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Daily Rules, Proposed Rules, and Notices of the Federal Government

BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1090

[Docket No. CFPB-2012-0040]

RIN 3170-AA30

Defining Larger Participants of the Consumer Debt Collection Market

AGENCY: Bureau of Consumer Financial Protection.
ACTION: Final rule.
SUMMARY: The Bureau of Consumer Financial Protection (Bureau) amends the regulation defining larger participants of certain consumer financial product and service markets by adding a new section to define larger participants of a market for consumer debt collection. The final rule thereby facilitates the supervision of nonbank covered persons active in that market. The Bureau is issuing the final rule pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. That law grants the Bureau authority to supervise certain nonbank covered persons for compliance with Federal consumer financial law and for other purposes. The Bureau has the authority to supervise nonbank covered persons of all sizes in the residential mortgage, private education lending, and payday lending markets. In addition, the Bureau has the authority to supervise nonbank "larger participant[s]" of markets for other consumer financial products or services, as the Bureau defines by rule. An initial rule defining larger participants of a market for consumer reporting was published in theFederal Registeron July 20, 2012 (Consumer Reporting Rule).
DATES: Effective January 2, 2013.
FOR FURTHER INFORMATION CONTACT: Kali Bracey, Senior Counsel, (202) 435-7141, or Susan Torzilli, Attorney-Advisor, (202) 435-7464, Office of Nonbank Supervision, Bureau of Consumer Financial Protection, 1700 G Street NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:

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.1 On July 20, 2012, the Bureau published the Consumer Reporting Rule.2 The Bureau is issuing this final rule to define larger participants of a market for consumer debt collection (Final Consumer Debt Collection Rule). This Final Consumer Debt Collection Rule is the second in a series of rulemakings to define larger participants of markets for consumer financial products and services for purposes of 12 U.S.C. 5514(a)(1).

177 FR 9592 (Feb. 17, 2012).

277 FR 42874 (July 20, 2012).

I. Overview

Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)3 established the Bureau on July 21, 2010. One of the Bureau's responsibilities under the Dodd-Frank Act is the supervision of certain nonbank covered persons,4 and very large banks, thrifts, and credit unions and their affiliates.5

3Public Law 111-203 (codified at 12 U.S.C. 5301et seq.).

4The provisions of 12 U.S.C. 5514 apply to certain categories of covered persons, described in subsection (a)(1), and expressly exclude from coverage persons described in 12 U.S.C. 5515(a) or 5516(a). A “covered person” means “(A) any person that engages in offering or providing a consumer financial product or service; and (B) any affiliate of a person described [in (A)] if such affiliate acts as a service provider to such person.” 12 U.S.C. 5481(6);see also12 U.S.C. 5481(5) (defining “consumer financial product or service”). Under 12 U.S.C. 5514(d), subject to certain exceptions, “to the extent that Federal law authorizes the Bureau and another Federal agency to * * * conduct examinations, or require reports from a person described in subsection (a)(1) under such law for purposes of assuring compliance with Federal consumer financial law and any regulations thereunder, the Bureau shall have the exclusive authority to * * * conduct examinations [and] require reports * * * with regard to a person described in (a)(1), subject to those provisions of law.”

5 See12 U.S.C. 5515(a). The Bureau also has certain authorities relating to the supervision of other banks, thrifts, and credit unions.See12 U.S.C. 5516(c)(1), (e). The Bureau notes that one of the objectives of the Dodd-Frank Act is to ensure that “Federal consumer financial law is enforced consistently without regard to the status of a person as a depository institution, in order to promote fair competition.” 12 U.S.C. 5511(b)(4).

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.6 The Bureau also has supervisory authority over “larger participant[s] of a market for other consumer financial products or services,” as the Bureau defines by rule.7 On July 20, 2012, the Bureau published in theFederal Registerthe Consumer Reporting Rule, which defined larger participants of a market for consumer reporting.8 The Consumer Reporting Rule also established various procedures and standards that will apply with respect to all larger participants defined by rule, including those in the market for consumer debt collection that is defined in this Final Consumer Debt Collection Rule.

