The Consumer Financial Protection Bureau on Feb. 16 proposed rules to supervise large debt collectors and credit reporting agencies, the first time that the billion-dollar industries would be subject to such federal oversight.
The proposed rule covers consumer debt collectors — including law firms — earning more than $10 million from the activity. That works out to about 175 companies — 4% of consumer debt collectors, but about 63% of annual receipts from the debt collection market, according to the CFPB. The agency reports that about 30 million Americans have debts under collection, with an average amount owed of $1,400.
The draft rule specifies that law firms and attorneys engaged in consumer debt collection — whether suing to collect debts, sending letters or using other tactics — are included in the category. By one estimate, approximately one in 20 delinquent accounts gets referred to a law firm that specializes in debt collection.
To Ballard Spahr partner Christopher Willis, the proposed inclusion of law firms is likely to prove controversial. “Firms may argue they’re regulated in other ways, by the rules of court and ethical obligations, and [CFPB oversight] is not necessary,” he said. Also, they may be collecting debts on behalf of entities such as mortgage servicers that are already under CFPB supervision.
Consumer credit reporting agencies with more than $7 million in annual receipts are also subject to CFPB supervision under the draft rule. The proposed threshold means the CFPB would cover about 30 agencies that account for about 94 percent of the business — bringing the agency’s reach well beyond supervision of the “big three” — Experian, Equifax and TransUnion.
According to the Consumer Data Industry Association, each year there are 36 billion updates to consumer files, and three billion reports are issued. The three largest consumer reporting agencies maintain information on 200 million American consumers.
“Our proposed rule would mean that those debt collectors and credit reporting agencies that qualify as larger participants are subject to the same supervision process that we apply to the banks,” said CFPB head Richard Cordray in a news release. “This oversight would help restore confidence that the federal government is standing beside the American consumer.”
The Dodd-Frank Act that created the CFPB gives the agency the authority to supervise nonbanks of all sizes engaged in residential mortgage, payday lending, and private education lending. The law also gives the CFPB the power to oversee “larger participants” providing other nonbank financial services. The proposed rule marks the CFPB’s first attempt to define and regulate larger participants in a market.
However, the CFPB in its proposed rule points out that smaller entities are still “subject to the bureau’s regulatory and enforcement authority and any applicable federal consumer financial law, regardless of whether they are subject to the bureau’s supervisory authority.”
Supervision is generally described as inspection by the CFPB and submitting periodic reports, but the details are not spelled out in the draft rule, which focuses on establishing who will be supervised. The CFPB also stated it may require companies to submit financial records and other documents to determine if they are subject to supervision.
The CFPB’s authority to supervise all nonbanks is contingent on having a director in place. Cordray was named director on Jan. 4 by President Barack Obama via a controversial recess appointment. Legal experts predict a court challenge is likely, though no suit targeting his appointment has yet been filed.
The proposed rule is open for comment for the next 60 days.
Contact Jenna Greene at firstname.lastname@example.org.