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Proposed rules would limit harassment by debt collectors

Proposed rules would limit harassment by debt collectors
Richard Cordray, director of the Consumer Financial Protection Bureau, testifies before the Senate Banking, Housing and Urban Affairs Committee in 2015. (Bill Clark / CQ Roll Call)

The Consumer Financial Protection Bureau is taking its first step toward reining in debt collectors, releasing an early outline of rules aimed at preventing them from harassing consumers and trying to collect debts that don't exist.

The proposal, which will be discussed Thursday at a CFPB hearing in Sacramento, would require collection companies to do more to verify information about debts before contacting consumers, limit the number of times a collector can call or email consumers, and make it easier for consumers to dispute debts and put the collections process on hold.

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Consumer advocacy groups have long complained about the practices of debt collectors, saying they often try to collect from the wrong people, intimidate consumers with nuisance lawsuits and harass borrowers with constant calls.

"We continue to hear about serious problems with debt collection — debiting accounts without authorization, calling at all hours of the day or night, threats of arrest or criminal prosecution, or threats of physical harm to consumers and even their pets," CFPB Director Richard Cordray said in remarks prepared for Thursday's hearing.

Consumer groups called the proposal a good first step. But, as with other CPFB proposals, they say they would like to see more stringent consumer protections.

A trade group for debt-collection firms, meanwhile, said rules that go too far could prevent some borrowers from getting loans in the first place.

"If creditors are not able to collect rightfully owed debts, they will be less likely to extend credit to consumers," said Cindy Sebrell, a spokeswoman for trade group ACA International.

The proposal, released late Wednesday, is an early step in a process that could take more than a year to produce final rules. The CFPB's initial outline will be reviewed by a panel of small debt-collection businesses before more formal rules are proposed, likely sometime next year.

The early proposal calls for debt collectors and debt buyers — firms that buy delinquent debt from banks and other lenders, then try to collect from borrowers — to contact consumers no more than six times in a week.

It also calls for debt collectors to inform consumers if their debts are too old for the collector to take them to court.

In a 2013 report, the Federal Trade Commission found that while debt buyers usually, though not always, have the information they need to prove a debt exists — such as a borrower's name, the amount they owe and the name of the original lender — they often lack documents related to the debt, such as account statements or loan agreements.

What's more, debt buyers usually don't receive any information about whether consumers have disputed a debt or if a disputed debt has been verified — information, the FTC noted, that would help determine whether a debt is legitimate.

The National Consumer Law Center, which has pushed for tighter restrictions on debt collectors, said the proposal is a good first step but that it would like to see the CFPB put forward even tougher rules.

Margot Saunders, an attorney with NCLC, said the CFPB's proposal would create complicated, difficult-to-enforce rules regarding what information collectors have to verify before trying to collect.

What's more, she said one part of the proposal could be confusing to borrowers. In most states, consumers can only be taken to court over bad debts for a certain amount of time after defaulting. The CFPB's proposal calls for debt collectors to inform consumers if their debts are too old to result in a lawsuit. But Saunders said that proposal would flummox consumers.

"If you received a notice saying, 'We're collecting this $1,000 debt from you, we're informing you that we can't sue you, but you still owe it and need to pay it,' would you be confused?" Saunders said. "It's at best confusing and at worst useless."

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She wants the CFPB to essentially ban debt-collection firms from trying to collect debts that are too old.

"Most statutes of limitation are five, six, seven years. That leaves plenty of time for the debt to be collected," Saunders said.

Over the past few years, the Federal Trade Commission and the CFPB have gone after debt-collection firms and debt buyers for trying to collect debts without properly verifying them. They've also taken action against lenders for failing to tell debt buyers about payments the borrowers made after their debts were sold.

Scott Pearson, an attorney at Ballard Spahr who represents financial-services firms, said debt collectors know there are problems in the industry and that the CFPB's proposal could address some of those.

"There have been lots and lots of consumer complaints resulting from attempts to collect by debt buyers who don't have proper documentation," he said. "Most people in the industry would acknowledge this is a problem. There are situations where someone is trying to collect a debt that's already been paid. Nobody wants that."

Still, he said he expects lenders and debt collectors alike to push back on the bureau's proposal and argue, as ACA International already has, that rules that make debt collection more costly will make it harder for customers to get loans.

If debt buyers have higher costs, they might pay less for bad debts. That could push lenders to be more cautious when they lend, potentially cutting off access to credit for some consumers.

"When you do this kind of thing, you make every debt obligation less valuable," Pearson said. "There's good reason to have more regulation, but anyone in the industry is going to say CFPB has gone too far."

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