Susan Eckert of Promontory Financial Group also contributed to this post.
More than 30 million Americans have debts in collection — the back end of the product life cycle that has long been among the leading sources of consumer complaints and litigation in the financial services industry.
The Office of the Comptroller of the Currency and the Federal Trade Commission have stepped up reports, guidance, and enforcement actions to address persistent problems in this industry, and the Consumer Financial Protection Bureau has acted quickly to define its supervisory authority over debt collectors. The bureau also launched a major rulemaking under the Fair Debt Collection Practices Act using its authority to implement that statute and to prevent unfair, deceptive, or abusive acts or practices. The first statement from the bureau about the scope and content of the new rules is an advance notice of proposed rulemaking that contained more than 160 open-ended questions about debt-collection issues and practices.
Market changes since the FDCPA’s passage in 1977 and the postcrisis shift toward regulation have opened the door to significantly enhanced consumer protections. The CFPB’s rulemaking has the potential to alter dynamics in every corner of the industry, from reducing recovery rates and limiting post-charge-off sale options and pricing to driving further consolidation by firms with sophisticated processes, systems, and controls.
Defining and consistently implementing responsible and effective debt collection has never been easy. But the coming reforms will require debt collectors of all kinds to re-evaluate their strategic and operational practices and oversight frameworks.
The CFPB’s Rulemaking
The scope of the bureau’s ANPR is notable. Rather than address isolated problems or consolidate existing law as the first agency able to write rules under the FDCPA, the CFPB appears poised to fundamentally reorient the regulatory framework so that the same principles govern the entire default lifecycle — from delinquency and charge-off through debt sale and litigation — regardless of whether the original creditor, a vendor, or a debt buyer undertakes a particular action. Much like the bureau’s effort to apply common standards to banks and nonbanks, formally incorporating creditor or first- party collection efforts into the new rules will have the effect of regulating activities based on their consequences to consumers rather than the legal character of the actor.
The debt-collection rulemaking will also offer important clues about the CFPB’s development as the bureau provides its first definitive statements on issues with broader application, such as how consumer protections will be extended to new technologies and how the agency interprets its discretionary rulemaking authority. The new rules may also create tension with safety and soundness considerations.
Congress passed the FDCPA in 1977 to eliminate abusive collection practices and allow consumers to dispute and validate debt information. The FDCPA exempted first-party collectors — original creditors or those who bought loans in good standing — from its requirements, although federal prohibitions against unfair and deceptive practices and similar state law requirements still applied and many firms voluntarily adopted the statute’s principles. Before the Dodd-Frank Act gave authority to the CFPB, no agency had authority to promulgate regulations to implement the FDCPA, and monitoring was left largely to the FTC.
The most dramatic structural change in the marketplace has been the growth of purchasing, collecting, and reselling charged-off debts. Debt buyers include national collection firms, collection law firms, contingency collection agencies, and financial investors, and it is common for the same portfolios of charged-off debt to be repeatedly bought and sold as the debt ages.
New technologies have also changed the marketplace. From more-robust databases to predictive dialing technologies, today’s collectors have better information to determine which debts are collectible, and better tools to conduct collection activity. Sophisticated data analysis and quantitative scoring models have also allowed firms to refine their business strategies based on the tradeoffs involved in collecting debts throughout the default life cycle.
The result has been a shift from localized, one-on-one collection efforts to nationwide companies leveraging new technologies to expand the range of collectible debts and extend the period in which collection activities remain economical. Considered together, these market changes point to several important themes underpinning the bureau’s rulemaking:
- Converging incentives for all collectors
- Increasing complexity in the challenge of maintaining data integrity
- Adapting disclosures to help consumers recognize and dispute debts
- Clarifying responsible use of new technologies
Consumer advocates, banks, and collectors of various kinds welcome the opportunity to update the FDCPA framework, especially with respect to clarifying expectations regarding practices and technologies not contemplated in 1977, and consolidating various sources of law in one set of regulations. But the extent to which consumer protections are enhanced may have dramatic consequences for the cost of a wide array of lending products.
Activities, Not Actors
The most significant change contemplated by the CFPB is applying FDCPA-like standards to collection activities that original creditors or purchasers of performing loans pursue on their own behalf. This approach would be consistent with one of the bureau’s core missions — to level the playing field among market participants conducting the same activities — and opens the door to thorough compliance examinations for an array of institutions.
The CFPB’s first debt-collection guidance signaled its intention to harmonize the expectations for first- and third-party collectors. Notwithstanding voluntary adoption of FDCPA standards by many large creditors, the bureau set forth its view that preventing unfair, deceptive, or abusive acts or practices barred first-party collectors from engaging in much of the same conduct that the FDCPA prohibited for third parties, such as making false statements about credit-bureau reporting, collecting unauthorized fees or interest, or taking possession of property without the legal right to do so.
One of the bureau’s early enforcement actions underscored this position by citing a bank for making misleading claims about the impact of entering into a debt settlement on the customer’s credit report and waiver of debts remaining after settlements.
The original distinction between first- and third-party collection efforts has eroded. Each successive buyer of a debt essentially makes the same choice as original creditors: collecting the debt via in- house efforts, placing the debt with a collection vendor, or re-selling the debt. Further, participants in a chain of debt sales face similar incentives to maximize recoveries against outlays, which may favor collection practices that pressure consumers to apply limited funds to one of many delinquent debts.
To bring all collection efforts under the same legal framework, the CFPB will likely need to rely on its UDAAP rulemaking authority. How the bureau interprets and applies this authority is largely untested, and there is little history of federal rulemakings of this kind to draw upon. The nexus that the bureau draws between a particular unfair, deceptive, or abusive act or practice and the regulatory requirements it imposes will bear close attention.
Even before the CFPB’s rules are finalized, debt buyers and collection vendors are likely to find themselves in a push to develop bank-like compliance-management systems for the first time. These efforts will be essential not just for those directly regulated by the CFPB, but more broadly for firms that need to ensure their viability as business partners for regulated institutions and larger market participants. Given the expanding application of third-party-management principles and regulatory emphasis on data integrity during servicing transfers and asset sales, creditors and regulators alike want to know that collection vendors or debt buyers base their actions on documented and valid debts and comply with applicable law — and can prove it.
Part Two of this article will explore exactly how banks have been regulated in recent years and the branches of focus we expect to see from the CFPB in its debt collection rules.
Susan Eckert and P-R Stark are members of Promontory Financial Group’s Consumer Protection Practice and provide clients with strategic, regulatory, and compliance advice. This article originally appeared in Promontory’s Sightlines newsletter, for which you can sign-up here.