612 U.S.C. 5514(a)(1)(A), (D), (E).

712 U.S.C. 5514(a)(1)(B), (a)(2). The Bureau also has the authority to supervise any nonbank covered person that it “has reasonable cause to determine, by order, after notice to the covered person and a reasonable opportunity * * * to respond * * * is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.” 12 U.S.C. 5514(a)(1)(C). The Bureau has published a notice of proposed rulemaking to establish procedures relating to this provision of the Dodd-Frank Act. 77 FR 31226 (May 25, 2012).

877 FR 42874.

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.9 While the specifics of an examination may vary by market and entity, the supervision process generally proceeds as follows. Typically, 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. Bureau examiners also will review the components of the supervised entity's compliance management system. 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. 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. As with the Bureau's bank examinations, examinations of nonbanks involve issuing confidential examination reports, supervisory letters, and compliance ratings.

912 U.S.C. 5514(b)(1).

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.10 As explained in the examination manual, reports of examination will be structured to address various factors related to a supervised entity's compliance with Federal consumer financial law and other relevant considerations. On September 5, 2012, prior to beginning examinations of consumer reporting entities, the Bureau released examination procedures specific to consumer reporting.11 In connection with this Final Debt Collection Rule, the Bureau is releasing examination procedures related to debt collection. This Final Consumer Debt Collection Rule establishes a category of covered persons that are subject to the Bureau's supervisory authority12 under 12 U.S.C. 5514, by defining “larger participants” of a market for consumer debt collection.13 The Final Consumer Debt Collection Rule pertains only to that purpose and does not impose new substantive consumer protection requirements. Nor does the Final Consumer Debt Collection Rule delineate the scope of the Fair Debt Collection Practices Act (FDCPA),14 provisions of the Dodd-Frank Act related to consumer debt collection activities, or any other Federal consumer financial law. Activities that the Bureau has chosen to exclude from the defined consumer debt collection market may nonetheless qualify as “collecting debt” within the meaning of the Dodd-Frank Act and may constitute consumer financial products or services. Activities that the Bureau has excluded from this market may also be subject to the FDCPA. Nonbank covered persons generally are subject to the Bureau's regulatory and enforcement authority, and any applicable Federal consumer financial law, regardless of whether they are subject to the Bureau's supervisory authority.15

10 Available at http://www.consumerfinance.gov/guidance/supervision/manual/.

11 SeeConsumer Financial Protection Bureau,Consumer Reporting Examination Procedures(Sept. 5, 2012)available at http://files.consumerfinance.gov/f/201209_cfpb_Consumer_Reporting_Examination_Procedures.pdf.These procedures are an extension of the CFPB's general Supervisory and Examination Manual and provide guidance on how the Bureau will be conducting its monitoring in the consumer reporting market.

12The Bureau's supervision authority also extends to service providers of those covered persons that are subject to supervision under 12 U.S.C. 5514. 12 U.S.C. 5514(e);see also12 U.S.C. 5481(26) (defining “service provider”).

13The Final Consumer Debt Collection Rule describes one market for consumer financial products or services, which the rule labels “consumer debt collection.” The definition in the rule does not encompass all activities that could be considered consumer debt collection. Any reference herein to “the consumer debt collection market” means only the particular market for consumer debt collection identified by the Final Consumer Debt Collection Rule.

14The FDCPA is codified at 15 U.S.C. 1692et seq.

15As the Bureau explained in the Consumer Reporting Rule, the Bureau may examine a covered person's consumer financial products and services, as well as any of its activities that are subject to Federal consumer financial law, beyond the particular activities that rendered the person subject to supervision. Thus, the Bureau may examine activities of a larger participant of the consumer debt collection market that might not fall within the rule's definition of consumer debt collection.

II. Background

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.16 The Bureau also held a series of roundtable discussions with industry, consumer and civil rights groups, and State regulatory agencies and associations.17 The Bureau considered the comments it received in connection with the Notice in developing a proposed rule to define larger participants of two markets for consumer financial products or services: consumer debt collection and consumer reporting. The Bureau published a notice of proposed rulemaking on February 17, 2012 (Proposed Rule or Proposal), that proposed definitions for larger participants of consumer reporting and consumer debt collection markets, as well as procedures and definitions that would be applicable for all current and future markets in which the Bureau will define larger participants.18 The Bureau requested and received public comment on the Proposed Rule. The Bureau received 83 comments on the Proposed Rule from, among others, consumer groups, industry trade associations, companies, State financial services agencies, and individuals.19 The comments pertaining to consumer debt collection are discussed in more detail below in the section-by-section analysis of the final rule.

