The U.S. government's consumer financial regulator warned debt collectors July 10 to stop using forbidden tactics, and gave consumers new tools to communicate with collectors and fight shakedowns.
The U.S. Consumer Financial Protection Bureau took the steps the same day it began accepting complaints about collectors from the public.
Those moves -- coming a day after the Federal Trade Commission announced a record $3.2 million penalty against the largest global collection agency -- amount to a powerful warning shot across the bow of outlaw collectors.
"Those debt collectors that are treating consumers fairly have nothing to worry about," CFPB Director Richard Cordray said during a hearing on debt collection in Portland, Maine. "But those using illegal means to collect consumer debts should be forewarned that we will not tolerate such behavior."
Bad practices cited
The agency cited the federal Dodd-Frank Act's prohibitions against unfair and deceptive practices as its authority for acting and gave several examples. Prohibited practices include:
- Falsely threatening lawsuits, arrest and imprisonment for nonpayment.
- Adding on amounts not authorized by the credit agreement
- Revealing the debt to your employer or co-workers.
The agency issued a separate bulletin warning debt collectors against false statements about how paying a collector might affect your credit . Collectors may recommend paying a defaulted debt in order to boost your creditworthiness, but they don't really know how a payment will affect your score, the bulletin states.
"One strategy (collectors use) is to discuss how the unpaid debt affects a person's creditworthiness, and we are concerned that some of these discussions could be illegal," Cordray said.
The Dodd-Frank powers extend to original creditors such as card-issuing banks, as well as contractor or "third-party" debt collectors working on commission.
In addition to signaling that it would be watching for unscrupulous debt collectors, the agancy also issued five sample debt collection letters that consumers can use to protect themselves.
Industry agrees it needs weeding
The collection industry's trade group approved the moves, while saying that all collectors should not be tarred with the same brush.
"We agree there are bad actors out there, and like any industry, those bad actors are making it increasingly difficult for the good ones to go about their business," said Mark Schiffman, director of public affairs for ACA International, formerly called the American Collectors Association.
ACA International Chief Executive Patrick Morris, who spoke at the CFPB hearing, said that the organization welcomes the CFPB's complaint process, which will loop in the collector and seek a resolution of the problem. Collectors have long objected to FTC complaint reports, which gathered complaint totals without checking to see if the collector was at fault.
"Debt collectors are not an enemy of consumers," Morris said. "Our members take consumer complaints seriously and want to resolve them."
In the aftermath of the Great Recession, about 30 million U.S. consumers have one debt in collection, or close to 15 percent, according to estimates by the Federal Reserve Bank of New York. People with debts in collection owed an average of $1,400.
"Our job is to root out bad actors and protect consumers against unfair, deceptive, or abusive practices and other legal violations," Cordray said. In addition to the initiatives announced July 10, the agency began conducting examinations of large collection companies in January 2013.
Debt collection collects complaints
Collection attracts the most complaints of industries regulated by the Federal Trade Commission, with 125,136 lodged in 2012. An agency report in 2010 called collection a "broken system," citing lack of protection for consumers in legal cases or arbitration.
Separately July 10, the Wall Street Journal reported that Chase Bank's internal review of its collection lawsuits against credit card customers -- the subject of a lawsuit by California's attorney general -- found mistakes in 9 percent of cases. Mistakes included incorrect amounts of interest and fees, and sometimes higher balances than were actually owed, the report said.
State regulators at the CFPB hearing said the job of reining in hardball collectors will not be easy. "The question for us now in the public sector," Maine Attorney General Janet Mills said, "is how to separate the predators from the benefactors."
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