The Consumer Financial Protection Bureau's debt collection plan is likely to put pressure on banks and first-party creditors to provide better documentation on consumer debts that get transferred to debt buyers and collectors.
The plan, released Thursday, would prohibit debt collectors from collecting on debts without proper documentation. While the proposal does not cover banks and first-party creditors, industry experts said banks are going to be on the hook for providing more information to debt collectors and buyers, which will increase due diligence costs.
"It certainly puts more of an onus on any bank that decides to offload its uncollectable debts to a third-party debt collector," said Kevin Petrasic, partner and head of the global financial institutions advisory practice at White & Case. "Third-party debt collectors are going to be asking for very clean files so they can pursue a debt. There is a lot of information that would be required for the debt collector to obtain, and [the debt collector] will inevitably transfer those documentation burdens to the [originating] institution."
The bureau split its debt collection plan into two separate proposals. It outlined one plan before a small business review panel convened Thursday that would target debt collectors and others subject to the Fair Debt Collections Practices Act. The agency plans to convene a separate panel in the next few months to give details on a plan that would affect banks, credit card companies and other first-party creditors not subject to that law.
Bob Jaworski, a member of the financial industry group at Reed Smith, said that while there is nothing in the CFPB's plan released Thursday that would require banks to certify the accuracy of information on debt given to third-parties, he expects such a requirement is in the works.
"I expect to see that," he said. "They're going to have to put some kind of requirement to show that [first-party creditors] provided a certification of accuracy and did due diligence in providing it."
The initial plan outlined three things a debt collector has to do before picking up the phone to contact a consumer: have better information on the debt and the consumer, review warning signs if information appears to be inaccurate, and get a representation of accuracy from the creditor.
At a field hearing in Sacramento, CFPB Director Richard Cordray said the agency is seeking to put consumers in control of communications with collectors.
"If debt gets sold, it would have to be accompanied by specific information about the debt — information that benefits the consumer, not just the collector," Cordray said Thursday in prepared remarks. "Each new collector would have to review their files to establish a reasonable basis for demanding payment."
The CFPB's plan would require that collectors meet a higher threshold before pursuing a lawsuit and would ban filing a lawsuit to collect on a debt when the statute of limitations has expired.
Several public commentators at the hearing urged the CFPB not to base its proposal on the actions of bad actors. Others suggested that the rules unfairly treat debt collectors compared to first-party creditors.
"The bad faith of debt collectors is overstated and the good faith of consumers is overstated," said Mark Ellis, a Sacramento lawyer who defends debt collectors.