1676 FR 38059 (June 29, 2011).

17In July 2011, the Bureau held four roundtable discussions on the Notice. More than 70 stakeholders participated, representing a diverse mix of nonbank and bank trade associations and consumer advocacy and civil rights groups. The roundtables focused on key issues regarding how to define larger participants, including what criteria to measure, where to set thresholds, available data sources, and which markets to cover. Also in July 2011, the Bureau held a multistate regulator and regulatory association conference call that had more than 40 participants.

1877 FR 9592.

19Comments solely relating to Subpart A of 12 CFR part 1090, such as those relating to general definitions, concepts, protocols, and procedures relating to the Bureau's supervision of larger participants and assessments of whether entities are larger participants were addressed in the Consumer Reporting Rule and are not discussed again here.

On July 20, 2012, the Bureau published the Consumer Reporting Rule defining larger participants of a consumer reporting market.20 The Consumer Reporting Rule established subpart A of 12 CFR part 1090 (12 CFR 1090.100-103), including general definitions, concepts, protocols, and procedures applicable to all larger participants of markets for consumer financial products or services. Section 1090.100 sets forth the scope and purpose of part 1090 as defining larger participants of certain markets for consumer financial products or services that are subject to supervision by the Bureau. Section 1090.101 defines terms that are generally applicable to Part 1090. Unless otherwise specified, the definitions in § 1090.101 should be used when interpreting terms in this FinalConsumer Debt Collection Rule. Section 1090.102 establishes that once a nonbank covered person meets the larger-participant test for a particular market, the person retains larger-participant status for a period of at least two years. Section 1090.103 sets forth a procedure for a person to challenge an assertion by the Bureau that the person qualifies as a larger participant of a covered market and a mechanism by which the Bureau may request information to assess whether a person is a larger participant. The Consumer Reporting Rule also established subpart B of part 1090 (12 CFR 1090.104), identifying a market for consumer reporting, defining terms applicable to that market, and establishing a test for assessing which entities are larger participants of that market. As the Bureau identifies additional markets of which to supervise larger participants, the Bureau will include relevant market descriptions and larger-participant tests in subpart B.

2077 FR 42874.

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.

III. Summary of the Final Rule

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.21 Creditors' practices vary in how they use third-party debt collectors. In some cases, creditors use third-party debt collectors in the early stages of delinquency prior to charge off.22 In other cases, creditors use third-party debt collectors after the creditors have written off the debts.

21ACA International,2012 Agency Benchmarking Survey,at 21 (2012). According to ACA International's 2012 Benchmarking Survey, collection agency commission rates averaged 28.4% in 2011, with a median of 25.5%.

22Charge off usually occurs 120 or 180 days after delinquency, depending on the type of debt. For example, the Federal Financial Institutions Examination Council, in its Uniform Retail Credit Classification and Account Management Policy, establishes a charge-off policy for open-end credit at 180 days delinquency and for closed-end credit at 120 days delinquency.See65 FR 36903 (June 12, 2000).

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.23 They profit when their recoveries exceed the direct and indirect costs of collection, including the costs of acquiring the debt and of collecting from consumers. Debt buyers sometimes use third-party debt collectors or collection attorneys to collect their debts, but many also undertake their own collection efforts. Finally, debt buyers also may decide to sell purchased debt to other debt buyers.

23Federal Trade Commission,Collecting Consumer Debts: The Challenges of Change,at 4 (Feb. 2009),available at http://www.ftc.gov/bcp/workshops/debtcollection/dcwr.pdf(citing Kaulkin Ginsberg, The Kaulkin Report: The Future of Receivables Management at 50 (7th ed. 2007)).

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.24

24Federal Trade Commission,Collecting Consumer Debts: The Challenges of Change,at 14 (Feb. 2009),available at http://www.ftc.gov/bcp/workshops/debtcollection/dcwr.pdf(citing Kaulkin Ginsberg, The Kaulkin Report: The Future of Receivables Management at 73 (7th ed. 2007)).

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).25 Consumer debt collection is important to the functioning of the consumer credit market and has a significant impact on consumers. By collecting consumer debt, collectors reduce creditors' losses from non-repayment and thereby help to keep credit accessible and more affordable to consumers.

