The CFPB announced today that it has taken action against two of the biggest debt buyers in the U.S., Encore Capital Group and Portfolio Recovery Associates (PRA). The Bureau cited both buyers for what it termed illegal debt collection activities, including purchasing debts they should have known were inaccurate and/or not legally enforceable and attempting to collect on that debt through unlawful means.

“Encore and Portfolio Recovery Associates threatened and deceived consumers to collect on debts they should have known were inaccurate or had other problems,” said CFPB Director Richard Cordray. “Now, the two biggest debt buyers in the market must refund millions and overhaul their practices. We will continue to take action to protect consumers from illegal and obnoxious debt collection practices.”

The Bureau ordered Encore to refund customers up to $42M, to stop efforts to collect on $125M in debts and to pay a $10M penalty. PRA is on the hook for $19M in refunds, must stop collections on $3M in debts and pay an $8M penalty.

In complying with terms of the settlement, both buyers will refund “tens of thousands” of consumers, per the CFPB estimates. The CFPB would not say what specifically triggered its investigation into the debt buyer giants, and would only say that the actions and settlements followed from an agency investigation into the buyers’ practices.

The CFPB action against the two buyers dovetails with forthcoming agency rules on debt collection and industry participants looking for trends in regulation and enforcement action should take a hard look at these actions, Cordray noted.

Both the actions and the new rules “are efforts to address certain common problems, such as data integrity, the substantiation of debts, and collection of time-barred debt,” Cordray said. “Industry members who sell, buy, and collect debt would be well served by carefully reviewing the terms of these orders, as well as our recent resolution with JP Morgan Chase.”

According to CFPB charges:

  1. Both Encore and PRA bought debts they should have known were inaccurate or could not be legally enforced. In some cases, the debt sellers let the buyers know they were getting potentially faulty debt. In other cases, the “past practices of debt sellers or consumer disputes” should have tipped off the buyers that they were buying inaccurate or unenforceable debt.
  2. Both Encore and PRA continued to buy debt from sellers without checking to make sure the debts were accurate and enforceable. The agency specifically notes that the companies entered into contracts to buy debts that “deliberately imposed significant limitations on their access to account-level documents” – documents that could have helped them verify those debts in question.
  3. Both firms used misrepresentation and other unlawful tactics to pressure consumers to pay. The CFPB alleges, for example, that PRA told consumers that accounts had been reviewed by an attorney and that litigation was imminent when it was not. The CFPB accuses Encore, through its subsidiary, Asset Acceptance, of placing excessive numbers of phone call s to consumers outside the time periods permitted by debt collection laws. Both firms, per the CFPB, allegedly claimed to consumers that their debts were legally enforceable when, in fact, they were not and in using robo-signed, inaccurate court filings to propagate lawsuits.

Both buyers expressed relief that the CFPB action has been finalized and, at the same time, took issue with the Bureau’s characterization of their business practices.

Steve Fredrickson, chairman and chief executive officer of PRA Group, Inc., said, “It was time to end this drawn-out process and eliminate the threat of litigation so we can focus with renewed vigor on serving our customers and growing our business. Given the circumstances, we went the extra mile to achieve closure, despite our objection to the CFPB’s characterization of PRA’s business practices.”

“We remain confident that our business practices serve as a model for the industry, frequently going above and beyond applicable legal requirements,” he added. “Moreover, we are proud of our practices and leadership in the industry, and we are glad to have reached an agreement with the CFPB.”

Encore issued a stronger statement, insisting that it acted “in accordance with all relevant laws.”

“After rigorously and thoroughly scrutinizing seemingly countless aspects of our business for more than a year, the CFPB ultimately identified only two key issues warranting consumer refunds,” Encore’s President Kenneth Vecchione said. “While we disagree with the CFPB’s positions on these two issues, we chose to agree to a settlement so we can move forward. We also believe the CFPB is imposing yet-to-be-adopted rules to past practices. This outcome is not about current law or rules already on the books, but instead about the CFPB subjecting companies to its own interpretations that have never been codified or adopted.”

The whole industry will soon have to live by these standards and it was to Encore’s advantage to have to comply early, Vecchione insists.

“This outcome does not change the way we think about our long-term growth prospects,” he said. “If anything, it strengthens our competitive position in the marketplace because we believe this settlement, which we are largely compliant with, will become de facto standards for the entire sector.”

insideARM Perspective

The fact that this action was a possibility did not come as a surprise.  insideARM reported on the CFPB investigations in our August 11, 2015 stories on both PRA Group’s and Encore’s second quarter results. Both had mentioned the CFPB investigations in their 10Q filings.

What was a surprise were the dollar amounts of the fines and refunds to consumers. Encore had mentioned exposure “in excess of $35 million”, but PRA Group had not provided any such guidance.

In our view the most significant takeaway for the ARM industry from this story is Director Cordray’s comment in the announcement:  “Industry members who sell, buy, and collect debt would be well served by carefully reviewing the terms of these orders, as well as our recent resolution with JP Morgan Chase.”

The Encore consent order can be found here.

The Portfolio Recovery Associates consent order can be found here

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