[Senate Hearing 113-75]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 113-75
 
             SHINING A LIGHT ON THE CONSUMER DEBT INDUSTRY

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON

             FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION

                                 of the

                              COMMITTEE ON

                   BANKING,HOUSING,AND URBAN AFFAIRS

                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

             SHINING A LIGHT ON THE CONSUMER DEBT INDUSTRY

                               __________

                             JULY 17, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


                 Available at: http: //www.fdsys.gov/





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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

     Subcommittee on Financial Institutions and Consumer Protection

                     SHERROD BROWN, Ohio, Chairman

       PATRICK J. TOOMEY, Pennsylvania, Ranking Republican Member

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         DAVID VITTER, Louisiana
ROBERT MENENDEZ, New Jersey          MIKE JOHANNS, Nebraska
JON TESTER, Montana                  JERRY MORAN, Kansas
JEFF MERKLEY, Oregon                 DEAN HELLER, Nevada
KAY HAGAN, North Carolina            BOB CORKER, Tennessee
ELIZABETH WARREN, Massachusetts

               Graham Steele, Subcommittee Staff Director

       Tonnie Wybensinger, Republican Subcommittee Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JULY 17, 2013

                                                                   Page

Opening statement of Chairman Brown..............................     1

                               WITNESSES

Corey Stone, Assistant Director, Office of Deposits, Cash, 
  Collections, and Reporting Markets, Consumer Financial 
  Protection Bureau..............................................     3
    Prepared statement...........................................    19
    Responses to written questions of:
        Senator Toomey...........................................    28
James Reilly Dolan, Acting Associate Director, Division of 
  Financial Practices, Federal Trade Commission..................     4
    Prepared statement...........................................    21
    Responses to written questions of:
        Senator Toomey...........................................    33

              Additional Material Supplied for the Record

Statement of the Office of the Comptroller of the Currency.......    36

                                 (iii)


             SHINING A LIGHT ON THE CONSUMER DEBT INDUSTRY

                              ----------                              


                        WEDNESDAY, JULY 17, 2013

                                       U.S. Senate,
                 Subcommittee on Financial Institutions and
                                       Consumer Protection,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 10:13 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Sherrod Brown, Chairman of the 
Subcommittee, presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. The Subcommittee will come to order. Thank 
you to the witnesses for joining us. Thanks for those in the 
audience who are here in this very warm room today, which I 
guess is the first Banking hearing since the new Consumer 
Bureau Director has been confirmed. That is good news in terms 
of moving forward, good news in terms of setting a precedent in 
this agency, and good news in expanding the authority that this 
Committee and this Senate and Federal law gives the Consumer 
Bureau in terms of the more expansive powers that we vested in 
him, once confirmed, so that is good news all around.
    Senator Toomey is going to try to join us. I apologize for 
the delay. We had a vote at 10 o'clock, so I had to go vote 
first. I will make a brief statement. Then we want to hear from 
the witnesses, and then we will begin the questions.
    Two years ago, we learned the Nation's largest banks kept 
shoddy mortgage records and forged legal documents in the 
foreclosure process. We know how people, so many homeowners, 
paid a terrible, terrible price for that.
    In response to these issues, the Nation's regulator for 
national banks began investigating the consumer debt markets to 
see if there were similar kinds of behaviors, and here is what 
the OCC said--the OCC not necessarily always in its past a 
friend of consumers, but increasingly so, and increasingly 
doing its job as a regulator. And I would thank them for that. 
But what they said was: ``Its current interest debt collection 
and debt sales activity stems from the OCC's 2010 examination 
work when mortgage servicing and foreclosure practices that 
revealed weak governance of third-party vendors, including 
notaries and affiants, and poor documentation practices more 
generally. Because of''--this is the important part--``Because 
of the similarities in processes and heavy reliance on third 
parties, outside attorneys, notaries, and affiants, the agency 
was concerned that similar weaknesses might be present in other 
retail lending activities.''
    Just as we saw in the mortgage market, banks and other 
lenders again are keeping shoddy records and giving them a seal 
of approval again. Former bank employees have reported that 
they were instructed to ``go ahead and sign'' affidavits 
verifying consumer debts, even when they did not have 
documentation to back up their claims.
    When debt buyers purchased these loans from the biggest 
banks, they signed as-is contracts, giving banks cover to 
offload debts for collection that may be inaccurate, they may 
be incomplete, they may be legally uncollectible, but going 
forward as is.
    When banks and third parties collect debts based on 
unreliable information, megabanks are again making the rules, 
and consumers again pay a price for that. And it shows. Last 
year, the FTC received more complaints about debt collectors 
than about any other industry. Some 200,000 complaints came in 
about lenders that collect their own debts, collectors hired by 
lenders to collect on their behalf, and outside debt buyers 
that paid just pennies on the dollar for tens of billions of 
dollars in charged-off debt, hoping to collect even a small 
fraction of that debt.
    In the past year, debt collectors have paid millions to 
Federal regulators to settle legal action for violating 
consumer protection laws. Several collectors violated the Fair 
Debt Collection Practices Act, the law intended to keep 
collectors from abusing consumers by threatening physical harm, 
by calling repeatedly at all hours of the day, by divulging 
consumers' confidential financial information, by attempting to 
collect debts they know do not exist, and refusing to fully 
review the validity of a debt even when a consumer says, ``I do 
not owe that.''
    In 2010, Congress created the Consumer Financial Protection 
Bureau, the first Federal agency with comprehensive authority 
over the collection industry. The CFPB is in the process of 
writing the first rules, as we know, to supervise large 
creditors and collectors. Collecting on legitimate debts in a 
safe and sound way can help our Nation's credit system function 
more efficiently. Banks can make less expensive loans, 
consumers are better off. But attempting to collect on 
illegitimate debts using abusive or deceptive tactics hurts 
consumers and deadlocks our backlogged legal system.
    In the 35 years--this bill I believe was signed into law in 
1977. In the 35 years since the first debt collection law was 
passed, the industry has changed, and changed dramatically, but 
the law has not been updated. I hope to hear from the FTC, the 
agency that now has authorities over debt collectors, and the 
CFPB about how we can modernize debt collection oversight to 
better serve consumers.
    I will introduce the panel, and then we will go forward.
    Corey Stone is Assistant Director, Credit Information, 
Collections, and Deposit Markets at the CFPB. He serves as 
Assistant Director and has extensive experience with electronic 
payment infrastructures, credit scoring, credit access, and 
money service businesses. Mr. Stone, thank you for joining us.
    Reilly Dolan is Acting Associate Director for the Division 
of Financial Practices at the FTC's Bureau of Consumer 
Protection. Mr. Dolan has a distinguished career in consumer 
protection at the FTC, has supervised investigations and 
litigation enforcing the Federal Trade Commission Act and other 
financial consumer product laws governing nonbank financial 
service providers.
    Mr. Stone, why don't you go first. Thanks for joining us.

    STATEMENT OF COREY STONE, ASSISTANT DIRECTOR, OFFICE OF 
 DEPOSITS, CASH, COLLECTIONS, AND REPORTING MARKETS, CONSUMER 
                  FINANCIAL PROTECTION BUREAU

    Mr. Stone. Thank you, Chairman Brown. It is a pleasure to 
speak with you today on behalf of the Consumer Financial 
Protection Bureau on the subject of debt collections.
    In the wake of our recent financial crisis, we see far too 
many people in financial difficulty. By our best estimate, 30 
million people have one or more debts in collection. These 
consumers are likely to hear from one of over 4,000 debt 
collection and debt purchasing companies. These firms are an 
essential part of our credit system, and without collection 
activity, more debts would go unpaid, and lenders would be more 
reluctant to extend credit and would need to charge more for 
doing so.
    Yet while many debt collectors treat consumers fairly and 
respectfully, others try to get ahead by flouting the rules. 
Our job is to root out bad actors and protect consumers against 
unfair, deceptive, or abusive practices and other violations 
that harm both consumers and every collector that tries to 
operate within the law.
    In January, the Bureau gained its authority to supervise 
about 175 of the largest debt collection and debt-buying firms, 
which represent over 60 percent of consumer collection industry 
receipts. Through our examinations, we are now in a position to 
evaluate whether Federal consumer laws are being followed at 
every stage of the credit-granting process--from credit 
origination to servicing to debt collection. And through our 
enforcement authority, we have taken action and we will 
continue to do so when we see the law being flouted.
    Last month, we held a stakeholder roundtable with the 
Federal Trade Commission to gather insight on the integrity of 
information used in debt collections and in lawsuits against 
debtors. We often hear about collectors who pursue payments 
from the wrong consumers or for the wrong amounts. This can 
happen when information about a debt gets lost or changed as 
the debt is assigned or reassigned to a collector or sold off 
to a debt buyer. Over time, with changing ownership and 
accumulated interest and fees, the debt may become 
unrecognizable to the consumer who owes it.
    At our roundtable, we heard strong consensus about the need 
for robust national documentation and accuracy standards 
pertaining to information used to verify and collect debts, and 
we will keep that in mind as we consider rulemaking on debt 
collection issues.
    Last week, we announced that we would begin to take 
consumer complaints about debt collection through our Consumer 
Response office. As with other complaints we take, these will 
be forwarded to the collection company, and in some cases to 
the original creditor, for resolution. We will be able to track 
responses. The process will aid consumers who may have been 
subject to potentially improper actions, and it will enable us 
to identify entities whose practices generate high levels of 
complaints and target our supervision and enforcement efforts 
where they are most needed.
    I want to point out two growing challenges in debt 
collection.
    The first is that unsecured debt issued by financial 
institutions no longer represents the largest focus of debt 
collection activity in our country. According to one trade 
group, hospitals and other health care providers now represent 
both the largest group of customers of collection agencies and 
their largest amount of recoveries in dollar terms. Unpaid 
medical bills trouble a large number of Americans, including by 
adding negative information to their credit reports and hurting 
their credit scores.
    Another fast-growing area of collection is student debt. 
Nearly $100 billion in Federal and private student loans is 
currently delinquent or in default. Unpaid medical bills and 
student debt present some unique challenges to both consumers 
and collectors and to our overall economy. We will need to be 
sensitive to these challenges as we seek to improve practices 
and protections in the overall marketplace for collections.
    The second challenge is what you said, Senator: Congress 
passed the Fair Debt Collection Practices Act many years ago, 
before many of today's communication technologies were in use. 
Cell phones, text messaging, email, voicemail, and even faxes 
did not exist back then, but are now being used by collectors 
to reach consumers, sometimes in ways that can compromise both 
dignity and privacy. We intend to engage with our colleagues at 
the FTC and the FCC, each of which have relevant jurisdictions 
that pertain to these practices, to establish clearer 
guidelines for how collectors may use some of these new 
communication technologies to reach consumers who owe debts, 
while protecting privacy and dignity.
    As our Director, Richard Cordray, pointed out last week, 
our system of granting credit is based on ``an accepted notion 
that people who owe money to others should in fact repay the 
money they have borrowed, and that they should feel an 
obligation to do so.'' So debt collection activities play an 
essential role in this system, and without them, credit would 
be harder to come by and more expensive. Our job is to assure 
that consumers are not subjected to collection of debts they do 
not owe or to debts in the wrong amount or that they have 
already paid. Likewise, Congress has empowered and obligated us 
to assure that when consumers cannot, or even in the occasion 
when they will not, repay their debts that they continue to be 
treated with dignity and respect.
    Thank you for having me here today, and I look forward to 
your questions.
    Chairman Brown. Thank you, Mr. Stone.
    Mr. Dolan.

  STATEMENT OF JAMES REILLY DOLAN, ACTING ASSOCIATE DIRECTOR, 
   DIVISION OF FINANCIAL PRACTICES, FEDERAL TRADE COMMISSION

