How a consumer watchdog wants to reform debt collection

The Consumer Financial Protection Bureau unveiled sweeping reforms for the multibillion dollar debt collection industry on Thursday, introducing what would be the most significant changes in decades to practices that many Americans feel border on harassment.

The suggested guidelines are an attempt to stop collectors from pushing people to pay debts they may not owe, and from calling numerous times a day. The Consumer Financial Protection Bureau (CFPB) also wants to see companies better inform borrowers about their rights, including more information about how to dispute a bill.

"Today we are considering proposals that would drastically overhaul the debt collection market," Richard Cordray, the consumer watchdog’s director, said in a statement. "This is about bringing better accuracy and accountability to a market that desperately needs it."

With some 77 million people – about one in three adults with a credit report – having a delinquent debt in collections, according to the Urban Institute, the rules could potentially have a broad impact. The CFPB receives more complaints about debt collection than about any other financial service. 

The proposals would require collectors to substantiate the debt before contacting consumers about it, according to the watchdog's summary. In an effort to “limit excessive contact” from debt collection companies, the CFPB would also limit agencies' calls to debtors to six attempts a week and impose a thirty-day waiting period after a person dies before contacting surviving relatives.

The proposal also requires agencies to provide consumers with more information about their debt, such as when outstanding debt is too old for a lawsuit to collect it. Collectors would also be required to make it easier to dispute a debt, or pay it, using tear-off coupons on the bottoms of collection notices, according to the CFPB.

The proposals strike at a major concern about the industry – that many consumers are unexpectedly hit with penalties or the garnishment of their wages after companies file suit against them to collect debts. In a scheme that mirrored efforts by mortgage lenders, some collection agencies automatically signed thousands of lawsuit documents a day, as Bill Bartmann, the chief executive of a debt collection company that does not use such suits, wrote for The Christian Science Monitor:

For as little as $40, collectors can take those robo-signed documents and file suit electronically. Then they often send a plain letter by first-class mail, notifying people that they’re being sued. In some areas, as many as 94 percent of defendants don’t show up in court, either because they didn’t realize they were being sued, or they’re too scared. Of the ones who do appear, sometimes only 1 in 100 brings a lawyer.

The result? The gavel drops and a “default judgment” is issued. Now the debt collector can sit back and grin, because the court now sees to it that the collector is paid, using threats of wage garnishment, arrest, strip searches, and jail.

Previously, the Federal Trade Commission has had oversight over debt collection practices through the 1977 Fair Debt Collection Practices Act. But the CFPB says it also has the ability to regulate how debt collectors operate under a provision that allows it to ban “unfair, deceptive or abusive acts,” The New York Times reports.

While other proposals the consumer watchdog has issued in recent months, such as prohibitions on mandatory arbitration clauses and stricter rules on payday lending, have sparked a debate, some industry groups have praised the bureau’s efforts on debt collection as thoughtful.

“We’re looking forward to the rules providing the industry with a clear road map,” Jan Stieger, the executive director of DBA International, which lobbies on behalf of debt-buying companies, told the Times.

The proposals cover third-party collectors and companies that purchase debt, and must now be reviewed by a panel of small business owners. The CFPB has said it plans to address first-party collectors in another rule-making proposal.

Some advocacy groups were optimistic, noting that the number of debt collection lawsuits have fallen in New York after the state adopted stricter rules governing the industry.

“The problems around abusive debt collection in New York have gotten a lot better,” Susan Shin, the legal director of the New Economy Project, told the Times. “Strong rules make a difference.”

This report includes material from Reuters.