If you've ever been hounded about an overdue debt or rejected for a loan because of negative information on your credit report, you may be relieved to know the federal consumer financial watchdog agency has plans to police these two important credit-related industries in the near future.
The Consumer Financial Protection Bureau (CFPB) on Thursday released new rules defining which debt collectors and credit reporting bureaus are big enough to warrant regulation. It will be the first time federal regulatory oversight will be applied to these "nonbank" entities.
The federal agency, born in July 2011 as part of the federal Dodd-Frank Wall Street reform law, was given broad powers to oversee those involved in consumer finances. Its mission: protecting consumers from fraud, abuse and deception. The rules released Thursday will determine which companies are "large participants" in their respective industries and thus will fall under the bureau's supervision and jurisdiction.
"Our proposed rule would mean that those debt collectors and credit reporting agencies that qualify as large participants are subject to the same supervision process that we apply to the banks," Richard Cordray, director of the federal consumer financial watchdog agency, said in a press release. "This oversight would help restore confidence that the federal government is standing beside the American consumer."
Under the proposed rules, debt collectors with more than $10 million in annual receipts from debt collection activities and credit reporting bureaus with more than $7 million in annual receipts from consumer reporting activities would undergo the same kind of close scrutiny that banks and credit unions undergo for federal bank examiners.
That means regulators can examine the books and operations of these companies on an ongoing basis looking for practices that might be harmful to consumers. Previously, these companies were policed or sanctioned only after the fact once consumers or other agencies filed complaints with the Federal Trade Commission.
"There is a long history of debt collectors taking advantage of the elderly, students, military personnel and others -- some of our most vulnerable populations," Pam Banks, senior policy counsel for Consumers Union, the nonprofit owner of Consumer Reports magazine, said in a statement. "Greater oversight would help protect consumers and shine a light on these predatory practices."
Industries react Representatives from both industries said they needed time to figure out how the new federal scrutiny would impact their operations.
"We've never been under this CFPB supervision before," notes Mark Schiffman, director of public affairs for ACA International, the largest trade group of debt collectors. "We knew it was coming. We need to look at what it all means now. We hope there is a way to comply with the CFPB in a way that doesn't put an overdue burden on the business."
Some of the major players in debt collection are NCO Group Inc., iQor, Allied Interstate, Midland Credit Management and Portfolio Recovery Associates Inc. Patrick Lunsford, senior editor for the insideARM.com collections industry newsletter, says many companies may welcome the CFPB's involvement.
The bureau has the authority to write new rules and update the Fair Debt Collection Practices Act -- the federal law governing debt collection practices. Lunsford says debt collectors frustrated with "amibiguities and paradoxes" in the existing law and the FTC's inability to write new regulations will appreciate it if the CFPB is "a little more nimble in making changes."
175 debt collection agencies covered According to the CFPB, the rule would affect about 175 debt collection agencies -- about 4 percent of debt collection firms. In all, these companies take in 63 percent of the annual debt collection receipts. The industry has three main types of collection operations: agencies that collect debt owned by another company, such as a credit card issuer; agencies that buy outstanding debts, collect the proceeds and keep them for themselves; and agencies that rely on attorneys and law firms to collect debt through litigation. The CFPB notes that a single company may collect debt via one or all of these different methods.
Debt collection activities conducted by credit card companies and other creditors is known as first-party collection and is typically performed by in-house units of the card issuers.
Schiffman says the debt collection industry has a bad reputation but many people overlook the benefits the industry provides the U.S. economy. An industry survey conducted in the fall of 2011 found that $44 billion was returned to the economy through third-party debt collection activity. Money recovered from debtors helps keep down costs of goods and services for all consumers and allows lenders to make loans to other borrowers.
"Nobody wants to get a call from a debt collector, but it's an incredibly vital industry to our national and state economies," Schiffman says.
Monitoring credit of 200 million Americans Credit reporting is dominated by the Big Three operators known to most consumers: Experian, Equifax and TransUnion. Very few adults can say they haven't been impacted by a credit bureau at some point in their lives -- whether it was renting an apartment, buying a car or home or getting a credit card or college loan. Lenders rely on credit bureaus to assess the risk of loaning money to borrowers and keep track of monthly payment records for millions of Americans. Each year, there are an estimated 36 billion updates to consumer credit files. According to the Consumer Data Industry Association, the national trade group, the three largest bureaus collect information for 200 million Americans.
According to the CFPB, about 30 reporting agencies nationwide -- nearly 7 percent of the consumer reporting industry -- would fall under the bureau's jurisdiction. These companies account for about 94 percent of annual receipts from consumer reporting.
Norm Magnuson, vice president of public affairs for the credit bureau trade group, said he won't comment on the new guidelines until he has discussed them with his membership.
Banks, from Consumers Union, said, "We hear a lot of complaints from consumers about credit bureaus dragging their feet to correct credit report mistakes. Consumers need and deserve a better system for fixing errors that can cost them in the long run."
The proposed rule is open for public comment for 60 days after it is published in the Federal Register.
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