Tougher Rules Coming for Debt Collectors

Year after year, federal regulators get more complaints about debt collection than any other industry. Now the griping has prompted an overhaul of collection rules for the first time in decades.

A frequent refrain is that collectors sling harsh threats demanding payment on poorly documented debts. Yolanda Banda, an nurse assistant in California, is among the victims. She thought she paid off her payday loan, but a call from an “investigator” at a company called Williams, Scott and Associates left her baffled and frightened.

“He said I would go to federal prison for check fraud if I did not immediately pay Williams, Scott,” Banda said in a sworn statement in 2014.

The caller convinced her to pay $ 200 immediately to stay out of jail, plus more each week. “I had to use my unemployment check to make payments,” Banda said.

After doing some research she realized it was a scam, but not before she paid $ 2,172 on a fictitious debt. 

“The debt collection industry is filled with far too many unscrupulous actors willing to deceive and abuse consumers just to make a quick buck,” said Benjamin Lawsky, New York state superintendent of financial services, in announcing a regulatory crackdown in December 2014. New York’s new rules beef up the information collectors must give you when they claim you owe money, among other things.

New York isn’t the only place putting tougher rules on its books — the other 49 states are about to get stronger protection from collection abuses as well. The U.S. Consumer Financial Protection Bureau is writing new rules under the main federal law that protects consumers from harassment, deception and abuse by debt collectors. It will be the first update of the U.S. Fair Debt Collection Practices Act  (FDCPA) since President Jimmy Carter signed the law in 1978.

“These rules will update federal law, which has not kept up with changes in technology or market practices,” CFPB Director Richard Cordray said in a speech last year at the University of Michigan Law School. The regulations are expected later this year and, after comments and revisions, would go into effect in 2016.

However, the CFPB lacks the power to raise penalties on abusive collection that were set in the Carter administration, which consumer lawyers call toothless. Nor can the agency regulate lawyers or the medical industry, which are key parts of today’s collection arena.

Sweeping regulatory changes
Whatever its shortcomings, the collection law overhaul will be extensive. Among the changes that consumer advocates and debt collectors expect are:

•  Include original lenders. Banks, credit card issuers and other original creditors are currently exempt from the collection law, which only applies to hired or “third-party” collectors. The CFPB can extend the law’s restrictions to original lenders through its rule-making power against “unfair, deceptive or abusive” conduct under the Dodd-Frank Act.
  Given the tens of thousands of collection complaints aimed at creditors every year, “[E]xperience since passage of the FDCPA suggests that first-party collections are in fact a significant concern in their own right,” the consumer protection bureau said in its request for comments.
• Reveal expired debt. Collectors will have to tell you if a debt has passed the statute of limitations, meaning it is too old for them to sue you for. This provision is part of New York’s new collection rules and looks certain to be in the federal rule, making it much more difficult for collectors to bring in years-old delinquencies.
• Email and text messaging permitted. After getting a debtor’s permission, collectors will be able to communicate via email and possibly text messages and social media, which aren’t covered by the collection law. Supporters say the new forms of communication will cut down on annoying phone calls and generate more records of what a collector tells you, increasing accountability.
• Debt sales get more accurate. Federal bank regulators have already issued guidance to banks restricting debt sales and requiring that some supporting documents go with the sold-off accounts. The CFPB may extend the requirements to other types of creditors and may also require that debt sellers notify debtors about the sale of their account.
• Phone messages get clearer. Collectors are supposed to tell you they’re collecting a debt. But if they say that on a phone message and someone else hears it, they violate another rule against revealing the debt to others. The consumer protection bureau is expected to provide guidance that will let collectors leave messages without stepping into a Catch-22.
•  More information about debts. If you demand verification of your debt, collectors will need to provide account information to back up their claims. This might include the name of the original creditor, original account number and the amount owed on the last bill you received — and maybe even a copy of the bill itself. Currently collectors may legally “validate” a debt without proving that the debt exists.
  “Once they recognize a debt, consumers might be more willing to discuss payment arrangements,” the CFPB said in its request for comments. New York’s rule requires collectors to back up debt claims with documentation.

Debt collection has changed
The debt collection world has changed since Jimmy Carter signed the debt collection law. A debt-buying industry has sprung up, as banks and other creditors sell off their uncollected accounts in a largely unregulated market. The easy availability of sold-off debt has spawned a class of collectors more concerned with bringing in the money than whether the debt is valid, consumer advocates say.

Accounts sometimes wind up in the hands of more than one collector, while other debts are simply fabricated, as Banda found out. The Federal Trade Commission convinced a judge to shut down Williams, Scott in 2014, calling it a “phantom debt” collector that concocted fake debts. The phony law firm managed to rake in $ 3.5 million in supposed payday loans that it either did not own or made up entirely. It was one of three crackdowns on phantom debt collectors last year.