25Federal Reserve Bank of New York,Quarterly Report on Household Debt and Credit(May 2012),available at http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q12012.pdf.

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.26 Title X's prohibition of unfair, deceptive, or abusive acts or practices serves, in part,a similar end. The Bureau's program of supervision in the consumer debt collection market will help to secure these benefits and advance the Bureau's mission of promoting fair, transparent, and competitive consumer financial markets.

26 See15 U.S.C. 1692(e).

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.27 This definition encompasses a scope of activity similar to what the definition in the Proposed Rule covered;28 in light of comments received, the Bureau believes the definition adopted will be clearer.

27The definition of “debt collector” in the Final Consumer Debt Collection Rule incorporates parts of the FDCPA's definition of that term. 15 U.S.C. 1692a(6).

28The Proposed Rule suggested that medical debt is not a consumer financial product or service and that collection of such debt therefore did not fall within the proposed definition of “consumer debt collection.” The Final Consumer Debt Collection Rule acknowledges that medical debt may, if it arose from an extension of credit within the meaning of the Dodd-Frank Act, involve a consumer financial product or service. However, the rule excludes receipts resulting from collecting medical debt from the definition of “annual receipts,” and thus from the quantity that determines larger-participant status.See infrann. 39-47 and accompanying text.

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.

IV. Legal Authority and Effective Date A. Rulemaking Authority

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.

B. Effective Date of Final Rule

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.29 The Bureau received two comments requesting a postponement of the effective date to at least 180 days after publication of any rule finalizing larger-participant definitions for the consumer reporting or consumer debt collection markets. Responding to these comments, the Bureau set an effective date for the Consumer Reporting Rule that was more than 60 days after publication of that rule. The Bureau believes, for the same reasons expressed in the Consumer Reporting Rule, that it is reasonable to set an effective date more than 60 days after publication of this Final Consumer Debt Collection Rule.30 In balancing the requests for a longer pre-effective date period with the Bureau's view that too lengthy a period would be detrimental to consumers and the debt collection market, the Bureau believes it is reasonable to extend the effective date to January 2, 2013, to give larger participants, as defined by this rulemaking, more time to prepare for the possibility of Federal supervision. The Bureau therefore adopts this effective date for the Final Consumer Debt Collection Rule. As compared with the Proposal, this new effective date will provide more than double the time between the publication date and the date when consumer debt collectors may be subject to Bureau supervision under the Final Consumer Debt Collection Rule.

295 U.S.C. 553(d).

30 See77 FR 42876. The Bureau decided to extend the effective date in the Consumer Reporting Rule to over 60 days after publication because companies affected by the Consumer Reporting Rule might not previously have been supervised at the Federal or State level and might need time to develop processes and engage in training to prepare for examinations. The Bureau declined to extend the effective date any further, as requested by commenters, because the Consumer Reporting Rule did not impose substantive conduct requirements requiring time to come into compliance. Furthermore, an extended delay in the Bureau's supervision program would have harmed consumers. Similar reasoning applies here.

V. Section-by-Section Analysis of the Final Rule31

31The Bureau notes that the Final Consumer Debt Collection Rule is structured differently than the Proposed Rule. Unlike the Proposed Rule, 12 CFR 1090 is divided into Subparts A and B. Subpart A establishes generally applicable definitions and processes for assessing larger-participant status. Subpart B establishes market-specific definitions and tests for assessing larger-participant status. The Final Consumer Debt Collection Rule amends 12 CFR 1090 by adding § 1090.105 to define larger participants of the consumer debt collection market to follow § 104, which defines larger participants in a market for consumer reporting.

Subpart B—Markets Section 1090.105—Consumer Debt Collection Market

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.32 The market identified by the Final Consumer Debt Collection Rule generally includes third-party debt collectors, debt buyers, and collection attorneys.

32Federal Reserve Bank of New York,Quarterly Report on Household Debt and Credit(May 2012), available athttp://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q12012.pdf.

