Daily Rules, Proposed Rules, and Notices of the Federal Government
On February 17, 2012, the Bureau published a notice of proposed rulemaking proposing to define larger participants of two markets identified by the Bureau: consumer reporting and consumer debt collection.
Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
Under 12 U.S.C. 5514, the Bureau has supervisory authority over all nonbank covered persons offering or providing three enumerated types of consumer financial products or services: (1) Origination, brokerage, or servicing of residential mortgage loans secured by real estate, and related mortgage loan modification or foreclosure relief services; (2) private education loans; and (3) payday loans.
The Bureau is authorized to supervise nonbank entities subject to 12 U.S.C. 5514 of the Dodd-Frank Act by requiring the submission of reports and conducting examinations to: (1) Assess compliance with Federal consumer financial law; (2) obtain information about such persons' activities and compliance systems or procedures; and (3) detect and assess risks to consumers and consumer financial markets.
The Bureau has published a general examination manual describing the Bureau's supervisory approach and processes. This manual is available on the Bureau's Web site.
On June 29, 2011, through a notice and request for comment (Notice), the Bureau solicited public comment on developing an initial proposed larger participant rule.
On July 20, 2012, the Bureau published the Consumer Reporting Rule defining larger participants of a consumer reporting market.
In addition to the provisions that were adopted in the Consumer Reporting Rule, the Proposed Rule included a test to assess whether a nonbank covered person is a larger participant of the consumer debt collection market. Under this test, a nonbank covered person with more than $10 million in annual receipts resulting from consumer debt collection, as described in the Proposed Rule, would be a larger participant of the consumer debt collection market. As defined in the Proposed Rule, “annual receipts” would generally be derived from a three-year average of receipts.
The Final Consumer Debt Collection Rule amends part 1090 by adding § 1090.105 to subpart B, to define larger participants of the consumer debt collection market. Section 1090.105 identifies a market for consumer debt collection, defines the term “annual receipts” for purposes of measuring participation in that market, and sets forth the test for assessing which entities are larger participants of the market. In the Proposal, the Bureau explained that the consumer debt collection market encompasses the collection, or attempted collection, of debt related to the consumer financial products or services described in 12 U.S.C. 5481(5) and (15). As discussed below, the Final Consumer Debt Collection Rule adopts a definition of “consumer debt collection” that is similar in scope but has been restructured in response to comments.
Participants of the consumer debt collection market identified in the Final Consumer Debt Collection Rule generally include different types of consumer debt collection entities such as third-party debt collectors, debt buyers, and collection attorneys (collectively referred to as consumer debt collectors). Third-party debt collectors primarily collect debt on behalf of originating creditors or their assignees and typically are compensated through contingency fees calculated as a percentage of the debt they recover.
Debt buying is another important component of the consumer debt collection market. As the name indicates, debt buyers purchase debt, either from the original creditors or from other debt buyers, usually for a fraction of the balance owed.
Additionally, collection attorneys play a role in the consumer debt collection market. Collection attorneys undertake traditional collection efforts, such as contacting consumers by telephone or written communication. Attorneys also file lawsuits against consumers to collect debts or may buy debt and collect in their own names.
Debt collection is a multi-billion-dollar industry that directly affects a large number of consumers. In 2012, approximately 30 million individuals, or 14 percent of American adults who have credit reports, had debt that was subject to the collections process (averaging approximately $1,500 per consumer).
Debt collection performed in illegal ways has the potential to cause consumers substantial harm. If collectors falsely represent amounts owed, consumers may pay debts they do not owe simply to stop collection efforts or because they are unsure how much they owe. In addition, consumers may unintentionally yield their rights, such as by waiving the statute of limitations on debt claims for which the relevant limit periods have expired. Whether or not consumers owe and are liable for the debts collectors are attempting to recover, unlawful collection practices can cause significant reputational damage, invade personal privacy, and inflict emotional distress. Among the possible consequences, a collector's inappropriate interference with a consumer's employment relationships can also impair the consumer's ability to repay debts.
Federal consumer financial law related to debt collection, and its implementation by the Bureau, protects consumers from such harms. The FDCPA gives consumers certain rights that protect them from unfair, deceptive, misleading, or abusive collection practices as well as from the collection of debts they do not owe. In addition, Federal consumer financial law promotes fair competition in the debt collection marketplace. To the extent that unfair, deceptive, or abusive practices increase collectors' rate of recovery on debts subject to collection, debt collectors that avoid such practices could be at a competitive disadvantage. By placing important parameters on debt collection activities, the FDCPA was meant in part to ensure that those that refrain from improper practices in debt collection are not thereby competitively disadvantaged.
