On July 17, the Senate Banking Committee's Subcommittee on Financial Institutions and Consumer Protection, chaired by Sherrod Brown, D-Ohio, held a hearing titled "Shining a Light on the Consumer Debt Industry."
Corey Stone, an assistant director at the Consumer Financial Protection Bureau (CFPB), and Reilly Dolan, acting associate director of the division of financial practices at the Federal Trade Commission (FTC), testified before Brown alone, except for a brief, but meaningful, appearance by the ranking Republican on the subcommittee, Pat Toomey, R-Penn. The Comptroller of the Currency sent a statement, but, by arrangement, did not send a live witness.
Brown began the hearing by expressing satisfaction that Richard Cordray has been confirmed as director of the CFPB and will now be able to exercise the full powers that go with the position. (Brown did not refer to the fact that Senate Democrats had to "go nuclear" in order to accomplish this, but he is justified in expressing satisfaction. This removes one of the key grounds for opponents to challenge the legitimacy of the CFPB. There remains a challenge to the constitutionality of the establishment of the agency, but this will probably be resolved somehow in a manner that will not result in invalidation of all of the actions the CFPB has taken. At the very least, the administration has taken a calculated risk and so far is winning handsomely.)
In his opening statement, Brown acknowledged the need for a debt collection system, then reviewed a litany of abusive practices by the debt collection industry, such as making repeated contacts with debtors, making physical threats against them, threatening to desecrate the bodies of dead relatives and threatening to kill the pets of debtors — practices that have been the subject of settlements that in some cases also provided injunctive relief against continuing to work in the industry.
He also reported that former industry employees have spoken of signing affidavits to proceed on collections without the supporting documentation to back up the claims.
Readers would not be surprised to learn this, but they might be surprised to learn that several of the largest debt collection agencies are owned by several of the largest banks. When regulators require banks to charge off delinquent loans, perhaps after 180 days, by moving the loans to an affiliated collector, the bank can retain an interest without having the loans languish on the books of the banking entity.
At the same time, they avoid so-called "reputational risk" associated with the tactics collectors employ against debtors and compliance with laws and regulations.
The regulatory landscape has changed, so that the authority will be concentrated in the CFPB rather than divided between the so-called "prudential" banking regulators and the FTC. Also, the nature of the industry has changed with the evolution of technology since the basic regulatory authority, the Fair Debt Collection Practices Act (FDCPA) was enacted in 1977, but the law has not been updated.
A major issue is the uneven quality of data that sloshes around the system and the difficulty consumers have in getting access to the documents they need in order to establish that the debt is valid, as hospitals, banks and student lenders sell and resell the debts.
Brown set forth a number of policies and asked the FTC's Dolan whether they would be feasible.
The list provides an indication of where Brown is headed in drafting new legislation:
• To require debt collectors, whether primary creditors or third-party collectors, to have all relevant documentation before issuing their first debt collection notice to the consumer;
• To require that information on prior collection attempts travel with the debts;
• To prohibit the sale of unverifiable debts and implicitly suggesting that those debts are verifiable;
• To disclose whether debt being sold is time-barred.
Dolan's answers showed that the response by the FTC is incomplete, but several of them mentioned difficulties in obtaining adequate data.
Ultimately, these issues wind up at the CFPB, and Stone spoke hopefully of advances in technology that promise to make data available to all parties cheaply through a central depository.
He pledged that the CFPB will work with other regulators, including the banking regulators and the FTC "to establish clearer guidance for how debt collectors may use some of the new communication technologies to reach those who owe debts, while protecting privacy and dignity."
During his limited participation, Toomey jousted with Stone about whether the CFPB exceeded its authority by using bulletin guidance to apply its authority to regulate unfair and abusive practices to the debt collection industry, rather than undertake a full-fledged rulemaking.
Stone responded that the CFPB is on solid ground under existing law. Toomey then asked whether, in effect, the bulletin was saying that that which is illegal is illegal, and Stone agreed.
Toomey called this circumstance "peculiar," and he appears to be gearing up to support whatever resistance the industry decides to pose against forthcoming regulation and legislation.
In conclusion, both Sen. Brown and the CFPB are in the early stages of developing an updated version of collection law and the regulations to go with it, and the CFPB is still struggling to get a grip on how the industry works, but the destination of these efforts is clear, along with a likely source of fierce opposition.
Also, I would point out that a couple of issues for further inquiry would be to follow up on the modest settlements that the FTC has achieved to determine 1) ironically, whether the fines have actually been collected, and 2) whether if injunctive relief included bars working in the industry, the miscreants have not evaded the injunction by recasting their work in some new format and perhaps in a different locale, perhaps offshore.
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