Debt Collection May Be Changing In A Big Way

When you read some of the new rules proposed on the heels of the Consumer Financial Protection Bureau’s review of this country’s debt collection process, you may find yourself shaking your head that these regulations haven’t been in place sooner.

Per the Wall Street Journal, debt collection practices in the United States haven’t been revamped in four decades, in fact. What’s existed, it turns out, has been an unregulated mess of a system where debt is bought and sold without much backstory or even proof that the name attached to it is indeed correct. According to CFPB data about debt-collection complaints, 63 percent of the complaints filed with the Bureau in 2015 were from people who said they were being contacted about a debt that belonged to someone else.

The CFPB estimates that 70 million Americans have debts in collection. That means about 22 percent of the U.S. population may stand to benefit from these proposed new regulations.

Here’s what the CFPB is recommending as it relates to third-party debt collectors (proposed new rules related to banks and credit card companies will be coming soon):

1. Collectors should make sure they have ample information about debts they purchase.

Per Consumer Reports, the CFPB says collectors should be required to confirm it has—in addition to just a name, amount owed, and a phone number—the account number associated with the debt, date of default, amount owed at default, and the date and amount of any payment or credit applied after default. You would think debt collectors would have been required to have this information already, but that’s not the case.

Collectors would also be required to transfer dispute information along with the debts they resell, a practice that appears to be largely unheard-of in the industry today. The process for filing a dispute on a debt is arduous, and a big frustration for consumers is that Collector A will sell your debt to Collector B without any mention of a dispute-in-progress. New rules would ensure dispute information be shared when debt is sold, and further, that the new collector be unable to collect on the debt until the dispute is resolved.

2. A lack of information will halt the collection process.

As a means of supporting the regulations above, the proposed new rules would include the following safeguard: If a consumer files a dispute and the collector doesn’t have ample supporting documentation to resolve that dispute, the collection must be put on hold until all necessary documents are compiled.

Collectors would be required to review purchased debt for certain “red flags” that, if found, would mean the collections process must stop. According to Consumer Reports, these red flags would include “a high rate of disputes in a particular portfolio of debts” and “a debt seller that is unwilling or unable to provide supporting documents.”

3. Combatting harassment.

As many of those with outstanding debt know, third-party collectors can border on harassment while trying to collect money owed. The Fair Debt Collections Act already requires that collectors stop contacting you if you ask them to—unless it’s to notify you of legal action. The problem is—and this goes back to the two points above—when your debt is sold to another collector, there’s no record of your “no contact” request and so the calls start up again.

CFPB is proposing that collection companies be limited to six points of contact per consumer each week. This could be six phone calls or two emails, one letter and three phone calls. However they break it down, collectors would be limited in the amount of contact they’re legally able to make.

4. More transparency around old or zombie debt.

As it is, debt collectors are legally able to sue the people who owe them money. That is, unless the statute of limitations (which varies by state) has passed. While the amount is still owed, if the statute of limitations has passed, a collector can’t actually sue you for it—and new regulations would require the collector to tell you as much when working to receive payment for a debt.

The tricky point here is that starting to pay on a debt not that’s not currently prosecutable could actually restart the statute of limitations. This is somewhat of a catch-22, it seems, as collectors want to receive money towards a debt but consumers may be hesitant to pay if it means they become liable again. While it’s unclear how CPFB will tackle this so-called “zombie debt,” it would require collectors to at least disclose to the debtor if the statute of limitations has expired.

5. Simplifying the dispute process.

CPFB is recommending a streamlined process for consumers looking to file a dispute related to debt collection. Disputes currently have to be filed in writing. The Bureau is suggesting that a “tear off” portion on a collection notice be developed and/or that disputes be able to be registered via phone.

What’s next?

The release of these proposed new rules are the first step in what will likely be at least a year-long process for bringing final rules to life. While there are critics on both sides, the important point is that a messy, troubling process is finally getting the attention it needs in order to start to be revamped.