Debtors Receive Extra Protection in New Federal Laws

Digital Eyes Watching
Car loans, personal loans, student loans—all loans carry a sense of the unknown for both the lender and the borrower. When loans are left unpaid, they can have serious repercussions not only on the current loan but on any future lending. One area of concern deals with debt collection agencies and their occasional abuse of power. New laws are being implemented to protect the consumer from false and potentially life-altering credit reports.

On Oct. 24, 2012, the Consumer Financial Protection Bureau (CFPB) published a rule that will enable it to federally oversee large debt collection companies. Starting Jan. 2, 2013, any debt collection firm that has more than $10 million in annual consumer debt collection receipts will be subjected to the Bureau’s authority.

“Millions of consumers are affected by debt collection, and we want to make sure they are treated fairly,” CFPB director Richard Cordray said in a statement. “We want all companies to realize that the better business choice is to follow the law—not break it.”

According to the Bureau's released statement, only four percent of the nation’s nearly 4,500 consumer debt-collection firms would face potential examinations. However, that small group represents about 60 percent of the annual receipts. Although all debt collection agencies will not be monitored, the new rule will enable a large percentage of consumers to be protected.

Approximately 30 million Americans have an average of $1,500 in debt that is subject to collection. Debt can range from unpaid credit card bills to defaulted car loans and more, but not all debt is the same. Whether or not a case is given to a debt collection agency depends on several factors. The extent of debt can cause a creditor to expedite the collection process. Another factor which can influence the process is the interaction between the debtor and the creditor. If overdue payment notices and phone calls continue to be ignored, the creditor will likely see no other choice but to turn the case over to a debt collection agency. If the debtor keeps a clear line of communication with the creditor about when payments will be made, then the need for a debt collection agency decreases. It is not guaranteed that the next step will not be taken, but it will likely increase the time given for a debtor to pay the money back.

Staying updated about credit history and debt is important for any person. The information being exchanged between debt collectors and credit bureaus is highly powerful. If incorrect or unfavorable information is listed on their credit score, it can seriously deter their future borrowing abilities.

When applying for mortgages, car loans and personal loans, collection accounts can negatively affect credit scores. For example, when vehicle shopping, if a consumer’s credit score is low (below 580), the borrower will find it difficult to get approved for a car loan. In the event a poor credit borrower is approved, the auto loan’s terms will likely include a higher interest rate and require a larger deposit in order to protect the lender. If the car loan debt is unpaid, complications ensue.

When a person’s debt transfers from a creditor to a collection agency, the agency submits a report to the three major credit bureaus: Experian, Equifax, and TransUnion. The reports notify the bureaus that the account is in the process of collection. These statements appear and will remain on credit reports for seven years. This is why it is important to check credit scores frequently, and why the CFPB’s new laws are groundbreaking. If any information is wrongly reported, it can be the deciding factor between getting approved or denied on car loans, mortgages and other types of financing.