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[Federal Register Volume 77, Number 211 (Wednesday, October 31, 2012)]
[Rules and Regulations]
[Pages 65775-65799]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-26467]

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1090

[Docket No. CFPB-2012-0040]
RIN 3170-AA30

Defining Larger Participants of the Consumer Debt Collection 
Market

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) amends 
the regulation defining larger participants of certain consumer 
financial product and service markets by adding a new section to define 
larger participants of a market for consumer debt collection. The final 
rule thereby facilitates the supervision of nonbank covered persons 
active in that market. The Bureau is issuing the final rule pursuant to 
the Dodd-Frank Wall Street Reform and Consumer Protection Act. That law 
grants the Bureau authority to supervise certain nonbank covered 
persons for compliance with Federal consumer financial law and for 
other purposes. The Bureau has the authority to supervise nonbank 
covered persons of all sizes in the residential mortgage, private 
education lending, and payday lending markets. In addition, the Bureau 
has the authority to supervise nonbank ``larger participant[s]'' of 
markets for other consumer financial products or services, as the 
Bureau defines by rule. An initial rule defining larger participants of 
a market for consumer reporting was published in the Federal Register 
on July 20, 2012 (Consumer Reporting Rule).

DATES: Effective January 2, 2013.

FOR FURTHER INFORMATION CONTACT: Kali Bracey, Senior Counsel, (202) 
435-7141, or Susan Torzilli, Attorney-Advisor, (202) 435-7464, Office 
of Nonbank Supervision, Bureau of Consumer Financial Protection, 1700 G 
Street NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION: On February 17, 2012, the Bureau published a 
notice of proposed rulemaking proposing to define larger participants 
of two markets identified by the Bureau: consumer reporting and 
consumer debt collection.\1\ On July 20, 2012, the Bureau published the 
Consumer Reporting Rule.\2\ The Bureau is issuing this final rule to 
define larger participants of a market for consumer debt collection 
(Final Consumer Debt Collection Rule). This Final Consumer Debt 
Collection Rule is the second in a series of rulemakings to define 
larger participants of markets for consumer financial products and 
services for purposes of 12 U.S.C. 5514(a)(1).
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    \1\ 77 FR 9592 (Feb. 17, 2012).
    \2\ 77 FR 42874 (July 20, 2012).
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I. Overview

    Title X of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) \3\ established the Bureau on July 21, 
2010. One of the Bureau's responsibilities under the Dodd-Frank Act is 
the supervision of certain nonbank covered persons,\4\ and very large 
banks, thrifts, and credit unions and their affiliates.\5\
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    \3\ Public Law 111-203 (codified at 12 U.S.C. 5301 et seq.).
    \4\ The provisions of 12 U.S.C. 5514 apply to certain categories 
of covered persons, described in subsection (a)(1), and expressly 
exclude from coverage persons described in 12 U.S.C. 5515(a) or 
5516(a). A ``covered person'' means ``(A) any person that engages in 
offering or providing a consumer financial product or service; and 
(B) any affiliate of a person described [in (A)] if such affiliate 
acts as a service provider to such person.'' 12 U.S.C. 5481(6); see 
also 12 U.S.C. 5481(5) (defining ``consumer financial product or 
service''). Under 12 U.S.C. 5514(d), subject to certain exceptions, 
``to the extent that Federal law authorizes the Bureau and another 
Federal agency to * * * conduct examinations, or require reports 
from a person described in subsection (a)(1) under such law for 
purposes of assuring compliance with Federal consumer financial law 
and any regulations thereunder, the Bureau shall have the exclusive 
authority to * * * conduct examinations [and] require reports * * * 
with regard to a person described in (a)(1), subject to those 
provisions of law.''
    \5\ See 12 U.S.C. 5515(a). The Bureau also has certain 
authorities relating to the supervision of other banks, thrifts, and 
credit unions. See 12 U.S.C. 5516(c)(1), (e). The Bureau notes that 
one of the objectives of the Dodd-Frank Act is to ensure that 
``Federal consumer financial law is enforced consistently without 
regard to the status of a person as a depository institution, in 
order to promote fair competition.'' 12 U.S.C. 5511(b)(4).
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    Under 12 U.S.C. 5514, the Bureau has supervisory authority over all 
nonbank covered persons offering or providing three enumerated types of 
consumer financial products or services: (1) Origination, brokerage, or 
servicing of residential mortgage loans secured by real estate, and 
related mortgage loan modification or foreclosure relief services; (2) 
private education loans; and (3) payday loans.\6\ The Bureau also has 
supervisory authority over ``larger participant[s] of a market for 
other consumer financial products or services,'' as the Bureau defines 
by rule.\7\ On July 20, 2012, the Bureau published in the Federal 
Register the Consumer Reporting Rule, which defined larger participants 
of a market for consumer reporting.\8\ The Consumer Reporting Rule also 
established various procedures and standards that will apply with 
respect to all larger participants defined by rule, including those in 
the market for consumer debt collection that is defined in this Final 
Consumer Debt Collection Rule.
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    \6\ 12 U.S.C. 5514(a)(1)(A), (D), (E).
    \7\ 12 U.S.C. 5514(a)(1)(B), (a)(2). The Bureau also has the 
authority to supervise any nonbank covered person that it ``has 
reasonable cause to determine, by order, after notice to the covered 
person and a reasonable opportunity * * * to respond * * * is 
engaging, or has engaged, in conduct that poses risks to consumers 
with regard to the offering or provision of consumer financial 
products or services.'' 12 U.S.C. 5514(a)(1)(C). The Bureau has 
published a notice of proposed rulemaking to establish procedures 
relating to this provision of the Dodd-Frank Act. 77 FR 31226 (May 
25, 2012).
    \8\ 77 FR 42874.