The Final Consumer Debt Collection Rule describes a market for consumer debt collection. In response to comments received, the Bureau has adopted a definition of “consumer debt collection” that differs in some respects from that of the proposed definition. As defined in the Final Consumer Debt Collection Rule, the market includes collection by “debt collector[s],” as defined in the Final Consumer Debt Collection Rule, of debts incurred by consumers primarily for personal, family, or household purposes related to consumer financial products or services.
The Final Consumer Debt Collection Rule also establishes a test, based on “annual receipts,” to assess whether a nonbank covered person engaging in consumer debt collection is a larger participant in this market. The definition of “annual receipts” is adapted from the definition of the term used by the Small Business Administration (SBA) for purposes of defining small business concerns. The Final Consumer Debt Collection Rule adopts the proposed test for qualifying as a larger participant of the consumer debt collection market: more than $10 million in annual receipts resulting from relevant consumer debt collection activities. However, the Final Consumer Debt Collection Rule excludes from the definition of annual receipts those receipts that result from collecting debts that were originally owed to a medical provider. Covered persons meeting the test qualify as larger participants and are subject to the Bureau's supervision authority under 12 U.S.C. 5514.
The test to assess larger-participant status set forth in the Final Consumer Debt Collection Rule is tailored to the consumer debt collection market identified by the Final Consumer Debt Collection Rule. The Bureau has not determined that annual receipts, or a threshold of $10 million in annual receipts, would be appropriate for any other market that may be the subject of a future larger-participant rulemaking. Rather, the Bureau will tailor each test for defining larger participants to the market to which it will be applied.
The Bureau is issuing this Final Consumer Debt Collection Rule pursuant to its authority under (1) 12 U.S.C. 5514(a)(1)(B) and (a)(2), which authorize the Bureau to supervise larger participants of markets for consumer financial products or services, as defined by rule; (2) 12 U.S.C. 5514(b)(7), which, among other things, authorizes the Bureau to prescribe rules to facilitate the supervision of covered persons under 12 U.S.C. 5514; and (3) 12 U.S.C. 5512(b)(1), which grants the Bureau the authority to prescribe rules as may be necessary and appropriate to enable the Bureau to administer and carry out the purposes and objectives of Federal consumer financial law, and to prevent evasions of such law.
The Bureau proposed an effective date of 30 days after the publication of the Final Consumer Debt Collection Rule, noting that the Administrative Procedure Act generally requires that rules be published not less than 30 days before their effective dates.
As discussed in the Summary of the Final Rule above, consumer debt collection is important to the functioning of the consumer credit market and has a significant impact on consumers, with approximately 30 million individuals in the United States having debt in collection.
Commenters criticized the Bureau's plan to supervise larger participants of the markets identified in the Proposed Rule. They stated that the Dodd-Frank Act requires the Bureau to consider the
One commenter also asked the Bureau to explain why it is identifying consumer debt collection as the subject of this rule, instead of some other market for a different consumer financial product or service. The Bureau has wide discretion in choosing markets in which to define larger participants. The Bureau need not conclude, before issuing a rule defining larger participants, that the market identified in the rule has a higher rate of non-compliance, poses a greater risk to consumers, or is in some other sense more important to supervise than other markets. Indeed, 12 U.S.C. 5514(b)(1), by recognizing that the purposes of supervision include assessing compliance and risks posed to consumers, suggests that the Bureau is not required to determine the level of compliance and risk in a market before issuing a larger-participant rule.
The consumer debt collection market is a reasonable choice for the Bureau. Because consumer debt collection is an important activity that affects millions of consumers, supervision of larger participants of this market will be beneficial to both consumers and the market as a whole. Supervision of larger participants in the consumer debt collection market will help the Bureau ensure that these market participants are complying with applicable Federal consumer financial law and thereby will further the Bureau's mission to ensure consumers' access to fair, transparent, and competitive markets for consumer financial products and services.
The Bureau agrees with commenters who took issue with the categorical statement that the collection of medical debt generally is not a consumer financial product or service. In some situations, the collection of medical debt may be a consumer financial product or service. The Dodd-Frank Act defines as a “financial product or service” the activity of collecting debt “related to any consumer financial product or service.”
