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Federal consumer agency proposes overhauling debt collection

Collections-enforcementA rule is being proposed that would overhaul debt collection by capping collector contact attempts and ensuring that companies collect the correct debt.

Under the proposal, debt collectors would be required to have more and better information about the debt before they collect it. As they’re collecting the debt, companies would be required to limit communications, clearly disclose debt details, and make it easier to dispute the debt, the Consumer Financial Protection Bureau said Thursday.

When responding to disputes, collectors would be prohibited from continuing to pursue debt without sufficient evidence. These requirements would follow the debt if it were sold or transferred.

“Today we are considering proposals that would drastically overhaul the debt collection market,” said Richard Cordray, director of the bureau. “This is about bringing better accuracy and accountability to a market that desperately needs it.”

Debt collection is a multi-billion dollar industry that affects about 70 million consumers. Banks and other creditors can collect their own debts or hire third-party debt collectors. Original creditors also often sell their consumers’ debts to debt buyers that may collect on the purchased debts or hire third-party debt collectors to recover them.

There are more than 6,000 debt collection firms in the United States.  

The bureau’s proposal will help protect consumers from being unfairly harassed and hold debt collectors accountable for showing they have a reasonable basis to collect past debts, said Consumers Union, the policy arm of Consumer Reports.

“However, the outline falls short of requiring debt collectors to check actual records associated with the consumer’s original account, and would still permit collection of stale debts so long as the collector discloses that the consumer can no longer be sued for it under state law,” said Suzanne Martindale, staff attorney for Consumers Union. “We urge the CFPB to close those loopholes in the official proposed rule.” 

About one-in-three consumers had been contacted by a creditor or collector trying to collect a debt within the past year, according to a bureau study. Most consumers who had been contacted reported attempts to collect payment on between two and four debts. And one-third of consumers who had been contacted about a debt in the last year reported an attempt to collect in the wrong amount.

Debt collection generates more complaints to the bureau than any other financial product or service. The most common complaints are about collectors seeking to collect debt from the wrong consumer, for the wrong amount, or debt that couldn’t legally be enforced.

When consumers are contacted by collectors for debts they don’t recognize, they often don’t know what to do next, Cordray said. They may feel pressure to resolve the debt but don’t have a clear understanding of their rights.

Sometimes consumers pay a debt they don’t believe is accurate to make the collector stop contacting them, he said. Other times, consumers spend significant time and money to dispute the debt. They may have to hire a lawyer.

Debt collection protections

Federal law already prohibits debt collectors from harassing, oppressing, or abusing consumers.

The proposals being considered would increase protections relating to third-party debt collectors and others, including many debt buyers. As part of its overhaul, the bureau plans to address consumer protection issues involving first-party debt collectors and creditors separately.

In October 2012, the bureau established authority over nonbank debt collectors with more than $10 million in annual receipts. This covers about 175 debt collectors making up more than 60 percent of the industry. The bureau also has ordered some companies to stop collecting on debt based on bad information and to refund hundreds of millions of dollars for unlawful debt collection.

Copyright 2016, Rita R. Robison, Consumer Specialist

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