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[[Page 65776]]

    The Bureau is authorized to supervise nonbank entities subject to 
12 U.S.C. 5514 of the Dodd-Frank Act by requiring the submission of 
reports and conducting examinations to: (1) Assess compliance with 
Federal consumer financial law; (2) obtain information about such 
persons' activities and compliance systems or procedures; and (3) 
detect and assess risks to consumers and consumer financial markets.\9\ 
While the specifics of an examination may vary by market and entity, 
the supervision process generally proceeds as follows. Typically, 
Bureau examiners initiate an on-site examination by contacting the 
entity for an initial conference with management, and often by also 
requesting records and information. Bureau examiners also will review 
the components of the supervised entity's compliance management system. 
Based on these discussions and a preliminary review of the information 
received, examiners determine the scope of an on-site examination, and 
then coordinate with the entity to initiate the on-site portion of the 
examination. While on-site, examiners spend a period of time holding 
discussions with management about the company's processes and 
procedures; reviewing documents, records, and accounts for compliance; 
and evaluating the entity's compliance management systems. As with the 
Bureau's bank examinations, examinations of nonbanks involve issuing 
confidential examination reports, supervisory letters, and compliance 
ratings.
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    \9\ 12 U.S.C. 5514(b)(1).
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    The Bureau has published a general examination manual describing 
the Bureau's supervisory approach and processes. This manual is 
available on the Bureau's Web site.\10\ As explained in the examination 
manual, reports of examination will be structured to address various 
factors related to a supervised entity's compliance with Federal 
consumer financial law and other relevant considerations. On September 
5, 2012, prior to beginning examinations of consumer reporting 
entities, the Bureau released examination procedures specific to 
consumer reporting.\11\ In connection with this Final Debt Collection 
Rule, the Bureau is releasing examination procedures related to debt 
collection. This Final Consumer Debt Collection Rule establishes a 
category of covered persons that are subject to the Bureau's 
supervisory authority \12\ under 12 U.S.C. 5514, by defining ``larger 
participants'' of a market for consumer debt collection.\13\ The Final 
Consumer Debt Collection Rule pertains only to that purpose and does 
not impose new substantive consumer protection requirements. Nor does 
the Final Consumer Debt Collection Rule delineate the scope of the Fair 
Debt Collection Practices Act (FDCPA),\14\ provisions of the Dodd-Frank 
Act related to consumer debt collection activities, or any other 
Federal consumer financial law. Activities that the Bureau has chosen 
to exclude from the defined consumer debt collection market may 
nonetheless qualify as ``collecting debt'' within the meaning of the 
Dodd-Frank Act and may constitute consumer financial products or 
services. Activities that the Bureau has excluded from this market may 
also be subject to the FDCPA. Nonbank covered persons generally are 
subject to the Bureau's regulatory and enforcement authority, and any 
applicable Federal consumer financial law, regardless of whether they 
are subject to the Bureau's supervisory authority.\15\
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    \10\ Available at http://www.consumerfinance.gov/guidance/supervision/manual/.
    \11\ See Consumer Financial Protection Bureau, Consumer 
Reporting Examination Procedures (Sept. 5, 2012) available at http://files.consumerfinance.gov/f/201209_cfpb_Consumer_Reporting_Examination_Procedures.pdf. These procedures are an extension of 
the CFPB's general Supervisory and Examination Manual and provide 
guidance on how the Bureau will be conducting its monitoring in the 
consumer reporting market.
    \12\ The Bureau's supervision authority also extends to service 
providers of those covered persons that are subject to supervision 
under 12 U.S.C. 5514. 12 U.S.C. 5514(e); see also 12 U.S.C. 5481(26) 
(defining ``service provider'').
    \13\ The Final Consumer Debt Collection Rule describes one 
market for consumer financial products or services, which the rule 
labels ``consumer debt collection.'' The definition in the rule does 
not encompass all activities that could be considered consumer debt 
collection. Any reference herein to ``the consumer debt collection 
market'' means only the particular market for consumer debt 
collection identified by the Final Consumer Debt Collection Rule.
    \14\ The FDCPA is codified at 15 U.S.C. 1692 et seq.
    \15\ As the Bureau explained in the Consumer Reporting Rule, the 
Bureau may examine a covered person's consumer financial products 
and services, as well as any of its activities that are subject to 
Federal consumer financial law, beyond the particular activities 
that rendered the person subject to supervision. Thus, the Bureau 
may examine activities of a larger participant of the consumer debt 
collection market that might not fall within the rule's definition 
of consumer debt collection.
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II. Background

