In what the Consumer Financial Protection Bureau (CFPB) characterized as an “overhaul” of the debt collection industry, the agency proposed changes including capping collector contact attempts and making it easier for consumers to dispute debts.
What happened
Emphasizing the impact of the debt collection industry on consumers—citing a recent study that one in three consumers had been contacted by a creditor or collector trying to collect a debt within the past year, with one-third of those reporting an attempt to collect the wrong amount—the CFPB published proposals to increase protections pertaining to debt collection.
The current proposals would apply only to “debt collectors” as defined in the federal Fair Debt Collection Practices Act (FDCPA). Accordingly, these proposals generally would not extend to creditors collecting their own debts, coverage of which had been anticipated based on an earlier CFPB Advance Notice of Proposed Rulemaking. The CFPB stated that it expects to convene a second proceeding in the next several months for creditors and others engaged in collection activity who are covered persons under the Dodd-Frank Act but who may not be “debt collectors” under the FDCPA.
“This is about bringing better accuracy and accountability to a market that desperately needs it,” CFPB Director Richard Cordray said about the proposal, noting that debt collection generates more complaints to the CFPB than any other financial product or service.
Pursuant to the proposal, debt collectors would be required to “substantiate” a debt prior to contacting a consumer, confirming that the collector has certain “fundamental information” to initiate collection, including the consumer’s full name, last known address, last known telephone number, account number, date of default, amount owed at default, and date and amount of any payment or credit applied after default.
In a major change, collectors would be limited in the number of collection attempts permitted, capped at six communication attempts per week through any point of contact before they reach the consumer. Consumers would also be empowered to request that a debt collector stop using specific points of contact, such as a particular phone number or during certain hours. Also under consideration: a 30-day waiting period after a death before a collector can communicate with surviving parties.
Disputing a debt would be easier under the proposal, with collectors required to include more information about the debt in the initial collection notices. Along with information about the consumer’s federal rights, debt collectors would need to disclose when a debt is too old to form the basis of a legal action. The notice form sent to consumers would also feature a tear-off portion that consumers could send back to pay the debt or dispute it, listing options for why the consumer thinks the collector’s demand is incorrect.
If a consumer returns the tear-off portion of the notice or sends any other written notice within 30 days of the initial collection notice, debt collectors would be obliged to provide written information substantiating the debt to the consumer under the CFPB’s proposal. Collection attempts would be halted until the verification is sent.
In addition to the tear-off dispute mechanism, consumers would be permitted to verbally challenge a debt. The CFPB would require a stop to all collection attempts when a consumer questions a debt until the debt collector verifies all the necessary documentation. Collectors would be similarly prohibited from collection efforts if any “warning signs” are found, such as inaccurate or incomplete information.
Examples of warning signs include a portfolio with a high rate of disputes, the CFPB said, or the inability to obtain underlying documents to respond to specific disputes. Before pursuing a collection action in court, collectors would need to verify the debt documentation such as evidence of the amount of principal, interest or fees billed, as well as the date and amount of each payment made after default.
All the consumer rights established by the CFPB would remain for the life of the debt. So if a debt collector transferred the debt without responding to a dispute, the next collector would similarly be unable to collect until resolving the debt’s validity. The CFPB would also require the transfer of information from one debt collector to another so that consumers would not have to resubmit data.
To read an outline of the CFPB’s debt collection proposal, click here.
Why it matters
Regulations had not previously been issued under the FDCPA, and the current proposals would represent a major increase in the regulation of the debt collection industry. While the proposal addresses only third-party debt collectors, as discussed above, creditors should brace themselves for regulation as well, as the CFPB has indicated that a similar proposal for first-party debt collectors is forthcoming, based primarily on Dodd-Frank provisions prohibiting unfair, deceptive or abusive acts or practices. However, the CFPB’s proposal is only the first step in the rulemaking process. For the next move, the CFPB will convene a Small Business Review Panel to gather feedback from the industry. The CFPB also said it intends to gather input from the public, consumer groups, industry and other stakeholders before issuing proposed regulations (which will also be open to comment). Once all of these steps are completed, the CFPB can publish a final rule.
