CFPA Debated in Committee this Week; Experts Weigh In on ARM Impact

A committee in the U.S. House of Representatives was expected to move forward this week with legislation that would create a new regulator, the Consumer Financial Protection Agency (CFPA), which could supplant the Federal Trade Commission as the primary regulator for collection firms.

A bill currently before the House Financial Services Committee, H.R. 3126, would also take regulatory powers from the Federal Reserve and other agencies and place it in the hands of independent regulators who would oversee products such as credit cards and other financial services. As such, the CFPA would oversee the Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA).

The idea has gained quite a bit of traction after the failure of bank regulators to catch many of the recent abuses in the financial services industry that led to a meltdown in the sector last year. But the Fed, along with much of the financial services industry, opposes the legislation.

ACA International, the association of credit and collection professionals, is also very concerned about the proposal. “The industry is very concerned about how this will work in practice,” said Adam Peterman, the group’s government affairs director. “It seems to me when you have the overall financial system governed by various regulators, you’re able to take into account all of the necessary parts of the economic cycle.”

Under the current system, the Federal Reserve handles economic growth; the Office of the Comptroller of the Currency (OCC) within the Treasury Department handles solvency and the FTC handles consumer protection, Peterman explained. “You are accurately considering the entire economy, and that provides for a healthy cycle. With the Consumer Financial Protection Agency, they will be trying to handle consumer protection in the financial arena.”

But some promoting the adoption of the new agency want to limit the development of any new financial products to ones that are “plain vanilla.” If limited to such products, the financial industry would stagnate, according to Peterman. He pointed out that the limited amount of financial products and services available in the 1970s would be insufficient in today’s economy. Similarly, products and services available now could very well be insufficient in 40 years.

Some in the accounts receivable management industry are taking a pragmatic approach to a potential CFPA, viewing it as inevitable. They are actively working to make sure the agency considers the position of the ARM industry.

“One regulator for both originating creditors and debt buyers could eliminate confusion for the financial services industry and consumers alike,” DBA International President Roger Knauf wrote in a letter to the editor Friday in the Wall Street Journal. “CFPA must be given pre-emptive rule-making authority over states, or this super agency will be an ineffective paper tiger with little authority to create protection for consumers nationwide.”

DBA International is an association of debt buying professionals.

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Peterman likes the idea of one set of rules for collectors rather than different rules in different states. But he says that he is concerned that the CFPA would not provide a uniform set of rules that would make compliance easier. Instead, the agency would provide just another layer of rules and regulations, making compliance even more cumbersome.

Congressional Republicans have been focusing their efforts on the state pre-emption issue as well. “We can end up with a patchwork quilt of regulation from states that may be hard for people to follow and hard to do business in,” said Rep. Mike Castle (R-Del.) as he debated the bill in the Financial Services Committee.

The Republican position is in response to an amendment offered by committee chairman Barney Frank (D-Mass.) that would allow states to pass stricter laws governing national banks’ activities.

Knauf also sees some problems with the proposed legislation that would hurt rather than help consumers: “Shortening the time period in which creditors can collect on past due debts further tightens credit standards in order to limit a lender’s risk. It leaves many creditors with no choice but to rush to the courtrooms seeking judgments, with the cost of that unnecessary litigation passed on to the consumer,” he wrote in his letter.

However, Dana Wiklund, research director, risk management, for Financial Insights, expects little change from the new legislation if it becomes law.

“I am not sure the CFPA will have any immediate or dramatic impacts on the collections industry,” he said. “Initially the CFPA will be focusing on rights and protections consumers have with their front line relationships with financial institutions. By front line, I mean that collections are a secondary relationship that consumers develop.”

The new regulator will concern itself with standardizing regulation around fees and rate practices that might impact consumers, according to Wiklund. “Many states have fairly evolved regulatory constraints on collections practices. That said, as consumer defaults climb, supply of collectable accounts will also rise, therefore lowering the fees and profits available to the collections industry. This environment will create greater competition and possibly more aggressive collections tactics. Consumer outcry may draw the attention of the CFPA at some point to look more closely at collections practices and tactics in this changed environment.”

Wiklund added: “My advice to the collections industry would be to rely on advanced analytics to improve their recovery rates and be very mindful of the regulatory environment they operate within, rather than on making their processes more aggressive.”