    Mr. Dolan. Thank you, Chairman Brown. I am James Reilly 
Dolan. I am the Acting Associate Director for the Division of 
Financial Practices in the FTC's Bureau of Consumer Protection. 
I appreciate the opportunity to present the FTC's testimony on 
debt collection and the Fair Debt Collection Practices Act. The 
views expressed in the written testimony represent the views of 
the Commission. My oral statement and responses to your 
questions reflect my own views.
    While lawful debt collection serves an important role in 
making consumer credit more readily available and affordable, 
unfair, deceptive, and abusive collection practices victimize 
consumers and undermine fair competition. In some extreme 
cases, collectors will even threaten to have consumers arrested 
or jailed, pretend to be law enforcement, or threaten to 
physically harm consumers or their loved ones.
    Accordingly, stopping such unlawful debt collection 
practices is among the FTC's highest priorities. Since January 
1, 2010, the FTC has brought 15 cases against debt collectors 
and has obtained judgments of more than $56 million and orders 
that protect hundreds of thousands, if not millions, of 
consumers from future harm.
    Just last week, the FTC announced it reached a settlement 
with the world's largest debt collector, Expert Global 
Solutions, commonly known as NCO, to resolve allegations of 
FDCPA violations. The FTC alleged that NCO annoyed and harassed 
consumers with repeated phone calls and impermissibly disclosed 
debt to third parties, especially in answering machine 
messages. As part of the settlement, NCO agreed to pay a $3.2 
million civil penalty, the largest civil penalty the FTC has 
obtained in cases alleging violations of the FDCPA.
    As another example, in 2012, the FTC obtained a civil 
penalty of $2.5 million as part of a settlement with a leading 
debt buyer, Asset Acceptance, to resolve alleged violations of 
the FDCPA. The FTC also obtained strong injunctive relief as 
part of the settlement, including a requirement that Asset will 
tell consumers whose debts may be too old to be legally 
enforceable that it will not sue to collect on that debt. This 
disclosure requirement already has had a positive impact on 
industry practices.
    In other cases, the FTC has focused on swiftly halting 
exceptionally egregious debt collection conduct, seeking and 
obtaining preliminary relief including ex parte temporary 
restraining orders, assets freezes, and appointments of 
receivers. The FTC has also obtained strong final relief, 
including in some cases banning the defendants from engaging in 
debt collection.
    For example, in FTC v. Forensic Case Management Services, 
the Commission stopped a debt collector charged with engaging 
in a host of egregious conduct, including threatening to 
physically harm the consumers, desecrate the bodies of dead 
relatives, and to kill their pets. The defendants ultimately 
stipulated to a permanent ban on engaging in debt collection.
    As another example, the FTC obtained preliminary relief in 
three recent cases against so-called phantom debt collectors. 
Phantom debt collectors, in some cases located offshore, 
attempt to collect on debts, often related to payday loans, 
that either do not exist or are not owed to the phantom debt 
collectors. In each case, the FTC alleged that the defendants 
pretended to be law enforcement or other Government authorities 
and falsely threatened to arrest or jail consumers immediately 
if they did not agree to make payment.
    While enforcement actions like these are at the heart of 
the Commission's debt collection work, it also engages in 
education, public outreach, and research and policy 
initiatives.
    For instance, the FTC held a series of nationwide 
roundtable discussions and public comments examining debt 
collection litigation and arbitration proceedings, which 
culminated in the publication of a report in July 2010. And in 
January of this year, the FTC released a report on the first 
empirical study of the debt-buying industry. The report was 
based on extensive and detailed information that the FTC 
obtained from nine of the largest first-generation debt-buying 
companies, and found there is room for improvement in the 
information and documentation debt buyers have when they 
contact consumers and try to collect debts.
    Most recently, as Mr. Stone referred, as part of the FTC's 
ongoing coordination with the CFPB on debt collection, the two 
agencies cohosted a roundtable to examine the flow of consumer 
data through the debt collection process. The roundtable 
brought together consumer advocates, credit issuers, collection 
industry members, State and Federal regulators, academics, and 
other stakeholders to exchange information on a range of issues 
related to the consumer information that flows through the life 
of a debt. All stakeholders agree that better information is 
better for all.
    I thank you for the opportunity to present the Commission's 
testimony in this critical area, and I am happy to answer your 
questions.
    Chairman Brown. Thank you very much, Mr. Dolan.
    I will start with Mr. Stone. You talked about hospital 
debt. I will get to that in a second. I understand student loan 
debt is different because it is the behavior of the debt 
collectors I assume is different--I want you to walk through 
that in a moment--because it is not dischargeable in 
bankruptcy. Is hospital debt any different in terms of the--do 
you see different trends in hospital debt in terms of how long 
the hospital tries to collect, the methods that hospitals use, 
when they sell their debt how those--just the process of 
selling the debt and collecting, do you see any difference in 
this growing health care debt from other kinds of debt? Putting 
aside student loans for a moment.
    Mr. Stone. Yes, the biggest difference is there is a huge 
diversity in medical providers. It is not just hospitals. If 
you go into the hospital for a medical procedure, you are 
likely to have consumed the services of a blood testing service 
and an ambulance service, so a bill typically involves multiple 
providers and potentially multiple payments by insurers, and 
the consumer is stuck with the rest if they have insurance. 
Otherwise, they are getting separate bills.
    There are no standards yet in terms of when a debt is 
assigned to a collector or, when it is considered to be charged 
off. Some collectors in the medical field are essentially 
outsourced receivables management companies who actually do the 
billing and take over the calling from day one. They provide 
the lockbox service to collect the payments while others keep 
all those collections in-house. There is a great variety in 
terms of whether hospitals report or do not report items in 
collection to a consumer reporting agency and when they would 
report. So we have a little bit of a wild, wild west situation 
in that----
    Chairman Brown. Thank you. A health care bill where you go 
to a hospital and you are paying the lab and you owe money to 
the lab, the doctor, the hospital itself, a number of doctors, 
and maybe multiple labs or testing facilities or scanning 
companies or whatever, scanner companies, is there usually--if 
I am the debtor there, am I usually--am I getting pursued by 
five or six or eight people for that debt unlike maybe a credit 
card debt when it is one entity pursuing me? Or is it more 
likely that there is some coordination among the various 
medical professionals or companies there in pursuit of that 
debt? Or is there no rhyme or reason or no trends that you can 
see?
    Mr. Stone. So far we have not been able to see rhyme or 
reason in that. One of the things that, say, a credit card 
issuer would have is guidance or accounting rules that are 
imposed by the prudential regulators when a debt is considered 
to be charged off, and that typically is a point at which a 
card issuer would tend to use an outside collection agency. 
There is no standard like that in the medical field. You have 
got all these different kinds of providers with different 
capabilities, different record keeping, and different 
capabilities to do their own collections. And, in the medical 
field, they tend to be using different collection agencies, 
many of whom are small and local, because health care provision 
tends to be local.
    Chairman Brown. So there is a reasonable chance that I am 
discharged from a hospital, my insurance was either inadequate 
or I am fighting with my insurance company, it is not paying 
what I thought it would, or maybe I do not have insurance, 
whatever, and I am getting calls then from a number of 
different collectors, collection agencies, for that hospital 
bill different--again, very different from running up a debt 
with one credit card or with one student loan company.
    Mr. Stone. Right, and----
    Chairman Brown. Which suggests, if I could interrupt for a 
moment, which suggests perhaps more protections should be in 
place for that customer, for that debtor. Go ahead.
    Mr. Stone. Yes, standards would be a great starting point. 
You raise the possibility you might get multiple calls. In 
fact, many of these debts are very small. I think the statistic 
from the Fed's initial research on this is that 60 percent of 
the debts are less than $200 in medical, so in many cases, the 
consumer will not get a call. In the way our medical system 
does billing, they may not get a bill from the individual 
ambulance provider, which may get rolled up in the hospital 
bill and get lost. However, that does not stop the ambulance 
service from trying to collect. They need to get paid by 
somebody. And so the simplest thing for a lot of these 
providers to do is to report the debt to a credit report 
company because it is free. Then when the consumer applies for 
a loan or happens to, perhaps, look at their credit report, 
they discover the unpaid bill, and that is the time when they 
first contact the provider.
    Chairman Brown. So the ambulance company to which you owe 
$180 typically collects that from the hospital where you have 
been--where the ambulance driver has taken you. And if the 
hospital does not pay because you have not paid the hospital, 
all the ambulance driver might--all the ambulance company might 
do is put it on your credit report, not go after you directly, 
I who was riding in the ambulance?
    Mr. Stone. We are just beginning to understand this. It is 
not clear that the hospital is the one who is responsible for 
paying the ambulance company. It might be the insurance company 
that is responsible for paying the ambulance company, but the 
hospital is responsible for billing the insurance company on 
behalf of the ambulance company, and the insurance company 
negotiates with each of the billers. It is hard to track 
exactly what is happening. There is also some question as to 
whether the insurance company covers the ambulance service or 
not. If it does, it might pay the hospital, which would pay the 
ambulance company. The insurance company may also pay the 
ambulance company directly, bill the consumer, or does not bill 
the consumer and waits until it has got a response from parking 
this----
    Chairman Brown. So how do you make rules and standards 
here? Is it up to the States? Is it up to the Consumer Bureau? 
What do you see in the next months ahead about this?
    Mr. Stone. This is an area where we need to do a lot of 
further investigation to really understand it. The Affordable 
Care Act may make a difference. One of the interesting things 
coming out of the Act is that the first set of standards for 
collecting of medical debt has been established by the IRS for 
nonprofit hospitals as part of their retaining a nonprofit 
status. So, there are growing impetuses for the creation of 
standards on the record keeping, on the billing, and ultimately 
for the collections of these debts.
    Chairman Brown. Let me come back to you on student loans, 
but, Mr. Dolan, the OCC statement for the record quotes 
Comptroller Curry from a year ago saying he has seen 
institutions outsourcing such functions as debt collection, but 
not taking adequate care to ensure that the third-party 
contracted to perform these functions follows the law and 
regulations governing them.
    You mentioned NCO and the settlement. Does it trouble you 
that NCO is owned by one of the world's largest banks? Is that 
troubling, or does that not matter?
    Mr. Dolan. Obviously, we would need to make sure that they 
deal with conflicts of interest. When we did the debt buyer 
study, we looked at publicly available data from Nielsen and 
confirmed that 4 out of the 14 top debt buyers were publicly 
owned including NCO, and they do have this connection with the 
bank.
    In some ways that could make life easier because they have 
potentially greater access to the documentation that the 
original creditor has. I do not know to what extent they had 
access to that documentation. In most instances, contracts 
provide limited access to documentation from the original 
creditor. The debt buyer can only go back so many times, can 
only go back so many times within a certain timeframe, and then 
they start being charged for the information.
    There could be benefits to having a relationship as long as 
the arm's-length transactions are maintained.
    Chairman Brown. Let me talk about another one of those, and 
as you point out--and thank you for that answer--there are a 
number of examples of large institutions, large banks 
especially, owning these companies. One collector, Allied 
Interstate, is owned by the Canadian Firm iQor in which 
Citigroup holds a large investment stake. I guess I draw three 
conclusions from the fact that Citigroup--or another large 
institution in the case of another one of these collection 
agencies, these collection firms, I guess I draw three 
conclusions from Citigroup deciding that Citigroup is not 
collecting this, that they have created a subsidiary to do 
this. And let me share the three and get your thoughts about 
them:
    First, that Citigroup and this bank and other banks think 
that this is a lucrative business to do debt collection;
    Second, there is some reputational risk, for want of a 
better term, in associating with these collection firms. 
Citigroup does not want, apparently--I mean, my contention 
perhaps. I think this is the case, that Citigroup probably does 
not want the imprimatur of Citigroup on their aggressive 
tactics to pay these debts back, so they have something called 
iQor or Allied Interstate or something else;
    And, third, it should not be that difficult for these banks 
to share--the banks to whom the debt is owed to share 
information with iQor or Allied Interstate when they do the 
collection.
    So the problem we cited earlier is that, you know, 
sometimes the debts are not really owed; other times the debts 
are--it is more in question; other times the debt has already 
been paid back, whatever the reason. But the debt collector 
does not often have that information, so the three points I 
made, a bit circuitously, the three observations, and I want 
your comments on each: it must be lucrative, the banks probably 
do not want their names on it on their aggressive tactics, and, 
third--and I am not judging their tactics. I am just saying 
they are aggressive. I think they are. But that does not mean 
they are good or bad or fair or unfair. And, third, there 
should be more--there could be more information sharing, which 
there apparently is not. Would you give me your thoughts on 
that?
    Mr. Dolan. Happy to. With regard to the reputational risk, 
you are actually touching on one of the things that we have 
kind of pulled out through our roundtables and through the debt 
buyer study, and that is, the identity of the original 
creditor. Consumers often need that identity in order to be 
able to assess, Hey, is this a legitimate debt? Did I even deal 
with this company? That is even, quite frankly, becoming more 
of an issue with the emergence of phantom debt.
    As I said, the contracts often that we were reviewing 
during the debt buyer study would have provisions in them that 
actually prohibited the disclosure of the original creditor. 
While we do not know for sure why, I think the supposition that 
you put forward is the reputational risk is certainly something 
that could very well be related to that. Along those lines, the 
OCC recently issued guidance for safety and soundness concerns 
when financial institutions are charging off debt to consider 
who the debt buyer is and to recognize that there will still be 
reputational harm to them based on the debt buyer's contacts 
and conduct with regard to the debtors.
    So who the original creditor is is very important 
information. It is not currently required under the FDCPA. The 
FDCPA simply says that when a consumer requests validation of 
the debt, the debt collector has to identify who owns the debt. 
It made sense back in 1977 because debt buying really had not 
come into the industry at that time. Things have changed and 
the Commission has expressed concern that consumers are not 
getting that information under the current rubric of the FDCPA.
    With regard to whether this is lucrative, there is probably 
a convergence of a number of different issues that play into 
this. First off, within the last couple of years, the OCC has 
required financial institutions to charge off debt within a 
certain period of time. Credit card debt has to be charged off 
within 180 days. That means it can no longer count toward the 
bank's assets, and obviously the OCC's concern for banks' 
safety and soundness, they want to make sure that there is a 
sufficient asset-to-liability ratio.
    So banks have to get rid of the debt within 180 days. One 
way they are able to still recoup the benefit of what otherwise 
would be deemed an asset is to sell the debt. Another way is if 
they have a relationship, they sell it in-house, for lack of a 
better term, to a debt buyer that they have an ownership 
interest in. But that allows them to continue to gain benefit 
of the assets while not affecting the OCC guidelines as to 
having to charge the debt off and not being able to count that 
as an asset for their asset-liability ratio.
    Information sharing was your third point, and the 
Commission is very concerned about the level of information 
that does get passed on, especially generation to generation, 
from a debt buyer. One of the things that we learned from the 
debt buyer study--I think we were a little surprised--is that 
all of the information that currently is required by the FDCPA 
to be provided in that validation notice is included in the 
data sheets that the debt buyers get. The biggest issue is the 
documentation. That is where currently the limitations are. 
Most sellers, as you noted in your opening remarks, sell it as 
is. They do not make the warranties, and they currently put 
restrictions on how many times a debt buyer may come back to 
get documents both in terms of time and in terms of frequency. 
So that is definitely one of the concerns the Commission has 
raised and wants to continue to look at, and we want to work 
with the CFPB as they are addressing some of these issues in 
rulemaking, and we will be continuing to look at it from the 
law enforcement lens.
    Chairman Brown. Thank you.
    Mr. Stone, I want your comments on Mr. Dolan's comments, 
but one question first to Mr. Dolan. Do these large banks that 
have these subsidiaries or have ownership of these companies, 
do they sell their debts exclusively to them? Or do they sell 
some portion of their debt collections to their subsidiaries? 
So, in other words, does Citigroup sell all of its debt 
collections to iQor, or do they spread them around to other 
institutions typically? Or don't you know that?
    Mr. Dolan. I actually do not know the answer to that 
question.
    Chairman Brown. OK. Mr. Stone, your comments on Mr. 
Dolan's.
    Mr. Stone. Just to answer the question you had, I know that 
in some cases these are actually in an auction environment, 
which makes it difficult for the buyer to negotiate better 
terms in terms of data continuity and data availability with 
the creditor who is selling the debt and who is trying to get 
as many dollars for that debt as they possibly can.
    The roundtable that we had together really focused on the 
importance of the need for standards and particularly on the 
need for the availability and retention of documents that can 
be used to validate and verify a debt down the line, including 
when it potentially goes to court.
    Interestingly, the Truth in Lending Act data retention 
requirements are 2 years. The statute of limitations tends to 
be longer in many States, and the period over which debt is 
reported to consumer reporting agencies as being in collection 
can be 7 years. The ability to conduct a proper investigation 
or to provide proper documentation to a court can be very much 
limited by the data retention policies of the original 
creditor.
    So we are trying to bring a soup-to-nuts, beginning-to-end 
approach to this, and make sure that we understand the hand-
offs, have standards for how those happen, and what is included 
in them.
    Chairman Brown. Thank you.
    Mr. Stone, tell me how you look at or how you assess the 
difference between student debt, which, as of course you know, 
cannot be charged off the bankruptcy--is not dischargeable in 
bankruptcy as other debt is. That is a whole other judgment 
call, but how that affects the debt collector's behavior over 
time versus a debt which is dischargeable with bankruptcy?
    Mr. Stone. Yes, well, in some ways, it does not. The 
largest debt collectors who collect on Federal student debt 
qualify under contracts with the Department of Education to 
collect those debts. They are all subject to the Fair Debt 
Collection Practices Act, and because they are virtually all 
larger participants in the collection market, they will be 
subject to our supervision. So we will be looking at their 
practices just like we do others.
    The differences have to do with an area where I do not by 
any means have the most expertise, and I know my colleague 
Rohit Chopra, who is our student ombudsman----
    Chairman Brown. He has been here.
    Mr. Stone. ----was in front of the full Committee several 
weeks ago to talk about student debt. The differences are, in 
addition to the nondischargeability, the youth and lack of 
sophistication of the population of students who owe student 
debt. Many of them are coming right out of school and are 
trying to get their first job to be able to create earnings to 
begin to pay off their debt; sometimes a mixture of public and 
private loans, which have different rules and may be a source 
of confusion. Public Federal debt has a set of rules about 
ability to pay and payments commensurate with earnings and 
forbearance that does not apply necessarily to the private 
student loans, and likewise, the powers that come with 
collecting student debt are, to some extent, accorded through 
the Department of Education and the Higher Education Act.
    The amount of student debt is a big number. It is a 
specialized population. We have to pay attention to maximizing 
the prospects of these people's earnings and ability to move 
along with their lives in order to maximize their possibility 
of repaying the debt. I think that this is a particular set of 
concerns of this population.
    Chairman Brown. Debt collectors recognize what you said and 
recognize the issue of discharging in bankruptcy. They also 
know that the Department of Education and private student 
lenders like Sallie Mae will pay a premium to collectors, will 
pay more than other kinds of debt. My understanding is they pay 
a commission. They give the collector a bonus for getting 
customers to make large payments. Incentives are not offered to 
help borrowers, though, enter sustainable income-based 
repayments. Pioneer Credit Recovery, a collector that contracts 
with Treasury and with the Education Department, is owned by 
Sallie Mae. If you would answer this, how do the incentive 
structures for collectors of student debt, what impact does 
that have on these consumers? Should these profit-driven 
practices be part of any lender or collector's business model?
    Mr. Stone. Yes. I am by no means the expert on this. The 
incentives, as you point out, are different. The cost of 
collection, as I understand it, is rolled into the principal of 
the loan at the time that it is assigned to collections at 
default, and that does create a bigger amount of principal. I 
am not quite sure how the collector gets paid, but my 
colleague, Rohit, would know much better. But the nature of the 
incentive, as you point out, is--and this goes back to the 
servicing as well as in collections, so the servicer of the 
loan is generally not the collector postdefault--to not 
necessarily advise the consumer of their options that are 
available through the rules that pertain to Federal student 
loans.
    Chairman Brown. Thank you. OK. Mr. Dolan, let me switch 
over to another issue. The OCC has put out some best practices 
on this, pretty strong, pretty solid. It seems they have 
expressed concern that banks' documentation is inadequate, 
which we had referenced earlier, requiring banks to include 
relevant information like cease-and-desist requests or whether 
this person--whether it is a servicemember, include relevant 
information on accounts that it sells. It questions whether 
these high-touch accounts should be sold at all.
    If banks have spotty documentation, the question to me is 
whether they should be able to collect or sell any of these 
accounts. And let me match--that is sort of the question I 
think we should ask. I just want you to--I want to list a 
number of policies, potential policies, and ask if you think 
they would be feasible: to require debt collectors, whether 
primary creditors or third-party collectors, to have all 
relevant documentation before issuing their first debt 
collection notice to the consumer, whether that should be a 
requirement; whether we should require that information on 
prior collection attempts travel with the debt, so if the 
original creditor tried to collect, then sold it to a 
collection agency, if that information should be available. 
Should we prohibit the sale of unverifiable debts, implicitly--
or suggesting that we need to know--or they should have to--
there should be some evidence and proof that they have, in 
fact, had verifiable debts, and disclosing that a credit 
collector is selling or collecting time-barred debt. If you 
would answer those.
    Mr. Dolan. Answering your first question, requiring debt 
collectors to have all relevant documentation, clearly, as I 
have noted, we have concerns about the availability of such 
documentation that collectors have, and the ability to provide 
that to consumers when they are disputing the debt or 
requesting validation.
    As you go down the generations of debt buyers, I am a 
little more concerned about kind of unintended consequences 
that may come out of a small debt buyer having a lot of 
information and they would, therefore, need to make sure that 
they have data security procedures in place because the last 
thing we would want is to find all that consumer file sitting 
in a dumpster. So we would have to make sure we are thinking of 
all of the unintended consequences as we go down that road.
    With regard to prior collection history, one of the things 
that our debt buyer study noted is that is one of the pieces of 
information that was not readily available in the data spread 
sheets that debt buyers would get from the creditors or from 
prior generations of the debt buyers. Clearly that is very 
relevant information. If a consumer has already disputed a 
debt, whether it is the full debt, amount of debt, ``I already 
paid that,'' ``It is not me,'' whatever the dispute is, that is 
information that a collector should have so that they are not 
reinventing the wheel with that particular debtor or purported 
debtor. So that definitely is something that we would like to 
work with the CFPB on how to best address that issue.
    On prohibiting the sale of unverifiable debt, I think the 
industry would reply they do not know it until they try it. The 
way that the Commission has addressed this issue in the past 
is, in addition to the requirements of the FDCPA, we have 
applied the FTC Act, and one of the doctrines of the FTC Act is 
that when an entity makes a claim, they have to have a 
reasonable basis for that claim. They have to have the 
substantiation to support that claim. In the debt collection 
context, what that means is if I am going to call you up and 
say you owe me money, I have to have a reasonable basis to make 
that claim.
    The creditor's data spread sheet may be a starting point, 
at least for the initial contact, for me to have a reasonable 
basis. But if you then say, ``Mr. Dolan, it is not me, it is 
Mr. Brown who lives down the street,'' I then have to take that 
information into consideration with the other information that 
I have in order to say I still have a reasonable basis or, gee, 
maybe I better go back and get more.
    So we have addressed that issue of unverifiable debt 
through the FTC Act. Trying to prohibit the sale of 
unverifiable debt we have not really looked at. We did not 
verify the accuracy of the data in our debt buyer study. There 
was really no easy way to do that given the volume of aggregate 
data that we had. So we do not know how accurate the as-is data 
really is. Clearly we hear plenty of anecdotes, and we receive 
a lot of complaints saying, hey, wait a minute, they did not 
get it right. But we just do not know if we are talking 3-, 4-
percent error rate, which still may affect a million consumers, 
or whether we are talking a much larger error rate.
    And then, I am sorry, I wrote down ``time'' for your fourth 
point, and I do not know what that reference is.
    Chairman Brown. The last is selling or collecting time-
barred----
    Mr. Dolan. Time-barred debt, thank you. It is not illegal 
under the FDCPA to attempt to collect on a time-barred debt. 
With that being said, it is a violation of the FDCPA to state 
or to imply that you could be sued in order to collect on that 
debt. So basically there is nothing wrong with saying, in the 
cleanest version, you owe this debt, it is old, I cannot sue 
you on it, but wouldn't you like to clear your name? That is 
probably not problematic. Any kind of implied representation, 
either through silence or through affirmative representations, 
that imply that I can or would sue you, violates the FDCPA. So 
right now the way the law is, collecting on time-barred debt, 
as long as the debt collector does not cross that line, is not 
a violation of the FDCPA.
    Chairman Brown. Do agencies--and then I will turn to 
Senator Toomey. Do agencies inform consumers that they can sue? 
Is this--that they cannot sue? Is that something that they do?
    Mr. Dolan. Most recently in our Asset Acceptance 
settlement, there is an order provision that if it is likely 
that the debt is at or near the statute of limitations, Asset 
has agreed under the order that it will inform the consumer 
that it will not sue on the debt. There are a couple of State 
laws that require that disclosure or in some cases a more 
complicated disclosure. More and more States are considering 
that type of disclosure. Absent either an order or in a State 
where disclosure is currently required, the debt collectors 
usually do not affirmatively say, ``I cannot sue you on this 
debt,'' or, ``I will not sue you on this debt.'' That is where 
the implied representation can arise, especially in a situation 
where, if it has gotten to the point that it is time-barred 
debt, most likely that consumer has been contacted on that debt 
multiple times. Prior collectors, who were not facing the time-
bar issue, probably were threatening lawsuit. There is a 
provision in the FDCPA that says you cannot threaten action you 
do not intend to take. So the threat is sometimes a little more 
subtle than that. But many of these consumers may have heard 
the message that they could be sued on these debts. So by the 
time that a debt buyer is a couple generations into it, has the 
time-barred debt, and does not say anything but does say, you 
know, ``You have to pay this debt or else,'' that could be 
enough to create that implied misrepresentation.
    Chairman Brown. OK. Senator Toomey, thank you for joining 
us, and take as much time as you would like, of course.
    Senator Toomey. Thank you very much, Mr. Chairman. I 
appreciate it. I am sorry I got here a little bit late, and I 
will not be able to stay long, but I did want to ask Mr. Stone 
a couple of questions, so I welcome our witnesses and thank 
them for being here.
    My questions, Mr. Stone, are about the process that the 
Bureau was using to establish the criteria for determining 
unlawful, inappropriate, unfair, deceptive, abusive practices. 
And my understanding is that the CFPB has done this by 
releasing guidance documents in the form of bulletins. There 
are a couple of bulletins that do this. And my first question 
is: Why is the CFPB doing this in the form of bulletins instead 
of in the ordinary rule-making process?
    Mr. Stone. Thank you, Senator. I am glad you asked that 
question, and there are many areas where we do feel that it is 
important to use a rule to clarify areas of law that are 
uncertain.
    I think one of the things that led up to the bulletin that 
you are probably referring to that we issued last week, which, 
essentially, listed practices that are defined in the Fair Debt 
Collection Practices Act as unfair, deceptive, or abusive, as 
being potential UDAAPs under our Title X authority, was that 
these are areas of established law where the Fair Debt 
Collection Practices Act is defining what is unfair, deceptive, 
and abusive. There are court cases that support those findings 
and add further definition to them. There are also many first-
party collectors that are already using the Fair Debt 
Collection Practices Act as guidance for how to conduct their 
own collection activities. So we felt we were on pretty 
conservative ground here in issuing that bulletin.
    Senator Toomey. But as you point out, you add further 
definition to existing law, and if there is a need to do a 
bulletin, there is obviously a perception that there is some 
need to provide this precision. My reading of Dodd-Frank Title 
X grants the CFPB authority to use rulemaking for this purpose, 
and one of the reasons, of course, is that rulemaking is a 
defined process that requires things like public input and 
review and opportunity for a real robust public discussion.
    In creating the bulletin, did you leave it open for public 
comment? Was there a comment period? How many comments did you 
get? Were they incorporated in a revised bulletin? Did any of 
that process occur?
    Mr. Stone. No, Senator. When we issue bulletins, we do not 
go through a comment process. I thought what I said was that we 
do issue rules when we need to add further definition, but in 
this case of unfair, deceptive, or abusive practices in the 
collections market, we did not think we were adding further 
definition to the law and, therefore, a rulemaking was not 
required.
    Senator Toomey. So what does the bulletin do then? What is 
the purpose of the bulletin if it is not to provide any 
additional definition or clarification?
    Mr. Stone. The bulletin simply says that the practices that 
have been deemed over many years to be unfair and deceptive or 
abusive in the debt collection practices as it applies to 
third-party collectors may be unfair, deceptive, and abusive 
practices as practiced by first-party collectors.
    Senator Toomey. So are you saying the bulletin just says 
that which is illegal is illegal?
    Mr. Stone. I guess I would have to agree with you, Senator.
    Senator Toomey. Well, that is peculiar. All right. But this 
is not something for which--I mean, there was some decision 
made here as to least apply to some parties that which was 
historically applied to other parties. That is determined, that 
is the decision that is embodied in the bulletin, right?
    Mr. Stone. Well, I think the history behind this includes 
not just FDCPA actions but actions under the FTC Act. So there 
are many, many actions that have been taken, including the 
actions that my colleague from the FTC just described as well 
as our recent action against American Express that we shared 
with the OCC and with the FDIC, which referred to the FTC Act 
in their case, and in our case under our Title X authorities 
where those practices were deemed to be unfair and deceptive, 
under the FTC Act and under Title X.
    Senator Toomey. OK. No further questions. Thanks.
    Chairman Brown. Thank you.
    I have one other question. I just want to make a comment. I 
appreciate Senator Toomey being here. I think that if it is a 
suggestion of CFPB overreach, I think that looking at what the 
OCC put out in terms of best practices is a similar kind of 
regulatory--financial regulatory body looking at suggestions 
that can make the system perhaps work a bit better.
    Mr. Dolan, let me just kind of conclude with a series of 
questions about the FTC. The FTC recommended that collectors 
systematically break out for consumers the principal balance of 
these accounts, the interest, and the fees. Both of you can 
answer this. These sorts of itemized--do you agree these--and 
make these answers short. They are pretty easy. Do you both 
agree these sorts of itemized statements should be provided to 
consumers? Any reason that you would not say yes to that?
    Mr. Dolan. We have consistently said that consumers should 
be provided the breakdown of principal, interest, and fees. I 
will note that one of the things we learned during the joint 
workshop was that it is easy to calculate postjudgment. It is 
not quite as easy to calculate prejudgment. But we still take 
the position that this type of information helps consumers 
understand the nature of the debt and it is consistent with 
what the FDCPA wants debt collectors to provide to consumers 
when they validate the debts.
    Chairman Brown. Mr. Stone, briefly.
    Mr. Stone. I think I can make my answer shorter: Yes.
    Chairman Brown. OK. Thanks.
    You both described and referred to a couple of times the 
FTC held a workshop on debt collection--this was 2009--and 
concluded that debt collectors have inadequate information when 
they seek to collect from consumers. The FTC then recommended 
changes in the information that debt collectors and buyers 
receive and advocated for improved validation notice for 
consumers.
    Last month, at the Debt Collection Roundtable--that one you 
referred to--we heard over and over again there is just not 
enough quality information available--well, at least provided 
to debt collectors or to consumers.
    With the technologies available today, why 4 years later 
are we still waiting on banks to improve their own information 
and the information they send on to collectors?
    Mr. Dolan. I think at this stage it is what the market 
bears between the creditors and the debt collectors. Most of 
the creditors are financial institutions outside of our 
jurisdiction, so we really are looking at it from just one part 
of the prism. I think the CFPB has a more global view, so this 
is one of those areas that we definitely want to continue to 
work closely with the CFPB as they are able to look at it from 
both sides.
    Mr. Stone. So if I can jump in, there are a couple of 
promising developments in this area. One is, as part of their 
due diligence and oversight of their collection agencies, a 
number of larger banks are requiring the collectors to actually 
transact their business on the bank's system, so there actually 
is no transfer of information. The system that is used by an 
individual representative is a screen that goes back to record 
keeping that is maintained by the banks, so there is not a 
hand-off of information. That also has some security benefits.
    A second development, that a few companies have proposed 
and developed the capability to provide, is a debt registry. So 
when debt is moved to collection by an institution, a clear set 
of data, to a standard that is yet to be developed and vetted 
by us, could be placed in a central repository. Rather than 
moving records around with ownership of the debt, one moves 
around access to the records, including access to any kind of 
documentation. Original statements, for example, and contracts 
that might travel with the debt, could be made available 
through the registry and would have a particular advantage for 
allowing smaller collectors to have access to the records 
without worrying about compromising data security. It could 
also serve as a place for consumers to go on a self-service 
basis, look up the debt with a secure ID, and determine whether 
it is theirs or not, and whether it actually represents what 
they think they owe.
    Chairman Brown. Is it particularly costly or burdensome for 
the creditors to provide documentation to the collectors? That 
is the argument that, of course, we hear. What is your thought 
on that?
    Mr. Stone. We have not gone and measured it. The companies 
who are developing these registry systems are saying it is 
quite inexpensive for them to provide, based on a one-time fee 
of a couple dollars, that creates a permanent record that could 
support all the players in the marketplace downstream. So the 
question really is: How much does it take to load up the 
original data by the original creditor? And in that regard, 
technology is moving in favor of that becoming increasingly 
cheap.
    Chairman Brown. And before you answer that, Mr. Dolan, it 
is pretty clear that if debt collectors--I mean, there are 
examples of this, more than anecdotal evidence, that when debt 
collectors misrepresent information or just get it flat out 
wrong, that consumers can lose access to credit; they can have 
a terrible credit report follow them around for the next 
decade. They spent time unnecessarily fighting the debt and all 
that comes--all that they are victimized by.
    The OCC has suggested that debt losses--that debt buyers 
would be willing to pay more for better information because 
they will collect more on these accounts. So when you think 
about the additional cost, there is a suggestion of additional 
payoff, that banks will get more money, consumers will benefit. 
Do you agree with that?
    Mr. Dolan. I was just writing down in my own notes, supply 
and demand curve. Currently, to kind of follow up on Mr. 
Stone's comments and then use that as a segue into your 
question, we have not looked at how much the increase in the 
cost of debt would be to the debt buyer for this information. 
What we have heard in the past is that debt buyers have said 
the creditor wants to charge us more for this, and obviously 
the incentives of the supply and demand currently have it at, 
on average, 4 cents--approximately 8 cents for what I will call 
the cleanest debt. Having the creditor maintain the 
documentation or provide it to the debt buyer will shift that 
curve. It is just I do not have a good answer of how far.
    With that being said, to the extent that they have more 
documentation, it is easier to collect on debts that otherwise 
might be disputed. So I do agree that the better data will 
allow better collection efforts as well.
    Chairman Brown. Thank you, and thank you both for being 
here. This was a very helpful discussion. Good luck to you, Mr. 
Stone, with the new and improved agency and as you work on 
these rules.
    I want to ask unanimous consent that the statement of the 
Office of the Comptroller of the Currency be included in the 
hearing record, too. And since nobody else is here to object to 
the unanimous consent, I guess it is agreed to.
    Thank you. If any Members of the Subcommittee have 
questions in writing to you, we will submit them to you within 
a week. I hope you can turn around the answers to those 
questions quickly.
    Thanks to both of you for your public service, and the 
Subcommittee is adjourned.
    [Whereupon, at 11:17 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                   PREPARED STATEMENT OF COREY STONE
    Assistant Director, Office of Deposits, Cash, Collections, and 
        Reporting Markets, Consumer Financial Protection Bureau
                             July 17, 2013
    Good morning, Chairman Brown, Ranking Member Toomey, and Members of 
the Subcommittee, it is a pleasure to be here again, and I am grateful 
for the opportunity to speak with you today on behalf of the Consumer 
Financial Protection Bureau on the subject of debt collections.
    The topic of today's hearing was also the focus of a field hearing 
the Bureau held last week in Portland, Maine. Many of my remarks today 
draw from those given by Director Richard Cordray at that event. Debt 
collection has long been a source of frustration for many consumers, 
generating a heavy volume of consumer complaints. It is the focus of 
considerable enforcement activity by the Federal Trade Commission, by 
State attorneys general, and most recently by the Bureau. We are all 
determined to make steady progress, together, to protect consumers in 
this area.
    Debt collection also has more salience today than perhaps at any 
time in our country's history. In the wake of the recent financial 
crisis, we see far too many people who have fallen into financial 
difficulties. Many lost their jobs, much of their savings, and even 
their homes. Bills piled up and sat unpaid. Many consumers fell behind, 
either because of bad decisions they made or because they were victims 
of tough economic conditions during the recession. The best estimates 
are that 30 million people--nearly one out of every ten Americans--came 
out of the financial crisis with one or more debts in collection, for 
amounts that average about $1,400 per person.
    While many debt collectors play by the rules and treat consumers 
fairly and respectfully, others try to get ahead by flouting the rules. 
Our job is to root out bad actors and protect consumers against unfair, 
deceptive, or abusive practices and other legal violations, which 
damage both consumers and every other debt collector that tries to 
operate within the law.
    There are over 4,000 debt collection and debt purchasing companies 
and they represent a wide spectrum of firms. They are an essential part 
of the credit system, which operates under the accepted notion that 
people who owe money to others should in fact repay the money they have 
borrowed, and they should feel their obligation and responsibility to 
do so. Without collection activity, more debts would go unpaid, and 
lenders would both be more reluctant to extend credit and would need to 
charge more for doing so.
    In January, the Bureau gained its authority to supervise firms that 
have more than $10 million in annual receipts from consumer debt 
collection activities. Our supervision authority extends to about 175 
debt collectors and debt buyers, which account for over 60 percent of 
the consumer debt collection industry as measured by annual receipts. 
Through our examinations, we are now in a position to evaluate whether 
Federal consumer laws are being followed at every stage of the 
process--from credit origination to debt collection. And through our 
enforcement authority, we have taken action and we will continue to do 
so when we see the law being violated.
    Last month, we held a joint roundtable with our partners at the 
Federal Trade Commission to gather information and solicit input from a 
wide range of stakeholders on the integrity of information used in debt 
collections and in lawsuits against debtors. We often hear about 
collectors who pursue payments from the wrong consumers or for the 
wrong amounts. This can happen when information about a debt gets lost 
or changed when the debt is assigned to a collector or sold off. Over 
time, when this information is presented to the consumer, the debt may 
become unrecognizable. At our joint roundtable, we heard strong 
consensus about the need for robust national documentation standards 
and the need to maintain the accuracy of information used to collect 
debts. We will keep that in mind as we move toward a rule-making 
process on debt collection issues.
    Last week we also announced that we would begin to take consumer 
complaints about debt collection through our Office of Consumer 
Response. As with other complaints we take, these will be forwarded to 
the collection company (which in some cases means the original 
creditor) for resolution and we will be able to track responses to 
those complaints. In a market composed of over 4,000 collection firms 
and where consumers are also subjected to scams by illegitimate actors, 
providing consumers with the opportunity to submit these complaints 
will serve as an important early warning function, as well as serving 
to aid consumers who may have been subject to potentially improper 
actions by companies. We will be able to identify entities whose 
practices generate high levels of complaints and target our supervision 
and enforcement efforts where they are most needed. Likewise, we will 
be able to identify criminals who are posing as collectors and report 
them to the proper law enforcement authorities.
    I want to point three important challenges in debt collection:

    First, when one excludes mortgages and auto loans, debt 
        issued by financial institutions no longer represents the 
        largest focus of debt collection activity in our country, 
        either by dollar amount or number of consumers affected. This 
        has been surpassed by medical debt. According to ACA 
        International, the largest trade group of debt collection 
        companies, hospitals and other health care providers now 
        represent both the largest group of customers of collection 
        agencies and their largest amount of recoveries in dollar 
        terms. \1\ As Senator Merkley pointed out in this 
        Subcommittee's hearing last December on credit reporting, 
        medical debt is affecting a large number of Americans, 
        including adding negative information to their credit reports 
        and exerting a negative impact on their credit scores. Third 
        party collectors of medical debt are subject to the same 
        Federal statute as collectors of financial debt when it comes 
        to protecting consumers, and we will be working with our 
        partners at the FTC to better understand collection practices 
        in this market and work to improve them.
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     \1\ ACA statistics on hospital and other health care providers' 
share of debt collector customers were presented in Bob Hunt's 
(Philadelphia Fed) presentation at the joint roundtable, available at 
http://www.acainternational.org/economicimpact.aspx.
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    Close behind, and perhaps the fastest growing area of debt 
        collection is student debt. With nearly $100 billion in Federal 
        and private student loans currently delinquent or in default, 
        this area of debt collection deserves particular scrutiny. As 
        my colleague Rohit Chopra, who is our Student Loan Ombudsman, 
        indicated in testimony before your full Committee three weeks 
        ago, \2\ we are working to help young Americans who are having 
        difficulty paying off their student loans to better understand 
        their options under the law either to restructure loan 
        repayments in ways that are affordable, or if their 
        circumstances require it, to obtain forbearance.
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     \2\ Testimony of Mr. Rohit Chopra, available at http://
www.consumerfinance.gov/testimonies/the-cfpb-before-the-senate-
committee-on-banking-housing-and-urban-affairs/.
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    Both medical and student debt have unique characteristics. And when 
        borrowers are delinquent or in default, both types of debt 
        present some unique challenges to both consumers and 
        collectors. We will need to be sensitive to these challenges as 
        we seek to improve practices and protections in the overall 
        marketplace for collections.

