The Consumer Financial Protection Bureau is attacking the much-maligned business tactics of the debt collection industry from multiple angles.
Banks that sell unpaid debts were put on notice back in July, when the agency reached a $216 million settlement with JPMorgan Chase over faulty practices.
And on Wednesday, the consumer bureau sent a separate warning to debt buyers by announcing settlements with the industry's two largest firms, Encore Capital Group and Portfolio Recovery Associates.
Combined, the companies must pay up to $79 million in penalties and refunds as a result of a slew of alleged misdeeds. They will also be required to stop reselling debt, stop collecting debts they cannot verify, and to ensure the accuracy of allegations they make in lawsuits against consumers, among other mandated reforms.
"Industry members who sell, buy and collect debt would be well served by carefully reviewing the terms of these orders, as well as our recent resolution with JPMorgan Chase," CFPB Director Richard Cordray said during a conference call with reporters. "Taken together, these cases paint a broader picture about how the consumer bureau is working to clean up the market from both ends."
Cordray also noted that the CFPB is currently working on new debt collection rules. The industry-wide rules are expected to resemble the restrictions imposed Wednesday on the sector's two largest participants.
"Our actions today are distinct from that rulemaking, but both are efforts to address certain common problems, such as data integrity, the substantiation of debts, and collection of time-barred debt," Cordray said.
The latest settlements were cheered Wednesday by consumer groups.
"This is stuff that we've been complaining about for years," said Ira Rheingold, executive director of the National Association of Consumer Advocates. "Hopefully, the industry will get the message and will reform."
But the two debt buyers that agreed to settle CFPB shrugged at the impact on their businesses, suggesting in press releases that they have already adopted key reforms.
"We remain confident that our business practices serve as a model for the industry, frequently going above and beyond applicable legal requirements," Steve Fredrickson, chief executive officer of Portfolio Recovery Associates' parent company, said in a press release.
"We take great pride in the fact that we have helped lift up this entire industry by adopting stringent protocols for our employees and working with regulators to raise industry standards," he added.
Encore Capital said that as a result of the settlement, it expects to take a one-time, after-tax charge of $43 million in the third quarter. "Overall, the company anticipates that after this one-time charge, any future earnings impact will be immaterial," Chief Financial Officer Jonathan Clark said in a press release.
"This outcome does not change the way we think about our long-term growth prospects," said Kenneth Vecchione, Encore's chief executive officer. "If anything, it strengthens our competitive position in the marketplace because we believe this settlement, which we are largely compliant with, will become de facto standards for the entire sector."
Encore also suggested the CFPB's actions were unfair and held the firm to standards it has not yet spelled out.
"This outcome is not about current law or rules already on the books, but instead about the CFPB subjecting companies to its own interpretations that have never been codified or adopted," Vecchione said.
Investors in the two companies also seemed unworried. Shares in Norfolk, Va.-based PRA Group, the parent company of Portfolio Recovery Associates, closed up 1.8% on the day. The stock price of San Diego-based Encore Capital was up 0.1% Wednesday.
Larry Berlin, an analyst at First Analysis, said that Portfolio Recovery Associates and Encore Capital likely have at least 50% combined market share in the debt-purchase market. Together, they have purchased the right to collect more than $200 billion in defaulted consumer debts, according to the CFPB.
Berlin predicted that the impact of the settlement on both companies will be minor, given the changes they have already adopted to deal with new regulatory expectations.
"My feeling is, 'Great, it's behind them,'" he said. "I just don't think it's going to be a big deal in the end."
The CFPB's allegations against Encore Capital Group and Portfolio Recovery Associates will sound familiar to anyone who has been paying attention to the debt-collection industry in recent years.
The two companies attempted to collect debt that was unsubstantiated or inaccurate, according to the CFPB. And they allegedly relied on robo-signed affidavits to churn out lawsuits, relying on the assumption that many defendants would fail to show up in court and they would never have to prove their cases.
The CFPB's consent order with Encore requires the firm to pay up to $42 million in consumer refunds and a $10 million penalty, and to stop collections on debt with a face value of more than $125 million.
The consent order with Portfolio Recovery Associates requires the company to pay $19 million in consumer refunds and an $8 million penalty, and to stop collections on debt with a face value of $3.4 million.
The agreements lay out a series of detailed requirements the companies must follow in the future.
For example, in cases where the debt seller didn't promise the accuracy of the information it provided, the two debt buyers must review original account-level documents to verify the debt's validity.
The two companies must also provide consumers with the name of the creditor and the balance, and offer to provide the original documents related to the account, before filing a lawsuit.