CFPB: Debt Collectors Now Under Federal Supervision
For the first time, the federal government will directly supervise non-bank consumer debt collectors. On October 24, 2012, the Consumer Financial Protection Bureau (CFPB) published its second “ larger participant rule,” defining those debt collectors who will be subject to the CFPB’s enforcement power. The CFPB also released the field guide that examiners will use to ensure that companies and banks engaging in debt collection are following the law.
In an attempt to touch as many companies as possible, the three types of businesses which are included in this rule include:
- Companies that may buy defaulted debt and collect the proceeds for themselves;
- Companies that may collect defaulted debt owned by another company in return for a fee; and
- Debt collection attorneys that collect through litigation.
The CFPB’s supervision authority over these entities will begin when the rule takes effect on January 2, 2013. Under the rule, any firm that has more than $10 million in annual receipts from consumer debt collection activities will be subject to the CFPB’s supervisory authority. This authority will extend to about 175 debt collectors, which account for more than 60 percent of the industry’s annual receipts in the consumer debt collection market.
What Does The Rule Say?
According to the CFPB, examiners will be assessing potential risks to consumers and whether debt collectors are complying with requirements of federal consumer financial law. Among other things, examiners will be evaluating whether debt collectors:
- Provide required disclosures;
- Provide accurate information;
- Have a consumer complaint and dispute resolution process; and
- Communicate civilly and honestly with consumers.
The rule outlines the process by which the on-site examination will take place:
(1) The Bureau examiners initiate an on-site examination by contacting the entity for an initial conference with management, and often by also requesting records and information. CFPB examiners will also review the components of the supervised entity’s compliance management system;
(2) Based on these discussions and a preliminary review of the information received, examiners determine the scope of an on-site examination, and then coordinate with the entity to initiate the on-site portion of the examination;
(3) While on-site, examiners spend a period of time holding discussions with management about the company’s processes and procedures; reviewing documents, records, and accounts for compliance; and evaluating the entity’s compliance management systems. Examinations of nonbanks involve issuing confidential examination reports, supervisory letters, and compliance ratings; and
(4) Moreover, depending on the nature of the complaints the company has received, examiners will be interviewing consumers.
What Does This Mean for You?
Debt collection companies need to be prepared for the heavy oversight that the CFPB will bring. Not only will the supervision cost time and money, but once an investigation begins, there is a good chance an enforcement action or a required settlement will occur. And the CFPB has been going after large settlement amounts – up to $250 million in many cases. Another large concern is the amount of privileged and confidential information the CFPB could release, which can lead to more private lawsuits – including class and mass actions – as well as other state and federal agency oversight.
Generally, those entities within the CFPB’s ambit need to have a substantive compliance program and maintain procedures to ensure that complaints are received and dealt with in an appropriate fashion. According to the CFPB’s “field guide,” the basic information examiners will seek to obtain and review will be:
- Organizational charts and process flowcharts;
- Board minutes, annual reports, or the equivalent;
- Relevant management reporting;
- Policies and procedures;
- Notes and disclosures;
- Telephone recordings;
- Operating checklists, worksheets, and review documents;
- Monitoring procedures;
- Compensation policies
- Relevant computer program and system details
- Consumer files, including original loan documents, and payment records system;
- Historical examination information;
- Audit and compliance reports, and management responses to findings;
- Training programs and materials;
- Scripts for employee use;
- Third-party contracts and oversight materials, including monitoring reports and findings;
- Written correspondence with consumers;
- Court documents; and
- Consumer complaints and disputes, including those submitted to the CFPB Consumer Response Center, Consumer Sentinel, the Better Business Bureau, or other sources as appropriate.
The CFPB is poised to begin its assault on debt collection companies. It is imperative that all compliance issues and concerns are remediated and all necessary programs are put into place before January 2, 2013.
To learn more about the Consumer Financial Protection Bureau, please do not hesitate to contact David Anthony, Alan Wingfield, John Lynch or Virginia Flynn.
Troutman Sanders is an accomplished and experienced leader in providing litigation and regulatory advice to a broad spectrum of financial services institutions. Troutman Sanders’ CFPB Team monitors the development and activities of the CFPB on its blog and also advises clients on CFPB and Dodd-Frank issues. Additionally, Troutman Sanders’ Financial Services Litigation Group has successfully litigated a wide range of individual and class action claims involving the FCRA, FDCPA, TCPA, and other federal and state consumer protection laws.
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