    A second point is that there is a surprising amount of 
        consensus across all market participants--from debt collectors, 
        creditors, and collection attorneys, to consumer advocates, 
        legal services providers, and State attorneys general--that we 
        must develop clear standards for data integrity and record-
        keeping in the debt collection market. This is a finding from 
        our joint roundtable and one that Director Cordray made last 
        week. Too often, important information about a debt, including 
        whether a consumer has disputed the debt, does not travel with 
        the debt when it gets assigned to third party collectors or 
        purchased by a debt buyer. And it is often either not present 
        or available as part of the required notice to consumers when 
        companies initiate collection activity or when owners of debt 
        file claims or seek judgments in court. If we can address this 
        problem, we will be providing consumers with tools they need to 
        engage more confidently in the collection process, set 
        requirements for disclosure and verification of debts that will 
        discourage illegitimate actors, and enable collectors who play 
        by the rules to more often avoid litigation. There is the 
        potential for all legitimate players to benefit.
    This will not be easy. When it comes to standards for the 
        fundamental task of maintaining records and disclosing 
        information, the devil is in the details. It means answering 
        the question: which specific pieces of information about a debt 
        need to be maintained, by whom, and disclosed when? If we get 
        this right, the result will be a more trustworthy collections 
        system that is more likely to treat consumers with dignity and 
        respect, while better meeting the needs of creditors.

    A final point: Congress passed the Fair Debt Collection 
        Practices Act when I was in high school. The Act is 
        significantly about proscribing certain practices that have to 
        do with how a collector communicates with a consumer who owes a 
        debt, and about making sure these communications are conducted 
        in ways that protect that consumer's dignity and privacy. But 
        the act was written before many of today's communication 
        technologies were in use, including cell phones, text 
        messaging, email, voicemail, and even faxes. These 
        communication methods are being used today by some collectors 
        to reach consumers in ways that can compromise both dignity and 
        privacy. We intend to engage with our colleagues at the FTC and 
        the FCC, each of which have relevant and unique jurisdictions 
        that pertain to these practices, to establish clearer 
        guidelines for how collectors may use some of these new 
        communication technologies to reach consumers who owe debts, 
        while protecting consumers' privacy and dignity.

    As Director Cordray pointed out last week, our system of granting 
credit is based on ``an accepted notion that people who owe money to 
others should in fact repay the money they have borrowed, and that they 
should feel an obligation to do so.'' Debt collection activities play 
an essential role in this system. Without them, credit would be harder 
to come by and more expensive. Our job is to assure that consumers are 
not subjected to collection of debts they do not owe or to debts in the 
wrong amount or that have already been paid. Likewise, Congress has 
empowered and obligated us to assure that when a consumer cannot, or 
even in the occasion where they will not, repay their debts that they 
continue to be treated with dignity and respect.
    Again, thank you for the opportunity to join you today and I look 
forward to discussing these matters further with you and to answering 
your questions.
                                 ______
                                 
