In rebuke of CFPB, states look to get tough on debt collectors

As states flex their regulatory muscle in response to a pullback in enforcement activity by the Consumer Financial Protection Bureau, they are zeroing in on debt collection as an area needing more oversight.

Governors in New York and California both have recently pushed for their states to have more authority over debt collectors. The state proposals come as the CFPB works on instituting regulatory reforms for debt collectors that critics say are a gift to the industry.

“Debt collection is one more avenue for states to be exercising oversight and inquiry into a rapidly expanding area, where they might want to ensure things are okay to the general public,” said Stefanie Jackman, a partner at Ballard Spahr.

California and New York have been among the last holdouts in bringing debt collectors into the state regulatory fold. Neither state currently licenses debt collectors. While consumer advocates say the states could fill a regulatory void left by the CFPB, some debt collection advocates say new licensing regimes could in fact help their industry.

Both states’ plans are in the early stages and require legislation. In December, New York Gov. Andrew Cuomo — as part of his 2020 State of the State program — proposed a new licensing and oversight process for debt collectors.

Meanwhile, the new California consumer protection agency proposed last week in Gov. Gavin Newsom's annual budget plan — seen as a mini-CFPB — would extend state oversight to debt collectors as well as other types of firms not currently subject to state licensing rules.

Some suggest the states were motivated to act ahead of the CFPB’s upcoming rulemaking on debt collection. The federal consumer bureau proposed changes last year under the Fair Debt Collection Practices Act to allow debt collectors to have unlimited contact with debtors through email and text, though consumers could opt out of such communications.

“There is a sense in both California and New York that the federal government has pulled back on regulation generally and there’s concern about the final form the CFPB’s debt collection rule will take,” said Ted Mermin, interim executive director at the Berkeley Center for Consumer Law & Economic Justice.

Consumer advocates have voiced concerns that CFPB Director Kathy Kraninger’s proposal would open the door to consumers to being bombarded with messages from collectors, although others suggest consumers can flush such communications out with spam filters.

Yet the CFPB plan leaves open the possibility that states could impose tougher limits.

“California and New York have long wanted to be seen as aggressive in consumer protection and the states are tired of waiting to see the direction of a Kraninger CFPB and for the CFPB to act,” said Allison Schoenthal, a partner at Hogan Lovells.

Big civil-money penalties could be another driver. As restitution amounts in CFPB enforcement actions have plummeted under Kraninger, observers say the Democratic governors could be eager to show they are policing the marketplace by collecting big fines from bad actors and reimbursing harmed consumers.

Cuomo's plan, as described by his office's announcement last month, would allow state investigators to access "debt collector's offices at any time to review their books and records," target schemes meant to compel consumers into paying debts they do not owe, and potentially result in firms facing punitive action to lose their state license.

Debt collectors in New York are regulated by the Department of Financial Services but since the department does not license them, debt collectors are not subject to the same supervision as most other financial institutions.

"We license barbers, home inspectors and used car dealers in New York — so it makes no sense that we don't have the authority to license an industry that can cause families financial ruin," Cuomo said in a statement released with the plan. "As this industry grows and increasingly deploys abusive and deceptive practices to prey on consumers, this proposal would give the state new tools to regulate debt collectors — stopping unscrupulous practices and strengthening our consumer protection laws."

New York State Department of Financial Services Superintendent Linda Lacewell called on the CFPB last year to do more policing of debt collectors. Lacewell sent Kraninger a letter in September alleging that the bureau’s debt collection proposal would “severely harm the financial futures and social well-being of millions of consumers in New York state.”

“This is the right time to license debt collectors, since the CFPB through its debt collection rules has signaled a future of weak federal enforcement for this industry,” said a New York state regulatory official who spoke on the condition of anonymity. “Implementing a licensure regime for debt collectors at the state level will ensure that New Yorkers are protected no matter what the CFPB does or does not do for consumers going forward.”

Still, legislation to be proposed in New York could potentially benefit the collections industry, said Jan Stieger, executive director of the Receivables Management Association International, a trade group that has met with Cuomo and provided language for a bill.

Some municipalities such as New York City have debt collection regulations that the industry views as burdensome and state licensing could potentially preempt local laws, Stieger said.

“Industry supports the licensing of industry participants and we are actively engaged in working out the details of the legislation,” Stieger said.

Though debt collectors may be an easy target politically, they take orders from banks and other financial institutions that play a major role in approving collections letters and disclosures, writing phone scripts and negotiating payoffs with consumers.

“The scary part for debt collectors and loan servicers will be ensuring compliance with all the new rules, and then the number of new regulators able to go after them if or when the rules are not implemented perfectly,” Schoenthal said.

California has not licensed debt collectors for at least 20 years. Newsom's plan to revamp the Department of Business Oversight would give a new Department of Financial Protection and Innovation both licensing and enforcement authority over debt collectors. Currently, complaints against debt collectors are referred to the state attorney general’s office.

Yet like New York State, debt collectors in California are not entirely opposed to becoming licensed.

“With the CFPB being rolled back, the attorney general’s office in California is getting a lot more reports,” said Shawn Surh, president of the California Association of Collectors, a trade group. “A lot of our members are licensed in other states. We are definitely for collection agency oversight, it’s not a new issue and we’re not opposed to reasonable oversight though the devil will be in the details.”

Some said consumers could benefit from rules that require collectors to inform Social Security and Veterans benefits recipients that such income is protected from collection and when a debt is beyond the statute of limitations.

“It’s hard to know how much the licensing itself really reins bad actors in, but it’s great to have a resource for complaining about a debt collector,” said Carolyn Coffey, director of litigation for economic justice at Mobilization for Justice, a New York City nonprofit.

However, tougher state oversight would likely increase costs for collectors, largely through fees and compliance. Debt collectors are concerned that more state regulations will come with new requirements for state disclosures that consumers rarely read.

“It’s always a big deal when you have to comply with a licensing regime in a new state, and those are two states that have a lot of that activity and perhaps they want more insight into and oversight over what [companies] are doing,” Jackman said.