However, the Bureau has decided to explicitly exclude from the definition of annual receipts those receipts that result
Accordingly, the Final Consumer Debt Collection Rule excludes from the definition of annual receipts those amounts that result from collecting medical debt. For these purposes, medical debt means debt that was originally owed to a medical provider.
Notwithstanding this exclusion, the Bureau believes that the collection of medical debt has an important impact on consumers.
In the Consumer Reporting Rule, the Bureau clarified that “annual receipts” are not based solely on the receipts of a single year, but are generally based on the average of an entity's receipts over a three-year period.
Two consumer groups suggested that to prevent evasion of the rule, annual receipts should also include receipts of any person who is an agent or contractor of a consumer debt collector. One of these commenters expressed concern that a debt buyer, in particular, could evade coverage as a larger participant by engaging several third-party debt collectors to collect debts on its behalf.
The Bureau understands commenters' concern regarding possible evasion of the Final Consumer Debt Collection Rule that could potentially occur by market participants engaging third-party debt collectors. However, the Dodd-Frank Act requires that an entity's activity levels be computed by aggregating the activities of affiliated companies.
The Bureau adopts the proposed definition of “annual receipts” with the amendment described above, excluding receipts that result from collecting debt that was originally owed to a medical provider, and with other minor technical amendments.
The Bureau received a number of comments asking it to exclude various types of activity from the definition of consumer debt collection. As discussed more fully below, the Bureau is adopting a number of the suggested exclusions, either in part or in full, and rejecting some of the suggestions. Many of the suggested exclusions were based on exclusions from the FDCPA's definition of debt collector.
To make the rule clearer in light of these changes, the Bureau is also restructuring the definition of consumer debt collection to track the FDCPA more closely. The Final Consumer Debt Collection Rule includes definitions of “creditor” and “debt collector” that are based on the FDCPA's definitions of those terms. Consumer debt collection, in turn, means the activity of a “debt collector,” as defined in the rule, to collect debt incurred by a consumer for personal, family, or household purposes, and related to a consumer financial product or service. For most purposes, the scope of the Final Consumer Debt Collection Rule's definition will be the same as that of the proposed definition. The difference in structure facilitates the Bureau's
First, the Bureau received several comments that the proposed definition of consumer debt collection appeared to include loan servicing or the collection of debt that is not in default. Many commenters suggested that the Bureau should explicitly exclude loan servicing from the defined consumer debt collection market by incorporating an exclusion contained in the FDCPA's definition of debt collector. Under the FDCPA, a person who collects “debt which was not in default at the time it was obtained by such person”
The Bureau does not regard loan servicing as part of the same market, for purposes of this Final Consumer Debt Collection Rule, as consumer debt collection. Loan servicers send out billing statements, accept payments and assign them to accounts, and answer consumer questions. In many cases, loan servicing activities involve consumers who are current on payments of their loans and with whom creditors have ongoing relationships. Loan servicing in the traditional sense ordinarily does not involve attempts to locate a debtor by contacting relatives or employees; garnishment of wages or lawsuits. Attorneys are not often involved in loan servicing; they ordinarily do not become involved until debts are in default.
Indeed, the Proposal did not contemplate including loan servicing in that market, as several commenters recognized.
However, the Bureau acknowledges that the proposed definition could have been misunderstood on this point. To clarify that loan servicing is not within the defined consumer debt collection market, the Bureau accepts the commenters' suggestion and excludes from the definition of debt collection activity involving “debt which was not in default at the time it was obtained by such person[s].” The Bureau intends to include in the consumer debt collection market those entities that are engaged in debt collection activity and exclude those that only engage in loan servicing. The provision just described is an appropriate means to achieve that purpose, because it is similar to language in the FDCPA provision that, as commenters noted, many entities regard as distinguishing loan servicing from debt collection.
Two trade associations representing student lenders commented that the proposed definition of consumer debt collection would prevent their members from engaging in default prevention and loan modification activities that they said are a form of loan servicing. According to the commenters, the goal of these activities is to benefit consumers by offering payment plans and other services in an effort to prevent default. If, as these commenters suggested, their loan modification and default prevention services involve debt that was not in default at the time it was obtained, then those activities are not consumer debt collection under the Final Consumer Debt Collection Rule.