This article appears in the June issue of Collections & Credit Risk.
With the economy struggling to get back on track, a wave of new rules and regulations are forecast as lawmakers seek to ramp up consumer protections and prevent future financial meltdowns.
Most observers agree the collections business is getting little attention right now as legislators and regulators alike struggle to stem the impact of a steep decline. But as the downturn subsides, and reform of the wider financial system becomes a top priority, the collections and credit industries can expect to see more regulation.
New regulations may be a year or so away, industry observers say, but the government seems to have already taken a more pro-consumer stance. The U.S. Congress is moving legislation forward to give consumers more protections, such as a Credit Cardholders' Bill of Rights. The Federal Reserve Board, along with several government agencies, approved new rules that take effect July 1, 2010 aimed to protect consumers against unfair and deceptive credit card practices.
Meanwhile, the industry is still pushing to reform the Fair Debt and Collections Practices Act (FDCPA), which has not been updated since it was enacted into law some 30 years ago. The Federal Trade Commission (FTC) wants reforms too. Complaints about collectors are growing along with the mounting crush of bad debt due to the weakening economy.
At the same time, data security and privacy remain big legislative issues while states and cities, in search of new revenue streams, attempt to enact more licensing requirements for agencies and attorneys alike.
"We can expect more regulation," says Robert Belair, partner at Oldacker, Belair and Wittie, a Washington, D.C., law firm that represents DBA International. "More oversight is inevitable."
Consumer groups at least agree on that point. "There's no doubt that our financial system is out of control from the origination of credit and the selling of debt, to the collection of debt," says Ira Rheingold, executive director at the National Association of Consumer Advocates, Washington, D.C. He says abusive collections practices are growing and he would like to see collections reforms instituted soon. But Rheingold, like others, thinks that new regulation won't happen until Congress and government agencies feel that the economy has stabilized so reform can be tackled.
In February, the long-awaited report on FDCPA reform was issued by the Federal Trade Commission (FTC). Based on findings from a public workshop held in the fall of 2007, the report concludes that the FDCPA needs to be changed to require that debt collectors have better information, and that collectors provide better information to consumers. The report also recommends that collection laws be modernized to take into account changes in technology.
Another problem flagged by the report is that certain debt collection litigation and arbitration practices appear to raise consumer protection concerns. Because the FTC said it did not have enough information on the issue, the agency will hold regional roundtables this year with state court judges and officials, debt collectors, collection attorneys and consumer advocates among other stakeholders.
The report also suggests that the FTC be granted the authority to issue regulations to implement the FDCPA. "It's high time for reform of the FDCPA," says Peggy Twohig, associate director at the Division of Financial Practices at the FTC, Washington, D.C. "Reform is needed in the debt collection system."
Many of the suggested FDCPA reforms are pro-consumer, some industry sources say. For example, collectors would be prohibited from contacting consumers via cell phone without prior consent. Also, collectors would be required to conduct reasonable investigations of disputes.
But David Goch, general counsel for the Commercial Law League of America, wasn't surprised by the report's findings. "I was more surprised by those in the industry who were surprised," says Goch, partner at Webster, Chamberlain & Bean, Washington, D.C. The FTC is a consumer watchdog agency, he notes. "Just because the word `trade' is in the name doesn't mean it's friends with business."
The newly appointed FTC Chairman, Jon Leibowitz, is expected to step up consumer protections. Leibowitz had been a sitting FTC commissioner and has expressed reservations about the effectiveness of self regulation.
But there are indications legislators are not ready to jump completely into the consumer's corner either. A bill that would have allowed judges in bankruptcy court to lower the principal on a mortgage, called a cramdown, has yet to pass Congress despite a bug push from consumer groups.
For now, industry groups are treading lightly. They figure the best approach is to soft pedal their agenda, especially when a growing number of consumers are receiving collections calls.
The Commercial Law League's Goch takes the approach that rules should be fair. "The debt collection industry is needed," he says. "We want to understand the law and be given direction."
The industry is trying to find common ground with consumer groups too, according to Robert Markoff, current president at the National Association of Retail Collection Attorneys (NARCA). For example, both consumer and industry groups believe financial institutions should play a role in determining whether funds are exempt from garnishment. "We would support regulation on this," says Markoff, partner at Markoff & Krasny, Chicago.
