Consumer Financial Protection Bureau Warned about Debt Collection Regulations

There has been a flurry of online activity devoted to the debates generated by recent proposals by the Consumer Financial Protection Bureau (CFPB.) In a new article, Todd Zywicki, writing for the Mercatus Center at George Mason University, warns that the CFPB may cause some “unintended consequences” with regards to new regulations on debt collection actions. The author further contends that a careful cost benefit analysis be conducted prior to enacting these types of regulations. Mr. Zywicki currently serves as a law professor at George Mason University and is the Senior Scholar at the Mercatus Center.

Back in the late fall of 2014, the CFPB released their Advance Notice of Proposed Rulemaking. In this publication, the agency asked for comments about the various practices of debt collection agencies and companies. These questions were focused on both third party collector, creditors collecting on in-house debts and debt purchasing companies. Fast forward to the spring of 2015’s rulemaking agenda, and the CFPB hinted that the new rules, which may concern the coming together of a SBREFA panel in December of 2015.

There are unintended consequences any time new regulations are announced on a national level. Mr. Zywicki noted that the potential for prohibitions or severe limitations on communications tools that rely on cutting edge technology (like text messaging or sending emails) could result in creditors/collectors ramping up their efforts to make more collections earlier in their debt collection schedules. He also noted that a ban on the collection of some debts could have dire consequences for some consumers that go further than the “…obvious economic effect of leading to increased interest rates and a reduction in lending volume, especially for higher-risk consumers.” Zywicki commented that he thinks this type of ban would lead to a higher number of lawsuits filed against debtors prior to the expiration of the current statute of limitations.

Mr. Zywicki argues that since there are multiple restrictions on collectors that do not provide a direct benefit to consumers, and that debt collection rules put together by the Consumer Financial Protection Bureau should be drafted post a careful cost to benefit analysis and with thoughts toward the potential lifestyle changes that consumers have gone through via newer communication technological advances. He believes that prior to the addition of new regulations that the CFPB would be best of to “take care to precisely identify what market failure it believes to exist; whether government regulation is the most effective means of redressing that market failure; and whether, in fact, government regulation can be written and implemented in such a manner that the marginal benefits exceed the marginal costs to consumers.  Each of these steps requires careful analysis.”

As an example that is focused on the debt purchasing industry, he remarked that the industry already has a proven self-regulation certification system in place for debt purchasers and that a number of large debt sellers have already made it known that they will only do business with companies that are certified as part of that system. He went on to suggest that a result may be that pressures in the market and voluntary action, in combination with regulatory oversight, may already be combining to do all that is necessary to fully address the concerns of the CFPB and other consumer advocate groups. As to whether or not Mr. Zywicki’s valid concerns will be taken into consideration by those in charge at the CFPB remains to be seen as of the writing of this article.

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