• CFPB Publishes Proposed Rule Defining “Larger Participants” in Consumer Debt Collection and Consumer Reporting
  • February 23, 2012 | Authors: David N. Anthony; John C. Lynch; Ethan G. Ostroff
  • Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Washington Office ; Troutman Sanders LLP - Virginia Beach Office
  • On February 16, 2012, the Consumer Financial Protection Bureau (CFPB) took the first step in including debt collectors and consumer reporting agencies (CRA) within its examination authority by publishing a Proposed Rule and requesting for public comment defining “larger participants” in the markets for consumer debt collection and consumer reporting. The Proposed Rule establishes a test that measures the criterion of “annual receipts” for each market to determine whether a nonbank entity is a larger participant of these markets. Covered persons meeting the proposed tests would qualify as larger participants and be subject to the CFPB’s supervision authority, including its authority to conduct examinations of business practices of the larger participants.

    The CFPB is authorized by section 1024 of the Consumer Financial Protection Act of 2010 (the Act) to supervise certain nonbank covered persons for compliance with federal consumer laws. In addition to regulating nonbank covered persons of all sizes in the residential mortgage, private education lending, and payday lending markets, the CFPB also has the authority to supervise nonbank “larger participants” in markets for other consumer financial products or services.

    For the debt collection market, the proposed threshold is more than $10 million in annual receipts. The Proposed Rule defines consumer debt collection as “collecting or attempting to collect, directly or indirectly, any debt owed or due or asserted to be owed or due to another and related to any consumer financial product or service.” Under Section 1002(15)(A)(x) of the Act, the term “financial product or service” includes “collecting debt related to any consumer financial product or service.” Proposed § 1090.101(g) defines the consumer financial product or service of “consumer debt collection” to “ensure that it captures a range of consumer debt collection activities, including consumer debt collection activities undertaken by third party collectors, law firms, attorneys, and debt buyers.”

    For the consumer reporting market, the measure is more than $7 million in annual receipts. The CFPB proposes to define “consumer reporting” as “collecting, analyzing, maintaining, or providing consumer report information or other account information used or expected to be sued in any decision by any other person regarding the offering or provision of any consumer financial product or service.”

    However, the Proposed Rule expressly excludes from the definition of consumer reporting a person that “collects, analyzes, or maintains information that solely relates to transactions or experiences between the person and a consumer,” and provides this information to an affiliate. Also, the CFPB proposes to carve out an exception for furnishers of information to a consumer reporting agency where the person “provides information solely relates to transactions or experiences between and a consumer and the person, or the affiliate of such person, to another person that is engaged in consumer reporting.”

    Finally, consumer reporting does not include a person that “provides consumer report or other account information that is used or expected to be used solely in any decision regarding the offering or provision of a product or service that is not a consumer financial product or service,” which includes “a decision for employment,” etc.

    According to the Proposed Rule, this CFPB will use a definition of “annual receipts” that is “informed by the method of calculating annual receipts” that is used in determining whether a business is a “small business concern” by the Small Business Administration (SBA) pursuant to 13 CFR 121.104. The Proposed Rule’s definition of “annual receipts” means “total income” (or in the case of a sole proprietorship, “gross income”) plus “cost of goods sold” as these terms are defined and reported on Internal Revenue Service (IRS) tax return forms for particular forms of business associations. Under the tests set forth in the Proposed Rule, these receipts must result from activities related to the market in question.

    Importantly, annual receipts of a person are calculated to include annual receipts of each affiliated company. If a person has acquired an affiliated company or been acquired by an affiliated company during the applicable period of measurement, the annual receipts used in determining “larger participant” status include the receipts of such affiliated company for the entire period of measurement (not just the period after the affiliation arose). The period of measurement depends on the number of years in which the particular person has been in business.

    Nuts and Bolts

    While it is unclear exactly how the CFPB will regulate debt collectors and CRA, the examinations likely will be similar to the examinations the CFPB will conduct on banks. Debt collectors and CRAs should, therefore, be prepared for unannounced visits from agency members and be prepared to have their company documents, board minutes, and reports reviewed. Moreover, a compliance program should be implemented in order to deal with consumer complaints. The number of consumer complaints received will directly correlate to the amount of attention a company receives. Thus, how a company handles these complaints is vital.

    Any comments on the Proposed Rule must be received by the CFPB on or before 60 days after the rule is published, meaning that comments must be received no later than April 17, 2012.