Debt collectors would face strict new limitations on how (and when) they contact consumers under a sweeping proposal announced Thursday by the Consumer Financial Protection Bureau.
Collectors would be limited to 6 contacts per week while attempting to reach consumers, would have to work harder to prove validity of debts they are trying to collect, and they’d have to provide simple “tear-off” instructions for consumers to file disputes.
“Today we are considering proposals that would drastically overhaul the debt collection market,” CFPB Director Richard Cordray said in a press release. “This is about bringing better accuracy and accountability to a market that desperately needs it.”
The bureau has been weighing new debt collection regulations since it issued a notice of proposed rules back in November 2013. More than 35,000 comments piled into the bureau from consumer groups and industry representatives.
There are about 6,000 debt collection firms working in the $13.7 billion industry in the U.S., the CFPB says. But the industry has a bad reputation. Debt collectors attract the most complaints at the CFPB and the Federal Trade Commission every year. Since the bureau began accepting complaints in July 2013, 200,000 consumer complaints were compiled.
Many complaints involve attempts to collect a debt that consumers say they don’t owe. The bureau said about one-third of consumers contacted by debt collection firms claim an attempt to collect the wrong amount. (You can read more on your debt-collection rights here.)
“When consumers are contacted by collectors for debt they do not recognize, they often do not know what to do next,” the CFPB said in its note announcing the new rules. “They may feel pressure to resolve the debt, but do not have a clear understanding of their rights. Sometimes consumers pay a debt they don’t believe is accurate to make the collector stop contacting them. Other times, consumers spend significant time and money to dispute the debt. They may have to dig through old records to prove information to the collector or retain a lawyer.”
The CFPB proposal says the following:
- Collectors would have to scrub their files and substantiate the debt before contacting consumers. For example, collectors would have to confirm that they have sufficient information to start collection.
- Collectors would be limited to six communication attempts per week through any point of contact before they have reached the consumer.
- The CFPB is also considering proposing a 30-day waiting period after a consumer has passed away, during which collectors would be prohibited from communicating with certain parties, like surviving spouses.
- Collectors would be required to include more specific information about the debt in the initial collection notices sent to consumers.
- The proposal under consideration would also add a “tear-off” portion to the notice that consumers could send back to the collector to easily dispute the debt, with options for why the consumer thinks the collector’s demand is wrong. The tear-off would also allow consumers to pay the debt.
- If a consumer disputes – in any way – the validity of the debt, collectors would have to stop collections until the necessary documentation is checked. Collecting on debt that lacks sufficient evidence would be prohibited.
The rules also deal with a relatively new complaint about collector tactics sometimes called “debt laundering” that Credit.com has covered in the past. Occasionally when consumers dispute a debt, the collector does not respond to the dispute but instead sells the debt to another collector, who begins the process again, requiring the consumer to restart the dispute process. The new CFPB rules would prevent this.
“If debt collectors transfer debt without responding to disputes, the next collector could not try to collect until the dispute is resolved,” the CFPB proposal states.
In responding to the CFPB’s request for comment on rules, industry groups said that consumers dispute only 3.2% of the bills that debt buyers attempt to collect. They also warned that additional regulations could interfere with the credit market.
New rules that would require additional debt validation “would impose significant costs and burdens that would weigh on the cost and availability of credit,” the American Bankers Association and the Financial Services Roundtable said in a letter sent to the CFPB.
The tougher rules are required because debt collection is not a typical industry that responds to consumer dissatisfaction, the bureau argues.
“In the debt collection market, notably, consumers do not have the crucial power of choice over those who do business with them when creditors turn their debts over to third-party collectors. They cannot vote with their feet,” Cordray said in remarks prepared for an event to announce the new rules. “It is not surprising, then, that for many years, the debt collection industry has drawn more complaints than any other.”
As is standard in CFPB rule-making, a panel of small business experts will now convene to review the impact of the regulations on industry. After that panel issues a report, the CFPB will issue its final rules.
Remember, legitimate debt collection accounts can damage your credit. Too see if any are affecting yours, you can check your credit reports each year for free at AnnualCreditReport.com and view your free credit report summary, updated each month, for free on Credit.com.
Image: Todd Keith