Tuesday, February 28, 2012

Debt Collection and Credit Rating Firms Face Broad New Scrutiny

The new Consumer Financial Protection Bureau (CFPB) is beginning to aggressively set its agenda. After long-delayed implementation and attempts to block the seating of a Director of the new agency, this watchdog’s newest focus will be on debt collection and credit reporting companies. Because these industries’ have a reputation for being abusive and unscrupulous, the CFPB recently announced that it will begin examination into debt collectors who profit more than $10 million a year and credit agencies that profit more than $7 million a year. Thus, the CFPB will set its sights on 175 debt collectors, who make up two-thirds of the debt collection market, and thirty companies in the consumer credit reporting spectrum.

According to the New York Times: “Debt collectors and credit reporting companies are bracing for intense scrutiny after the government’s consumer finance watchdog unveiled a broad plan to regulate financial firms that have largely evaded federal oversight.”

For the debt collection and credit reporting industries, the CFPB’s oversight will initiate a new era for both groups. According to Travis Plunkett, the legislative director for the Consumer Federation of America, these industries have been able to skirt federal regulations because the regulators lacked enforcement power, and the regulators only “reacted” to abusive industry practices. Now, the CFPB has the authority to be proactive. Says Plunkett: “You’re looking at problems on the front end rather than going in after the fact. You can actually prevent problems.”

As the CFPB continues to set its agenda, it appears that check cashing services will be the next industry that it seeks to regulate. As many believe that the 2008 mortgage meltdown exposed numerous financial companies that abused consumers “[t]his oversight [will] help restore confidence that the federal government is standing beside the American consumer,” said Mr. Richard Cordray, the new director of the CFPB. “Debt collectors and credit reporting agencies have gone unsupervised by the federal government for too long,” says Cordray. “It is time to provide the kind of oversight of these markets that will help ensure that federal laws protecting consumers in these financial markets are being followed.”


  1. The CFPB estimates that it will have supervisory authority over about 30 consumer-reporting firms that account for about 94% of the annual receipts from consumer reporting. Since the CFB will be able to supervise such a large area this bureau will have a large affect on consumer transactions. The CFPB is supposed to protect consumers from unfair, deceptive, or abusive acts or practices in connection with consumer financial products or services so this bureau has broad powers through rulemaking and administrative proceedings. Since states have typically provided large amounts of consumer protection, sometimes with standards that are stricter than federal standards, I wonder if states will now reform their legislation to provide a more proactive approach?

  2. Dependant upon how the CFPB exercises its control and authority, this seems to verge on an unconstitutional action from our government. Engaging in regulatory actions related to consumerism may be protected by the due process clause, however, the CFPB is free to take action with no regulation from the President (in opposition to Article II). In addition, I worry that through the overzealousness of the CFPB there will be a creation of a permissive nature for those incurring colossal amounts of debt and we as a society will allow these individuals to be permitted to not fully pay off their self-induced pile of debt. Accountability is the concern here - for the CFPB and for the consumers who accumulated their debt.

  3. My personal opinion regarding this important new regulatory agency (briefly stated) is that it is a much needed federal presence in the area of both regulating and preventing rampant financial predatory practices that were in part responsible for the economic downturn beginning in 2007-08. The abuses, which have gone on for years prior to the recent recession, primarily hurt the lower and working economic classes who fell (and continue to fall) prey to mortgages they cannot afford, debt collectors, payday lenders, etc.

    My personal opinion aside, my comment/question is how successful this agency will be long-term. Specifically, with such stalemate in Washington and Republican anger at (1) the actual formation of the agency, and (2) the early fight over the director (Elizabeth Warren), will the CFPB survive a post-Obama Administration in 2013 or 2019? Perhaps if it does prove to be successful, the states may play a more involved role, as Ms. Peters mentioned. I believe this in turn would calm the anger of those who feel this is an abuse of the federal government's power and role in the economy. I suppose only time will tell

  4. While my personal beliefs on this matter are very similar to Mr. Smith's, my question on this matter is more related to the level of enforcement they're authorized to bring. While I understand they are taking a more pro-active approach to prevent the problems before they start, I am still unclear from the article (and the CFPB website, for that matter) on what their enforcement powers are. If their policing powers are limited to levying fines against financial abusers, I don't see this bureau having any real muscle because many of these individuals are already extremely wealthy. Therefore, I believe the only real way for this bureau to be effective is if they have the authority to press criminal charges against the worst abusers because that is a threat that would actually make abusers think twice before engaging in reckless behavior.

  5. JGevas, was it the individuals in 2008 who created their debt? It was not self-induced; the problem was much bigger than that. The Fed was truly in bed with the industry, and the industry manipulated (and preyed) on the market and consumers. Deregulation destroyed our economy; instituting the CFPB is the least that the government can do to correct the wrongs. Maybe we should shift our focus of being concerned with the overzealousness of the CFPB (and empowering consumers) and look at the overzealousness of the unscrupulous special interests. That's the problem.

  6. This is somewhat helpful to determine the scope of the CFPB:

    I have to believe this agency should/will get Chevron deference from the courts, assuming it is kept properly staffed and funded - a big if considering the way other agencies, like the NLRB, have been treated in this regard over the last decade. The penalties available to the CFPB, according to the aforementioned document:

    Civil Penalties: $5k/day for federal consumer financial law violations; $25k/day for reckless violations; $1M/day for knowing violations
     Additional Relief: rescission or reformation of contracts, refunds, restitution, disgorgement for unjust enrichment, damages or other monetary relief, limits on activities and functions.
     State Attorneys General: – Generally authorized to bring civil actions in the name of their states to enforce provisions of the law or regulations
    – Against national banks and savings associations, may only bring civil suits to enforce CFPB regulations

    I am curious to see how strong the teeth are in the "additional relief" section, as well. There could be legitimate deterrence value in contract reformation and activity limits, depending on how those provisions are interpreted.