The debt collection industry is gearing up for a major shake-up as the Consumer Financial Protection Bureau looks to revamp rules that will likely cover every player in the market, from first-party creditors down to the buyers of others' debts.
The CFPB said Wednesday that it would begin taking comments on how to write new regulations for the debt collection industry, that could impact how often a debt can be sold and to whom. The agency's actions echo changes the CFPB is seeking in other markets, including mortgages.
Although the new mortgage rules have made lenders anxious, however, many debt collectors appear supportive of heightened regulations, with some suggesting more rules are necessary.
"The last thing we're going to do is run because of regulatory headwinds. It's not going to put us out of business. It's just unpleasant and sad that we need this," said Clint Sallee, president and chief executive of Fidelity Creditor Service, a debt collector in California. "But I can fully appreciate where the CFPB is headed."
Though opinions may change once the CFPB issues its proposed regulations, most debt collectors are hopeful that the rules will weed out the bad actors who often buy debt for pennies on the dollar and then threaten consumers through litigation without verifying documents.
"Many of the buyers in the industry today will not be able to sustain the standard that's been established by the CFPB because of their practices," said Bill Bartmann, chief executive of debt collector CFS II. "It's a ticking time bomb and banks are going to be cautious about selling loans to a buyer who has litigation-heavy model."
Already, some of the larger debt collectors and banks have been preparing their systems for heightened rules and enforcement after the Dodd-Frank Act gave the CFPB authority to write regulations on the industry. Other regulators such as the Office of the Comptroller of the Currency have also been scrutinizing debt sales.
That has helped to spur both JPMorgan Chase and Wells Fargo to halt unpaid debt sales. JPMorgan also closed and redistributed its group that handles litigation services for debt collection.
Larry Berlin, analyst at First Analysis said the biggest banks that halted such sales are likely to enter back into the market during the next few quarters once they get clearer understanding of what the CFPB is planning to do. It's the smaller firms that Berlin said will likely not be able to afford the new standards.
"A year ago, there were roughly 175 collectors," he said. "We think that's going to go into the handful ... it might have been such a heavy boat that it's going to be flipping over."
Labor and costs have already increased for debt collectors as a result of the CFPB's moves. Sallee said he gets three emails from the CFPB every night to inform him of the status of consumer complaints that require numerous clicks in order to find out whether or not a complaint has been filed against his company. Since the CFPB started receiving complaints on the debt collection industry in July, Sallee said he's only received one complaint but that doesn't stop him from digging through emails every night.
"Every time there is a new regulatory process related to compliance, it has created a lot of resentment among peers because they don't want to go through a bunch of hoops to find out they don't have any issues," Sallee said.
The other major concern by the CFPB is that the main rule governing debt collectors the Fair Debt Collection Practices Act was written 35 years ago before electronic data, mobile phone and email communication took off. Though it's unclear how the CFPB will address the issue, most collectors would prefer clearer updates, rather than being cited for communication violations.
"The reputable debt collection companies actually welcome clarification on issues like electronic communications with debtors, caller ID, data storage and sharing, and what constitutes 'unfair, deceptive, and abusive acts and practices,'" said Ronald Rubin, a former CFPB enforcement attorney who now represents large debt collection companies at the law firm of Hunton & Williams. "The upstanding debt collection companies, and there are many of them, know that the CFPB's rules will increase their compliance costs, but in the long run will make them more profitable by putting the bad actors out of business."