                PREPARED STATEMENT OF JAMES REILLY DOLAN
  Acting Associate Director, Division of Financial Practices, Federal 
                            Trade Commission
                             July 17, 2013
    Chairman Brown, Ranking Member Toomey, and distinguished Members of 
the Subcommittee, I am James Reilly Dolan, the Acting Associate 
Director for the Division of Financial Practices at the Federal Trade 
Commission (``Commission'' or ``FTC''). \1\ I appreciate the 
opportunity to appear before you today to discuss the Commission's 
efforts to protect consumers from unfair, deceptive, and abusive debt 
collection practices.
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     \1\ While the views expressed in this statement represent the 
views of the Commission, my oral presentation and responses to 
questions are my own and do not necessarily reflect the views of the 
Commission or any individual Commissioner.
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    Consumer credit is a critical component of today's economy, 
allowing consumers to purchase goods and services for which they are 
unable or unwilling to pay the entire cost at the time of purchase. If 
consumers do not pay their debts, creditors may be less willing to 
extend credit or may increase the cost of borrowing money. Lawful debt 
collection thus helps keep credit more readily available and 
affordable.
    Unlawful debt collection practices, however, cause serious harm to 
consumers--both those in financial distress as well as others who do 
not owe the debt they are being contacted about--and place law-abiding 
debt collectors at a competitive disadvantage. Accordingly, challenging 
unlawful debt collection practices continues to be one of the 
Commission's highest priorities. The Commission receives more 
complaints about debt collection than any other specific industry, and 
these complaints have constituted around 25 percent of the total number 
of complaints received by the FTC over the past 3 years. \2\ In 2012, 
consumers filed 125,136 complaints about third-party debt collectors 
and in-house collectors. \3\ The consumer complaints most frequently 
reported are that collectors falsely represented the character, amount, 
or status of a debt (38.9 percent); made repeated or continuous calls 
(36.5 percent); falsely threatened to sue consumers or take other 
unintended actions (29.6 percent); failed to send a written notice of 
the debt to the debtor (25.4 percent); and falsely threatened to arrest 
a consumer or seize a consumer's property (23.4 percent). \4\
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     \2\ See, Consumer Financial Protection Bureau, Fair Debt 
Collection Practices Act: CFPB Annual Report 2013, at 14 (24.1 percent 
of all complaints the FTC received); Consumer Financial Protection 
Bureau, Fair Debt Collection Practices Act: CFPB Annual Report 2012, at 
14 (27.16 percent of all complaints the FTC received); FTC, Annual 
Report 2011: Fair Debt Collection Practices Act, at 5 (27 percent of 
all complaints the FTC received).
     \3\ Id. These numbers only include complaints filed directly with 
the FTC, which are coded and categorized in a consistent manner. These 
numbers also do not include identify theft or Do Not Call Registry 
complaints that may involve debt collection.
     \4\ Because consumer complaints frequently address more than one 
debt collection practice, a single complaint may count towards multiple 
violation categories. Hence, the sum of these percentages will be more 
than 100 percent.
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    To stop these illegal practices, the Commission maintains an active 
program of vigorous law enforcement, education and public outreach, and 
research and policy initiatives. This testimony will describe the 
Commission's actions in each of these areas, as well as the 
Commission's coordination and cooperation with the Consumer Financial 
Protection Bureau (CFPB) in addressing unlawful debt collection 
practices.
I. Enforcement
    The Commission is primarily a law enforcement agency, and law 
enforcement investigations and litigation are at the heart of our 
recent debt collection work. The Commission has the authority to 
investigate and take law enforcement action against debt collectors who 
engage in unfair, deceptive, abusive, or other practices that violate 
the Fair Debt Collection Practices Act (FDCPA). \5\ The Commission also 
has the power to investigate and take enforcement action against 
entities that, in connection with collecting on debts, engage in unfair 
or deceptive acts or practices in violation of Section 5 of the FTC 
Act. \6\ These law enforcement actions supplement what Congress 
intended to be a significant part of FDCPA enforcement--private 
individual and class action lawsuits. \7\
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     \5\ 15 U.S.C. 1692-1692p.
     \6\ 15 U.S.C. 45.
     \7\ See, S. Rep. No. 95-382.
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    The Commission generally carries out these powers in two ways. \8\ 
First, the Commission may refer cases alleging violations of the FDCPA 
to the Department of Justice (DOJ) in instances where preliminary 
injunctive relief to halt unlawful conduct is not needed and where 
civil penalties are appropriate monetary relief. Second, the Commission 
has the authority under Section 13(b) of the FTC Act to file actions in 
Federal district court to obtain injunctions and disgorgement of ill-
gotten gains or restitution against those who violate the FDCPA or the 
FTC Act. \9\ The Commission generally files actions under Section 13(b) 
where the unlawful conduct of collectors is so egregious that a court 
order is needed to bring an immediate halt to the conduct or where 
equitable monetary relief, such as restitution and disgorgement of ill-
gotten gains, are more appropriate forms of monetary relief than civil 
penalties.
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     \8\ Section 814 of the FDCPA, 15 U.S.C. 1692l(a), authorizes the 
FTC to use all of its functions and powers under the FTC Act to enforce 
the FDCPA, including but not limited to the power to address a 
violation of the FDCPA in the same manner as if the violation had been 
a violation of a FTC trade regulation rule. Accordingly, the FTC can 
either seek civil penalties through a referral to the Department of 
Justice or seek equitable relief through its own attorneys.
     \9\ 15 U.S.C. 53(b).
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    In recent years, to improve deterrence, the Commission has focused 
on bringing a greater number of cases and obtaining stronger monetary 
and injunctive remedies against debt collectors that violate the law. 
Since January 1, 2010, the Commission has brought fifteen debt 
collection cases \10\ and has obtained judgments of more than $56.2 
million--including civil penalties, disgorgement of ill-gotten gains, 
and restitution--against a variety of debt collectors. \11\ These cases 
include three civil penalty actions--United States v. Expert Global 
Solutions, Inc., United States v. West Asset Management, Inc., and 
United States v. Asset Acceptance, LLC--that resulted in settlements in 
which the debt collectors paid $3.2 million, $2.8 million, and $2.5 
million, respectively, the three largest civil penalties obtained by 
the agency in cases alleging violations of the FDCPA.
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     \10\ FTC v. Expert Global Solutions, Inc., No. 3-13 CV 26 2611-M 
(N.D. Tex. filed July 8, 2013); FTC v. Security Credit Services, LLC, 
No. 1:13-cv-00799-CC (N.D. Ga. filed March 13, 2013); FTC v. Goldman 
Schwartz, Inc., No. 4:13-cv-00106 (S.D. Tex. filed Jan. 14, 2013); FTC 
v. Pro Credit Group, LLC, No. 8:12cv586 (M.D. Fla. filed Mar. 19, 
2013); United States v. Luebke Baker & Assocs., Inc., Civ. A. No. 1:12-
cv-1145 (C.D. Ill. filed May 11, 2012); FTC v. Broadway Global Master 
Inc., 2:12-cv-00855-JAM-GGH (E.D. Cal. filed Apr. 3, 2012); FTC v. AMG 
Servs., Inc., 2:12-cv-00536 (D. Nev. filed Apr. 2, 2012); FTC v. Am. 
Credit Crunchers, No. 12cv1028 (N.D. Ill. filed Feb. 13, 2012); United 
States v. Asset Acceptance, 8:12-cv-182-T-27EAJ (M.D. Fla. filed Jan. 
30, 2012); FTC v. Rincon Mgmt. Servs., LLC, 5:11-cv-01623-VAP-SP (C.D. 
Cal. filed Oct. 11, 2011); FTC v. Forensic Case Mgmt. Servs., Inc., 
LACV11-7484 RGK (C.D. Cal. filed Sept. 12, 2011); FTC v. Payday Fin., 
LLC, 3:11-cv-3017-RAL (D.S.D. filed Sept. 6, 2011); United States v. 
West Asset Mgmt., Inc., 1:11-cv-0746 (N.D. Ga. filed Mar. 10, 2011); 
FTC v. LoanPointe, LLC, 2:10-cv-00225-DAK (D. Utah filed Mar. 15, 
2010); United States v. Credit Bureau Collection Servs., 2:10-cv-169 
(S.D. Ohio filed Feb. 24, 2010).
     \11\ This includes approximately $42.5 million in equitable 
monetary relief and approximately $13.2 million in civil penalties. In 
some settlement orders, the monetary judgment is suspended in part or 
in whole based on the defendants' ability to pay.
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    In each of these cases, the FTC charged debt collectors with 
engaging in a host of unlawful practices. For example, in the most 
recent case, announced last week, the Commission filed a complaint 
against, and obtained a settlement with, the largest third-party debt 
collector in the world, Expert Global Solutions Inc. The FTC alleged 
that the defendants--commonly known as NCO--annoyed and harassed 
consumers for years with repeated phone calls, despite being told that 
the consumer does not owe the debt, does not know the whereabouts of 
the alleged debtor, or does not wish to receive any more 
communications. \12\ The FTC also alleged that the debt collector 
disclosed consumers' debts to third parties through voicemail messages, 
even when the outgoing answering machine greeting either did not give 
the name of the person or announced that the answering machine was for 
a person other than the consumer that the collector was trying to 
reach.
---------------------------------------------------------------------------
     \12\ United States v. Expert Global Solutions, Inc., No. 3-13 CV 
26 2611-M (N.D. Tex. July 8, 2013).
---------------------------------------------------------------------------
    In West Asset Management, Inc., the Commission alleged that a 
leading debt collector misrepresented that the collector was a law firm 
or that its collectors were attorneys; falsely claimed that debtors 
would be arrested or have property seized if they did not pay, among 
other false statements; revealed to third parties that a consumer owed 
a debt; and committed other violations of the FDCPA and the FTC Act. 
\13\
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     \13\ United States v. West Asset Mgmt., Inc., No. 1-11-cv-0746 
(N.D. Ga. Mar. 14, 2011); see also, FTC, ``Leading Debt Collector 
Agrees To Pay Record $2.8 Million To Settle FTC Charges'', Mar. 16, 
2011, available at http://www.ftc.gov/opa/2011/03/wam.shtm.
---------------------------------------------------------------------------
    In Asset Acceptance, LLC, the Commission alleged that one of the 
Nation's largest debt buyers had failed to disclose that debts were too 
old to be legally enforceable or that a partial payment would extend 
the time a debt could be legally enforceable; misrepresented that 
consumers owed a debt when it could not substantiate its 
representations; provided information to credit reporting agencies, 
while knowing or having reasonable cause to believe that the 
information was inaccurate; repeatedly called third parties who did not 
owe a debt; and committed other violations of the FDCPA, the FTC Act, 
and the Fair Credit Reporting Act. \14\
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     \14\ United States v. Asset Acceptance LLC, No. 8:12-cv-182-T-
27EAJ (M.D. Fla. Jan. 31, 2012); see also, FTC, ``Under FTC Settlement, 
Debt Buyer Agrees To Pay $2.5 Million for Alleged Consumer Deception'', 
Jan. 30, 2012, available at http://www.ftc.gov/opa/2012/01/asset.shtm.
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    In addition to its civil penalty cases, which must be referred to 
the Department of Justice for filing, the Commission has brought a 
number of court actions, filed under Section 13(b) of the FTC Act, 
against debt collectors in which it sought injunctions and restitution 
or disgorgement of ill-gotten gains. \15\ In these cases, the 
Commission has focused on swiftly halting exceptionally egregious debt 
collection conduct. Accordingly, in many of these cases the Commission 
has sought and obtained preliminary relief, including ex parte 
temporary restraining orders with asset freezes, immediate access to 
business premises, and appointment of receivers to run the debt 
collection business. The Commission also has sought and obtained strong 
permanent relief to ensure that defendants do not engage in unlawful 
debt collection practices in the future. In certain cases, this relief 
includes banning individuals or entities from engaging in debt 
collection. Since January 1, 2010, the FTC has obtained such bans 
against 12 entities and individuals.
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     \15\ Under the FTC Act, the Commission must refer to DOJ all cases 
in which it seeks civil penalties. DOJ then has 45 days to decide 
whether to file the case in its own name or return it to the FTC to 
file. Section 16(a) of the FTC Act, 15 U.S.C. 56.
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    For example, in FTC v. Forensic Case Management Services, Inc., the 
Commission obtained a wide array of relief against a debt collector 
charged with engaging in a host of egregious conduct, such as 
threatening to physically harm consumers and desecrate the bodies of 
their dead relatives; threatening to kill consumers' pets; using 
obscene and profane language; revealing consumers' debts to third 
parties; and falsely threatening consumers with lawsuits, arrest, and 
wage garnishment. \16\ In addition to obtaining the strong preliminary 
relief discussed above, the Commission ultimately secured substantial 
monetary judgments against the defendant debt collection enterprise and 
a complete ban on future debt collection activity, along with other 
permanent injunctive relief. \17\
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     \16\ FTC v. Forensic Case Mgmt. Servs., Inc., No. LACV11-7484 RGK 
(C.D. Cal. Jan. 4, 2013).
     \17\ See, FTC, ``FTC Settlement Obtains Permanent Ban Against 
Abusive Debt Collection Operation'', Jan. 17, 2013, available at http:/
/www.ftc.gov/opa/2013/01/rumson.shtm.
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    The Commission has also used its Section 13(b) authority to halt 
debt collectors from employing unfair and deceptive tactics to recover 
on payday loans. In a typical payday loan, consumers receive cash in 
exchange for their personal checks or authorization to debit their bank 
accounts, and the lenders agree that consumers' checks will not be 
cashed or consumers' accounts will not be debited until a designated 
future date. Payday loans have high fees and short repayment periods, 
which translate to high annual rates, and they often are due on the 
borrower's next payday.
    In two recent cases, the FTC alleged that a payday loan operation 
violated the law by attempting to garnish consumers' wages without 
first obtaining a State court order. Although Federal law allows 
Federal agencies to require employers to garnish employees' wages 
without a State court order if the employees owe money to the Federal 
Government, private parties must obtain a court order to garnish wages. 
In the first case--FTC v. LoanPointe, LLC--the FTC alleged that 
defendants sent documents to the employers of consumers that mimicked 
the documents that the Federal Government sends in collecting on its 
own debts, thereby falsely representing that the defendants (like the 
Federal Government) were entitled to garnish wages without obtaining a 
court order. \18\ The FTC won a preliminary injunction and summary 
judgment against the defendants. In awarding summary judgment to the 
FTC, the United States District Court for the District of Utah observed 
that wage assignment clauses like the ones used by the defendants may 
cause ``substantial harm to consumers'' by imposing administrative 
costs on employers, pressuring consumers into forgoing valid defenses 
against the debt collection attempt, jeopardizing consumers' job 
stability, and obtaining wage earnings that may otherwise go to basic 
necessities. \19\
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     \18\ FTC v. LoanPointe, LLC, No. 2:10-CV-00225-DAK (D. Utah Dec. 
9, 2011); see also, FTC, ``Court Rules in Favor of FTC; Orders 
Defendants in Payday Lending Case To Pay More Than $294,000 for Illegal 
Garnishment of Consumers' Paychecks'', Dec. 19, 2011, available at 
http://www.ftc.gov/opa/2011/12/getecash.shtm.
     \19\ FTC v. LoanPointe, LLC, No: 2:10-CV-00225-DAK (D. Utah Sept. 
16, 2011) (decision and order) (relying in part on Am. Fin. Servs. 
Assoc. v. FTC, 767 F.2d 957, 974 (D.C. Cir. 1985)).
---------------------------------------------------------------------------
    In the second case--FTC v. Payday Financial LLC--the FTC alleged 
that a payday loan operation that purportedly has an association with a 
Native American tribe employed similar wage garnishment tactics. \20\ 
The FTC specifically alleged that the defendants were sending documents 
to consumers' employers that falsely represented that, under tribal 
laws, they were entitled to garnish wages without obtaining a State 
court order. The case is currently in litigation.
---------------------------------------------------------------------------
     \20\ FTC v. Payday Fin., LLC, No. 3:11-cv-03017-RAL (D.S.D. filed 
Sept. 6, 2011); see also, FTC, ``FTC Action Halts Allegedly Illegal 
Tactics of Payday Lending Operation That Attempted To Garnish 
Consumers' Paychecks'', Sept. 12, 2011, available at http://
www.ftc.gov/opa/2011/09/payday.shtm.
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    Recently, the FTC also has used its Section 13(b) authority to shut 
down so-called ``phantom'' debt collectors. Phantom debt collectors 
engage in wholesale fraud by attempting to collect on debts (often 
related to payday loans) that either do not exist or are not owed to 
the phantom debt collectors. In 2012, the Commission filed three cases 
against alleged phantom debt collectors, and obtained strong 
preliminary injunctive relief in each case. \21\ In these three cases, 
the Commission alleged that the callers carrying out the phantom debt 
collection schemes pretended to be law enforcement or other Government 
authorities, and falsely threatened to arrest and jail consumers 
immediately if they did not agree to make payments. One of the cases 
ended with the Commission obtaining a permanent injunction--including 
bans prohibiting the defendants from working in debt collection--and a 
substantial monetary judgment. \22\ The FTC continues to litigate the 
other two cases.
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     \21\ FTC v. American Credit Crunchers, LLC, No. 12cv1028 (N.D. 
Ill. Oct. 10, 2012); FTC v. Broadway Global Master Inc., No. 2:12-cv-
00855-JAM-GGH, (E.D. Cal. filed Apr. 3, 2012); FTC v. ProCredit Group 
LLC, No. 8:12cv586 (MD. Fla. filed Mar. 19, 2012).
     \22\ See, FTC, ``U.S. Defendants Who Allegedly Abetted Fake Debt 
Collector Calls From India Agree To Settle FTC Charges'', Oct. 23, 
2012, available at http://www.ftc.gov/opa/2012/10/americancredit.shtm.
---------------------------------------------------------------------------
    As a supplement to its Section 13(b) and civil penalty cases, the 
FTC also files amicus briefs to offer the Commission's views on 
important questions of law. For example, in December 2011, the 
Commission, in a joint brief with the United States and the CFPB, urged 
the Supreme Court to deny certiorari in Fein, Such, Kahn and Shepard, 
PC v. Allen, \23\ a consumer class action against several entities 
involved in a mortgage foreclosure action. The putative consumer class 
alleged that the law firm that brought the foreclosure action violated 
the FDCPA by sending a letter to the consumer's attorney that demanded 
payment for fees that were much higher than the amounts allowed under 
State law. The district court and court of appeals rejected the law 
firm's motion to dismiss the FDCPA claims, which argued that 
communications to a consumer's attorney are categorically excluded from 
the FDCPA.
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     \23\ Brief for the United States as Amicus Curiae, Fein, Such, 
Kahn and Shepard, PC v. Allen, No. 10-1417 (U.S. Dec. 23, 2011).
---------------------------------------------------------------------------
    Among other things, the joint brief advocated that the Supreme 
Court deny certiorari in Fein because the decision of the Third Circuit 
is consistent with the plain language of the FDCPA, the structure of 
the FDCPA, and the underlying purposes of the FDCPA. In January 2012, 
the Supreme Court denied the petition for certiorari. \24\
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     \24\ Fein, Such, Kahn and Shepard, PC v. Allen, No. 10-1417, 2012 
WL 171347 (U.S. Jan. 23, 2012) (mem.) (order denying cert.).
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II. Education and Public Outreach
    The FTC works to educate consumers and businesses about their 
rights and obligations under the FDCPA. The FTC's consumer education 
efforts include English and Spanish written materials, one-on-one 
guidance, and speeches and presentations. In 2012, the Commission 
supplemented its distribution of this information by launching two 
consumer-oriented Web sites: consumer.ftc.gov and consumer.gov. 
Consumer.ftc.gov offers straightforward articles about a variety of 
consumer protection topics, as well as videos, educational games, and a 
blog that invites consumer comments. The site addresses debt collection 
topics such as how to spot a fake or ``phantom'' debt collector, the 
rights consumers have when debt collectors are seeking to recover on 
time-barred debts, and the rights and responsibilities related to the 
debts of a deceased relative. Consumer.gov is the product of extensive 
work in coordination with the Center for Applied Linguistics to write 
and design the site for audiences with low literacy levels. Features 
include short videos, infographics, and read-along audio. The site 
includes basic material on a variety of consumer protection topics, 
including a section about dealing with debt collectors.
    Business education is also a priority for the FTC. Over the past 3 
years, the Commission's business outreach activities have included 
developing and distributing business education materials, delivering 
speeches, participating in panel discussions at industry conferences, 
and providing interviews to general media and trade publications. These 
efforts help to ensure that debt collectors understand their 
responsibilities under the FDCPA.
    Finally, as part of the FTC's Legal Services Collaboration project, 
FTC staff regularly meets with legal services providers to discuss 
various consumer protection issues, including the FTC's work in the 
debt collection arena. These discussions allow staff to better identify 
debt collection practices that are causing serious consumer harm and to 
improve the development and direction of our educational resources. 
Recent legal services outreach efforts have included providing 
information in a webinar hosted by the National Association for 
Consumer Advocates and convening legal services providers and 
Government agencies for a Washington, DC, conference that had a strong 
focus on debt collection issues. The FTC also organizes ``Common 
Ground'' conferences that bring together legal services providers and 
law enforcement agencies to discuss a wide variety of consumer 
protection issues, including debt collection.
III. Research and Policy Development Activities
    The third prong of the FTC's debt collection program is research 
and policy initiatives. Since 2010, the FTC has continued to monitor 
and examine the debt collection industry and its practices through 
workshops, reports, and policy statements.
    As part of these initiatives, the FTC hosts roundtables and 
conferences on topics ranging from the use of new debt collection 
technologies to the flow of information in the debt collection process. 
For example, the FTC held a series of nationwide roundtable discussions 
and public comments examining debt collection litigation and 
arbitration proceedings, which culminated in the publication of a 72-
page report in July 2010. \25\ Drawing from the roundtables and 
comments, the report concluded that the system for resolving consumer 
debt collection disputes is broken and recommended that States consider 
significant reforms to improve efficiency and fairness to consumers. 
These reforms included measures to increase consumer participation in 
debt collection lawsuits, requiring collectors to include more debt-
related information in legal complaints against consumers, and 
assigning the burden of proving that debts are not time-barred to 
collectors.
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     \25\ FTC, ``Repairing a Broken System: Protecting Consumers in 
Debt Collection Litigation and Arbitration'', July 2010, available at 
http://www.ftc.gov/os/2010/07/debtcollectionreport.pdf.
---------------------------------------------------------------------------
    In April 2011, the FTC hosted a workshop on the use of new 
technologies in the debt collection process. \26\ The workshop brought 
together industry representatives, consumer advocates, regulators, 
researchers, and other stakeholders to discuss issues related to a 
variety of debt collection technologies. For example, participants 
discussed the use of mobile telephones, email, social media, text 
message services, information gathering tools, dialers, databases, and 
payment portals. Topics included: how technologies have evolved in 
recent years; how technologies may affect the accuracy of underlying 
debt information or in correctly identifying debtors; the costs and 
benefits to consumers and collectors of employing newer technologies 
for information collection and storage, communication, and payment; and 
whether any related legal or policy reforms might enhance consumer 
protection.
---------------------------------------------------------------------------
     \26\ ``Debt Collection 2.0: Protecting Consumers as Technologies 
Change'' (April 2011). A transcript and related materials are available 
at http://www.ftc.gov/bcp/workshops/debtcollectiontech/index.shtml.
---------------------------------------------------------------------------
    On January 30, 2013, the FTC released a report based on the first 
empirical study of the debt buying industry. \27\ The report was based 
on extensive and detailed information that the FTC had obtained from 
nine of the Nation's largest debt buying companies, and analyzed more 
than 5,000 portfolios of consumer debt containing nearly 90 million 
accounts with a face value of $143 billion. The report noted 
significant consumer protection concerns in the debt buying industry 
and concluded that there is room for improvement in the information 
debt buyers possess when they contact consumers and try to collect 
debts. The report explained that debt buyers typically receive some 
information from creditors at the time a debt is purchased, but seldom 
receive certain key information and documentation about the debt, such 
as the dispute history or outstanding balances broken down by 
principal, interest, and fees. The report also found that consumers 
disputed an estimated one million or more debts that debt buyers 
attempted to collect. \28\ In addition, the report found that debt 
buyers only verified about half of the debts that consumers disputed. 
\29\
---------------------------------------------------------------------------
     \27\ FTC, ``The Structure and Practices of the Debt Buying 
Industry'', Jan. 2013, available at http://www.ftc.gov/os/2013/01/
debtbuyingreport.pdf.
     \28\ Id. at 38.
     \29\ Id. at 39.
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    Most recently, building on these reports and the related source 
material, on June 6, 2013, the FTC cohosted a roundtable with the CFPB 
to examine the flow of consumer data throughout the debt collection 
process. \30\ The roundtable brought together consumer advocates, 
credit issuers, collection industry members, State and Federal 
regulators, academics, and other stakeholders to exchange information 
on a range of issues. The topics discussed included the amount of 
documentation currently available to different types of collectors, the 
costs and benefits of providing consumers with additional disclosures 
about their debts and debt-related rights, and information issues 
related to debt collection litigation.
---------------------------------------------------------------------------
     \30\ A recorded Web cast of the event and related materials are 
available at http://www.ftc.gov/bcp/workshops/lifeofadebt/.
---------------------------------------------------------------------------
    In addition to its workshops and reports, the FTC also issues 
statements clarifying the FTC's debt collection enforcement policy. For 
example on July 27, 2011, the FTC published a statement of enforcement 
policy regarding the collection of the debts of deceased persons. In 
general, debts survive the death of the debtor for a period of time, 
and a debt collector may seek payment of the debt from the estate of 
the deceased. \31\ Pursuant to Section 805 of the FDCPA, however, debt 
collectors in this situation may only communicate with the deceased's 
spouse, parent (if the deceased was a minor), guardian, executor, or 
administrator.
---------------------------------------------------------------------------
     \31\ See, FTC, ``Statement of Policy Regarding Communications in 
Connection With the Collection of Decedents' Debts'', 76 Fed. Reg. 
44915 (July 27, 2011).
---------------------------------------------------------------------------
    State probate laws, however, have evolved considerably since the 
passage of the FDCPA, and now, in many cases, confer authority on 
individuals other than those set forth in Section 805 to wind up the 
estate, including the payment of the decedent's debts. For this reason, 
the FTC's policy statement clarifies that the agency will not take 
enforcement action under the FDCPA or the FTC Act against companies 
solely for communicating with someone who is authorized to pay debts 
from the estate of the deceased, regardless of whether that person has 
been appointed as an ``executor'' or ``administrator''. The statement 
also emphasizes that debt collectors may not mislead relatives to 
believe that they are personally liable for a deceased consumer's 
debts, or use other deceptive or abusive tactics.
IV. Coordination With the Consumer Financial Protection Bureau
    The Dodd-Frank Wall Street Reform and Consumer Protection Act, 
which created the CFPB, directs the FTC and the CFPB to coordinate 
their law enforcement activities and promote consistent regulatory 
treatment of consumer financial products and services, including debt 
collection. \32\ The Commission has done so by working closely with our 
partners at the CFPB to coordinate efforts to protect consumers from 
unfair, deceptive, and abusive debt collection practices. In addition, 
in January 2012, the FTC and CFPB entered into a memorandum of 
understanding that supplements the requirements of the Dodd-Frank Act 
and creates a strong and comprehensive framework for coordination and 
cooperation. \33\
---------------------------------------------------------------------------
     \32\ See, Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376 1024(c)(3) (July 21, 2010).
     \33\ Memorandum of Understanding Between the Consumer Financial 
Protection Bureau and the Federal Trade Commission, January 2012, 
available at http://ftc.gov/os/2012/01/120123ftc-cfpb-mou.pdf.
---------------------------------------------------------------------------
    As reflected in the memorandum of understanding, FTC and CFPB staff 
have worked with one another to coordinate their debt collection 
programs. These efforts include regular staff meetings to discuss 
ongoing and upcoming law enforcement, rulemaking, and other activities; 
sharing debt collection complaints; cooperation on consumer education 
efforts in the debt collection arena; and consulting on debt collection 
rulemaking and guidance initiatives. For example, as discussed above, 
the two agencies recently hosted a joint workshop on issues related to 
the life cycle of consumer information as it flows through the debt 
collection process.
V. Conclusion
    Thank you for the opportunity to discuss the Commission's debt 
collection program. We look forward to continuing to work with Congress 
and this Subcommittee on this important area.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                        FROM COREY STONE