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 thefour specific factors listed in 12 U.S.C. 5514(b)(2)33 when issuing a rule under 12 U.S.C. 5514(a)(2). As explained in the Consumer Reporting Rule, the Bureau believes that these commenters misinterpreted the scope and purpose of 12 U.S.C. 5514(b)(2).34 That subsection describes how the Bureau must “exercise its authority under paragraph [(b)](1),”35 which in turn authorizes the Bureau to supervise “persons described in subsection (a)(1).”36 The Final Consumer Debt Collection Rule does not exercise authority provided by subsection (b)(1). Instead, it “describe[s],” in part, a set of entities falling within subsection (a)(1), a category of larger participants to which the Bureau may apply the authority that subsection (b)(1) provides. Thus, the Bureau is not required to conduct a risk-based analysis when deciding in which markets it will define “larger participants.” Instead, the Bureau will conduct the risk-based analysis required under 12 U.S.C. 5514(b)(2) in choosing which persons to supervise among the larger participants in a given market.

33These factors are “the asset size of the covered person; the volume of transactions involving consumer financial products or services in which the covered person engages; the risks to consumers created by the provision of such consumer financial products or services; [and] the extent to which such institutions are subject to oversight by State authorities for consumer protection.” 12 U.S.C. 5514(b)(2).

3477 FR 42883 (noting that the risk-based factors described in 12 U.S.C. 5514(b)(2) do not apply to “larger participant” rulemakings).

3512 U.S.C. 5514(b)(2).

3612 U.S.C. 5514(b)(1).

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.

Section 1090.105(a)—Market-Related Definitions

Annual receipts.The Bureau received a number of comments relating to “annual receipts.”

Overview of proposed definition.The proposed definition of “annual receipts” was informed by the method of calculating “annual receipts” used by the SBA in determining whether an entity is a “small business” concern.37 Under the proposed definition, for purposes of calculating “annual receipts,” the term “receipts” would mean “total income” (or in the case of a sole proprietorship, “gross income”) plus “cost of goods sold” as these terms are defined and reported on Internal Revenue Service (IRS) tax return forms. Under the Proposal, the term would not include net capital gains or losses. In addition, annual receipts would be measured as the average over a person's three most recently completed fiscal years, or over the entire period the person has been in business if that period is less than three completed fiscal years.38 The proposed calculation of annual receipts also would implement the aggregation requirement in 12 U.S.C. 5514(a)(3)(B) by providing that the annual receipts of a person shall be added to the annual receipts of each of its affiliated companies. As proposed, such aggregation includes the receipts of both the acquired and acquiring companies in the case of an acquisition occurring during any relevant measurement period.

3713 CFR 121.104.

3812 CFR 1090.101 defines terms such as “completed fiscal year,” “fiscal year,” and “tax year.”

Exclusion of receipts from collecting medical debt.In the Supplemental Information section of the Proposal, the Bureau stated that “debt related to * * * consumer financial products or services” generally does not include medical debt.39 In light of that statement, consumer debt collectors might expect that annual receipts resulting from the collection of medical debt would not be used to determine whether they were larger participants in the identified market for consumer debt collection. The Bureau received several comments both in favor of and opposed to counting annual receipts resulting from the collection of medical debt towards larger-participant status. Several consumer groups stated that annual receipts resulting from the collection of medical debt should count towards larger-participant status because the collection of medical debt is conducted similarly to that of other debts and has similar impact on consumers. Another commenter pointed out that when a medical provider gives care first and then bills the consumer later, the medical debt arose from an extension of credit, so the collection of that debt is therefore related to a consumer financial product or service. Two industry commenters agreed with the Proposal that collection of medical debt should not be included in the market for consumer debt collection.

3977 FR 9597.

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.”40 If the underlying transaction involved a consumer financial product or service under the Dodd-Frank Act, such as “extending credit” to a consumer for personal, family, or household purposes,41 then the resulting debt arose from, and is thus “related to,” a consumer financial product or service. The collection of that debt is also a consumer financial product or service within the meaning of the Dodd-Frank Act. Under the Dodd-Frank Act, “credit” is “the right granted by a person to a consumer to defer payment of a debt, incur debt and defer its payment, or purchase property or services and defer payment for such purchase.”42 In some situations, a medical provider may grant the right to defer payment after the medical service is rendered. In those circumstances, the transaction might involve an extension of credit.

