Consumers hounded by sometimes-threatening debt collection calls could soon get some relief.
On Oct. 24, the federal Consumer Financial Protection Bureau (CFPB) published a new federal rule that allows it to oversee large collection companies to ensure they are following the Fair Debt Collection Practices Act (FDCPA). The FDCPA bars collectors from using deceptive or abusive methods to get consumers to pay. The federal watchdog agency’s oversight will begin Jan. 2, 2013. Yet advocates question whether it will go far enough to protect consumers.
Why the new rule?
Complaints about debt collection companies are regularly near the top of consumer complaints reported to the Federal Trade Commission. In 2011, they were No. 2, behind identity theft, and made up 10 percent of the 1.8 million complaints filed.
According to CFPB, about 30 million consumers — or about one in 10 Americans — are pursued by debt collectors. Individual debt amounts average about $1,500.
CFPB Director Richard Cordray noted in a public hearing on Oct. 24 that many collectors are well within the law when they call on consumers. It’s their job to see that debts are paid.
But what the CFPB wants to stop are the “bad actors” — those making multiple calls a day and communicating in improper ways, Cordray says.
With the power to send teams for on-site inspections, the agency can follow how debt collection is handled from origination, through sales of the debt to other companies, to collection. A major complaint against the industry is that, when debt gets sold, details are not always passed along accurately to the next company.
Collectors will have to prove that the amount owed is accurate and that the person they’re calling is the person who owes the money.
Currently, the rules are routinely ignored, consumer advocates say. Consumers, meanwhile, complain that collectors call their bosses, relatives and friends to embarrass them, threaten them with deportation or arrest and leave abusive messages on answering machines their families can access.
At the field hearing Wednesday, some consumers told their stories.
One woman told of falling deep into debt after her divorce and a $1,000-a-month increase in her adjustable rate mortgage. She filed for Chapter 11 bankruptcy, which discharges the debt, but even then, she said she was harassed by three different collectors for a year and a half. “Every time the phone rang I felt like … I needed to cower and hide,” she told the audience.
Too far? Or not far enough?
Consumer advocates are concerned that the new rule may leave some consumers unprotected.
One area the CFPB rule doesn’t specifically address is medical debt, which is often what debt collectors are after, says Charles Delbaum, attorney with the National Consumer Law Center. Consumers rack up out-of-control debts after accidents or illness. Then the debt may go to a collection agency before consumers even know the portion of the bill they owe.
“We’d like to see that systems are in place so that consumers are not taken advantage of, particularly at a time when they’ve just suffered a serious illness,” Delbaum says.
Some advocates are also skeptical that the CFPB will be able to rein in an industry that has been expanding so rapidly with the economic downturn and advancing with technology. Moreover, advocates wonder, will the punishments for companies that break the rules have teeth?
The debt collection business model already includes provisions for having to pay fines or settlements when customers complain, says Dana Karni, a Houston attorney who specializes in consumer protection in debt collection cases. So fines likely won’t be enough of a deterrent.
“It’s just the cost of doing business,” she says.
Joe Ridout, spokesman for Consumer Action, says that the fines for violating the rules (already set by the FDCPA) are not nearly high enough to deter abusive debt collectors.
He notes that the FDCPA was drawn up in the 1970s with a $1,000 limit for garden-variety violations. That may have been a reasonable deterrent 40 years ago, but not today, he says.
“An inflation-adjusted penalty would bring that to around $5,000,” Ridout says.
Ridout says raising the limits on those fines should be high on the list of priorities for making CFPB oversight more effective.
“Enforcement will be everything,” Ridout says. “It’s not a matter of how many complaints can you track…. Enforcement has been what’s been lacking for many years.”
Another point of contention is the size of the companies that will be monitored by the CFPB. The rule covers debt collection companies with $10 million in revenue. The CFPB says that will include about 175 debt collectors, which make up more than 60 percent of the industry’s annual receipts.
Consumer advocates say $10 million is too high a threshold because it doesn’t reach many of the smaller companies that they say are the source of many of the more egregious practices.
Debt collectors, meanwhile, say the threshold is too low. Because the companies collect money for clients, much of the money they collect from debtors goes back to those clients. In other words, revenue isn’t an accurate indicator of size, says Mark Schiffman, spokesman for the professional association for debt collectors, ACA International.
Building on existing protections
The CFPB oversight would build on protections consumers already have under the FDCPA and individual state laws. Those who receive threatening debt collection phone calls can already demand in writing that the collector stop contacting them. The FTC offers instruction on how to send such a letter and spells out what communication is allowed by law.
Yet, Karni says, having uniform federal oversight will help eliminate different interpretations of the law depending on where your case lands. Within Texas, for example, different jurisdictions have different standards of proof for whether a debt is really owed. In some courts, that means huge collection firms have been able to push through paperwork that has been mass-produced and robo-signed, or signed without proper knowledge or consideration.
“Our courts of appeal come down quite differently on whether the paperwork that is brought to court is good proof of the existence of the debt,” Karni says. “At least the CFPB would be able to take some action on a larger scale.”