Questions remain whether the FTC should be granted actual rule-making authority--a change suggested in the FTC report on FDCPA reform. "We would like to be able to make changes by rules and regulations," says the FTC's Twohig. She explains that the way the FDCPA is now written mandates that changes be made by Congress. No government agency has rule-making authority over the Act, which makes it difficult to adjust rules as the situation changes.
Also being considered is whether a new government agency should be created to oversee financial services. On March 10, Senator Dick Durbin (D-Ill.) introduced legislation to create the Financial Product Safety Commission--a single government agency in charge of ensuring that consumers are protected. A bill co-sponsor, Senator Chuck Schumer (D-NY) says: "The time is right for a financial services regulator with a consumer focus."
An independent financial services consumer protection regulatory agency would probably cover both collectors and debt buyers, according to Gary Wood, president at Madera Partners in Austin, Texas, and chair of the legislative committee for DBA. The DBA doesn't have a formal position on the proposal for a new regulatory agency, or whether the FTC should have expanded powers. "It's not clear what will come out of all this," notes Wood.
Regarding more powers for the FTC, NARCA's Markoff says: "We are not adverse to a discussion on this issue." Still, Markoff echoes the concerns of others in the industry who say the FTC and authorities should focus more on enforcement of laws that already regulate collection practices.
The FTC has modified its law enforcement approach, says the FTC's Twohig, noting that collections generated about 100,000 complaints in 2008, making the collections industry the biggest source of FTC complaints. The agency is increasing penalties to deter lawbreakers and to encourage compliance. The agency is also taking more actions against individuals, and not just companies, engaged in illegal collection practices.
Legislation regarding the FDCPA probably will not be on the Congressional agenda this session. But both the House of Representatives Financial Services and Senate Banking committees are studying the report, according to Rozanne Andersen, executive vice president and general counsel at ACA International, Edina, Minn. "The report has just not moved to the top of their issues."
The ACA is carefully monitoring other legislation, Andersen says. There's concern among ACA members about the possible passage of the Employee Free Choice Act, which would allow workers to unionize more easily. If enacted, the bill could present a problem for collection shops that have not traditionally been unionized, Andersen notes.
Data security and personal identifiers continue to be the subject of a host of pending bills. For example, Senate Bill 139, the Data Breach Notification Act, would require a federal agency or business entity to quickly notify an individual of a security breach involving personal data. Senate Bill 141 would place limits on when businesses can ask customers for social security numbers. "We are working to preserve our industry's access to and use of personal identifiers," says ACA's Andersen.
The ACA is tracking several other bills. The Notifying Americans Before Outsourcing Personal Information Act (H.R. 427) would put restrictions on the ability of collections agencies to send identifiers to offshore locations. The Consumer Cellphone Number Consumer Protection Act of 2009 has also been introduced. It would require consumers to give consent before they can be called.
Regarding bankruptcies, the ACA is seeking to have consumers include debt collectors on bankruptcy petitions. Collectors are currently not being notified along with other creditors when a bankruptcy is filed.
On the state and local levels, an emerging trend is that of increasing fees and licensing requirements for collectors. "The name of the game is revenue," says Andersen. "Collectors are on the radar screen and we expect to see changes with regards to fees."
In March, New York Mayor Michael Bloomberg signed into law a bill that expanded local licensing requirements. Purchasers of delinquent debt and attorneys that engage in debt collection activities must now obtain a license. Other provisions in the law require collections agencies to provide more information to consumers.
"This is an awful step," says NARCA's Markoff. If every town, or county requires a license, he explains, it could be very expensive and create an administrative nightmare for collections attorneys. "Where does it end?" he asks.
New York attorney Eric Berman, a director at NARCA, and others have formed the Coalition for Fair Debt Collection Practices. It is seeking to overturn the New York City licensing law.
For now, most of the legislative emphasis is on credit instead of on collections, according to Stuart R. Blatt, past-president at NARCA and principal, at the law firm Margolis, Pritzker, Epstein & Blatt. For example, the Credit Cardholders' Bill of Rights which had been held up in Congress was recently passed out of the Senate Banking Committee, a sign that it might be enacted. A similar measure in the U.S. House of Representatives sponsored by Rep. Carolyn Maloney (D-NY) also left committee.
"The balance of power is shifting to the consumer," says attorney Goch for the Commercial Law League of America. The good news is that, for now at least, legislators and the Congress are focused on the economic crisis at hand, he says. But when the economy stabilizes, says Goch, "The likelihood of more onerous proposals coming out of all this is high."