Director of the Consumer Financial Protection Bureau
Public Field Hearing on Debt Collection Practices
October 24, 2012
Thank you for being here with us in Seattle for this field hearing. I would also like to thank our colleagues from the Federal Trade Commission for joining us today. Over this past year, we have come to realize that we could not have a better group of partners than they have been to us, standing shoulder to shoulder to protect consumers across this country. We enjoy every chance to fight alongside them, on behalf of each of you.
We are here today to talk about debt collection. Because of my background in state and local government, it turns out that I have been immersed in this topic for a long time. I started out as a county tax collector, making a point to apply myself to collect tens of millions of dollars in property taxes, back taxes that had gone unpaid, in some instances for many years. It seemed to me grossly unfair to all the law-abiding taxpayers, who somehow managed to scrounge up their payments on time, to know that others were shirking their obligations and getting away with it.
We did not have any sophisticated methods, so we just applied elbow grease and shoe leather and as much ingenuity as we could muster. We reported scofflaw businesses to the Better Business Bureau, and when that did not work, to the Dun & Bradstreet credit rating agency, and when that did not work, to the local banks. We pursued them in court, including the bankruptcy courts, and we gradually moved ourselves up their priority list to get paid what we were owed.
But out of that work, I also learned some very different and unexpected lessons. I came face to face with people who were in trouble, many through no fault of their own – victims of disease, divorce, death in the family, dislocation from job loss.
My team and I called and visited seniors who had never fallen behind on their taxes before, whose delinquency was a red flag and a cry for help. We put people on payment plans to give them a chance to dig out of trouble. Out of these experiences, I first sought to grasp the foreclosure crisis, and I became convinced of the urgent need for greater financial know-how and financial capability for every citizen.
Later I served as Ohio Attorney General, where I found myself on both sides of the equation in debt collection. On the one hand, I was the primary debt collector for the state government, marshaling an army that collected hundreds of millions of dollars in unpaid fees, taxes, fines, and penalties each year.
On the other hand, I was charged with enforcing the law against every debt collector, big and small, who was operating in the state. I know first-hand how hard this work can be. But I also know that it can be done the right way, and I came to understand how hard it is on people when it is done the wrong way.
As we continue to emerge from the devastating fiscal crisis of 2007-2008, we now find that debt collection is a central issue of our times. Currently, about 30 million consumers – nearly one out of every ten Americans – are being pursued by debt collectors, for amounts that average about $1,500 apiece.
Independent debt collectors are in the business of collecting debts for others, and they conduct three main types of activities. First, they collect defaulted debt owned by a creditor, in return for a fee. Second, they may buy debt in default and collect the proceeds for themselves. Third, they may specialize in collecting debts through litigation. And they may engage in any or all of these activities.
We know that debt collectors represent a wide spectrum of firms. Many play by the rules and are simply doing their jobs, trying to collect what is legally owed. Indeed, the work they do is integral to the functioning of the consumer credit market.
But others cut corners and seek to gain an advantage by ignoring the rules. Our job, and that of our partners at the FTC, is to root out those bad actors. Not only do they hurt consumers, but they are also a detriment to every debt collector who is faithfully following the law.
In fact a stated purpose for the Fair Debt Collection Practices Act is that Congress wanted “to ensure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged.” At the Consumer Bureau, we deeply believe that reasonable market oversight is critical to fostering competition in consumer financial markets. We will be using both our supervision authority and our enforcement authority to oversee the market and go after bad actors who flout the law.
What is supervision authority? It is the authority to send a team of examiners to scrutinize a company’s business practices and determine whether they are in accord with the law. This broad authority is an effective tool to correct any violations that are occurring and to find ways to resolve matters that are causing harm to consumers. The Bureau is already supervising the debt collection practices of many large banks and nonbank lenders to make sure they are complying with federal consumer financial law.
Now we are taking another step forward to protect consumers against violations of the debt collection laws. The Consumer Bureau is announcing today that we will be expanding our supervision program to cover the larger firms that principally collect defaulted debts on behalf of creditors. We will be monitoring these debt collectors just as we have been monitoring the large banks and nonbank lenders.
Beginning in January, any firm that has more than $10 million in annual receipts from consumer debt collection activities will be subject to our supervisory authority. This authority will extend to about 175 debt collectors, which account for over 60 percent of the industry’s annual receipts in the consumer debt collection market. This new federal authority will enable us both to protect consumers and to support law-abiding debt collectors more effectively. We are also releasing examination procedures in the field guide our examiners will use to assess whether creditors and debt collection firms are following the law.