    On June 29, 2011, through a notice and request for comment 
(Notice), the Bureau solicited public comment on developing an initial 
proposed larger participant rule.\16\ The Bureau also held a series of 
roundtable discussions with industry, consumer and civil rights groups, 
and State regulatory agencies and associations.\17\ The Bureau 
considered the comments it received in connection with the Notice in 
developing a proposed rule to define larger participants of two markets 
for consumer financial products or services: consumer debt collection 
and consumer reporting. The Bureau published a notice of proposed 
rulemaking on February 17, 2012 (Proposed Rule or Proposal), that 
proposed definitions for larger participants of consumer reporting and 
consumer debt collection markets, as well as procedures and definitions 
that would be applicable for all current and future markets in which 
the Bureau will define larger participants.\18\ The Bureau requested 
and received public comment on the Proposed Rule. The Bureau received 
83 comments on the Proposed Rule from, among others, consumer groups, 
industry trade associations, companies, State financial services 
agencies, and individuals.\19\ The comments pertaining to consumer debt 
collection are discussed in more detail below in the section-by-section 
analysis of the final rule.
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    \16\ 76 FR 38059 (June 29, 2011).
    \17\ In July 2011, the Bureau held four roundtable discussions 
on the Notice. More than 70 stakeholders participated, representing 
a diverse mix of nonbank and bank trade associations and consumer 
advocacy and civil rights groups. The roundtables focused on key 
issues regarding how to define larger participants, including what 
criteria to measure, where to set thresholds, available data 
sources, and which markets to cover. Also in July 2011, the Bureau 
held a multistate regulator and regulatory association conference 
call that had more than 40 participants.
    \18\ 77 FR 9592.
    \19\ Comments solely relating to Subpart A of 12 CFR part 1090, 
such as those relating to general definitions, concepts, protocols, 
and procedures relating to the Bureau's supervision of larger 
participants and assessments of whether entities are larger 
participants were addressed in the Consumer Reporting Rule and are 
not discussed again here.
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    On July 20, 2012, the Bureau published the Consumer Reporting Rule 
defining larger participants of a consumer reporting market.\20\ The 
Consumer Reporting Rule established subpart A of 12 CFR part 1090 (12 
CFR 1090.100-103), including general definitions, concepts, protocols, 
and procedures applicable to all larger participants of markets for 
consumer financial products or services. Section 1090.100 sets forth 
the scope and purpose of part 1090 as defining larger participants of 
certain markets for consumer financial products or services that are 
subject to supervision by the Bureau. Section 1090.101 defines terms 
that are generally applicable to Part 1090. Unless otherwise specified, 
the definitions in Sec.  1090.101 should be used when interpreting 
terms in this Final

