The Consumer Financial Protection Bureau proposed a massive overhaul of the multibillion dollar debt-collection industry on Thursday, which would restrict collectors from calling numerous times a day, require them to have more documentation on what's owed, and give people more ability to dispute their bills.
It would be the biggest overhaul of the debt collection industry since Congress passed the Fair Debt Collections Practices Act nearly 40 years ago. Regulators estimate roughly 70 million Americans are contacted by debt collectors each year, and more Americans submit complaints to state and federal agencies about unfair or deceptive practices than any other part of the consumer financial system.
"This is about bringing better accuracy and accountability to a market that desperately needs it,'' said CFPB Director Richard Cordray.
Like payday loans and so-called binding arbitration agreements — two parts of the U.S. financial system that the CFPB has proposed regulating more tightly — the new proposals from are likely to be resisted strongly by the industry and its allies in Washington.
Under the proposed rules, debt collectors would first have to more substantially prove a debt is valid before starting collection. Collectors typically find business by buying large databases of past-due loans and credit cards for pennies on the dollar, but those databases can include loans discharged in bankruptcy or some too old to legally collect.
The changes would affect only third-party debt collectors. The CFPB has yet to propose rules that would impact first-party debt collection practices, such as credit card companies and payday lenders.
Once a debt is considered valid, the new rules would limit a collector to no more than six communication attempts per week. If someone wants a collector to stop calling a certain number, such as a workplace, the new rules would make it easier to request that.
If a consumer disputes the debt's validity, the proposals would require collectors provide clearer and easier ways for that person to challenge it. That would include a proposed "tear off'' portion of a collection notice where someone can specify why the amount is wrong or why the debt is invalid, or allowing consumers to start disputing the debt over the phone. Right now, most disputes must be handled in writing.
Collectors would be required to pause if a consumer disputes a debt, until they collect enough evidence to substantiate it. If the debt is sold, the new collector would inherit the dispute and would still have to provide validation, the CFPB says. This would solve a major source of complaints by consumers that collectors can harass them over debts that are in dispute already.
An advocacy group praised the CFPB for tackling the issue, but said the proposal does not go far enough. Margot Saunders with the National Consumer Law Center said the rules are overly complicated and still lets debt collectors rely on databases that may be inaccurate. The CFPB proposals do not address or increase the penalties that abusive debt collectors could face.
The CFPB is also proposing a 30-day waiting period for loans tied to a person who has recently died, stopping all collection attempts from a surviving spouse or child during that period.
The agency will hold a hearing Thursday in Sacramento, California, to discuss the proposed rules. This is the first step in CFPB's rulemaking process. Once formal rules are written, likely later this year, the public will have 90 days to comment before they go into effect.