Debt sales aid abusive collectors because they make it harder for consumers to tell if a collector is legitimate. Once a debt is sold and resold, the owner may be a company unfamiliar to you or the original creditor. What’s more, interest charges may have been added to the amount of your original debt.

A debt “may be unrecognizable to the consumer as the debt gets passed down the line,” Cordray said during a 2013 field hearing. One proposal is to create a registry for debts, where consumers could go to check the legitimacy of claims against them. But experts expect privacy concerns will block the registry.

Uneven oversight
Although people have mostly dug out from under the load of bad debt left behind by the recession of 2008-2009, collectors still reach into the lives of millions of Americans. Thirteen percent of consumers have one or more debts in collection on their credit report, according to the Federal Reserve Bank of New York’s report on household debt for the fourth quarter of 2014.

Collectors come in all stripes. The largest 175 agencies, which account for 60 percent of collection volume, are supervised by the CFPB with on-site examinations. Moreover, their pockets are deep enough to be attractive targets for class-action lawsuits brought by consumer attorneys. But most of the industry’s 4,100 agencies in the U.S. are much smaller and receive scant oversight.

“I think the larger entities are doing things more in the way consumer advocacy groups would want,” said Christopher Willis, a lawyer who represents debt collection companies. Smaller firms may count on being able to operate “under the radar” of consumer watchdogs.

Tough new rules, but soft old penalties
One important thing the new rules can’t do, experts say, is to raise the $ 1,000 penalty for collection abuses that a victim can win in court. Congress set the statutory penalty nearly 40 years ago and left it there. Without stiffer penalties, the scofflaws who flout the existing rules may ignore the new ones as well.

Robert Lawless, associate dean of research at the University of Illinois College of Law, said higher penalties are the single most important update needed for collection law. “If it takes an act of Congress, Congress should do it,” he said.

The penalty is important because enforcement of the FDCPA now relies heavily on consumer lawsuits. Regulators can bring only a handful of cases against abusive collectors such as Williams, Scott, while individual consumers armed with the collection law’s “private right of action” are a much larger force. The private right of action gives individual consumers the power to sue collectors to enforce the provisions of the consumer protection law.

And they have done so. Individuals filed more than 30,000 cases against collectors in federal courts under the FDCPA over the past three years, according to court records tracked by Web Recon LLC.

But consumer advocates say the $ 1,000 cap on consumers’ winnings is a weak deterrent to collection abuses. Today, the average amount in collection exceeds the penalty by about $ 400, according to figures from the Federal Reserve Bank of New York. And filing a claim under the FDCPA means finding a consumer rights lawyer willing to take the case, plus taking the time to gather evidence.

Inflation has boosted prices to nearly four times their level when the $ 1,000 penalty was set, according to the Federal Reserve. “I don’t know how much it would take to be a deterrent,” said Amy Kleinpeter, a consumer lawyer in Austin, Texas. “It’s not going up to $ 10,000 — that might be effective, though.”

Medical debt concerns
Another regulatory shortfall affects medical debt, which makes up more than half of all debt in collection. As a financial regulator, the CFPB lacks jurisdiction over doctors and health care services. However, debts handled by hired “third-party” collectors, or reported by credit reporting bureaus, do come under its authority.

“I would be surprised if they didn’t find a way to attack” medical debt, said David Anthony, a partner at Troutman Sanders who represents collectors.

The agency has already issued guidance for credit bureaus aimed at fighting error-prone medical debts that can trash your credit. However, medical providers themselves will remain outside the scope of debt collection rules.

Lawyers outside the law
Lawyers are also exempt from CFPB regulation when they’re practicing law — a fact that could block rules forcing debt collection cases to beef up the amount of proof behind a claim. State courts have seen a wave of collection cases that almost always end in a win for the collector when the consumer fails to show up — even though the collector’s case may be based on their own about the debt instead of account records.

“Debt buyers are not getting documentation — and they’re fine with it,” said Susan Shin, senior staff attorney at the New Economy Project in New York. “They’re relying on other tactics.” The community organization is fighting against court actions by debt buyers that can seize people’s wages without records to back up their claim.

One consumer lawsuit in New York charges that collection lawyers failed to notify people of cases against them, then won judgments easily when the supposed debtors didn’t show up for court. The case, potentially involving more than 100,000 debtors, was granted class-action status after judges said the charges have merit.

In its request for comments, the CFPB suggests that it can make rules about false statements in court filings. But experts think that authority is shaky. “They may try to put requirements of documentation before you can file a lawsuit,” Willis said, “but Dodd-Frank says they may not regulate lawyers in the practice of law.”

See related: Q&A: ‘Bad Paper’ author Jake Halpern roams debt collection’s Wild West