4012 U.S.C. 5481(15)(A)(x).

4112 U.S.C. 5481(15)(A)(i); 12 U.S.C. 5481(5)(A).

4212 U.S.C. 5481(7).

However, the Bureau has decided to explicitly exclude from the definition of annual receipts those receipts that resultfrom the collection of medical debt.43 The Bureau is concerned that consumer debt collectors will find it impracticable to determine whether the medical debts they collect involved extensions of “credit,” and therefore whether those medical debt collection receipts should be counted toward the threshold defining larger-participant status. The Bureau expects that a consumer debt collector will know certain information about a debt it collects, such as whether the debt was originally owed to a medical provider.44 However, a consumer debt collector may not have enough information to determine whether the debt involved an extension of credit, because that question turns on additional details about whether the medical provider granted the consumer the right to defer payment. The Bureau believes that consumer debt collectors often do not have enough details to answer that question for each debt under collection, and they therefore may not have enough information to determine whether particular medical debts arose from consumer financial products or services.

43As discussed above, this exclusion was implicit in the Proposed Rule. Annual receipts under the proposed definition included only receipts resulting from the collection of debt related to consumer financial products or services, and the Proposed Rule stated that this category does not include medical debt.

44Very often, debt collectors may obtain accounts from the original creditors. In addition, under the FDCPA, if a consumer makes a timely request for verification of a claimed debt, the debt collector must, if it persists in its attempts to collect the debt, respond with information that generally includes the name and address of the original creditor. 15 U.S.C. 1692g(b). For these reasons, the Bureau expects that debt collectors ordinarily make themselves aware of the original creditors for debts they collect.

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.45 As noted above, the Bureau expects that debt collectors already know the identities of the persons to whom the debts were originally owed. Therefore, an exclusion defined by reference to such persons will be straightforward for consumer debt collectors to apply. Neither the Bureau, in making its assessments regarding a consumer debt collector's larger-participant status, nor a consumer debt collector, in challenging an assertion by the Bureau that it qualified as a larger participant, would need to determine the specific details of each underlying transaction that gave rise to medical debt.

45Many debts that arise as a consequence of medical care are not originally owed to the medical care provider. For example, a consumer might use a credit card to pay some or all of a medical bill. The Bureau would regard the resulting debt as originally owed, for purposes of the Final Consumer Debt Collection Rule, to the credit card issuer.

Notwithstanding this exclusion, the Bureau believes that the collection of medical debt has an important impact on consumers.46 The Bureau reiterates that the Final Consumer Debt Collection Rule excludes medical debt collection activities from receipts because of the difficulty, at the current time, of identifying whether particular medical debts resulted from extensions of credit. The Bureau will continue to seek more information relevant to that task, through supervision, through potential registration of nonbank covered persons under 12 U.S.C. 5512(c)(7) and 12 U.S.C. 5514(b)(7), and from other sources. In addition, in supervising a larger participant of the consumer debt collection market, the Bureau will examine the entity's collection of medical debt along with other activities subject to the FDCPA and other Federal consumer financial law.47

46According to one survey, in 2010, medical debt constituted 35% of new business for debt collectors. ACA International,ACA Top Collection Markets Survey,2011. The same survey also reported that at least 53% of all debt collectors participate in the medical debt collection market. The 2007 Commonwealth Fund Biennial Health Survey found that 16% of working age adults, approximately 28 million people, had been contacted by debt collectors regarding medical debts, up from 13% in 2005. S. Collinset al., Losing Ground: How the Loss of Adequate Health Insurance is Burdening Working Families, Commonwealth Fund,Aug. 2008 at 12available at http://www.commonwealthfund.org/usr_doc/Collins_losinggroundbiennialsurvey2007_1163.pdf?section=4039.In 2011, 54% of third-party debt collectors listed health care (hospital) as one of their top three markets, and 64% listed health care (non-hospital). ACA International,2012 Agency Benchmarking Survey,2012.

47As the Bureau explained in the Consumer Reporting Rule, it has the authority to examine an entity's compliance with Federal consumer financial law, beyond the activities that rendered the entity subject to supervision. 77 FR 42880.

Other categories of debt.Commenters also asked the Bureau to clarify whether a number of other categories of debt are included in or excluded from the defined consumer debt collection market and as a result whether annual receipts resulting from such collection are counted towards larger-participant status. But these comments did not identify any comparable uncertainty in determining, given the identities of the originating creditors, whether debts in these various categories involve consumer financial products or services. As noted above, the Bureau expects that consumer debt collectors know the identities of the originating creditors for debts they collect. For many types of debt, that information should permit the consumer debt collector to determine, with a reasonable degree of accuracy, whether the underlying transaction involved a consumer financial product or service.48 Thus, the difficulty a consumer debt collector would face in assessing the status of a medical debt should not arise as a general matter in the collection of other debts. In essence, commenters asking the Bureau to clarify the status of various other kinds of debt were asking the Bureau to state whether such types of debt are related to consumer financial products or services, as a categorical matter. The Bureau declines at this point to identify specific types of debt that involve consumer financial products or services, or to provide an exhaustive list of such debts.