Q.1. Director Cordray recently announced that the CFPB will 
soon be engaging in FDCPA rulemaking. What key areas of the 
FDCPA will this rulemaking address? Are there any areas of the 
FDCPA that the CFPB considers off the table? Because the FDCPA 
is over 35 years old, should comprehensive FDCPA reform be left 
to the Congress rather than the CFPB?

A.1. In the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act), Congress amended the Fair Debt 
Collection Practices Act (FDCPA) to give the Consumer Financial 
Protection Bureau (Bureau) the authority to prescribe rules 
with respect to the collection of debts by debt collectors to 
implement that law. The Dodd-Frank Act also empowered the 
Bureau to issue rules applicable to covered persons and service 
providers (including debt collectors and creditors collecting 
their own debts) identifying unlawful unfair, deceptive, and 
abusive acts and practices in connection with any transaction 
with a consumer for a consumer financial product or service, or 
the offering of a consumer financial product or service, 
including requirements for the purpose of preventing such acts 
or practices. The Dodd-Frank Act also authorized the Bureau to 
prescribe rules to ensure that the features of any consumer 
financial product or service, both initially and over the term 
of the product or service, are fully, accurately, and 
effectively disclosed to consumers in a manner that permits 
consumers to understand the costs, benefits, and risks 
associated with the product or service, in light of the facts 
and circumstances.
    The Bureau is in the early stages of a debt collection 
rulemaking. Specifically, the Bureau is planning to publish an 
Advance Notice of Proposed Rulemaking (ANPR). The ANPR would 
elicit information about the nature and extent of consumer 
protection problems in debt collection as well as the 
advantages and disadvantages of various solutions to those 
problems. A broad focus in an ANPR is prudent in light of the 
many consumer protection concerns that have been raised 
relating to debt collection and the limited legislative changes 
and absence of regulation of debt collection practices since 
the FDCPA was enacted in 1977.
    The information that the Bureau receives from consumer 
groups, industry, and others in response to the ANPR will help 
identify topics that the Bureau might include in a proposed 
rule. At this time, the Bureau has not made a determination 
about which topics to cover in a proposed rule, although 
improving data integrity in the debt collection system and 
updating debt collection law to reflect technological advances 
are among the topics addressed.

Q.2. My office is aware of a number of industry self-regulatory 
initiatives, such as the certification program established by 
the Debt Buyers Association earlier this year. Are you aware of 
these efforts? Have you considered the impact of these 
industry-based solutions instead of pursuing a Government 
solution through FDCPA rulemaking?

A.2. The Bureau is aware of the Debt Buyers Association's (DBA) 
certification process, and during its development we provided 
informal comments on the program jointly with the Federal Trade 
Commission staff. The Bureau applauds the DBA's efforts.
    As we move forward, the Bureau will be taking consideration 
of the DBA's certification program as it evaluates what 
rulemaking activity to undertake in this area.

Q.3. What consumer cost-benefit analysis is the CFPB doing with 
respect to the proposed debt collection rulemaking? When 
evaluating what is best for consumers, is the CFPB taking into 
account the costs that will be passed onto the consumers who 
are current on their obligations in order to benefit late 
consumer debtors?

A.3. The Bureau's goal in the debt collection rulemaking will 
be to develop rules that protect consumers without imposing 
unnecessary or undue burdens on those who must comply with 
those rules. The Bureau will consider the costs, benefits, and 
impacts of any rules it issues on consumers and businesses, 
including creditors, debt buyers, and debt collectors. As part 
of that evaluation, the Bureau will assess whether the cost of 
complying with proposed debt collection rules could ultimately 
be reflected in higher prices and decreased availability of 
consumer credit and other consumer financial products and 
services.
    To obtain information about the costs and benefits of 
proposed rules, the Bureau anticipates requesting public 
comment on these issues in the ANPR and any Notice of Proposed 
Rulemaking it may issue.

Q.4. The CFPB has stated that attorneys who collect debts on 
behalf of their clients can be subject to the CFPB's rulemaking 
and supervision.
    Does the CFPB intend to examine, supervise or regulate the 
conduct of attorneys who are litigating matters before a court 
if they are defined as a ``covered person'' or ``service 
provider''?

