The nation's new cop on the beat for financial services is taking its most significant step yet: moving to bring many debt collectors and the credit-rating industry under federal supervision for the first time.
The Consumer Financial Protection Bureau (CFPB) announced its plan Thursday, citing its authority under the so-called Dodd-Frank Act, which created the agency in the wake of the financial crisis of 2008.
Republicans in Congress have opposed the very concept of the agency as a symbol of unneeded new regulation, and its creation – as well as the appointment of its first director – have served as focal points for the GOP leadership’s criticism of President Obama and his policies.
The move Thursday, therefore, represents a chance for the CFPB, under director Richard Cordray, to define its image as a responsible guardian of consumers in the arena of banking and borrowing.
Its message seems to be: We're on the case, but we're not the overzealous bureaucrats that you've been told to fear.
Mr. Cordray is choosing his first action to target an area of finance where consumers have many complaints.
The proposed supervision will cover debt-collection firms that have at least $10 million in annual revenues, or about 175 firms accounting for 63 percent of the industry. It would also mean new supervision of credit reporting firms such as Experian, Equifax, and TransUnion.
Of course, "not overzealous" is in the eye of the beholder. Cordray pledged that this was the first in a series of new consumer protection efforts, and critics argue that the agency could end up dampening innovation and activity in a vital industry that's already under strain, due to recession-related defaults by borrowers.
Cordray was recently installed in his position through a controversial appointment made by Mr. Obama during a congressional recess, which bypassed the Senate confirmation process.
For Obama, the agency and its new move fit with his populist theme of leveling America's economic playing field, so that bankers and financial firms play "by the same rules" as people on Main Street.
Cordray laid out the rationale for the new oversight in a statement Thursday.
“Consumer financial products and services have become more complex over the years and they have expanded well beyond traditional banks,” he said. “Our proposed rule would mean that those debt collectors and credit reporting agencies that qualify as larger participants are subject to the same supervision process that we apply to the banks. This oversight would help restore confidence that the federal government is standing beside the American consumer.”
The Dodd-Frank law, which some Republican presidential candidates say should be repealed, called for the Consumer Financial Protection Bureau to be created, and for it to have authority to supervise nonbank firms in the specific markets: residential mortgage, payday lending, and private education lending. In other nonbank markets for retail finance the CFPB has the authority to supervise “larger participants,” if it defines those participants by July 21 of this year.
The plan to supervise debt collectors and credit-rating firms is timed to meet that deadline (after a 60-day comment period).
About 30 million Americans have debt under collection, the CFPB says, with an average amount under collection of $1,400.
Cordray said that debt collectors have more complaints lodged against them by consumers than any other industry according to a database maintained by the Federal Trade Commission.
The FTC has in the past pursued cases on behalf of consumers against debt collection firms. But that agency doesn't officially supervise the industry, examining records for potential violations of law the way the CFPB intends to do.
Now the CFPB and trade commission have agreed to coordinate oversight of markets where they both have jurisdiction.
Debt collectors do not use a single business model. Some try to get money from delinquent customers for a fee, while others buy customers' debt from lenders and then try to recover what is owed.
Some debt collectors have recently run into trouble with federal regulators.
Last month a division of Asset Acceptance Capital agreed to pay a $2.5 million civil penalty as part of a settlement with the FTC and Justice Department over charges that it used deceptive collection practices.
Material from Reuters was used in this story.