New York financial regulator Benjamin Lawsky is joining the crackdown on the collection industry, proposing new rules that would tighten record-keeping requirements and other collection practices for banks and third-party debt buyers.
Lawsky, the Superintendent of Financial Services for New York State, unveiled his new rules on Thursday. The proposed reforms add to a groundswell of regulatory pressure on the collection industry, which is already facing scrutiny, lawsuits and potential enforcement actions from the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Trade Commission and state attorneys general.
Lawsky's proposals would directly address documentation and robo-signing concerns, by making it easier for borrowers to dispute the validity of debts that collectors claim they owe.
Currently New Yorkers who dispute a debt must put their objections in writing and request verification within 30 days of being contacted by a collector. But under the proposed new rules, New Yorkers can dispute debts by phone, and collectors will be required "to provide documentation proving that the debt is valid, including a copy of the signed contract and final account statement, and that the collector has 'chain-of-title,' proving that the collector has the right to collect on the debt," New York State said Thursday.
The state's other proposals include:
Requiring that collectors provide borrowers with better information and disclosures about the amounts that are owed, including a breakdown of each charge added to the debt and each payment made after the debt was written off.
Requiring collectors to inform borrowers in every communication if the statute of limitations has expired on a debt
Providing borrowers with written confirmation of any debt settlement agreement, and with written confirmation and acknowledgement when those agreements are fulfilled, to prevent borrowers "from being pursued for debts that they already paid off."
Allowing borrowers to communicate with collectors by email.
The proposed regulation will be subject to a 45-day notice and comment period, New York State said.
"Debt collectors frequently use abusive scare tactics to try to stack the deck against struggling families and squeeze outsized profits out of their financial misery," Lawsky said in a press release. "These reforms will help level the playing field for consumers."
Banks historically have filed lawsuits to compel borrowers to repay defaulted credit card loans, but they also sell such debts to outside collection agencies for cents on the dollar. Those debt buyers then file their own suits seeking repayment.
Consumer advocates have long raised concerns about the amount of documentation that banks keep or provide to third-party debt buyers to support such lawsuits, and allegations of "robo-signing" and incomplete paperwork have been rampant.
California Attorney General Kamala Harris in May sued JPMorgan Chase (JPM) over such alleged shortfalls in its collections. Other banks, including Bank of America (BAC), have sold charged-off loans to third-party collectors without providing adequate documentation of the debts, leading some borrowers to face repeat collection efforts on bills they already have repaid.