A controversial government regulator set up after the 2008 financial collapse is taking aim at debt collectors and credit reporting agencies, proposing a rule that would bring the industry's largest players under federal supervision for the first time ever.
"Consumer financial products and services have become more complex over the years and they have expanded well beyond traditional banks," said Consumer Financial Protection Bureau director Richard Cordray, in a statement on the bureau's website. The new oversight from the CFPB would change that, applying the same supervision process to financial services providers outside the banking industry.
The impact of such a rule could be sweeping—about 30 million Americans currently have debt being pursued by collections agencies and the three largest consumer reporting agencies have information on more than 200 million Americans, according to the CFPB.
"These are [firms] involved in the financial system who have not been traditionally regulated," says Ira Rheingold, executive director of the National Association of Consumer Advocates, adding that while the Federal Trade Commission has historically handled regulating debt collectors and credit reporting agencies, it has had limited reach.
The CFPB wants "to go after the big actors involved in industries that really affect the financial services marketplace and clearly both debt collections and credit reporting are two of those places," he says.
The details of the new oversight are still murky, but it could allow the CFPB to go into theses business and examine their books and evaluate their practices. "They could do a compliance review, which was never really done before," Rheingold says.
It could also mean the CFPB has the authority to set rules governing the practices of the industry. "It's a very important announcement and something that we've needed for a very long time but didn't really have because the FTC was hamstrung," Rheingold says. "They didn't have quite the same authority as the CFPB has."
Under the proposed rule, only debt collectors earning more than $10 million annually would be subject to supervision. Those businesses amount to about 4 percent of companies in the industry, but account for more than 60 percent of debts collected each year.
The rule would also cover credit reporting, which is used to evaluate applications for credit cards, mortgages, auto loans and other types of credit. Agencies making more than $7 million a year would be subject to CFPB supervision, only about 7 percent of all agencies, but those companies cover about 30 consumer reporting firms and about 94 percent of proceeds earned from consumer reporting.
Bottom line, it's an excellent development for consumers, Rheingold says.
"These are industries that need supervision," Rheingold says. "There's probably no other industry that gets more complaints than the debt collection industry and then credit reporting is just so central to every decision these days."
The proposed rule is open for comment for 60 days during which the public is encouraged to weigh in on the details. The rule must be issued by July 21, according to the CFPB.