[[Page 65777]]

Consumer Debt Collection Rule. Section 1090.102 establishes that once a 
nonbank covered person meets the larger-participant test for a 
particular market, the person retains larger-participant status for a 
period of at least two years. Section 1090.103 sets forth a procedure 
for a person to challenge an assertion by the Bureau that the person 
qualifies as a larger participant of a covered market and a mechanism 
by which the Bureau may request information to assess whether a person 
is a larger participant. The Consumer Reporting Rule also established 
subpart B of part 1090 (12 CFR 1090.104), identifying a market for 
consumer reporting, defining terms applicable to that market, and 
establishing a test for assessing which entities are larger 
participants of that market. As the Bureau identifies additional 
markets of which to supervise larger participants, the Bureau will 
include relevant market descriptions and larger-participant tests in 
subpart B.
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    \20\ 77 FR 42874.
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    In addition to the provisions that were adopted in the Consumer 
Reporting Rule, the Proposed Rule included a test to assess whether a 
nonbank covered person is a larger participant of the consumer debt 
collection market. Under this test, a nonbank covered person with more 
than $10 million in annual receipts resulting from consumer debt 
collection, as described in the Proposed Rule, would be a larger 
participant of the consumer debt collection market. As defined in the 
Proposed Rule, ``annual receipts'' would generally be derived from a 
three-year average of receipts.

