Nothing grabs the attention of the business community like the arrival of a new regulator on the beat. So naturally collection agencies and debt buyers want to know all they can about the Consumer Financial Protection Bureau (CFPB).
And soon they will.
Under a proposal announced Thursday, the agency wants to supervise collection agencies with more than $10 million in annual receipts from collection activities (see story). Credit reporting firms with more than $7 million in annual receipts also would be supervised.
The two industries are the first identified by the agency to include in its nonbank supervision program, which launched Jan. 5. The proposal must be finalized by July 21, and the comment period will be open for 60 days.
Created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB was designed to oversee the consumer financial services markets. Previously, it was announced the agency would have authority over all financial instutions and lenders - including collectors, payday loan providers and mortgage servicers.
The collection and debt buying industry has been working to build a relationship with the agency. Last week, CFPB representative John Tonetti spoke at DBA International’s annual meeting in Las Vegas. DBA International is the largest association for debt buyers.
Tonetti mapped out what one attendee characterized as a willingness on the part of the agency to work with industry stakeholders.
Collections and debt buying industry insiders have been uneasy about the CFPB, and eager to gauge how they will be viewed. The appointment of Richard Cordray was a red flag.
Cordray has been an industry watchdog. As Ohio’s Attorney General, he won a lawsuit settlement of more than $400,000 from National Enterprise Systems. Republican lawmakers may still contest Cordray’s appointment.
Now, industry leaders remain hopeful for a good start with the agency. The idea is to turn the negative potential for an onslaught of new rules into a positive opportunity to reform existing regulations that hamper the industry.
It’s unclear exactly how – specifically how strictly - the agency will regulate collectors and debt buyers in that $10 million in annual receipts category. They may be asked to submit reports to the CFPB, and could also be subject to examinations. These examinations likely would be similar to the examinations the CFPB will conduct on banks.
The new reporting practices adopted by the large companies will eventually trickle down to smaller companies, says Rozanne Andersen, vice president and chief compliance officer at Muncie, Ind.-based Ontario Systems LLC, and former CEO at ACA International, the association of credit and collection professionals.
It was widely known that the CFPB would have the authority to oversee “large participants” in the collection arena, so the proposal was expected. But many collection insiders thought it might not come until the summer.
Discussions had been taking place over the last eight months about how to define “large participants,” according to Andersen. Most expected the category would be defined either by revenue, number of collectors or number of states in which the collector operates.
Agencies under the $10 million in receipts threshold are not in the clear, of course.
In a CFPB press release, officials also made it clear the agency also will have assume authority to supervise any nonbank company that it determines is posing a risk to consumers.
More regulation, more costs
Industry groups worry about not being included in rule-making discussions.
“My biggest concern is seeing changes made without our input,” says Mark Neeb, president and CEO of The Affiliated Group, Inc., Rochester, Minn., and current president of ACA International. Well-intended rules meant to protect consumers could have unintended consequences for the industry, which Neeb notes is a complex business.
Echoing that sentiment, Louis Freedman, president of the National Association of Retail Collection Attorneys (NARCA), and managing member of the collections group at the law firm of Freedman, Anselmo, Lindberg LLC, says, “We want protections for consumers, but we don’t want the legitimate collection process to be hindered.”
Of course, more regulation comes with a price tag, though the size of that price tag remains to be seen. The larger companies directly supervised by the CFPB will need staff to administer compliance programs. Smaller firms may need to spend more on compliance too, as industry practices change.
NARCA issued an alert to its members in late January regarding the CFPB’s outreach to gather information on large credit grantors, warning of the need for client confidentiality at collection law firms.
Another industry concern is how the CFPB will coordinate its activities with the Federal Trade Commission (FTC), which has enforcement authority over the collections industry but cannot make rules. The CFPB has both rule making and enforcement capabilities. In late January, (see story) the FTC and CFPB signed an agreement to coordinate consumer protection efforts and to help avoid a duplication of enforcement and regulatory efforts.
In an email, an FTC spokesperson explained to Collections & Credit Risk that the agreement does not assign collection enforcement to one agency or the other. Either agency can bring cases against companies. The spokesperson also noted in the email that the government receives a massive number of consumer complaints about the conduct of debt collectors, which makes collectors a priority of the FTC, CFPB, and other consumer protection officials.
“I think the agreement with the FTC was meant to calm the market,” says Andersen. “Regulators want the industry to know they will not be crawling all over companies. There’s a strong tether between the FTC and the CFPB.”
According to the CFPB’s semi-annual report issued January 30, 2012, the new agency has more than 750 employees. About 230 transferred from other federal agencies and bank regulators. Peggy Twohig heads the nonbank supervision team. She previously worked at the FTC on enforcement and policy related to consumer financial services. Twohig is very familiar with the collections industry and has spoken at the National Collections & Credit Risk Conference.
That’s a good start, industry observers say. And optimistic industry participants hope that the CFPB may be able to clarify certain rules. The ACA has a blueprint to modernize the consumer debt collection system. It includes suggested changes to current laws that would allow collectors to call cell phones.
Another area of confusion involves opposing court rulings on the interpretation of current laws. Industry players hope the CFPB might be able to reconcile conflicts in order to avoid the long process of amending the FDCPA through the U.S. Congress.
”We are not against regulation, but we want to know the rules and want them to be consistent,” says Tom Stockton, CEO of the CMI Group, Carrollton, Texas, and president- elect of ACA. Adds NARCA’s Freeman: “We want to be included in the rule-making process.”
At a press briefing Thursday, CFPB officials said their new proposal is only the first in a series of rulemakings - to be released on a rolling basis - that will identify markets for supervision.
Isaac Boltansky, an analyst with Compass Point Research & Trading, said it’s little surprise the agency is taking on collections early: "I think it's pretty clear that they were looking for industries that touched the largest number of Americans. They want to sell themselves as the protector of the working class in America. And an easy way to do so is to focus on debt collectors, given 30 million Americans have debt under collection."
In other words, as collection executives are more apt to explain it, the CFPB took on collections because it generates a lot of press coverage and consumer complaints.