October 29, 2021
The Consumer Financial Protection Bureau (CFPB) released a much-anticipated report in which they revealed a new regulation known as Reg F that directly relates to the collection of consumer debt. Banks, credit card companies, and debt collectors of all stripes have been pushing for the CFPB to release specific regulations regarding when and how often debt collectors may contact those who owe them money, and they got what they wished for.
It is important to note that the new regulations do not apply directly to banks and many other lenders seeking to collect a debt. They do apply to third-party collection services that may have purchased a debt from the original lender or other third-party collection services.
That said, these new regulations are not 100% beneficial to creditors that place with third-party collection agencies, and it is important to recognize the drawbacks to the new rules. What you will surely see as we go through the details of this regulation is that you need to have a coordinated plan for how you and your company will respond to the changes in regulation and the new risks of sequential placement with third-party collection agencies.
Connecting and communicating with those who owe a debt is usually the most effective way to get that debt settled, and it is also often in the best interest of both the debt holder and the capital provider to speak with each other directly. However, previous regulations have made it challenging for debt collectors to get in touch with debtors via the channels they need to use. Although previous regulations had the intent of protecting debtors from being harassed, those regulations often directly interfered with the ability of debtors and capital providers to get in touch with one another in the first place. There are a few changes coming out of Reg F that can finally help ease this stalemate:
Not every person works the same schedule or is around their phone during the same times of day or days of the week. Reg F now opens up the possibility of creditors reaching out to debtors up to seven times per week to try to catch them when they are near their phone and able to answer the call.
It is now possible for creditors to get in touch via the methods that so many of us already use in our daily lives: e-mail or text. Most people have moved towards this form of communication with all of the other contacts in their life, so it only makes sense that they would also do so when speaking with debt collectors and the like. It is a faster and more effective way for many debtors to be contacted.
Collections letters are something that needs to be worded carefully and precisely to stay within the letter of the law. The CFPB released approved standardized collection letter templates for companies to use when they need to send their notices out to consumers. This helps those collectors stay within the law more easily than they could before.
These are all things that debt collectors are cheering on, but they are also aware that the regulation is not completely in their favor in every aspect. There are many concerns currently being voiced by debt collectors about other aspects of the new rules.
Not everything that has come out of Reg F has been positive for debt collectors. The regulators are also implementing some changes that those in the debt collection industry are less than enthusiastic about:
Consumers must be provided with full and complete itemized proof of their debt when they receive a collections notice or call. This list can be lengthy, burdensome to produce, and may lack the accuracy of the debts in question that have been purchased or placed time and time again. It is something that lenders need to perk up and take notice of right away.
Under the new rules, consumers must be shown how they can opt-out of communications with the debt collectors. This means that the debt collectors must literally show the consumer a step-by-step process for how to shut down certain avenues of communication. This not only takes time, but it may disrupt the ability of the debt collector to easily get in touch with that consumer again at some point in the future.
In addition to these major challenges, many industry watchers are also concerned that debt providers and purchasers may fall under more severe scrutiny for the actions taken by third-party collection agencies. There is concern that those who provide the debt or purchase it and who have a close relationship with the debtor may find themselves in regulatory trouble for actions taken by a third-party collection agency that acts out of bounds of the new regulations coming down the pike. It is a frightening prospect that has many debt originators worried that they could be held legally liable for actions that were not their own.
Many lenders have decided to sell accounts once they reach charge-off. At this time, the lender has the complete account history and can be confident in providing the necessary information to satisfy Reg F. By selling the account to a buyer that will agree to never resell the account, sequential placements and the risk of erroneous data transfer is avoided. It is common for lenders to sell off some of the accounts that they hold at any given time to reduce their risk and to focus their energy on their most profitable accounts. Bankrate.com explains that many debts are sold to debt purchasers and sometimes to third-party debt collectors, usually around 180 days of delinquency:
"Later, often around 180 days after the original due date of the payment, the creditor might sell the debt to a collections agency", says Michael Micheletti of Freedom Financial Network. "This step indicates that the creditor has decided to give up on obtaining payment on its own, and selling the debt to a collection agency is a way to minimize the creditor's loss".
The practice is so common and the market for these debts is so liquid that there are generally plenty of buyers ready and willing to purchase debt from the original creditor. It is a vibrant and professional market where buyers are able to spend a great deal more time and money following the current regulatory environment and thus avoid regulatory issues. What happens if a creditor sells a debt to a third-party collector, but some of the information passed along is possibly information received from an outside collection agency? This could potentially lead to violations of the regulation.
Selling debt to a buyer that will continue to own, monitor, and comply with laws regarding that debt for the life of the loan avoids the issue of potential errors in data transfer due to sequential placement. In addition, having a debt buyer as a counterparty means the partner has the capital to protect and is thus more likely to treat debtors with respect, follow regulations and develop a long-term relationship with the borrower.
New regulations often require a period of time for companies to adjust to the changes. This is what is expected to play out with these Reg F changes as well. The best thing for any creditor to do in the meantime is trying to buckle down and only conduct business with those that they know they can trust. It is in their best interest to observe what these new regulations really mean for the marketplace and how they are enforced.
There is an expectation that additional tweaks to Reg F may be necessary and that the CFPB will continue to hone the regulatory environment. That said, it is definitely a time to tread lightly and ensure that you only sell the debt to trusted buyers who are fully compliant with the new regulations. You do not want any violations to create repercussions for you. You can avoid this entirely by only working with those that you know will adapt to any and all changes to the rules as they come into play.
For the latest on Reg F and other information coming out of the CFPB, please contact us.