A.4. As the Bureau explained in its rule defining larger 
participants in the consumer debt collection market that are 
subject to the Bureau's supervision, the Bureau has authority 
``regarding the offering or provision of a consumer financial 
product or service . . . that is . . . offered or provided by 
[an] attorney . . . with respect to any consumer who is not 
receiving legal advice or services from the attorney in 
connection with that product or service.'' 12 U.S.C. 
5517(e)(2)(B). Consumer debt collection is a consumer 
financial service that is provided ``with respect to'' the 
consumers who owe, or are claimed to owe, the debts subject to 
collection. An attorney engaged in consumer debt collection, as 
defined by the Bureau's larger-participant rule, does not 
provide ``legal advice or services'' to those consumers; to the 
contrary, the attorney represents clients with interests that 
may be or are likely to be adverse to those consumers. Such an 
attorney can therefore be properly subject to the Bureau's 
authority.
    As the larger-participant rule further explained, though, 
not every occasion on which an attorney seeks money from a 
consumer, including in the course of litigation, constitutes 
consumer debt collection. Consumer debt collection, under the 
Bureau's larger-participant rule, includes only the activities 
of persons whose principal business activity is debt collection 
or that regularly engage in debt collection.
    With respect to rulemaking, the Bureau notes that the 
Supreme Court has held that an attorney can be a debt collector 
subject to the FDCPA, and that the FDCPA does regulate to a 
certain degree the litigation activities of such an attorney. A 
rulemaking under the FDCPA could properly regulate the debt 
collection activities of an attorney subject to the FDCPA.

Q.5. The CFPB has stated that it ``continues to adhere to the 
position that it can compel privileged information pursuant to 
its supervisory authority'' and has noted that submission of 
privileged information to the CFPB will not be construed as a 
waiver of the privilege, even when the CFPB shares, for 
example, attorney-client privileged information with other 
Federal and State regulators. Does the CFPB have any concern 
that attorney's clients may have significantly less sense of 
security when sharing sensitive information with their counsel, 
knowing that it may be demanded by the CFPB and disclosed to 
other regulators? Does the CFPB feel that demanding such 
information may have the effect of limiting advice sought from 
attorneys relating to compliance questions?

A.5. The Bureau believes that the submission of privileged 
information to the Bureau does not constitute a waiver of 
privilege and will not have any significant adverse impact on 
supervised entities' willingness to share sensitive information 
with counsel. Congress has provided for this nonwaiver of 
privilege by statute, see 12 U.S.C. 1828(x), as it has for 
other agencies--and other agencies have been mandating the 
production of privileged information from their supervised 
entities for decades. The production of privileged information 
to the Bureau does not change the nature or status of the 
information shared between an institution and its counsel.

Q.6. The CFPB has issued ``Action Letters'' designed for use by 
consumers in responding to collection attempts by collection 
agencies or attorneys.
    One of the Action Letters may request that the collector 
provide more information to the consumer than is required by 
law. If a collector provides only the information that is 
required by law, and the consumer subsequently files a 
complaint with the CFPB because all the information requested 
was not provided, how will the CFPB respond? What will the CFPB 
do if the collector still refuses to provide more information 
than lawfully required?

A.6. The Bureau has received feedback on this point from one 
industry association, and has solicited feedback from others, 
as well as from consumer advocacy groups, and will review these 
comments to better understand any concerns and take appropriate 
action if necessary.
    It is important to note that in the background to the 
letter, the Bureau highlights that the debt collector is not 
legally required to provide all the information that a consumer 
may request, and that this would not necessarily mean that the 
collector has violated the law. However, prudent use of the 
letter may facilitate communication between the collector and 
the consumer by providing the consumer with information that 
would allow them to recognize the debt and verify that the 
balance is correct.

Q.7. Another Action Letter allows consumers to demand that the 
debt collector or collection attorney cease communicating with 
them. Is the CFPB concerned that the act of providing this 
letter to consumer may be construed as encouragement to use the 
letter even though circumstances may not warrant its use?

A.7. The Bureau has also received feedback on this point, and 
it is also considering whether to revise this letter. It is 
important to note that the Bureau does advise consumers of the 
potential consequences of using this letter, and suggests it 
may be prudent for them to request more information prior to 
using it.

Q.8. Can the CFPB state how much of its budget, in dollars and 
as a percentage, are directed toward consumer debt collection 
issues?

A.8. The Bureau's activities related to debt collection involve 
a variety of personnel and support services across multiple 
divisions. Bureau staff take complaints from consumers about 
debt collection issues; examine debt collection firms for 
compliance with consumer financial protection laws; research 
trends in the debt collection industry; and help educate 
consumers about the their rights related to debt collection. 
While we don't have a specific amount budgeted for debt 
collection activities, the budget for each of the Bureau's 
divisions, including staffing levels and key investments, is 
available on consumerfinance.gov. The Bureau has made and will 
continue to make investments to support ongoing work related to 
debt collection.

Q.9. The CFPB opened a portal to accept consumer debt 
collection complaints. The identity of the companies being 
complained of, and the nature of the complaints, is publicly 
available on the CFPB's Web site.
    Will the CFPB take any reasonable steps to ensure the 
validity of the complaints before posting the complaint, and 
the company's identity, on its Web site?
    If a company can show that a complaint was invalid, will 
the complaint be removed from the CFPB's Web site?

A.9. The Bureau began handling debt collection complaints on 
July 10, 2013. In addition to debt collection complaints, the 
Bureau also handles complaints on credit cards, mortgages, bank 
account and services, private student loans, consumer loans, 
credit reporting, and money transfers.
    Information about consumer complaints is available to the 
public through the Bureau's public Consumer Complaint Database. 
The database currently contains consumer complaints on credit 
cards, mortgages, bank accounts and services, private student 
loans, consumer loans, credit reporting, and money transfers.
    While the Bureau now accepts debt collection complaints, 
these complaints are not currently posted on the Consumer 
Complaint Database. When the Bureau accepts complaints about a 
specific product or service, it first evaluates the initial 
data about the complaints to consider whether any specific 
policy changes are warranted regarding what information gets 
published on complaints about that product or service before 
beginning to publish those complaints. The Bureau will evaluate 
debt collection complaint data in anticipation of publishing 
those complaints accordingly.
    The Bureau maintains significant controls to authenticate 
complaints. Each complaint is checked to ensure that it is 
submitted by the identified consumer or from his or her 
specifically authorized representative. Each submission is also 
reviewed to determine if it is a complaint, an inquiry, or 
feedback (submissions in the latter two categories are not 
forwarded to companies for handling). Further, each complaint 
is checked to identify duplicate submissions by a consumer who 
has already submitted a complaint on the same issue to the 
Bureau. Finally, complaints are only routed to companies when 
they contain all the required fields, including the complaint 
narrative, the consumer's narrative statement of his or her 
request, and the consumer's contact information. Companies view 
and respond to complaints using their secure web portals, which 
they also use to notify the Bureau if a complaint has been 
routed incorrectly. As we work to continually improve our 
complaint routing accuracy, such notifications from companies 
are key to routing complaints to the correct companies and 
increasing routing accuracy over time.
    Complaints will only be posted on the Consumer Complaint 
Database after the company responds confirming a commercial 
relationship with the consumer or after they have had the 
complaint for 15 calendar days, whichever comes first. 
Complaints can be removed if they do not meet all publication 
criteria. Additionally, the database does not include 
information about consumers' identities.
    The Bureau's entire Policy Statement on the Disclosure of 
Consumer Complaint Data (78 Fed. Reg. 21218 (April 10, 2013)) 
is available at http://files.consumerfinance.gov/f/
201303_cfpb_Final-Policy-Statement-Disclosure-of-Consumer-
Complaint-Data.pdf.

Q.10. States play an active role in regulating the consumer 
debt industry. The States' licensing system, the Nationwide 
Mortgage Licensing System (NMLS), allows the States to track 
licensees of all types from State-to-State on a nationwide 
basis. State regulators have begun using NMLS as the licensing 
platform for all types of nondepository financial service 
providers, including the Pennsylvania Department of Banking and 
Securities, which uses NMLS for licensing debt management 
companies.
    I have cosponsored legislation to enhance confidentiality 
and privilege for information shared among regulators in this 
system. Would it be beneficial to extend the privilege and 
confidentiality protections for mortgage-related information 
contained in the NMLS and which is shared by State and Federal 
regulators to information in the NMLS relating to all types of 
nonbanks?

A.10. The Bureau is committed to establishing and maintaining 
productive working relationships with State bank and nonbank 
regulators, and understands the importance of protecting the 
confidentiality of information that may be shared through such 
coordination efforts. To this end, the Bureau has entered into 
information-sharing and cooperation Memorandums of 
Understanding (MOU), requiring the safeguarding of confidential 
information, with most State bank and nonbank regulators that 
participate in the Nationwide Mortgage Licensing System (NMLS). 
Moreover, the Bureau recently entered into a State Coordination 
Framework to establish a process for coordinated Federal/State 
consumer protection supervision and enforcement of entities 
providing consumer financial products or services that are 
subject to concurrent jurisdiction of the Bureau and one or 
more State regulators.
    The Bureau believes that steps to better facilitate the 
sharing of information among regulators by extending the 
confidentiality safeguards and privilege protections applicable 
to information placed in the NMLS to additional nonbank 
activities could potentially be beneficial.

Q.11. I understand that the CFPB and the FTC have formed a debt 
collection working group to coordinate the respective 
activities between your agencies. Can you tell me more about 
this working group? Is this group considering how to pursue the 
bad actors without burdening legitimate businesses with undue 
regulatory requirements?

A.11. The Bureau and the Federal Trade Commission (Commission) 
formed a debt collection working group to pool resources, 
experiences, and ideas in our efforts to protect consumers in 
debt collection. The working group convenes periodically to 
discuss ongoing investigations, recent legal developments, and 
trends in the debt collection industry. This is part of a 
sustained effort by the Bureau and the Commission, as partners 
in consumer protection, to advance a united front against 
unlawful practices in debt collection.
    As stated during the hearing, the Bureau recognizes that 
debt collectors are an essential part of the credit system. 
With that in mind, the working group coordinates activities to 
prevent duplicative and burdensome regulatory action against 
businesses in the debt collection industry. By working 
together, the agencies can harmonize their regulatory efforts 
in a way that is effective for consumers and efficient for 
businesses.
    The coordination between the Bureau and the Commission is 
in accordance with the January 20, 2012, MOU between the two 
agencies. A copy of that MOU is available at http://
files.consumerfinance.gov/f/2012/01/FTC.MOUwSig.1.20.pdf.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                    FROM JAMES REILLY DOLAN

Q.1. States play an active role in regulating the consumer debt 
industry. The States' licensing system, the Nationwide Mortgage 
Licensing System (NMLS), allows the States to track licensees 
of all types from State-to-State on a nationwide basis. State 
regulators have begun using NMLS as the licensing platform for 
all types of nondepository financial service providers, 
including the Pennsylvania Department of Banking and 
Securities, which uses NMLS for licensing debt management 
companies.
    I have cosponsored legislation to enhance confidentiality 
and privilege for information shared among regulators in this 
system. Would it be beneficial to extend the privilege and 
confidentiality protections for mortgage-related information 
contained in the NMLS and which is shared by State and Federal 
regulators to information in the NMLS relating to all types of 
nonbanks?

A.1. I am not familiar with the specific confidentiality 
provisions in the NMLS or how State regulators are using the 
information. I agree, however, that regulators generally should 
properly safeguard any confidential information they receive, 
thereby promoting confidence by industry and ensuring public 
trust. With respect to the FTC's practices in that regard, as a 
general matter, when the FTC requests and obtains information 
from targets and third parties pursuant to Civil Investigative 
Demands, it handles the information consistent with its 
published policies and procedures for handling nonpublic 
information. Disclosure is permitted only pursuant to 
procedures for use set forth in the Commission's Rules of 
Practice or as set forth by statute. See, 15 U.S.C. 46 and 
57b-2, and 16 CFR 4.9-4.11. The Commission generally does not 
require targets to produce privileged information. See, 16 CFR 
2.11.

Q.2. I understand that the CFPB and the FTC have formed a debt 
collection working group to coordinate the respective 
activities between your agencies. Can you tell me more about 
this working group? Is this group considering how to pursue the 
bad actors without burdening legitimate businesses with undue 
regulatory requirements?

