U.S. Consumer Agency Aims to Overhaul Debt Collection Industry, Reports Reuters

By Lisa Lambert

WASHINGTON (Reuters) – The U.S. consumer financial watchdog announced a proposal on Thursday aimed at tightening regulations on the multibillion-dollar debt collection industry. The focus is on preventing agencies from pressuring individuals to pay debts they do not owe, ensuring borrowers are informed of their rights, and reducing the frequency of calls made to debtors.

Reactions from both the industry and consumer advocates were mixed. Industry representatives expressed concerns about the potential costs associated with the new requirements, suggesting that these costs could either be passed on to consumers or lead to the closure of smaller collection agencies. Meanwhile, advocates for consumer rights argued that the proposal fails to adequately protect borrowers and does not go far enough in addressing their concerns.

Richard Cordray, Director of the Consumer Financial Protection Bureau (CFPB), stated, "Today we are considering proposals that would drastically overhaul the debt collection market. This is about bringing better accuracy and accountability to a market that desperately needs it."

The proposed changes will primarily impact third-party collectors and debt buyers, while the CFPB plans to address first-party collectors and creditors like banks in a later phase.

The proposal outlines that debt collectors must substantiate the debt before reaching out to consumers. This includes confirming the consumer’s identity, the total amount owed, and checking for any payments made since the default. The CFPB has received numerous complaints about consumers being contacted for debts that do not exist.

To address excessive contact, the proposal limits the number of calls a debt collector can make to six each week and introduces a 30-day waiting period for contacting survivors after a person’s death.

Collectors will also be required to provide essential information to consumers, including the age of the debt in relation to legal action and offering easy ways to dispute or settle debts through detachable coupons on collection notices.

The Fair Debt Collection Practices Act already prohibits abusive and deceptive practices by collectors.

The industry has anticipated regulatory changes since 2013, and the CFPB has penalized several large debt collectors in recent years. The agency receives thousands of complaints monthly about debt collection practices, more than in any other sector.

John Redding, a partner at a firm specializing in financial services law, noted that while the CFPB’s analysis suggests low costs for the market, the actual costs of compliance may be significant, potentially requiring costly updates to technology used for tracking debts.

Walter Zalenski, also a partner at the same firm, expressed concern that the proposal might encourage consumers to dispute all debts, including those that are valid, leading to a rise in unfounded disputes.

According to the Federal Reserve Bank of New York, about 13 percent of consumers have debts in third-party collection, with an average amount of $1,300.

Ira Rheingold, executive director of the National Association of Consumer Advocates, challenged the view that consumers would exploit the system to dispute debts. He argued that many individuals do not contest their debts and often face default judgments.

Rheingold believes the proposal should outright ban collections on debts that have exceeded the statute of limitations and impose stricter calling limits. He also suggested that the CFPB could revise the penalties for violations of the Fair Debt Collection Practices Act to increase the consequences for misconduct.

In a survey accompanying the proposal, the CFPB found that over 75% of the nearly 4,000 debt collection firms in the U.S. are small businesses with fewer than 100 employees, whereas larger firms account for about two-thirds of the industry’s total revenue of $12.18 billion.

The CFPB’s proposal will now be reviewed by a panel of small business owners.