Debt Collection Industry Poised for Changes

Like Pamela, I’m very delighted to join Credit Slips. As Bob mentioned in his kind introduction, I spent a year as a policy fellow at the Consumer Financial Protection Bureau. One of the most things I got to work on while I was there were the rules defining "large market participants" in the debt collection and credit reporting markets. After issuing final rules, the CFPB began to supervise these non-bank entities; marking the first time any federal regulator had the authority to do so. 

Recently, the Bureau published an Advanced Notice of Proposed Rulemaking on debt collection (comments are due by February 28). The ANPR marks the first time that a regulator will interpret the Fair Debt Collection Practices Act, a statute that has barely changed since its enactment in 1977. What's more, because of its UDAAP authority; the CFPB will be able to write rules defining unfair, deceptive, and abusive practices that apply to both collectors and creditors. I've written elsewhere about how the systemic problems in the collections ecosystem begin at the creditor, so this is exciting news. What might be surprising though is that the collections industry seems to share in this excitement.

Earlier this week, I participated in the Large Market Participant Summit where collection agencies subject to the CFPB's supervision met to discuss common issues. The ANPR was the hot topic at the conference; everyone was hard at work on their comments to the 162 questions posed by the Bureau. From the industry's perspective it seemed that the consensus was that regulation was long overdue and the industry (cautiously) welcomed it. There was even a sense that consumer advocates and collectors might actually agree on some issues. 

The organizers invited a group of consumer advocates to discuss where there might be common ground. The conference didn't end with Kumbaya, but I think it's fair to say that there was a recognition that regulation could be a win-win situation in a number of cases. The top point of aggreement from where I stood seemed to be that collectors need more information about the debts that they are attempting to collect upon. "Media," the industry term for account statements, contracts, and the like, needs to be easily accessible by collectors. 

This is where the CFPB's power to regulate many credit issuers will be particularly helpful: the Bureau can require banks to keep and pass information on to collectors or debt buyers. Items like account statements showing the date of last payment, the charge-off statement, or the original contract. While it some creditors are moving in this direction, this is a fairly recent occurrence partly brought on by all the attention these issues are getting.

Another point of agreement: both industry representatives and consumer advocates seemed skeptical of one of the CFPB's potential solutions to the debt collection problems: a central data repository as a way to establish chain-of-title and validity of a debt (question 12). In light of the Target/Neimann Marcus breaches, folks in the room seemed concerned that this solution might create more problems than it solves. 

My own view is still evolving, but I appreciate the apparent simplicity--and centrality--that a repository would create: a one-stop-shop where consumers could verify who to contact about their debt and where they could see an itemization of the charges they are being asked to pay. Another way to do this would be to require creditors to keep all of this information themselves even after they have sold the debt, and to make that information available to consumers.

In some ways, this could be a better solution for consumers since they are already familiar with their creditor and are most likely to remember who that was rather than a third party collector or a debt buyer they did not do business with (as long as they realize for instance, that Citibank issues Sears credit cards). Requiring creditors to keep track of subsequent owners of a charged-off account could have the consequence of decreasing account sales (and resales). This would be a good thing. Many debt collection abuses are tied to small firms that lack the resources to implement a good compliance program. Consolidation in the industry should diminish the number of abuses.

In addition, the added cost to banks might have the effect of a "distressed debt tax," forcing banks to internalize some of the costs of their customers' financial distress and thus incentivizing them to minimize those costs (something Ronald Mann proposed a few years ago). Of course, creditors might just outsource the work to another entity (at least two firms are trying to do this already), which would bring us back to a version of the CFPB's central repository. Nonetheless, imposing liability on the creditor should keep them more connected to the debts they sell and should at least mean that the sale of debts "as is, without representations, without recourse or warranties of any kind" might actually stop.

Note: There is still time to comment on the CFPB's ANPR either via regulations.gov or regulationroom.org (most will find the latter site easier to use).