Banks aren't going to be able to hide behind the Fair Debt Collection Practices Act anymore.
The regulatory crackdown on debt collections has largely focused on the outside firms hired by lenders to do their dirty work. In the latest development, New York state approved tougher new rules for debt collectors, including an extended period for consumers to dispute cases.
The scope seems almost certain to widen to include in-house collection departments. If that happens, it will change a legal landscape that has been in place since 1977, when the fair practices act took effect. Only outside debt-collection firms, known in the industry parlance as third-party collectors, are subject to that law.
Banks oppose the possibility that original creditors will become subject to the same rules, and the industry has tried to lobby to prevent the inclusion of so-called first-party collectors.
They fear having to meet the act's standards will compound their already rising compliance costs. Its requirements include: written notices to borrowers with more information about the size of the debt and creditors' identities; limits on the hours during which a creditor can call a debtor; use of accurate information for calculating debts; and notices to the borrower of their right to dispute a matter.
Such requirements are "incongruent with the lender-borrower relationship," officials from three financial services industry groups wrote to the Consumer Financial Protection Bureau in a Feb. 28 letter. "Unlike the relationship between third-party collectors and debtors, the lender-borrower relationship is usually a long-standing one, covering the entire lifecycle of a loan."
The letter was co-authored by officials from the American Bankers Association, the Consumer Bankers Association and the Financial Services Roundtable.
Banks and their advisers also point out that many players in the industry have voluntarily adopted the requirements of the act. But it may be a futile effort to stop regulators from making those rules official for lenders, said Robert Foehl, general counsel at ACA International, a trade group for debt collectors.
"It's abundantly clear that the CFPB will hold first-party collectors to very similar, if not the exact same standards, as third-party debt-collection companies," Foehl said.
Instead, banks should be preparing for the inevitable, said Caren Enloe, an attorney at Morris, Manning & Martin who represents banks and debt collectors.
"A lot of big banks have in-house collections departments, and that's going to be a huge issue," Enloe said. "Banks have got to be more vigilant, or continue to be vigilant, and know that this is coming."
The CFPB has not officially said that it will regulate first-party collectors in the same strain as third-party collectors. The agency will release in April its proposed rules for debt collectors.
But the CFPB has given signals of the direction it's heading, as have the Federal Trade Commission and the Office of the Comptroller of the Currency. JPMorgan Chase shut down its in-house debt collection division after the OCC ordered it to clean up the faulty records and shoddy procedures that led to abuses.
Most recently, the CFPB issued a consent order to DriveTime Automotive Group, an automobile dealer and lender, after the agency said the company made overly aggressive debt-collection calls and provided inaccurate data to credit-reporting agencies. DriveTime used in-house personnel to collect debts.
The DriveTime consent order "caught a number of our members by surprise" because it marked the first time the CFPB had disciplined a first-party collector, said Dong Hong, regulatory counsel for the Consumer Bankers Association.
"Banks are supervised by a multitude of federal and state regulators and we think that we have all the guidance and supervision that is needed in this arena," Hong said.
The Federal Trade Commission is also making much stronger statements that it plans to use its legal authority to regulate first-party collectors, Foehl said. In June the FTC issued a consent order to subprime auto lender Consumer Portfolio Services, saying the company used illegal tactics in servicing and collecting its loans.
"The FTC has always had the ability to use their authority and power to regulate debt collectors, and since the CFPB has come on board [the FTC has] made even stronger pronouncements to that effect," Foehl said.
The expansion to first-party collectors is expected to happen on the state level, too, although a number of states already have laws that regulate first-party collectors. Massachusetts passed a law in 2012 expanding its rules to creditors that use in-house collectors.
New York state's tougher new rules for debt collectors, announced on Wednesday, apply only to third-party collectors, said Matt Anderson, a spokesman for the New York Department of Financial Services.
"We haven't made a determination at this point, but we decided to concentrate our first steps on third-party debt collectors, where the majority of the abuses have taken place," Anderson said.
Still, nothing has been finalized yet, and bankers are continuing to plead with regulators to keep the status quo. It is simply infeasible for banks that collect their own debts to be subject to the same rules as outside, third-party collectors, Wells Fargo's Tom Wolfe wrote to the CFPB.
"One of the biggest challenges a lender faces in trying to assist a customer is the customer's reticence to have an awkward conversation admitting they need help," Wolfe, executive vice president in consumer credit solutions at Wells Fargo, wrote in a Feb. 28 letter. "Any rules that make the experience more uncomfortable for customers will hinder reputable lenders' ability to help their customers."