A.2. The FTC is primarily a law enforcement agency that takes 
legal action when the Commission has reason to believe that an 
entity has been engaging in deceptive or unfair acts or 
practices.
    To coordinate such law enforcement efforts against debt 
collectors with the CFPB, which has concurrent law enforcement 
jurisdiction, staff-level FTC and CFPB attorneys have formed an 
informal working group. Staffs from the two agencies meet 
regularly to discuss matters related to the agencies' debt 
collection enforcement actions and the CFPB's examination 
authority, including current or upcoming investigations and 
examinations, enforcement actions, and enforcement or 
examination-related activities. These discussions generally are 
confined to ensuring the agencies do not engage in unduly 
duplicate investigations and examinations and to ensuring the 
staffs are consistent in how we interpret existing laws. The 
working group generally does not discuss new regulatory 
requirements.
    Apart from the two agencies' efforts to coordinate our law 
enforcement and supervision missions through the working group, 
the CFPB recently announced it intends to issue an Advance 
Notice of Proposed Rulemaking to implement the Fair Debt 
Collection Practices Act (FDCPA). Although the FTC has not had 
rulemaking authority to implement the FDCPA since its enactment 
in 1977, the FTC has a long history of enforcing the FDCPA and 
hosting informative workshops discussing hot debt collection 
topics. The FTC is likely to share its FDCPA enforcement 
experiences with the CFPB during the rulemaking process and 
comment on any regulatory proposals. In doing so, the FTC is 
likely to consider whether the proposals address problematic 
conduct without imposing undue regulatory burdens by 
considering whether they target unfair or deceptive acts or 
practices. It is well established that an act or practice is 
unfair if it causes or is likely to cause substantial consumer 
injury that is not reasonably avoidable by consumers and that 
is not outweighed by countervailing benefits to consumers or to 
competition. Likewise, an act or practice is deceptive if it is 
likely to mislead a consumer acting reasonably under the 
circumstances and the act or practice is material.
              Additional Material Supplied for the Record
         STATEMENT OF THE OFFICE OF COMPTROLLER OF THE CURRENCY
Introduction
    Chairman Brown and Ranking Member Toomey, please find below a 
statement for the Subcommittee hearing record regarding the Office of 
the Comptroller of the Currency's (OCC) supervision of debt collection 
and debt sales practices of national banks and Federal savings 
associations (collectively, banks). Lending is a central part of the 
business of banking. It is the means by which banks and savings 
associations meet the credit needs of the customers and communities 
they serve. With lending comes the risk of some of that debt going 
unpaid. While banks have a responsibility to their shareholders to 
minimize and recover losses on their unpaid debts, they must do so in a 
safe and sound manner that complies with applicable laws and consumer 
protections.
    Since the beginning of his term, Comptroller Curry has stressed the 
importance of banks effectively managing the operational risks 
associated with their activities. Debt collection and the sale of 
charged-off debt raises operational and reputational risks that the 
agency expects institutions to manage effectively and in a manner that 
ensures customers are treated fairly.
    The process of debt collection actually begins with the issuance of 
the loan. When current, that debt is collected through the routine 
payment and servicing of the loan. When delinquent, collection involves 
additional efforts that can involve internal collections by the bank, 
collection on behalf of the bank by a third party (referred to as debt 
placement), or the sale of the debt to a third party debt collector, 
where the bank no longer retains a legal interest in the debt. 
Improving debt collection practices and establishing effective controls 
reduce risks facing banks but also provide important consumer 
protections by ensuring debt collectors (banks or third parties) seek 
the right amounts of repayment from the right borrowers in the 
appropriate manner. This statement provides an overview of the OCC's 
supervision of consumer debt collection and debt sales activities of 
banks. It provides a brief description of the scope of debt collection 
and debt sales activity within the Federal banking system, a 
description of ongoing supervisory concerns and actions, and a 
discussion of policy implications.
Scope of Debt Collection and Debt Sales Activity Within the Federal 
        Banking System
    As providers of consumer credit, banks are in the business of 
lending money to be repaid with interest. They underwrite the loans and 
price them according to the risk associated with that lending and the 
customers' creditworthiness. A certain percentage of the loans that 
banks make go unpaid. Under the Interagency Uniform Retail 
Classification and Account Management Policy guidelines, banks must 
charge off open-ended retail credit loans, such as credit cards, once 
they have become 180 days past due. \1\ When a bank charges off a debt, 
it realizes a loss, but the borrower generally continues to have an 
obligation to repay the loan. At that point, the bank faces a business 
decision on how to recover that loss or not to pursue collection of the 
debt. Debt collection may take several forms, including continued 
efforts by the bank to collect it on its own, the hiring of a third 
party to collect the debt on its behalf, or the sale of the debt to an 
unaffiliated third party, which generates a partial recovery. While 
banks are expressly authorized to conduct debt collection activities, 
\2\ that decision must involve a consideration of all of the legal, 
reputational, and operational risks associated with the debt and the 
collection activity. The remainder of this statement focuses on one 
aspect of banks' debt collection activities, debt sales.
---------------------------------------------------------------------------
     \1\ See, OCC Bulletin 2000-20, ``Uniform Retail Credit 
Classification and Account Management Policy'', http://www.occ.gov/
news-issuances/bulletins/2000/bulletin-2000-20.html.
     \2\ See, ``Activities Permissible for a National Bank, 
Cumulative'', http://www.occ.gov/publications/publications-by-type/
other-publications-reports/bankact.pdf.
---------------------------------------------------------------------------
    The majority of bank debt sales activity is concentrated among the 
19 largest banking organizations, with the five largest making up about 
82 percent of the annual total average sales of debt. On average, the 
19 largest banking organizations have sold about $37 billion in 
charged-off debt sales in each of the past few years.
    To provide some context to this number, the total retail credit 
portfolio for these 19 banks averaged $2.5 trillion each of the last 5 
years. During that period, their combined annual charge-offs on these 
portfolios averaged $93.2 billion. The amount of retail debt charged 
off in recent years has fallen significantly as the economy has 
improved, with charge-offs declining from $130 billion in 2010 to $67.8 
billion in 2012, a decline of more than 48 percent.
    The vast majority of debt charged off by these large financial 
institutions and sold to third party debt collectors involves 
delinquent debt related to credit cards, but also includes other types 
of consumer credit such as auto, home equity, mortgage, and student 
loans.
    The value of debt sold to third party debt collectors likewise 
varies significantly based on the age of the debt, the completeness and 
quality of records related to the debt, previous work done to collect 
the debt, and the amount of debt being sold overall (supply). Recently, 
charged-off debt has sold for between $.05 and $.10 for every dollar of 
most types of debt. That price has increased lately as the overall 
supply of debt sold has declined.
    The volume of charged-off debt sold by the largest banks has 
decreased over the past few years. The drop reflects both the 
improvement in portfolio quality and a decision by some banks to limit 
or curtail their debt sales due to the heightened reputation and legal 
risks such activity can pose. \3\
---------------------------------------------------------------------------
     \3\ See, ``Chase Halts Card Debt Sales of Crackdown'', American 
Banker, July 1, 2013. http://www.americanbanker.com/issues/178_126/
chase-halts-card-debt-sales-ahead-of-crackdown-1060326-1.html
---------------------------------------------------------------------------
Ongoing Supervisory Concerns and Actions
    The OCC expects all national banks and Federal savings associations 
to have policies and procedures in place to manage their debt 
collection activities effectively. This includes managing the 
operational and reputational risks, and complying with all relevant 
consumer protection laws. When banks sell debt, the agency expects them 
to have policies, procedures, and practices that result in the third 
party treating customers fairly and consistently with the expectations 
of the banks and regulators. Even though a bank may have sold a 
consumer's debt to a third party, consumers often continue to view 
themselves as the bank's customers and may have other relationships 
with that bank. As a result, the debt collector's behavior affects the 
bank's reputation. Failure to implement proper controls and governance 
that effectively manage these activities represent safety and soundness 
and compliance concerns for the OCC. The Comptroller's Handbook on 
``Other Consumer Protection Laws and Regulations'' describes a bank's 
obligations under the Fair Debt Collection Act when conducting debt 
collection activities. \4\ The OCC has also published guidance to banks 
that provides principles for effectively managing risks associated with 
vendors and third-party service providers, which also applies to third-
party vendors collecting debt on behalf of the banks (debt placement 
relationships) and is also relevant to their relationships with buyers 
of their debt (debt sales relationships). \5\
---------------------------------------------------------------------------
     \4\ See, ``Comptroller's Handbook on Other Consumer Protection 
Laws and Regulations'', August 2009. http://www.occ.gov/publications/
publications-by-type/comptrollers-handbook/other.pdf
     \5\ See, OCC 2001-47, ``Risk Management of Third Party 
Relationships'', See, http://www.occ.gov/news-issuances/bulletins/2001/
bulletin-2001-47.html.
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    The OCC has expressed concern about operational risk at banks on a 
number of occasions. \6\ While operational risk includes a range of 
activities, the Comptroller specifically raised concerns with debt 
collection in May 2012 when he noted that the OCC has ``seen 
institutions outsourcing such functions as debt collection but not 
taking adequate care to ensure that the third-party contracted to 
perform those functions follows the laws and regulations governing 
them.'' \7\
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     \6\ See, Remarks by Deputy Comptroller for Operational Risk 
Carolyn DuChene, http://www.occ.gov/news-issuances/speeches/2013/index-
2013-speeches.html.
     \7\ See, http://www.occ.gov/news-issuances/speeches/2012/pub-
speech-2012-77.pdf.
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    The OCC's current interest in debt collection and debt sales 
activities stems from our 2010 examination work on mortgage servicing 
and foreclosure practices that revealed weak governance of third-party 
vendors, including notaries and affiants, and poor documentation 
practices more generally. Because of the similarities in processes and 
heavy reliance on third parties, outside attorneys, notaries, and 
affiants, the agency was concerned that similar weaknesses might be 
present in other retail lending activities. As a result, the OCC 
commenced a review of debt collection and sales activities across the 
large banks it regulates in April 2011, focusing primarily on notary 
and affiant practices. The review sought assurance that bank management 
had implemented necessary governance and control processes in this 
area. Throughout the summer of 2011, additional work continued in this 
area stressing the agency's concerns and communicating them to large 
bank management.
    Through its more recent work on debt sales, the OCC identified a 
number of best practices that OCC large bank examiners are 
incorporating into their supervision of debt sales activities. A copy 
of these best practices is included in the appendix to this statement. 
The OCC uses such best practices and insights gained from its on-site 
supervisory activities to inform the development of policy rules and 
guidance that may be more applicable to a broader range of financial 
institutions. As described later in this statement, efforts are 
currently underway to develop such guidance.
    The best practices document provides a practical description of 
effective risk management practices examiners should expect to see in 
large banks with debt sales activities. Such practices should include 
the establishment of detailed policies and procedures to govern debt 
sales practices consistently across the organization. Those policies 
and procedures should:

    require financial analysis of why selling the debt is a 
        better option than collecting debt internally;

    identify types of accounts that should not be sold and 
        specify quality standards and quality control for debt that is 
        sold, emphasizing the accuracy of the account balances;

    ensure the purchase and sale agreements clearly delineate 
        roles and responsibilities of all parties for fair debt 
        collection;

    require detailed documentation to ensure accurate and 
        reliable information is provided to the debt buyer at the time 
        of purchase;

    specify internal bank documentation retention practices; 
        and

    address due diligence requirements of third parties to 
        ensure compliance with the bank's own policies and procedures. 
        \8\
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     \8\ We recognize that debt buyers generally are not third-party 
vendors subject to OCC jurisdiction. Nonetheless, many of the 
principles enunciated in connection with risk management of third party 
vendors are relevant to ensuring that a bank has adequate policies and 
procedures in place to manage risks associated with debt sales.

    Due diligence reviews and ongoing monitoring of potential debt 
buyers are particularly important in managing the reputational risk 
associated with debt sales activities. Appropriate due diligence 
reviews should occur before the sale. The reviews should answer 
questions such as whether debt buyers have appropriate licenses; 
whether there are existing regulatory and legal actions against the 
debt buyer or its owners; and whether they are in good standing. In 
addition to these general governance activities characteristic of sound 
risk management, the document also includes a variety of specific 
actions that reflect best practices seen by examiners across large 
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banks:

    Establish oversight committee--an oversight body to monitor 
        third party debt buyers and provide a corresponding single, 
        consistent control structure for overall consumer debt sales 
        within an institution.

    Use debt buyer scorecards--enhanced controls to assess 
        legal and reputation risk of the debt buyer that takes into 
        consideration consumer complaints, repurchases, legal actions 
        filed against the company, and other regulatory compliance 
        issues.

    Maintain account accuracy and documentation--confirm the 
        accuracy of account balances, confirm marketable title that is 
        free and clear from all liens, and confirm the completeness and 
        accuracy of account documentation prior to debt sales.

    Use clear, consistent contract terminology--use boilerplate 
        contract language across lines of businesses when appropriate.

    Provide sufficient documentation--sufficient documentation 
        will allow fair and informed collection of debts including 
        relevant customer account codes and explanation of codes that 
        should alert a debt buyer to special handling of certain 
        accounts (e.g., attorney handling, etc.).

    Limit the resale of debt--contractually limiting the 
        ability of the third party to resell the debt to another entity 
        allows the bank to control who ultimately will pursue 
        collection from ``their'' customers and helps prevent legal 
        validity and ownership questions later.

    Limit the litigation strategy--banks should evaluate the 
        litigation strategies of debt buyers, consider selecting debt 
        buyers who limit their use of litigation, or use contractual 
        provisions or other means to limit the use of litigation by 
        buyers of their debt.

    Maintain quality Management Information Systems--establish 
        appropriate management reporting that tracks debt sales, sales 
        price, and repurchase causes and volume.

    Conduct periodic reviews--depending on past practices and 
        controls, a look-back review may be required to determine if 
        prior practices resulted in consumer harm.

    Specific debt sales practices vary from bank to bank as does the 
degree to which banks have implemented controls and procedures 
consistent with those in the best practices document. Weaknesses in 
debt sales activities stem from several sources. Many of the largest 
institutions have acquired other institutions, resulting in data 
quality and integrity issues and a collection of acquired systems that 
have been difficult to integrate. In some cases, customer account 
history in these legacy portfolios is not complete.
    Consistent with the OCC's heightened expectations for large banks 
overall, the agency is raising its expectations with regard to the 
banks' oversight and management of their debt sales activities. For 
example, while banks continue to work through integration issues, the 
OCC has emphasized the need for rigorous quality control processes and 
strong audit programs. The OCC has planned supervisory activities in 
the largest banks to assess policies, internal monitoring, and 
oversight of debt sale programs. Where OCC has been informed of planned 
Consumer Financial Protection Bureau (CFPB) reviews, resident OCC teams 
will collaborate with CFPB bringing both a safety and soundness and a 
consumer protection focus to these reviews. Where examiners find unsafe 
and unsound practices, practices that fail to comply with applicable 
laws or regulations, or practices that fail to meet our heightened 
expectations; the OCC will take appropriate supervisory action, 
including enforcement actions when warranted. Where the agency becomes 
aware of concerns with nonbank, third party debt collectors, it will 
refer those issues to the CFPB, which has jurisdiction over those types 
of entities.
Policy Implications
    While supervisory action continues, the OCC recognizes the need for 
clear, actionable, and effective policy regarding debt sales among all 
national banks and Federal savings associations that engage in this 
activity. The OCC is in the process of developing supervisory guidance 
that outlines safe and sound banking principles that should be followed 
in connection with sales of charged-off consumer debt. The guidance 
will outline risk management expectations for banks so they can 
appropriately assess and prudently manage the operational, compliance, 
and reputational risks associated with this activity and implement 
appropriate practices to address and mitigate those risks.
    The OCC expects a bank's sale of charged-off consumer debt to be 
structured and operated in a prudent and safe and sound manner that 
continues to ensure fair treatment of the affected customers. The OCC's 
guidance will detail the principles that OCC-supervised institutions 
will be expected to apply in their risk management processes, policies, 
and procedures regarding disposing of charged-off consumer debts. The 
principles articulated in the guidance will provide banks with 
appropriate flexibility in their business decisions regarding 
nonperforming consumer debts, while ensuring that their practices do 
not enable third party debt buyers to create unnecessary hardships for 
consumers through their actions after the acquisition of these charged-
off debts.
Conclusion
    Debt collection is a fundamental part of the business of lending. 
While banks must carefully underwrite the loans they make by 
considering the ability and willingness of the borrower to repay that 
debt, lending retains the inherent risk of borrowers failing to repay 
their debt. When that occurs, banks have the responsibility to attempt 
to collect that debt and to recover losses associated with that bad 
debt. They must do this in a manner that is not only safe and sound, 
but fair to their customers and in compliance with applicable laws and 
regulations.
    In seeking to recover their losses, banks should exercise 
particular care when they choose to sell that debt to third party debt 
collectors. Selling debt to third party debt collectors carries 
particular compliance, reputational, and operational risks. The OCC has 
highlighted these risks on a number of occasions and while the industry 
continues to heal from the credit and capital market challenges of the 
financial crisis, it is evident that these risks are gaining increasing 
prominence. For this reason, the OCC has raised its expectations for 
banks to provide effective risk management over all facets of their 
operations and activities. Meeting those expectations will require 
additional effort and investment on the part of the banks, but we are 
confident that they can meet those expectations, and we will insist 
that they do.





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