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Consumer Financial Protection Bureau taking regulatory reigns of debt collectors, credit bureaus

by Broderick Perkins

(2/23/2012) ERATE Exclusive - The Consumer Financial Protection Bureau is moving to take up oversight of debt collectors and consumer credit reporting agencies, industries whose activities impact hundreds of millions of Americans.

While the bureau isn't proposing new rules right now, it is likely to inject greater transparency into existing regulations and take to task entities that don't adhere to the law.

About 30 million Americans have debts under collection. The average amount under collection is $1,400.

The three largest credit reporting agencies - Experian, Equifax and TransUnion - alone maintain information on 200 million American consumers, but the new oversight will also include more than two dozen additional smaller operations in the same industry.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB, authorizes the CFPB to supervise non-banks primarily in the specific markets of residential mortgages, payday lending, and private education lending, but also in the area of "larger participants," in the financial services arena.

The Bureau must define "larger participants" by rule, initially by July 21, 2012. Last summer, CFPB opened for public comment possible markets to include in the initial rule.

"Consumer financial products and services have become more complex over the years and they have expanded well beyond traditional banks," said Richard Cordray, CFPB Director.

Currently governed by the Federal Trade Commission (FTC), debt collectors and credit reporting agencies, have been troublesome and are the first to come under the "larger participants," rule and the bureau published the proposal "Defining Larger Participants in Certain Consumer Financial Product and Service Markets" in the Federal Register on Feb. 17. The proposal is open to public comment until April 17, 2012.

"Our proposed rule would mean that debt collectors and credit reporting agencies that qualify as larger participants are subject to the same supervision process that we apply to the banks," Cordray added.

Debt collectors

Under the proposed rule for the CFPB to govern debt collectors, debt collectors with more than $10 million in annual receipts from debt collection activities would be subject to supervision. Regulatory supervision for the industry is guided by the existing "Fair Debt Collection Practices Act (FDCPA)." Consumers complain to the FTC about debt collection services more than any other issue except identity theft and the numbers are rising, according to the commission.

The CFPB estimates that the proposed rule would cover approximately 175 debt collection firms, only 4 percent of all debt collection firms, but these firms account for 63 percent of annual receipts from the debt collection market.

Consumer credit reporting agencies

Consumer reporting agencies, better known as credit reporting agencies or credit bureaus, retain millions of consumers' credit reports, comprised primarily of credit behavior data. The reports also are used to generate credit scores.

The credit reporting market has a dominant role in consumers' financial lives as lenders use credit reports when evaluating applications for credit, including credit cards, mortgages, automobile loans, and other types of credit. Specialty consumer reporting agencies also collect and provide information used to make eligibility decisions for a variety of products and services, including applications for rent, checking accounts, insurance, even jobs.

The big three, Experian, Equifax and TransUnion, dominate the market selling comprehensive credit reports and other data, but existing FTC-enforced regulations, the "Fair Credit Reporting Act (FCRA)", also govern credit report resellers as well as specialty consumer reporting agencies.

Each year, this industry accounts for 36 billion updates to consumer files, three billion reports issued and information maintained on 200 million consumers, according to the Consumer Data Industry Association.

Under the proposed rule, consumer reporting agencies with more than $7 million in annual receipts from consumer reporting activities would be subject to CFPB supervision. The proposed threshold would allow the CFPB to cover about 30 consumer reporting agencies which account for about 94 percent of the annual receipts from consumer reporting.

Credit reporting agency behavior has been dicey over the years.

Years of being charged with producing error-prone credit reports and keeping consumers blind to their own personal credit report data along with other questionable, information-handling behavior led to the "Fair and Accurate Credit Transactions Act (FACT Act)," an amendment to the FCRA designed to force the industry to reform.

FACT Act is responsible for giving consumers free access to their credit reports and a more consumer-friendly credit reporting industry.

A study last year by the Policy & Economic Research Council (PERC), "U.S. Consumer Credit Reports: Measuring Accuracy and Dispute Impacts" found that credit bureaus had either cleaned up their act or previous studies were faulty.

The study found that less than one percent, 0.93 percent, of all credit reports examined prompted a dispute that resulted in a credit score correction and an increase of a credit score of 25 points or greater.

The study also discovered scads of satisfied consumers -- nearly all, 95 percent of all consumers who participated in the dispute process were satisfied with the outcome.

However, the FTC repeatedly has had to reprimand the industry about luring free-credit-report-seeking consumers into purchasing unnecessary services.

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