The Consumer Financial Protection Bureau’s proposed debt collections rules could reduce recoveries on defaulted loans backing consumer asset-backed securities, including auto, according to a study released today by Moody’s Investors Service.
If passed, the rules would also force debt collectors to use “less aggressive tactics,” which would make it harder to collect on defaulted loans and lead to “lower and slower recoveries for securitizations that use such firms to pursue unpaid amounts,” Moody’s wrote in the report.
The proposed rules would also reduce the amounts that companies that buy charged-off debt out of securitizations are willing to pay, according to Moody’s.
Under the bureau’s proposal, released in late July, debt collectors would be required “to have more and better information about the debt before they collect,” the CFPB said in a release. “As they are collecting, companies would be required to limit communications, clearly disclose debt details, and make it easier to dispute the debt. When responding to disputes, collectors would be prohibited from continuing to pursue debt without sufficient evidence.”
On the Bright Side:
There are some potential benefits to the CFPB’s proposal, Moody’s wrote, including that maintaining better documentation would encourage loan servicers to improve their systems and record-keeping, making future collections easier.
“Additionally, if consumers make lower payments to settle debt held outside of trusts as a result of being provided greater information about their rights, they could have greater resources to repay their securitized borrowing,” Moody’s wrote.
Debt collectors are already prohibited by federal law from harassing, oppressing, or abusing consumers under the 1977 Fair Debt Collection Practices Act. The CFPB’s proposals seek to increase protections under the existing act, specifically aimed at ensuring that debt collectors:
- Collect the correct debt
- Limit excessive or disruptive communications
- Make debt details clear and disputes easy
- Stop collection or suing for debt without proper documentation
- Stop burying the dispute
“Reigning in abusive practices in the debt collection industry could also make borrowers more receptive to other attempts to collect delinquent debt,” Moody’s wrote. “Resulting in higher payments from some consumers on defaulted loans held by securitizations.”
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