48For example, consumer credit originated by a credit card issuer is a consumer financial product and the collection of that debt is therefore a consumer financial service. As another example, utility companies regularly extend credit to consumers who receive utility services.See, e.g., Maysv.Buckeye Rural Elec. Coop.,277 F.3d 873, 879 (6th Cir. 2002);Mickv.Level Propane Gases, Inc.,183 F. Supp. 2d 1014, 1019 (S.D. Ohio 2000);Williamsv.AT&T Wireless Services, Inc.,5 F. Supp. 2d 1142, 1145 (W.D. Wash. 1998);Haynesworthv.South Carolina Elec. & Gas Co.,488 F. Supp. 565, 567 (D.S.C. 1979). A consumer debt collector could reasonably expect that a debt originally owed by a consumer to a utility company arose from an extension of credit.

Use of IRS guidance.A commenter asked whether the Bureau intends to bind itself to IRS guidance and related Federal tax law with respect to the calculation of annual receipts and recommended that the Bureau provide examples of how different industry participants should do that calculation. The Bureau noted in the Consumer Reporting Rule that to the extent a nonbank covered person uses IRS tax forms to calculate receipts, the person should rely on IRS guidance. Additionally, the Bureau declined to provide examples of how market participants should calculate annual receipts because there may be a variety of circumstances facing covered persons, and the Bureau is not in the best position to ascertain the most appropriate or useful calculation methods for each entity. The Bureau declines, for reasons similar to those articulated in the Consumer Reporting Rule, to provide examples of how participants in the consumer debt collection market should calculate annual receipts.

Reimbursed amounts.The Bureau received a comment from an attorney representative expressing concern that the proposed definition of annual receipts included certain amounts for which attorneys or other consumer debt collectors receive reimbursement and recommending that such amounts beexcluded. This commenter contended that certain reimbursements for expenses, such as recording or filing fees, are not considered income under Federal tax law. This commenter requested that the Final Consumer Debt Collection Rule make clear that such pass-through funds are not included in the calculation of annual receipts. The Bureau notes that the calculation of annual receipts in the Final Consumer Debt Collection Rule is built on the concepts of “total income” and “cost of goods sold,” as used in Federal income tax reporting. Quantities that consumer debt collectors do not include in those categories would not count as annual receipts. If, on the other hand, some amount of reimbursed expense is included in one of these categories, that amount would count as annual receipts. Such an amount could fairly be considered a cost of doing business and providing the relevant consumer financial service. That some consumer debt collectors may characterize such an expense as a “reimbursed expense” and bill clients separately for the expense does not alter that fact. For these reasons, the Bureau declines to amend the definition of annual receipts to add a specific exclusion for reimbursed amounts.

Annual receipts and measurement period.The Bureau received several comments suggesting different measurement periods for assessing larger-participant status. One recommended that an entity be deemed a larger participant if either the entity's average annual receipts over the last three fiscal years or its receipts in the most recent fiscal year met the applicable threshold. Another commenter suggested that an entity should qualify as a larger participant only if its receipts were above the threshold for each of three years in a row. Some commenters, incorrectly believing the Proposal already specified that larger-participant status would be triggered by a single year's results, asked the Bureau to measure larger-participant status over a longer period of time. Otherwise, they stated, businesses would forego growing in order to avoid becoming subject to the Bureau's supervisory authority.

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.49 Using a longer measurement period reduces the impact on the calculation of short-term and potentially temporary fluctuations in receipts a company may experience—both decreases and increases. Similar reasoning motivates the Bureau to adopt a three-year measurement period, as proposed, for the Final Consumer Debt Collection Rule.

49As noted in the Proposal, if an entity has not completed three fiscal years, its “annual receipts” will reflect an average based on the shorter period of its existence.

