David N. Anthony
Alan D. Wingfield
On January 2, the Consumer Financial Protection Bureau’s second “larger participant rule” [PDF] took effect. The rule covers which debt collectors, debt buyers, and collection law firms are subject to its examination and enforcement power. The new programs mark the first time that companies in these industries will be subject to examination by a federal regulator. The second rule follows the Bureau’s adoption of a first rule defining larger participants in the consumer reporting industry, which took effect in September 2012.
Accompanying the new rule, the CFPB also released a field guide [PDF] that outlines the procedures by which its examiners will investigate certain companies and banks engaged in debt collection. Those procedures include evaluations of whether debt collectors:
- Provide required disclosures.
- Provide accurate information.
- Have a consumer complaint and dispute resolution process.
- Communicate civilly and honestly with consumers.
1. Who is Covered?
Pursuant to the Final Consumer Debt Collection Rule, the CFPB’s new supervision authority covers three types of businesses:
- Companies that may buy defaulted debt and collect the proceeds for themselves.
- Companies that may collect defaulted debt owned by another company in return for a fee.
- Debt collection attorneys that collect through litigation.
According to the CFPB, the rule will extend to about 175 of the approximately 4,500 U.S. debt collectors, buyers, and firms engaged in the practice. Of the industry’s $12.2 billion in annual receipts, the CFPB’s influence will extend to 63 percent. In this way, the Bureau hopes to assert its emergent influence over every stage of the debt-collection process—from origination to ultimate collection or resolution.
2. What Does CFPB Supervision Mean?
Debt collectors can expect the CFPB examination process to be extensive and time-consuming. Among other things, firms must be prepared for, at least:
- An initial conference between a CFPB examiner and company management, during which documents and records may be requested. The examiners may also review the entity’s compliance management system.
- A determination by examiners of the scope and details of an on-site examination.
- An on-site investigation, including discussions with management about the company’s processes and procedures; a review of documents and records; and more focus on compliance management systems.
- Issuance of confidential examination reports, supervisory letters, and compliance ratings.
- Depending on the nature of the complaints the company has received, examiners may interview consumers.
In short, supervision under the rule will require covered companies to submit reports to the CFPB and subject their businesses to thorough examinations by CFPB staff. The examinations will be looking to: (1) assess compliance with federal consumer financial law; (2) obtain information about activities and compliance systems or procedures; and (3) detect and assess risks to consumers and consumer financial markets.
Those entities within the CFPB’s ambit need to have a substantive compliance program and maintain procedures to ensure that complaints are received and dealt with in an appropriate fashion. According to the CFPB’s field guide, the basic information examiners will seek to obtain and review will be:
- Organizational charts and process flowcharts
- Board minutes, annual reports, or the equivalent
- Relevant management reporting
- Policies and procedures
- Notes and disclosures
- Telephone recordings
- Operating checklists, worksheets, and review documents
- Monitoring procedures
- Compensation policies
- Relevant computer program and system details
- Consumer files, including original loan documents, and payment records systems
- Historical examination information
- Audit and compliance reports, and management responses to findings
- Training programs and materials
- Scripts for employee use
- Third-party contracts and oversight materials, including monitoring reports and findings
- Written correspondence with consumers
- Court documents
- Consumer complaints and disputes, including those submitted to the CFPB Consumer Response Center, the FTC’s Consumer Sentinel network, the Better Business Bureau, or other sources as appropriate
3. What Makes a “Larger Participant”?
Any third-party debt collection agency, debt buyer, or collection law firm with more than $10 million in annual receipts qualifies as a larger participant. For calculation purposes, the term “receipts” means “total income” plus “cost of goods sold” as defined by the IRS. This definition is of particular import for debt collection law firms, as the CFPB recognized that certain reimbursement funds, such as recording or filing fees, are not part of the total income calculus.
The CFPB also differentiated between receipts on amounts collected for another entity and fees earned in connection with such collections, indicating that only the latter will be counted as receipts. Additionally, the “annual receipts” test aggregates the activities of all affiliate companies, i.e., any company that controls, is controlled by, or is under common control of another.
In the end, the $10 million annual receipt threshold was maintained despite a strong dissent from the debt collection industry, whose trade group, ACA International, made substantial efforts to contest the figure during the rulemaking process. It argued that defining companies with revenues of $10 million as “larger participants” contradicts existing federal definitions for company size, most notably the Small Business Administration’s definition of a “small business”—currently slated at $7 million.
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