Banks supervised by the Consumer Financial Protection Bureau now face penalties if they mistreat consumers while collecting debts, the U.S. agency said today.
The new policy, part of a crackdown on debt-collection practices the agency announced last year, will plug a gap in federal anti-harassment law that generally excluded creditors who collected debt themselves, rather than hiring third parties to do the work.
“It doesn’t matter who is collecting the debt, unfair, deceptive or abusive practices are illegal,” Richard Cordray, the CFPB director, said in an e-mailed statement.
The Fair Debt Collection Practices Act has since 1977 protected consumers against mistreatment from companies that buy debts from the original creditors, and from third-party vendors. It doesn’t usually cover companies collecting on loans they made themselves, Cordray said.
JPMorgan Chase & Co., the biggest U.S. bank, said in May it expected to face enforcement action over how it pursues consumers with bad debt. The Office of the Comptroller of the Currency, the U.S. regulator for national banks, is probing U.S. lenders’ debt-collection practices, and may force JPMorgan to identify borrowers that should be compensated for past abuses, the Wall Street Journal reported today, citing a person familiar with the New York-based bank’s conversations with regulators.
Thirteen states are also examining JPMorgan’s practices, according to the newspaper. The bank conducted an internal review of about 1,000 lawsuits and found mistakes in 9 percent of the cases, people familiar with the matter told the Wall Street Journal. The New York Times reported that the OCC found a 9 percent error rate in collection lawsuits filed from 2009 to 2011, citing several people close to the matter.
Kristin Lemkau, a spokeswoman at JPMorgan in New York, declined to comment on the reports.
JPMorgan said in a May 8 regulatory filing that it will face enforcement action from federal regulators over its collection practices and add-on products commonly appended to credit cards.
A debt-collection firm backed by a JPMorgan private-equity unit agreed to pay $3.2 million to settle a Federal Trade Commission complaint that it illegally harassed consumers, the agency said yesterday. JPMorgan said it has a stake in the company, Expert Global Solutions Inc., through its One Equity Partners business, and doesn’t use Expert Global’s debt-collection services.
The Consumer Financial Protection Bureau, created by the Dodd-Frank law of 2010, supervises banks with assets over $10 billion, ranging from JPMorgan to regional players like Lafayette, Louisiana-based Iberiabank Corp., for compliance with federal consumer-protection rules. It also oversees non-bank financial firms, such as credit bureaus, payday lenders and debt collectors.
The agency has signaled that it would take action against lending and debt-collection practices that take advantage of ill-informed or vulnerable consumers. In addition to reviewing debt-collection practices, the agency is scrutinizing payday and other small-dollar loans, overdraft fees, and discrimination in auto lending. As part of its efforts to identify problem areas for consumers, the agency is collecting and reviewing large amounts of consumer-transaction data, a practice that has been criticized by lawmakers and financial industry firms.
The debt-collection industry is a mixture of creditors, debt buyers, collectors and the lawyers who work with them. Major card issuers such as Bank of America Corp. and Capital One Financial Corp. collect on their own debt, but sometimes sell charged-off loans to buyers and collectors such as Portfolio Recovery Associates Inc. and Encore Capital Group Inc.
The consumer bureau will effectively extend the fair debt collection law to include creditor banks by issuing so-called supervisory bulletins that outline practices bank examiners may consider illegal, Cordray said.
The agency is holding a field hearing today in Portland, Maine, on the debt-collection business.
Improper collection practices include threatening a consumer with actions a collector cannot take, such as arrest, or lying about who owns the debt or the amount, Cordray said. A second bulletin warns companies to be cautious in making statements about how paying a debt affects a person’s creditworthiness.
“Debt collectors use all sorts of strategies, some legitimate and some illegitimate, to convince consumers to pay their debts,” Cordray will say at the hearing, according to his prepared remarks.
The CFPB is also opening its consumer-complaint system, which has included credit cards, mortgages and bank accounts, to debt collection, Cordray said.
In addition to filing a complaint against the debt collector, consumers can direct the complaint against the creditor that originated the loan.
“This intake system will be useful as a feedback mechanism for creditors that have hired third-party debt collectors or sold their debt,” Cordray will say.
Banks objected to the CFPB’s complaint system when it opened because the agency publishes the names of companies against whom consumers have filed. Advocacy groups have praised it as a way to hold lenders accountable. Some banks have used the system to improve customer service.
The agency is also considering a new regulation to promote accuracy of information used to collect debts.
Cordray said there is a “strong consensus about the need for robust national documentation standards” for the information used to collect debts. “We will keep that in mind as we move toward a rulemaking process on debt-collection issues,” Cordray will say.
The agency also released five model forms that consumers can use to communicate with debt collectors if they, for example, want to direct correspondence to their lawyers or obtain more documentation of a debt.
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