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.50 The definition of annual receipts implements this aggregation requirement by counting the receipts of affiliated companies.51 Control or common control is a prerequisite for being an “affiliate” under the Dodd-Frank Act, and the Consumer Reporting Rule appropriately made control or common control a prerequisite for being an “affiliated company” under Part 1090. Commenters offered no reason to think a special, different understanding of the term should apply for the consumer debt collection market. The Bureau therefore declines to amend the Proposal to require aggregation of the annual receipts of companies that have only an agency or contractual relationship.

50 See12 U.S.C. 5514(a)(3)(B).

51 See12 U.S.C. 5481(1) (definition of “affiliate”); 12 CFR 1090.101 (definition of “affiliated company”).

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.

Consumer debt collection.The Final Consumer Debt Collection Rule defines a market for “consumer debt collection,” which is among the consumer financial products or services described in 12 U.S.C. 5481(5)(B) and 15(A).52 Activities covered under these provisions of the Dodd-Frank Act include “collecting debt related to any consumer financial product or service.”53 Under 12 U.S.C. 5481(5)(B), such activity is a “consumer financial product or service” when “delivered, offered, or provided in connection with a consumer financial product or service.” The definition of “consumer debt collection” in the Final Consumer Debt Collection Rule is not meant to track these related provisions in the Dodd-Frank Act. The Final Consumer Debt Collection Rule's definition has a different function. Rather than describing the scope of a certain consumer financial product or service, it identifies a specific market for such a product or service.

52The Proposal defined the term “consumer debt collection” as collecting or attempting to collect, directly or indirectly, any debt owed or due or asserted to be owed or due to another and related to any consumer financial product or service. A person offers or provides consumer debt collection where the relevant debt is either collected on behalf of another person; or collected on the person's own behalf, if the person purchased or otherwise obtained the debt while the debt was in default under the terms of the contract or other instrument governing the debt. 77 FR 9607.

5312 U.S.C. 5481(A)(x).

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.54 For those suggestions the Bureau is accepting, it is incorporating into the rule's definitions language from the FDCPA that creates the corresponding exclusions in that statute.

54The Bureau notes that the usage, or omission, of specific language from the FDCPA in the Final Consumer Debt Collection Rule is not an endorsement by the Bureau of any specific interpretation of the FDCPA.

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'sresponse to the comments requesting various exclusions from the market.

Specific exclusions.The Bureau received a number of comments urging the adoption of particular exclusions from the definition of consumer debt collection.

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”55 is not, on the basis of that activity, a debt collector. Commenters stated that companies active in loan servicing rely on the FDCPA exclusion, with which they are familiar, to distinguish their servicing activities from debt collection.

5515 U.S.C. 1692a(6)(F)(iii).

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.56 In light of these characteristics, the Bureau believes that the purposes of the Final Consumer Debt Collection Rule are best served by excluding loan servicing, as described here, from the activity of “consumer debt collection” defined for purposes of the Final Consumer Debt Collection Rule.

56The Bureau recognizes that some loan servicing activity may involve techniques like those used in debt collection. And some consumer debt collectors may engage in collecting on accounts that are not in default. To the extent that developments in the markets for obtaining consumers' repayment of debts blur or alter the line between servicing and debt collection, the Bureau may in the future revisit the distinction that the Final Consumer Debt Collection Rule draws between the two activities. Meanwhile, as noted above, the Bureau may examine any consumer financial service provided by a person that is subject to Bureau supervision, such as a larger participant in the consumer debt collection market.

Indeed, the Proposal did not contemplate including loan servicing in that market, as several commenters recognized.57 As such commenters pointed out, the Proposal's economic assessment of the consumer debt collection market was based on Economic Census data that generally covered debt collection and did not cover loan servicing.58 The scope of the economic data that the Bureau described in the Proposal was reasonably consistent with the scope of the market that the Proposal contemplated.

57Because the Bureau already has supervisory authority over mortgage servicing pursuant to 12 U.S.C. 5514(a)(1)(A), the Bureau did not consider including mortgage servicing within the market for consumer debt collection.

58The Economic Census classifies industries using the North American Industry Classification System (NAICS) codes. The Bureau based its estimate of market coverage for the Proposed Rule on the NAICS code for debt collection (561440). Loan servicing activities fall under a different NAICS code (522390).

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.59

5915 U.S.C. 1692a(6)(F)(iii).

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.