Consumer Financial Protection Bureau Tames Debt Collectors

Although relatively new, the Consumer Financial Protection Bureau, or CFPB, has received a lot of attention from the financial industry, regulators, and legislators. The Bureau’s directive is simple – create a level playing field for consumers.  As stipulated in the Dodd-Frank Act, which was passed by Congress in response to the recession, the CFPB has been granted the authority to supervise non-bank entities and their compliance with federal consumer financial laws.  The authority extends throughout the financial spectrum, covering industries such as residential mortgages, private education lending, payday lending, and over certain other, “larger participants”, in markets for other financial products and services. One of the bureau’s first actions will be to supervise the debt collection industry, which isn’t sitting well with them, as you might imagine.  We’ll tell you what it means for you.

Debt collection agencies, whose aggressive tactics have drawn the attention of consumer protection advocates and legislators, will come under federal supervision beginning January 2, 2013. It’s no secret why debt collectors are high on the CFPB’s list.  The industry accounts for a large portion of consumer complaints to the Federal Trade Commission, which enforces restrictions against abusive practices.  The FTC received more than 180,000 complaints about debt collectors in 2011, up from 13,950 in 2000.  The complaints are centered on items that are expressly prohibited in the Fair Debt Collection Practices Act, the federal law that protects consumers from collectors. Among the infractions reported are harassment and baseless threats of lawsuits.

One thing to note is that not every debt collector will be subject to the new rules.  There are about 4,500 debt collection companies in the United States, but the rules will only apply to collectors with annual receipts of more than $10 million.  This represents about 175 companies, which may not sound like a lot; however, these agencies account for 63%, or $7.7 billion, of the industry’s $12.2 billion in collections.  Also, these rules would only apply to certain types of collectors.  According to the CFPB, the businesses within the consumer debt market covered by the rule include firms that buy defaulted debt and collect the proceeds for themselves; firms that collect defaulted debt owned by another company in return for a fee; and debt collection attorneys that collect through litigation.

The CFPB’s stated purpose is to ensure that consumers are treated fairly by financial service providers, and there are many examples of why this is necessary. A report last year by Consumers Union found debt collectors filing an increasing number of lawsuits without holding proper documentation of the debts involved.  In some cases, companies were suing consumers over debts that were already paid, or securing court judgments without proof that they owned the debt.  Beginning in January, the CFPB will require debt collectors to supply reports, and be subject to examinations of their compliance with relevant regulations. In a recently released bulletin, the CFPB recently put collection agencies and law firms on notice that the bureau’s examiners will be assessing every aspect of their practices and procedures.

As Steve Rhode, owner of the Get Out of Debt website, put it, “The basic tenets of this new supervision certainly seem logical and fair to both consumers and debt collection companies. It’s hard to argue that it’s burdensome on collection agencies to treat consumers with civility and honesty, that they must provide accurate information, and that they should provide required disclosures.”  Regulation is a bitter pill for many industries to swallow, and in some instances, increased oversight initially causes problems for consumers. For example, most banks reacted to the cost of abiding by the Card Act by eliminating free checking accounts, but those will come back some day. Banking is a competitive industry, and when one bank offers a new product, the others soon follow.  In the same way, debt collectors are in business to make money, and good companies can still do so under CFPB oversight.  While it may be challenging for some smaller agencies, the good that will come from the CFPB far outweighs the bad.  I’ve heard heartbreaking stories of how collection agent abuses have torn families apart, and even led to suicide.  I’m sure we can all agree that no amount of unpaid debt is worth the pain and suffering people have experienced after dealing with disreputable collectors. Protecting those consumers is the CFPB’s mission, and that’s something we should all support. Until next time, I’m Thomas Fox for Cambridge Credit Counseling.

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