III. Summary of the Final Rule

    The Final Consumer Debt Collection Rule amends part 1090 by adding 
Sec.  1090.105 to subpart B, to define larger participants of the 
consumer debt collection market. Section 1090.105 identifies a market 
for consumer debt collection, defines the term ``annual receipts'' for 
purposes of measuring participation in that market, and sets forth the 
test for assessing which entities are larger participants of the 
market. In the Proposal, the Bureau explained that the consumer debt 
collection market encompasses the collection, or attempted collection, 
of debt related to the consumer financial products or services 
described in 12 U.S.C. 5481(5) and (15). As discussed below, the Final 
Consumer Debt Collection Rule adopts a definition of ``consumer debt 
collection'' that is similar in scope but has been restructured in 
response to comments.
    Participants of the consumer debt collection market identified in 
the Final Consumer Debt Collection Rule generally include different 
types of consumer debt collection entities such as third-party debt 
collectors, debt buyers, and collection attorneys (collectively 
referred to as consumer debt collectors). Third-party debt collectors 
primarily collect debt on behalf of originating creditors or their 
assignees and typically are compensated through contingency fees 
calculated as a percentage of the debt they recover.\21\ Creditors' 
practices vary in how they use third-party debt collectors. In some 
cases, creditors use third-party debt collectors in the early stages of 
delinquency prior to charge off.\22\ In other cases, creditors use 
third-party debt collectors after the creditors have written off the 
debts.
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    \21\ ACA International, 2012 Agency Benchmarking Survey, at 21 
(2012). According to ACA International's 2012 Benchmarking Survey, 
collection agency commission rates averaged 28.4% in 2011, with a 
median of 25.5%.
    \22\ Charge off usually occurs 120 or 180 days after 
delinquency, depending on the type of debt. For example, the Federal 
Financial Institutions Examination Council, in its Uniform Retail 
Credit Classification and Account Management Policy, establishes a 
charge-off policy for open-end credit at 180 days delinquency and 
for closed-end credit at 120 days delinquency. See 65 FR 36903 (June 
12, 2000).
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    Debt buying is another important component of the consumer debt 
collection market. As the name indicates, debt buyers purchase debt, 
either from the original creditors or from other debt buyers, usually 
for a fraction of the balance owed.\23\ They profit when their 
recoveries exceed the direct and indirect costs of collection, 
including the costs of acquiring the debt and of collecting from 
consumers. Debt buyers sometimes use third-party debt collectors or 
collection attorneys to collect their debts, but many also undertake 
their own collection efforts. Finally, debt buyers also may decide to 
sell purchased debt to other debt buyers.
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    \23\ Federal Trade Commission, Collecting Consumer Debts: The 
Challenges of Change, at 4 (Feb. 2009), available at http://www.ftc.gov/bcp/workshops/debtcollection/dcwr.pdf (citing Kaulkin 
Ginsberg, The Kaulkin Report: The Future of Receivables Management 
at 50 (7th ed. 2007)).
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    Additionally, collection attorneys play a role in the consumer debt 
collection market. Collection attorneys undertake traditional 
collection efforts, such as contacting consumers by telephone or 
written communication. Attorneys also file lawsuits against consumers 
to collect debts or may buy debt and collect in their own names.\24\
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    \24\ Federal Trade Commission, Collecting Consumer Debts: The 
Challenges of Change, at 14 (Feb. 2009), available at http://www.ftc.gov/bcp/workshops/debtcollection/dcwr.pdf (citing Kaulkin 
Ginsberg, The Kaulkin Report: The Future of Receivables Management 
at 73 (7th ed. 2007)).
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    Debt collection is a multi-billion-dollar industry that directly 
affects a large number of consumers. In 2012, approximately 30 million 
individuals, or 14 percent of American adults who have credit reports, 
had debt that was subject to the collections process (averaging 
approximately $1,500 per consumer).\25\ Consumer debt collection is 
important to the functioning of the consumer credit market and has a 
significant impact on consumers. By collecting consumer debt, 
collectors reduce creditors' losses from non-repayment and thereby help 
to keep credit accessible and more affordable to consumers.
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    \25\ Federal Reserve Bank of New York, Quarterly Report on 
Household Debt and Credit (May 2012), available at http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q12012.pdf.
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    Debt collection performed in illegal ways has the potential to 
cause consumers substantial harm. If collectors falsely represent 
amounts owed, consumers may pay debts they do not owe simply to stop 
collection efforts or because they are unsure how much they owe. In 
addition, consumers may unintentionally yield their rights, such as by 
waiving the statute of limitations on debt claims for which the 
relevant limit periods have expired. Whether or not consumers owe and 
are liable for the debts collectors are attempting to recover, unlawful 
collection practices can cause significant reputational damage, invade 
personal privacy, and inflict emotional distress. Among the possible 
consequences, a collector's inappropriate interference with a 
consumer's employment relationships can also impair the consumer's 
ability to repay debts.
    Federal consumer financial law related to debt collection, and its 
implementation by the Bureau, protects consumers from such harms. The 
FDCPA gives consumers certain rights that protect them from unfair, 
deceptive, misleading, or abusive collection practices as well as from 
the collection of debts they do not owe. In addition, Federal consumer 
financial law promotes fair competition in the debt collection 
marketplace. To the extent that unfair, deceptive, or abusive practices 
increase collectors' rate of recovery on debts subject to collection, 
debt collectors that avoid such practices could be at a competitive 
disadvantage. By placing important parameters on debt collection 
activities, the FDCPA was meant in part to ensure that those that 
refrain from improper practices in debt collection are not thereby 
competitively disadvantaged.\26\ Title X's prohibition of unfair, 
deceptive, or abusive acts or practices serves, in part,

