As millions of Americans know first-hand, the country is suffering from a debt-collection headache, with more than 6,000 collection companies relying on often overly aggressive tactics to reclaim past-due payments.
Americans with debts in collections may see some pain relief from new rules proposed by the Consumer Finance Protection Bureau, which on Thursday said were aimed at curtailing what it calls some of the most egregious behaviors.
Debt collection, a $13.7 billion industry that employs more than 130,000 people, affects about 70 million consumers who have debts in arrears, although the CFPB said some of those consumers may be wrongly contacted by collectors.
The debt collection industry has grown in complexity over the past few decades, and some creditors now sell debts for pennies on the dollar to third-party collectors. Debt collectors sometimes try to collect in court, leading to abuses such as "robo-signed court documents" -- when debt buyers create affidavits without checking the accuracy of their records.
Other cases feature a lack of clarity about appropriate practices. CFPB director Richard Cordray noted that the 40-year-old Fair Debt Collection Practices Act was written before the advent of voicemail, email or text messages.
"Often debt collectors are motivated to go to almost any lengths to try to extract as much as they possibly can from the debtor," Cordray said in prepared remarks. "This is because they are typically paid based on the amount they collect, the relationship may be fleeting, and the more distant risk of being called to account later may not outweigh the immediate urgency of getting paid today."
Debt collection has drawn more complaints than any other single financial industry segment. Consumers have lodged more than 250,000 grievances about collectors with the agency, the CFPB said. That represents about one-quarter of all the complaints it has received.
An analysis from the People's Action Institute, a grassroots organization that works on economic, gender, racial and environmental issues, found that 42 percent of the debt collection complaints at the CFPB were for debts that consumers said they didn't owe.
"New rules to rein in abusive debt collection practices are absolutely needed," said LeeAnn Hall, co-executive director of People's Action Institute. "Some of the deceptive and abusive tactics documented in consumer complaints include harassing people for debts not owed, threatening illegal actions, calling people at work and contacting their employers and neighbors."
The rules outlined by the CFPB focus on third-party debt collectors. The agency noted that it intends to address first-party debt collectors -- such as banks or credit card issuers that are seeking repayment from their own customers -- in the future.
The CFPB's new proposals will next receive comments from a panel of small businesses in the industry, and the public will be invited to submit written comments. Following those steps, the agency will issue its final regulations.
Here are five things third-party debt collectors will no longer be able to do under the proposals.
Collect on a debt that doesn't exist. Unfortunately, some Americans end up hounded by debt collectors for obligations they don't owe. This can be due to mistakes in a debt collector's records or even fraud.
Under the CFPB's proposals, collectors would have to confirm that a debt exists and that they have sufficient information to begin a collection. The agency said it's considering barring collectors from pursuing debts with warning signs such as missing information or high dispute rates.
File a lawsuit to collect a debt after the statute of limitations has expired. The CFPB has singled out robo-signed court documents as a problem, but the agency said it wants to address the issue earlier in the process. It said debt collectors should have higher hurdles to pursue a lawsuit, including making it clear that they can't file a lawsuit on a debt if the statute of limitations has expired.
Demand repayment without informing a consumer of her rights. Communication from debt collectors can be confusing, especially when a consumer may not even remember the debt. While debt collectors provide notices about the debts, those statements include limited information and are written in legalese, the CFPB said.
Under the proposals, debt collectors would have to provide more information written in clear English about the debt and the consumer's rights .
Incessantly call, leave voicemails or email consumers. One major headache for people in collections is the number of times debt collectors contact them. The CFPB said it wants to limit the number of contacts for consumers that debt collectors haven't previously reached.
Debt collectors wouldn't be able to email, phone or send mail to a consumer more than six times per week, which would include unanswered calls and voicemails, the CFPB said. After reaching the consumer, the debt collector would be limited to either one actual contact or three attempted contacts per week.
Bury a complaint by selling the debt to another collector. One headache for consumers is that their disputes are sometimes lost if their debt is sold to another collector. Under the CFPB's rules, a new collector would have to investigate and resolve the dispute before trying to collect payment.