In a big win for third-party debt collectors, the Consumer Financial Protection Bureau said Thursday that banks and other first-party creditors are responsible for the accuracy of information on consumer debts.
The about-face by Richard Cordray, the CFPB's director, is a significant change for the bureau's overhaul of the debt collection industry. Cordray said the CFPB realized the difficulty of requiring that third-parties have accurate information on debts they did not originate.
"We have now decided to consolidate all the issues of 'right consumer, right amount' into the separate rule we will be developing for first-party creditors," Cordray said in prepared remarks at a consumer advisory board meeting. "Writing rules to make sure debt collectors have the right information about their debts is best handled by considering solutions from first-party creditors and third-party collectors at the same time."
Last July, the CFPB proposed ways to rein in the practices of debt buyers, collection law firms and loan servicers covered by the Fair Debt Collection Practices Act. But the CFPB had to split its debt collection proposal in two because first-party creditors such as banks and other lenders are excluded from that 1977 statute.
The CFPB issued its third-party debt collection proposal last year as part of a small-business review panel. A plan is expected by year-end or early 2018 while a time frame for a first-party debt collection proposal is further off.
"First-party creditors like banks and other lenders create the information about the debt, and they may use it to collect the debt themselves. Or they may provide it to companies that collect the debt on their behalf or buy the debt outright," Cordray said. "Either way, those actually collecting on the debts need to have the correct and accurate information."
Lawyers that represent third-party debt collectors breathed a sigh of relief.
"Hallelujah. It's not our problem anymore; that responsibility is off debt collectors' shoulders," said Joann Needleman, an attorney at the law firm Clark Hill in Philadelphia. "The industry is thrilled."
Debt collectors would still have to verify a debt. But the issue of whether the amount of the debt is accurate and which consumer actually owes the debt ultimately will be a requirement of the originator that has a relationship with the consumer, Needleman said.
Of all areas of consumer finance, debt collection gets the largest number of complaints to the federal government, Cordray said.
Separately, the bureau said it is extending the comment period on its request for information about small-business lending by 60 days.
The CFPB has partial oversight of small-business loans as the enforcer of the Equal Credit Opportunity Act, which prohibits discrimination in credit contacts on the basis of race, national origin, sex and other factors.
Cordray said several groups had asked for more time to respond to its data collection effort.
"There are other reasons why a deeper understanding of small-business financing may be quite important to progress in our economy and quality of life," Cordray said, citing a 2013 study that found that counties with higher percentages of their workforce employed by small businesses showed higher local income, higher employment rates and lower poverty rates.