Through our ability to conduct on-site examinations, the Consumer Bureau will be in a position to evaluate whether federal consumer laws are being followed at every stage of the process – from credit origination to debt collection. We will continue to exercise enforcement authority across the market to address problems after they surface, but our supervisory authority will mean we can identify these problems and root them out at an earlier stage in order to minimize harm to consumers. Above all, we are concerned about the system-wide problems in the debt collection market that pose risks to consumers, and we want to see good practices come to dominate the market.
One system-wide problem we are concerned with is the accuracy of the data that debt collectors are using to pursue consumers. After a debt is charged off, it may be sold several times. One issue is whether a sufficient amount of information about the debt is conveyed when the debt is first sold.
A second issue is the extent to which the accuracy of the information – including such fundamental facts as the consumer’s identity and the amount of the debt – deteriorates as it gets passed down the line. If any piece of that information is incorrect, the consumer might not recognize the debt, and it may not even be theirs. So our examiners will be paying close attention to whether debt collectors have accurate information when they are collecting debts.
Consumers also need to be able to dispute debts they believe to be incorrect. So we will look closely at how debt collectors process consumer disputes, and whether they do it in a timely manner. If the debt has been reported to a credit reporting company, the collector needs to investigate all disputes and should inform the company of any inaccuracies that are found. Given the impact that a credit report can have on a consumer’s life, it is critical that the credit reporting companies have accurate and up-to-date information.
One noted tactic is for a debt collector to pursue a default judgment in a court, sometimes by deliberately failing to notify the consumer. The debt collector knows that the information in a credit report provides powerful influence over the consumer’s access to credit, and this becomes the essential leverage for extracting payment, regardless of whether it can be justified.
As part of our approach to supervision, we will encourage robust compliance programs. It is not enough for a debt collector to point to policies and procedures as a means of justifying their collection practices – these policies and procedures must be followed consistently. The best way to be sure of that is by having sound monitoring systems in place. A good compliance program also closely analyzes complaints to find patterns that may pose risks to consumers, such as whether the complaints stem from a specific employee or from a certain type of account. We expect to see an effective and comprehensive process to address consumer complaints.
The law also recognizes that debt collectors can harm consumers, significantly, in many ways other than pure monetary harm. Much of the law was deliberately crafted to protect the dignity of the individual consumer and to ensure that he or she is treated with the respect we all deserve. So our examiners will evaluate whether debt collectors treat consumers fairly and humanely in a manner consistent with the law.
Sometimes collection methods involve harassment or deception, and they are typically illegal. Intimidation, abusive tactics, profane language, or threats of arrest are widely known to be out of bounds. Even placing certain kinds of calls – such as calls at unusual hours – is unacceptable and against the law. Wherever we find unlawful practices, we will take steps to eliminate them, thereby helping to protect consumers and, again, supporting those collectors that take care to comply with the law.
Earlier this year, our colleagues at the FTC were successful in halting an operation that involved calls about phantom payday loan debt. The perpetrators somehow obtained contact information for consumers who had applied online for payday loans. Then, posing as law enforcement or government officials, they would call consumers and threaten to arrest them if they did not make good on their supposed payday loan debt. We don’t need any fancy names for this kind of conduct – it is outright fraud.
The FTC established that the consumers did not actually owe money to the callers and won a court order halting the conduct and freezing the assets of the fraudulent operation. This kind of aggressive law enforcement sends a strong warning to others that this kind of exploitation will be exposed, and its exposure will be made to hurt. Our allies among the state attorneys general likewise devote considerable time and effort to rooting out bogus debt collection efforts, including improper practices, scams, and frauds. We have been initiating our own efforts, and working together with the FTC and state officials to enforce the laws on debt collection.
At the Consumer Bureau, both supervision and enforcement are key tools in our toolbox. But we have other tools as well. Another major component of our mission is to empower and educate consumers, which we are doing in part through Ask CFPB, an interactive, online database that answers consumers’ most frequently asked questions in plain language.
Today we are rolling out more than seventy new questions and answers about debt collection, covering such topics as the definitions of key terms, the proper boundaries of legal authority, and the best ways to negotiate a settlement with a collector. We want consumers to have an objective source of information on debt collection, and one that is easy to understand. You can find the Ask CFPB database on our website at www.consumerfinance.gov.
We also want to encourage participation in our everyday work at the Bureau, and that is one of the reasons we are holding a field hearing here today. We want to engage the entire public, including consumer groups, industry, and local officials, because we need help from all of you to promote honest practices in the consumer finance markets that will best protect consumers.
What stands out most clearly in my mind today is how important it is for us to succeed in our task of fixing the debt collection market. Doing so is clearly in everyone’s best interest – at least, everyone who intends to abide by the law. When this market works as it should, consumers are treated fairly, they retain their dignity, and they are prompted, appropriately, to pay their legitimate debts. We all have the right to demand and expect as much. Thank you.