U.S. consumers will get additional protections against abusive treatment by debt collectors under new federal oversight taking effect Jan. 2, the Consumer Financial Protection Bureau said today.
Companies with more than $10 million in annual receipts from consumer debt collections will be subject to supervision meant to ensure adherence to requirements such as that firms properly identify themselves and document amounts owed, the bureau said in an e-mailed statement. The agency will also examine whether collectors have “harassed or deceived” consumers, according to the statement.
“Millions of consumers are affected by debt collection, and we want to make sure they are treated fairly,” Richard Cordray, the agency’s director, said in the statement. “We want all companies to realize that the better business choice is to follow the law.”
The bureau, created by the Dodd-Frank Act, is taking on supervision of collectors as part of its mandate to protect borrowers against the kind of predatory business practices that drew complaints from lawmakers and consumer groups as delinquencies and defaults soared after the 2008 credit crisis.
The new rule could erode profits at major debt collectors including Norfolk, Virginia-based Portfolio Recovery Associates Inc. (PRAA:US), the largest publicly held firm in the business, San Diego- based Encore Capital Group Inc. (ECPG:US) and Asta Funding Inc. (ASFI:US), based in Englewood Cliffs, New Jersey. It could also affect the largest player by revenue, NCO Group, a unit of New York-based JPMorgan Chase & Co. (JPM:US)’s private equity arm One Equity Partners.
The regulation defines which companies will face direct supervision by examiners who inspect records, procedures and practices. Companies that collect debt and don’t fall under the consumer bureau’s supervision must still comply with the Fair Debt Collection Practices Act, and could face enforcement action from the agency if they don’t.
Until now, federal authorities could only bring lawsuits against debt collectors, as the Federal Trade Commission has done. The consumer bureau regulation gives the government an additional tool.
“Our supervisory authority will mean that we can identify these problems and root them out at an earlier stage in order to minimize harm to consumers,” Cordray said in remarks prepared for a speech today in Seattle, where the bureau is holding a field hearing on debt collection.
The collection business has long been the subject of complaints to state and federal agencies, and the numbers have risen amid increasing non-payment of credit-card debt during the recession and its aftermath. Consumers have cited harassing phone calls laced with profanity, unauthorized debits from bank accounts, attempts to collect debts never incurred and court judgments entered without proper notification.
In 2011, consumers filed a record 180,000 complaints with the FTC on debt collection.
The accounts-receivable industry had revenues of $17 billion in 2011, according to Kaulkin Ginsberg, a Rockville, Maryland-based consulting firm. In addition to collectors, the industry includes buyers, who purchase bad debt from creditors such as credit-card issuers. Debt collectors can be independent agents, employees of buyers or members of law firms.
Bureau supervisors will focus on the “system-wide problem” of the accuracy of data collectors use in pursuit of consumers, according to Cordray’s prepared remarks. They will also consider whether companies have a process in place for evaluating complaints, he said.
“A good compliance program also closely analyzes complaints to find patterns that may pose risks to consumers, such as whether the complaints stem from a specific employee or a certain type of account,” he said. “We expect to see an effective and comprehensive process to address consumer complaints.”
The rules closely track a Feb. 17 CFPB proposal opposed by the debt-collection industry because of the $10 million revenue threshold. ACA International, an industry trade group, said in an e-mailed statement that the level was improper because money is often partially returned to collectors’ clients.
“ACA members embrace consumer protection but it has to be balanced with the industry’s ability to do their jobs in recovering rightfully-owed consumer debt,” the group’s head, Pat Morris, said in an e-mailed statement.
In an April 10 letter, ACA called the $10 million figure “arbitrary and capricious, an abuse of discretion and not otherwise in accordance with law.”
The regulation also includes partial coverage of collection lawyers. Groups including the National Association of Retail Collection Attorneys and the American Bar Association criticized the agency’s initial proposal earlier this year.
The groups said Dodd-Frank exempted attorneys from bureau supervision because they are lawyers, not providers of consumer financial services.
“Congress took pains to exclude attorneys engaged in the practice of law,” the ABA wrote in an April 11 letter.
The final rule covers law firms meeting the agency’s definition of debt collectors, namely those “whose principal business activity is debt collection” or who regularly engage in debt collection.
Dodd-Frank empowers the bureau to supervise banks with assets of more than $10 billion for compliance with relevant federal consumer-protection laws. The law also authorizes supervision of mortgage originators, private student lenders and short-term creditors known as payday lenders.
Beyond that, the bureau must under Dodd-Frank define by regulation any other non-bank firms it will supervise. It has already published plans for supervision of credit-reporting companies such as Equifax Inc. (EFX:US) and TransUnion Corp. (TRUN:US)
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