Balances Rise While Third Party Debt Collection Accounts Decrease: Is This a New Trend?

Image courtesy of Stuart Miles / freedigitalphotos.net

According to information released last year by the Federal Reserve Bank of New York, the percentage of American consumers with at least one account serviced by collection agencies or collection attorneys fell sharply in 2013, particularly during the third quarter.  This is despite average account balances increasing—a trend that is just now changing from the previous year and a half. 

This trend has been interpreted to mean that consumers are paying down debts with smaller balances first, leaving their accounts with higher balances to collect further interest charges.  These accounts observed in the survey include a small percentage of credit accounts, but most were accounts held by parties collecting on medical bills and utility bills. 

Also on the FRBNY report was a general outstanding household debt that showed the largest quarter-to-quarter increase since 2008.  Among these debts, balances on mortgage accounts ($56 billion), student loans ($33 billion), auto loans ($31 billion) and credit card debt ($4 billion) were among the top consumer debt balances held by Americans in 2013.

Donghoon Lee, senior research economist at the New York Fed, stated “[In the third quarter of 2013], we observed an increase of household balances across essentially all types of debt. With non-housing debt consistently increasing and the factors pushing down mortgage balances waning, it appears that households have crossed a turning point in the deleveraging cycle.”

The final numbers of Q3 in 2013 showed American household debt at $11.28 trillion, which is only 11% below its peak in 2008 of $12.68 trillion.  Other trends include:  

• Student loan balances appearing on credit reports increased $33 billion to $1.03 trillion.
• Auto loan balances increased for the 10 straight quarter, up $31 billion to $845 billion.
• Credit card balances increased $4 billion to $672 billion.
• Total mortgage debt increased to $7.9 trillion, up $56 billion.

Notice from the Feds: Banks Will Be Held Responsible for Third-Party Collection Service Providers Used

At the end of 2013, the Federal Reserve Board released a reminder for all banks and banking institutions that they are held responsible for the actions of all third-party providers and collections agencies they hire, including ARM companies.  The statement advised all banks to take risk management measures seriously when considering the use of third-party collections, as a failure to collect according to increasing Federal regulatory procedures could hurt the reputation and financial well-being of larger companies. 

Also included in the issued guidelines were definitions of what the Federal Reserve Board considers to be a “service provider.”  In its definition, the FRB lists a service provider as any entity that enters into a contract with the financial institution in order to provide business functions or services for that financial institution.  With this definition, ARM firms would be clear-cut service providers, as would collection attorneys or collection agencies hired by larger banking institutions.  Other service providers might be firms offering accounting, loan review, compliance services, auditing and risk management assessments.

By holding financial institutions accountable for the actions of third-party ARM companies and collection attorneys, the Federal Reserve Board has taken an unprecedented move to encourage ARM businesses, collection agencies and collection attorneys to follow all compliance guidelines related to debt collection and legal action.  The loss of reputation and potential fines incurred by a larger financial institution means that they will be seeking only the most informed, professional ARM companies to provide third-party debt collections services.  It just makes better financial and business sense to play by the rules, particularly in the process of collecting on consumer debt. 

This guidance applies to all member banks of the Federal Reserve System, including savings and loan companies and nonbank subsidiaries.  Encouraging banks to closely monitor their ARM vendors keeps debt collection practices in line with new tighter Federal guidelines for collecting.  

What companies are under the oversight of the Consumer Financial Protection Bureau with the new rules?

How do I know if my ARM vendor will play by the rules?

What Every Business Should Know About the New CFPB Rules and How They Will Change the Debt Collection Process

The Consumer Financial Protection Bureau is broadening its reach witha recently released Advance Notice of Proposed Rulemaking meant to cover a wide spectrum of topicsconcerning debt collection and how the process of debt collection should be handled by a collection agency or collection attorney. 

According to CFPB’s Robert Cordray, “Debt collection . . . has more salience today than perhaps at any time in our country’s history … and is quickly becoming the topic that draws the most complaints of all of the consumer financial products and services covered by our consumer response team.”  Cordray continues to describe regulations adopted by the CFPB that prohibit “unfair, deceptive or abusive” acts related to collecting debt. 

Earlier in 2013, the CFPB was given oversight of any company that takes in more than $10 million in receipts related to collecting on consumer debt.  This number included approximately 175 companies that are now under the auspices of the CFPB for regulation.  It is expected that the CFPB will further expand its rules, including rules enacted upon debt owners and related to their communication with third-party debt collectors. 

In an effort to settle the questions that are still on the table related to the FDCPA and the specific debts that are subject to the authority of the CFPB, the CFPB has published the Advanced Notice of Proposed Rulemaking to give the financial services industry time to weigh in on certain issues that are still to be decided by lawmakers.  The issues include:

• Should first-party collectors be given the same set of regulations as those given to third-party collectors?
• What documentationshould be included in the transfer of debt collection to a third-party collector?
• Does the consumer have a right to know when a debt is given to a third-party collection firm?
• What should be the specific content of the FDCPA validation notices and Fair Credit Reporting Act dispute processes?
• Considering changes in technology, particularly mobile phone technology, what regulations should be placed on communications between the industry and consumers?

2014: What the Consumer Debt Collection Industry Can Expect with the New CFPB Debt Collection Rules

Get ready for it—2014 is going to change the entire credit and collection world, particularly the world of creditors in the banking and healthcare industry.  These changes are going to come in the form of new rules for credit collections expected to be released by the Consumer Financial Protection Bureau (CFPB) in the first half of the year.  In the meantime, the CFPB has released its Advanced Notice of Proposed Rulemaking (ANPR) to allow a period of time for feedback from interested parties—from consumers and creditors to collection attorneys, vendors and government officials—and fine tune the rules before they become regulations that must be followed. 

The biggest change noted so far is that these rules will affect everyone along the chain of collections, and some industries previously unaffected by the rules will now be affected.  Concerns are being raised about the care that will go into considering these new regulations and considering the impact they will have on the collections industry, as a whole.  ACA International, a trade group representing debt collectors, issued the following statement concerning this pending rulebook. “We agree that modernizing the nation’s consumer debt collection system is important so long as changes are based on common sense solutions that preserve balance between consumer protection and the ability of a creditor or debt collector to lawfully recover debts.” 

Particularly of concern to the Consumer Financial Protection Bureau are contact frequency, contact methods and claims during contact, including threats to initiate lawsuits or criminal prosecution, garnish wages, seize assets or damage a consumer’s credit rating.  The CFPB is looking to ascertain the extent of these activities, and if they are occurring, who is doing it. 

The gist of the changes is that every business will now be held liable for what it does (and doesn’t) know about Federal regulation for debt collection procedures.  A business’ reputation and future will depend on following such regulation, making it all the more important to stay updated on the changes being made in the industry.