On July 28, 2016, the Consumer Financial Protection Bureau (CFPB or Bureau) released an outline of possible regulatory proposals to address debt collection practices by third-party debt collectors under the Fair Debt Collection Practices Act (FDCPA). The CFPB will address first-party debt collectors and creditors, which are not currently covered by the FDCPA, “on a separate track.”
The CFPB’s initiative is raising some concerns with respect to how potentially more stringent debt collection standards may impact such areas as: banks’ ability to sell non-performing loans to debt collectors, assumptions regarding banks’ loss given default (LGD) rates as well as related write-offs, provisioning and capital allocations. They may also impact the ability of a range of debt buyers (including hedge funds) to acquire defaulted debt.
It will likely take more than half a year before the CFPB issues final rules regarding debt collection. This provides lenders and their third party service providers with time to prepare for more stringent regulations. It also provides banks with opportunities to update scenario analysis regarding LGD rates in light of tightening debt collection standards, as appropriate.
The Client Alert analyzes the CFPB’s newest initiative and its implications for a broad range of market participants.