The Consumer Financial Protection Bureau has issued its long-awaited final rule defining larger participants of a market for consumer debt collection. The rule is effective January 2, 2013. To enable its examiners to immediately begin scheduling examinations of qualifying entities, the CFPB concurrently released its debt collection examination procedures.

The final rule defines larger participants as third-party debt collectors, debt buyers, and collection attorneys with more than $10 million in annual receipts resulting from consumer debt collection. The CFPB issued the final rule under Section 1024 of the Dodd-Frank Act, which authorizes the CFPB to supervise nonbank covered persons in the residential mortgage, private education lending, and payday lending industries for compliance with federal consumer financial laws. That provision also authorizes the CFPB to supervise nonbank “larger participants” of markets for other consumer financial products and services. (Our prior legal alert discussed the CFPB's final rule issued on July 16, 2012, defining larger participants of a market for consumer reporting.)

The final rule does not differ substantially from the proposed rule (which was the subject of a prior legal alert). The final rule and the supplementary information accompanying it contain several important clarifications, however, which include:

• Amounts that result from the collection of medical debts—meaning debts originally owed to a medical provider— are expressly excluded from the definition of "annual receipts." The CFPB notes that where a consumer pays some or all of a medical bill with a credit card, such debt would be deemed originally owed to the card issuer. As a result, the amount collected would be included in the calculation of annual receipts.
• For purposes of calculating the annual receipts of an entity such as a debt buyer that engages third-party collectors with whom it only has an agency or contractual relationship, amounts collected by such third parties would not have to be aggregated in the calculation of the debt buyer's annual receipts. (By contrast, the rule would require aggregation of the receipts of the debt buyer's affiliate.)
• The CFPB notes that it rejected an approach under which the price debt buyers pay to purchase debt would be excluded from annual receipts. The CFPB said that approach would have been administratively difficult for the Bureau and debt buyers since debt buyers typically amortize their debt purchases over several years, which makes it difficult to know how much to exclude when counting income from debts recovered many years after purchase.
• To make clear that traditional loan servicing is not considered consumer debt collection, the definition of "debt collector" expressly excludes a person engaged in collection activity concerning "a debt which was not in default at the time it was obtained by such person." This language is similar to the Fair Debt Collection Practices Act's definition of "debt collector." Nonprofit consumer credit counselors are also expressly excluded from the definition of "debt collector."
• The CFPB declined to exclude the collection of student loans made under Title IV of the Higher Education Act from the definition of "consumer debt collection,” despite receiving comments that federal audits make the collection of such loans less risky for consumers. 
• Regardless of whether enforcing a security interest qualifies as debt collection under the FDCPA, for purposes of the final rule, the CFPB does not deem a person to be engaged in consumer debt collection if that person only enforces a security interest and does not seek payment of money or the transfer of assets not designated as collateral.

As it did in the proposal, the CFPB notes in the supplementary information the sources of its authority to examine, regardless of their size, nonbank members of the debt collection industry that do not qualify as larger participants under the final rule. The Dodd-Frank Act authorizes the CFPB to examine a nonbank if it (1) acts as a service provider to banks or companies that are subject to CFPB supervision (i.e., banks, thrifts, and credit unions with more than $10 billion in assets, residential mortgage companies, companies that make payday loans or private student loans, and larger participants), or (2) is found to be engaging in or to have engaged in conduct that presents risks to consumers.

Ballard Spahr lawyers regularly consult with their clients engaged in consumer debt collection on compliance with the FDCPA and state debt collection laws. Our Consumer Financial Services Group has created a team of lawyers who have already conducted compliance reviews for debt collectors and debt buyers in anticipation of their first CFPB examinations. On November 6, members of this team will be conducting a webinar on "What Debt Collectors, Debt Buyers, and Collection Lawyers Need to Know About the CFPB Larger Participant Rule and CFPB Exams." More information on the webinar and a link to register are available on the Ballard Spahr website.

Ballard Spahr’s Consumer Financial Services Group produces the CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right. The group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.