A warning to debt collectors: Back off

(MoneyWatch) The Consumer Financial Protection Bureau is going after banks and other lenders that lie to consumers when trying to collect on loans. Yesterday it published new guidelines for financial institutions as well as letters consumers can send to banks they feel are being abusive.

Prior to this, only third-party debt collectors had to abide by government rules about what they could and couldn't do when trying to collect on loans. The new rules will apply to banks, payday lenders, finance companies and other lenders who may be violating the law if they falsely represent the size of a consumer's debt, their legal right to collect the money or engage in other questionable practices.

Reports of abusive or deceptive practices by banks have increased in the wake of the financial crisis. Last year, six of the nation's largest mortgage lenders agreed to a $25 billion settlement with the government over abusive foreclosure practices. Even so, allegations of abuse continue to surface.

Last month, former Bank of America employees filed a lawsuit in which they allege that they were rewarded for meeting quotas tied to sending distressed homeowners into foreclosure. In their court filings they say employees working on mortgages falsified records and were told to delay U.S. loan-assistance applications by requesting paperwork the bank already had.

Banks have also come under increased scrutiny for how they collect on credit-card debt, which is regulated by the Office of the Controller of the Currency. In May, JPMorgan said it expected to face enforcement action over how it pursues consumers' bad debt. In addition to the federal probe, the bank is said to be under investigation by regulators in 13 states.

Under the CFPB rules issued yesterday banks could face fines for:

  • Collecting or assessing a debt and/or any additional amounts in connection with a debt (including interest, fees and charges) not expressly authorized by the agreement creating the debt or permitted by law
  • Failing to post payments timely or properly or to credit a consumer's account with payments that the consumer submitted on time and then charging late fees to that consumer
  • Taking possession of property without the legal right to do so
  • Revealing the consumer's debt, without the consumer's consent, to the consumer's employer and/or co-workers
  • Falsely representing the character, amount or legal status of the debt
  • Misrepresenting that a debt collection communication is from an attorney
  • Misrepresenting that a communication is from a government source or that the source of the communication is affiliated with the government
  • Misrepresenting whether information about a payment or nonpayment would be furnished to a credit-reporting agency
  • Misrepresenting to consumers that their debts would be waived or forgiven if they accepted a settlement offer when the company does not, in fact, forgive or waive the debt
  • Threatening any action that is not intended or the covered person, or that the service provider does not have the authorization to pursue, including false threats of lawsuits, arrest, prosecution, or imprisonment for nonpayment of a debt

The CPFB also published letters that can be used by consumers to get more information on the debt they owe; who want to dispute the debt and want the debt collector to prove responsibility or stop communication; who want to restrict when and how a debt collector can contact them; who have hired a lawyer; and who want the debt collector to stop any and all contact.

The agency also unveiled a website -- http://www.consumerfinance.gov/complaint/ -- where consumers can file and track complaints.