Former CFPB Regulator Looks at the Future of Debt Collection Regulation

Addressing attendees of insideARM's recent First Party Outsourcing Summit, Tom Pahl, former Managing Counsel in the Office of Regulations at the Consumer Financial Protection Bureau, laid out his predictions for the future of debt collection regulation:

• The decision of a panel of the D.C. Circuit last week in PHH holding that the structure of the CFPB is unconstitutional will have little or no effect on the debt collection rulemaking. 

Related: In PHH v. CFPB, D.C. Circuit Holds that CFPB Structure is Unconstitutional

• The CFPB’s SBREFA outline addressed some issues relating to the use of new and newer technologies collectors could use to contact consumers, yet it did not provide guidance that was sufficient or specific enough to foster their use.   There are advantages to both the collection industry and consumers from the use of these technologies, but the CFPB’s actions suggest that the agency is unlikely to articulate the standards necessary for this win-win solution to occur.
  

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• Because of the actions of the CFPB and other federal regulators, including debt collection rulemaking, there will be substantial overlap and blurring of obligations of creditors, first-party outsourcing firms, debt buyers, and third-party debt collectors.   Coordination among actors to make their systems and processes work together effectively will be critical to compliance.
  

• The CFPB will use the rulemaking process more than consent orders in individual enforcement actions to develop general standards for the debt collection industry.  This change in approach would be in the public interest because rulemaking requires agency to be transparent about what they are proposing, provide stakeholders with a chance to comment, explain why the rules issues are warranted based on the rulemaking record, and rules are subject to judicial review.  None of these protections exist if agencies use consent orders in individual enforcement actions to develop rules of general applicability for industry.
  

Related: Will Hensarling Letter to Cordray Do More Than Prolong Rulemaking?

• The CFPB’s debt collection rulemaking will create more rather than less uncertainty about the standards applicable to the debt collection industry.   While the CFPB’s SBREFA outline suggests the agency will provide needed clarity on some issues which decrease uncertainty (e.g., offering a Foti fix and a safe harbor validation notice), these decreases will be more than offset by the increases in uncertainty as to the broad and extensive standards the CFPB will include in rules to address novel and complex issues (e.g., contact caps and substantiation of claims of indebtedness).
  

Related: CFPB Previews Debt Collection Rule in SBREFA Outline

• The CFPB’s debt collection rules will impose substantial compliance costs on industry, far greater compliance costs than industry has incurred to date as federal oversight has increased markedly in recent years.  These increased compliance costs, in turn, will fundamentally remake the industry.   They will be put a premium on size to capture economies of scale that smaller collectors are unlikely to have, thereby increasing industry trends toward consolidation.  They also will be a catalyst to the use of new technologies of all sorts to keep compliance costs done and compete more effectively.
  

• Regulation will be a permanent feature of debt collection compliance.  Experience with other federal regulatory regimes strongly suggest that the current debt collection rulemaking is the first of many rulemakings in which the CFPB will address additional and new issues as well as clarify vague and ambiguous provisions in its rules.