You’d have to be told if debt’s too old to legally collect
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Debt collectors would have to tell you if a debt is too old for court and stop trying to call you after six attempts in a week, under far-reaching reforms being considered by the U.S. Consumer Financial Protection Bureau.
“This is about bringing better accuracy and accountability to a market that desperately needs it,” CFPB Director Richard Cordray said at the hearing in Sacramento.
Collection is one of the hottest friction points in the financial system. Some 70 million people have at least one debt in collection, and collectors generate more complaints filed with federal regulators than any other financial industry.
The consumer protection bureau’s proposals would expand and update safeguards in the 1977 Fair Debt Collection Practices Act. While the task of collecting debts is a fundamental part of the financial system, too many collectors use faulty information, or target the wrong people, Cordray said.
Despite the longstanding rules, “We continue to hear about serious problems with debt collection – debiting accounts without authorization, calling at all hours of the day or night, threats of arrest or criminal prosecution, or threats of physical harm to consumers and even their pets,” Cordray said.
Among the proposals being considered are requirements to:
- Reveal when debts are too old for court. If a debt is beyond a state’s statute of limitations, collectors might be required to inform you in a short statement with the initial contact letter, and at intervals after that. They would also be barred from threatening to sue over such debts.
- Verify debts. Collectors would have to meet a checklist of information about the debt and the supposed debtor before starting collection. They would also have to watch for warning signs that debts are invalid, such as a high rate of disputed debts from a certain creditor. When claims are made in a lawsuit, they should be backed by a higher level of verification.
- Limit calls and other communications. In addition to capping the initial contact attempts at six per week, collectors would have to stop calling on a particular line or at the debtor’s workplace if the debtor wishes, or not use a specified mode of communication. A special rule would limit communication with a recently deceased debtor’s family, perhaps for 30 days. After the collector has established contact with the consumer, contacts would be capped at three per week.
- Take disputes of the debt seriously. Collectors would send information about the debt and the consumer’s right to dispute it in the initial contact. The letter would include a “tear-off” portion allowing the consumer to easily dispute the debt, or pay it if valid. If the debt is disputed, the collector would be responsible for verifying it through account documents such as a billing statement, charge-off statement or contract. If a disputed debt is handed off to another collector, such as when creditors hire a new collector, information about the dispute would have to go with it.
“The burden should not be on the individual to prove the debt is not owed,” said Graciela Aponte-Diaz, director of California Policy at the Center for Responsible Lending.
The proposals also aim to update rules, written before email and texting existed, to remove uncertainty about how collectors can remain in compliance, the agency said.
Making collection too difficult will reduce access to credit and raise the cost for consumers, as lenders absorb higher costs of default, industry representatives said. But industry reaction to the proposals at Thursday’s public hearing was mild. Collectors applauded the CFPB’s pledge to state when they could use new forms of communication such as text and email to contact debtors, and to clarify how many contact attempts are permitted without violating the law’s provision against harassment.
“We are looking for clarity and uniformity so we know what is acceptable and what is not,” said Linda Guinn, CEO of CB Merchant Services, a California-based debt collection agency.
Proposed requirements on debt buyers largely match up with the industry’s self-regulatory rules under a certification program launched in 2013, said Jan Steiger, executive director of the industry group DBA International.
Gaps left in protections
Some of the gaps in consumer protection will remain untouched by the reform. The rules would not apply to creditors themselves, only to debt collectors and, in some instances, debt buyers and collection attorneys who work on behalf of creditors. The agency said it will address collection practices by creditors, who are not subject to the FDCPA, on a separate track.
There are an estimated 1,000 collection law firms in the U.S., about 330 debt buyers and more than 6,000 debt collection firms, the consumer bureau said. The CFPB has supervisory powers over large debt collection companies with annual revenue of $10 million or more, meaning it sends examiners to check on the companies’ compliance with regulations.
The proposals leave untouched the $1,000 penalty for wrongdoing in lawsuits that consumers may bring against collectors under the debt collection law. The penalty was set when the act was passed 39 years ago, and consumer lawyers say it has become toothless in individual lawsuits.
The reform proposals also stop short of requiring collectors to review actual account documents to substantiate all debts, which the CFPB said would be too burdensome. Instead, they can rely on confirmation from creditors that amounts claimed are accurate. Collection lawsuits should meet a higher standard of verification, the proposals said, but aren’t required to be backed up by original account records.
“So many collection lawsuits we see re not legitimate to begin with,” said Susan Shin, legal director of the New Economy Project, a New York City-based legal aid organization. Debt buyers sue without documentation, knowing that defendants usually lose anyway because they rarely show up in court. “People can’t afford to take off work — the CFPB needs to issue strong rules so collectors cannot be wasting people’s time and courts’ time on illegitimate, frivolous lawsuits.”
Collecting on expired debt
The agency said it discarded an idea to bar the collection of debts that had passed the statute of limitations, which means they are too old to be the basis of a lawsuit. Such a move might backfire, the CFPB said, by prompting collectors to press hard for payment before debts expire, or maneuver consumers to make a partial payment that would reset the time limit for a lawsuit. In addition, consumers might not understand that expired debts could still appear on their credit report. In most states debts expire in three to six years for court purposes, but unpaid bills continue to appear on credit reports for seven years after they fall delinquent.
Debt buyers may have to refrain from placing a debt with a collector that is not licensed in the state where the consumer lives, and would be barred from reselling or placing a debt known to be paid-off, settled or discharged in bankruptcy. However the CFPB’s outline of proposals stops short of reforming the debt-sale market.
The CFPB launched its review of collection rules with an advance notice of proposed rulemaking in 2013. Since then, some attention has shifted to rogue collectors and outright scammers posing as collectors, who flout existing rules. Fueled by the wider availability of individuals’ identifying information, and by an unregulated trade in sold-off debts, people posing as legitimate collectors can shake down consumers for made-up “phantom debts,” often using harsh threats as leverage, regulators say.
The CFPB and Federal Trade Commission announced an enforcement crackdown on abusive debt collection in November 2015. Joined by state consumer protection offices, the agencies promised a coordinated, tough response against rogue collectors and collection scammers.
The provisions of enforcement actions have provided a preview of the shape that new rules are likely to take. A 2015 crackdown on the two largest debt buyers, Encore Capital Group and Portfolio Recovery Associates, underlined that collectors must have solid claims when they file collection lawsuits.
See earlier coverage:Tougher rules coming for debt collectors