The Consumer Financial Protection Bureau is approaching supervision of debt collectors much like it did with mortgage servicers and auto lenders earlier this year, saying it plans to hold banks responsible for third-party actions.
But this time, the agency has come out even stronger against the collection industry, threatening enforcement, new regulations and public shaming in an effort to clean up a business it views as fraught with shady consumer practices.
"You can't ignore this. It's a freight train," said Paul Joseph, director of business development for McCarthy, Burgess & Wolff, a debt collector in Cleveland. "I have no doubt they're going to eventually come after everything" with regard to consumer debt.
The CFPB released bulletins Wednesday showing it was looking at every financial company it can, including lenders, debt buyers and debt collectors, as well as law firms that sue on behalf of banks.
Observers detected an undertone to the bulletins and subsequent speech by CFPB Director Richard Cordray that highlighted "first party" responsibilities. It reminded them of what the agency said in a March bulletin to auto lenders: that they were responsible for any potential fair-lending violations of partnering dealerships.
"No regulator has ever said it that overtly before," said Bill Bartmann, chief executive of debt collector CFS II. "While it's very clear that all agencies are working hand-in-hand on this [third-party] issue it's going to come out faster and harder more on the debt collection industry than in any other industry."
In recent years, banks have already begun thoroughly vetting partnerships in light of increased regulatory scrutiny by multiple agencies.
"It's creating the need on the part of the financial institution to become experts in things they weren't doing before, like being experts in the judicial process," said Kris Stewart, senior manager of compliance consulting services at Wolters Kluwer Financial Services. "You can't rely on attorneys anymore and since I am one, I wonder about that too."
But most debt collectors are just beginning to feel the heat, some said.
"The banks are the ones I know have realized this [regulatory scrutiny] for some time," Joseph said. "If you're using a collections company for your consumer debt and they are not at least as half as certified as we are, pretty soon they are going to have to change their business model."
Several years ago, Joseph's firm began pursuing a high-level and expensive security certification known as ISO 27001 in order to get a contract with a large credit card company. Now, Joseph said it's often a requirement for many large creditors, along with other compliance measures since his firm faces more audits by clients, prospects and security certification checks.
Auditors checking the ISO status "have the right to come in here and go through anybody's desk or drawers," Joseph said, noting that McCarthy Burgess has even built discrete barricades around the building for safety measures.
But not all debt collectors will meet banks audits or regulatory requirements, likely causing more lenders to pull back on delinquent debt sales to third-party collectors as first seen with JPMorgan Chase. That could lower the pricing of sales, at least in the near term until banks and regulators get comfortable with debt buyers and collectors.
"You may see a reduction in sales while institutions look at the processes they have in place or those collecting on their behalf," said Amy Brachio, a partner in the advisory services practice at Ernst & Young.
Unlike the past when the CFPB put a sector on notice, the agency took multiple actions in a single day on debt collectors by issuing two bulletins, opening its online public complaint portal to consumers about the collection industry and offering five letter templates for consumers to use when addressing a collector.
"It's interesting how the CFPB came out with three different things at the same time," Brachio said. As for the complaint database, it "provides them with additional data on what's the most important concern for consumers so they can develop any regulatory guidance and rulemaking as well as drive their enforcement process."
The CFPB is typically circumspect in whether it plans to release a new regulation unless it's already a requirement of the Dodd-Frank Act. But in the case with debt collectors, Cordray has clearly signaled regulation is likely as multiple federal agencies met last month, including the Federal Trade Commission, to discuss problems in the debt collection industry.
"At our joint roundtable, we heard strong consensus about the need for robust national documentation standards and the need to maintain the accuracy of information used to collect debts," said Cordray during a field hearing on debt collection in Portland Wednesday. "We will keep that in mind as we move toward a rulemaking process on debt collection issues."
Brachio said he expects the CFPB to look at regulation on debt collection similarly as it handled mortgage servicing when it issued guidance in February telling institutions to monitor customer impact when considering a mortgage portfolio transfer to another servicer.
"I think we will see the same thing with respect to non-mortgage debt," she said.
Other observers said it's possible that the CFPB will consider rulemaking that addresses the issue of robo-signing in the debt collection industry by requiring verification of documents and accurate documentation.
The Office of the Comptroller of the Currency has already issued a "best practices" guide for bank examiners when evaluating banks' sales of delinquent consumer debt, including concerns of robo-signing and transferring inaccurate data. The guide has yet to be adopted as a formal policy but it shows what the agency is targeting.
The OCC's memo "doesn't yet have regulatory affect but it certainly gives indication of what the OCC is thinking" in terms of vetting debt collection, said Stewart. "So they're starting to draw the line too."
But collectors said litigation tactics have already begun to dissipate because of the regulatory scrutiny, recent judicial decisions in favor of consumers and expected lower returns from litigated debt.
"The industry is about to go through some dramatic changes," Bartmann said. "These debt buying companies that operate through litigation are not going to have as much revenue because of the heightened regulation, scrutiny and penalties."
And with many large banks well underway in auditing debt sales and third-party vendors, some debt collectors said it will force their industry to correct itself before regulators do so through penalties and rules.
"The market has a way of correcting itself," Joseph said. "If you want to stay working in the consumer industry on a large scale, you better bone up on your security and compliance. And you better do it now."