Regulator targets credit reporting firms and debt collectors

Reporting from Washington —  The government’s newest regulator is ready to crack down on the nation’s large credit reporting and debt collection companies, proposing tough new oversight on two arcane financial groups that affect nearly all consumers.

The Consumer Financial Protection Bureau proposed to subject the companies to federal oversight for the first time as part of its broad authority to regulate firms outside the banking system.

By sending examiners to review their operations on a regular basis, the bureau hopes to spot problems before they arise at companies that book-end the consumer financial experience — firms that help determine who gets credit in the first place and those that pursue people unable to pay their bills.

“Debt collectors and credit reporting agencies have gone unsupervised by the federal government for too long,” Richard Cordray, the bureau’s director, said Thursday in announcing the effort.

The proposed rule, which is expected to be enacted in the next few months, was Cordray’s first major move since being installed by President Obama last month in a controversial recess appointment.

Debt collection has been second only to identity theft in consumer complaints to the Federal Trade Commission in recent years. The bureau estimated that 30 million Americans have debts in the collection process.

One of the nation’s largest firms, Asset Acceptance, agreed to pay a $2.5-million civil penalty in January to settle a Federal Trade Commission lawsuit for misrepresentations in dealing with consumers, including failing to disclose when a debt was too old to be legally collected.

“It will improve things immensely because most debt collectors are operating in an either illegal or amoral way,” said Bill Bartmann, chief executive of debt collection company CFS II in Tulsa, Okla., who has been a longtime critic of some industry practices.

The three large credit reporting companies, Experian Information Solutions Inc., Equifax Inc. and TransUnion, have records on 200 million Americans and hold the key to getting a credit card or mortgage — and increasingly even a job.

Their practices have been mysterious to consumer advocates for years, and the new federal oversight should help reduce the number of mistakes on credit reports, said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group.

“The CFPB is saying they should no longer be operating as a black box,” Mierzwinski said. “We should look inside the credit bureaus because they are gatekeepers to financial success, and we should see if their algorithms are fair to consumers.”

Credit reporting companies and debt collectors already fall under the bureau’s power to enforce consumer protection laws and enact new regulations. Cordray proposed to subject the largest of those companies to additional oversight because of their key role in consumer finance.

“Unlike most services or products where consumers have power through their ability to shop around among different providers, consumers lack the power to do that with these businesses,” Cordray said.

“Consumers do not choose whether to have any of the consumer credit reporting agencies keep track of their credit history, nor do they have the ability typically to choose their debt collector,” he said.

Bureau examiners would make sure consumer protection laws were being followed in the same way that other regulators examine banks regularly to check their financial condition. Congress directed the consumer bureau to examine large banks, mortgage companies, payday lenders and private student lenders.

In other areas of the financial industry, the bureau must designate which firms are large participants and then create rules to supervise them more closely.

Under Thursday’s proposal, consumer reporting companies with more than $7 million in annual receipts would face supervision. Only 30 companies, or just 7% of such firms nationwide, would fall under tougher scrutiny, but they account for about 94% of the market.

Consumer reporting companies include the three large credit reporting firms and those that provide specialty services to banks, such as those that track bounced checks.

“We remain committed to meeting consumers’ and clients’ needs within regulatory guidelines, while continuing to move our business forward,” said Gerry Tschopp, senior vice president of public affairs at Experian North America in Costa Mesa. He said the company has been working with the consumer bureau.

Neither Equifax nor TransUnion responded to requests for comment. The Consumer Data Industry Assn., a trade group, said it had not reviewed the proposal.

Debt collectors with more than $10 million in annual revenue from collection activities would also be subject to supervision. The bureau estimated that standard would cover about 175 debt collection firms — or 4% of those nationally — and account for about 63% of the market.

“We’ve not had to face this before, so we’re not quite sure what to expect,” said Mark Schiffman, a spokesman for ACA International, an industry trade group.

ACA had recommended to the consumer bureau that only a few large companies — those with more than $250 million in annual revenue — be covered by the new oversight.

Bartmann of CFS said that his company would be subject to the tougher oversight and that he welcomed the exams. The industry now is regulated by the outdated federal Fair Debt Collection Practices Act and a patchwork of state laws that rely on consumer complaints to identify problems, he said.

“It’s like a cop on the beat. It’s a deterrent,” Bartmann said of the proposed reviews of company records and practices.

Jean Ann Fox, director of financial services at the Consumer Federation of America, said her group recommended that the credit reporting and the debt collection industries be subjected to tougher oversight when the consumer bureau solicited input from the public last year.

Examining businesses regularly for compliance with consumer protection laws was one of the cornerstones of the 2010 financial reform law that created the bureau, Fox said.

“You can prevent problems, make sure everybody is complying with the law and make sure consumers aren’t being abused or harmed, rather than trying to get a refund after the fact or a penalty after the fact or an injunction after the fact,” she said.

jim.puzzanghera@latimes.com