By Stacy Cowley
For the first time in nearly 40 years, federal regulators are preparing to significantly strengthen the rules that govern debt collection in an effort to clamp down on collectors who hound consumers for debts they may not even owe.
Under the proposed regulations, which will undergo a lengthy review process, debt collection companies will have to more fully document the debt they are trying to collect, make it clear how a consumer can dispute the debt, and observe state statutes of limitations that bar them from legally pursuing older debts — all safeguards that are frequently flouted, according to the Consumer Financial Protection Bureau, the federal agency that plans to put forth the new rules on Thursday.
The regulations also take aim at the stereotype of the harassing debt agency: Collectors would be barred from trying to contact people more than six times in a week. And, after a debtor dies, the collectors would have to wait 30 days before contacting family members about paying up.
“This is about bringing better accuracy and accountability to a market that desperately needs it,” said Richard Cordray, the director of the Consumer Financial Protection Bureau.
The agency, set up in 2011 in the wake of the financial crisis, is a political lightning rod — the party platform Republicans adopted last week calls it a “rogue agency” that should be abolished — and howls of protest usually accompany any new rules it proposes.
But this time, the industry response has been muted — and even cautiously supportive.
The bureau began laying the groundwork for these new rules three years ago, and several trade group leaders said the process had been thoughtful and methodical.
“We’re looking forward to the rules providing the industry with a clear road map,” said Jan Stieger, the executive director of DBA International, which lobbies on behalf of debt buyers.
Some 77 million people — roughly one in three adults with a credit report — have a delinquent debt in collections, according to an estimate by the Urban Institute.
Right now, collectors must obey a patchwork of state, local and national laws. Harvey Moore, a collections lawyer in California and the president of the National Creditors Bar Association, said the rules should create “a higher degree of consistency” among various jurisdictions.
The debt collection proposal is the third major initiative to come out of the consumer bureau this year. In May, it proposed a rule to prohibit mandatory arbitration clauses and to restore customers’ rights to bring class-action lawsuits against companies. Last month, it released a draft of tighter rules covering payday lending that are aimed at keeping low-income people out of an endless cycle of ballooning debt.
The bureau receives far more complaints about debt collection than any other issue — more than 7,000 a month, on average — and 40 percent of them are about collection attempts on debts the customers say they do not owe.
Susan Macharia, 39, an administrative worker who lives in Buena Park, Calif., said she was blindsided in January when she got a call from a collector saying that her wages would be garnished unless she paid off a $10,000 credit card debt that she allegedly ran up in 2003.
A debt so old would normally be beyond the statute of limitations, and legally uncollectable, but the company had a copy of a 2006 default judgment that was entered against her when she failed to respond to a collection lawsuit.
But Ms. Macharia, who opened her first credit card account just three years ago, had no recollection of being notified of a lawsuit, and she was living in Atlanta when the papers were said to have been served on her in California. Fraudulent service is a problem so common it has a name — “sewer service” — derived from the way process servers metaphorically toss the papers they are supposed to deliver into a sewer instead.
While Ms. Macharia tried to figure out how to contest the debt, the collector began garnishing nearly $800 a month from her paychecks.
“I couldn’t sleep, and I lost so much weight because I couldn’t eat,” said Ms. Macharia, a mother with two children. “There was so much financial stress, and emotional stress — I had never dealt with anything like this before. And I knew I hadn’t done it! If I had ever used a credit card back then, I probably would have been like, ‘Whatever, I guess I owe this,’ but I knew there was no way.”
The Public Law Center, a pro bono group in Santa Ana, Calif., took on Ms. Macharia’s case and contacted the creditor about the errors it found in the file. The company agreed to stop pursuing the debt and to return the money it had garnished.
Leigh E. Ferrin, the head of the group’s consumer law unit, said that most collection firms “don’t want to litigate, because they know the documentation isn’t sufficient.”
The proposed regulations are aimed at making it much harder for debt collectors to pursue people like Ms. Macharia.
Just as with mortgages at the height of the financial crisis, delinquent consumer debt is often resold, sometimes multiple times, and in the chain of custody, things can go awry. The nation’s courtrooms have been glutted with millions of collection lawsuits, many of which are backed by thin documentation. And tales of abuses — like robo-signed affidavits filed in bulk, or aggressive collection efforts on erroneous debts — are rife.
Several states — most notably, New York and California — have adopted stricter rules about the documentation required to collect on a debt, which consumer advocates say have helped curb some abuses.
In 2008, nearly 300,000 debt collection lawsuits were filed in New York City’s civil courts. Last year, after new state regulations took effect, that number fell to 55,000.
“The problems around abusive debt collection in New York have gotten a lot better,” said Susan Shin, the legal director of the New Economy Project, an advocacy group. “Strong rules make a difference.”
The Federal Trade Commission has long been the main federal regulator of debt collection tactics through its enforcement of the Fair Debt Collection Practices Act, the 1977 law that governs how companies can pursue those who owe them money. But the consumer bureau — which has broad powers to make rules on its own — says that it, too, can take action under a provision in its charter that allows it to ban “unfair, deceptive or abusive acts.”
The consumer bureau used that clause recently to pursue a series of claims, including actions last year against Encore Capital Group and Portfolio Recovery Associates, the nation’s two largest debt buyers. Both settled, agreeing to stop collection on $128 million in debt, to refund some money that was collected and to alter some of their practices.
The bureau also struck multimillion-dollar settlements with JPMorgan Chase and Citibank over their sales of inaccurately documented debts to collectors.
The cases sent a clear warning to the industry about the standards companies would be expected to conform to, even though no new rules had yet been enacted.
“The bureau almost regulates through enforcement,” said Craig Nazzaro, a lawyer in Atlanta who represents creditors and debt buyers. “They tell the industry to watch the enforcement actions and comply with those practices. No one in the industry likes that. They want clear guidance.”
Many debt collectors have voluntarily taken steps to clean up their act, industry representatives say. Ms. Stieger, of DBA International, cited new certification rules her group adopted this year that mandate strict compliance with requirements similar to those the consumer bureau is considering.
Encore Capital said that it welcomed new national rules, and believed that it already adhered to most or all of the proposed requirements.
“We believe that the rule-making will provide important clarity around key issues for our industry,” the company said.