[[Page 65778]]

a similar end. The Bureau's program of supervision in the consumer debt 
collection market will help to secure these benefits and advance the 
Bureau's mission of promoting fair, transparent, and competitive 
consumer financial markets.
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    \26\ See 15 U.S.C. 1692(e).
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    The Final Consumer Debt Collection Rule describes a market for 
consumer debt collection. In response to comments received, the Bureau 
has adopted a definition of ``consumer debt collection'' that differs 
in some respects from that of the proposed definition. As defined in 
the Final Consumer Debt Collection Rule, the market includes collection 
by ``debt collector[s],'' as defined in the Final Consumer Debt 
Collection Rule, of debts incurred by consumers primarily for personal, 
family, or household purposes related to consumer financial products or 
services.\27\ This definition encompasses a scope of activity similar 
to what the definition in the Proposed Rule covered; \28\ in light of 
comments received, the Bureau believes the definition adopted will be 
clearer.
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    \27\ The definition of ``debt collector'' in the Final Consumer 
Debt Collection Rule incorporates parts of the FDCPA's definition of 
that term. 15 U.S.C. 1692a(6).
    \28\ The Proposed Rule suggested that medical debt is not a 
consumer financial product or service and that collection of such 
debt therefore did not fall within the proposed definition of 
``consumer debt collection.'' The Final Consumer Debt Collection 
Rule acknowledges that medical debt may, if it arose from an 
extension of credit within the meaning of the Dodd-Frank Act, 
involve a consumer financial product or service. However, the rule 
excludes receipts resulting from collecting medical debt from the 
definition of ``annual receipts,'' and thus from the quantity that 
determines larger-participant status. See infra nn. 39-47 and 
accompanying text.
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    The Final Consumer Debt Collection Rule also establishes a test, 
based on ``annual receipts,'' to assess whether a nonbank covered 
person engaging in consumer debt collection is a larger participant in 
this market. The definition of ``annual receipts'' is adapted from the 
definition of the term used by the Small Business Administration (SBA) 
for purposes of defining small business concerns. The Final Consumer 
Debt Collection Rule adopts the proposed test for qualifying as a 
larger participant of the consumer debt collection market: more than 
$10 million in annual receipts resulting from relevant consumer debt 
collection activities. However, the Final Consumer Debt Collection Rule 
excludes from the definition of annual receipts those receipts that 
result from collecting debts that were originally owed to a medical 
provider. Covered persons meeting the test qualify as larger 
participants and are subject to the Bureau's supervision authority 
under 12 U.S.C. 5514.
    The test to assess larger-participant status set forth in the Final 
Consumer Debt Collection Rule is tailored to the consumer debt 
collection market identified by the Final Consumer Debt Collection 
Rule. The Bureau has not determined that annual receipts, or a 
threshold of $10 million in annual receipts, would be appropriate for 
any other market that may be the subject of a future larger-participant 
rulemaking. Rather, the Bureau will tailor each test for defining 
larger participants to the market to which it will be applied.

IV. Legal Authority and Effective Date

A. Rulemaking Authority

    The Bureau is issuing this Final Consumer Debt Collection Rule 
pursuant to its authority under (1) 12 U.S.C. 5514(a)(1)(B) and (a)(2), 
which authorize the Bureau to supervise larger participants of markets 
for consumer financial products or services, as defined by rule; (2) 12 
U.S.C. 5514(b)(7), which, among other things, authorizes the Bureau to 
prescribe rules to facilitate the supervision of covered persons under 
12 U.S.C. 5514; and (3) 12 U.S.C. 5512(b)(1), which grants the Bureau 
the authority to prescribe rules as may be necessary and appropriate to 
enable the Bureau to administer and carry out the purposes and 
objectives of Federal consumer financial law, and to prevent evasions 
of such law.

B. Effective Date of Final Rule

    The Bureau proposed an effective date of 30 days after the 
publication of the Final Consumer Debt Collection Rule, noting that the 
Administrative Procedure Act generally requires that rules be published 
not less than 30 days before their effective dates.\29\ The Bureau 
received two comments requesting a postponement of the effective date 
to at least 180 days after publication of any rule finalizing larger-
participant definitions for the consumer reporting or consumer debt 
collection markets. Responding to these comments, the Bureau set an 
effective date for the Consumer Reporting Rule that was more than 60 
days after publication of that rule. The Bureau believes, for the same 
reasons expressed in the Consumer Reporting Rule, that it is reasonable 
to set an effective date more than 60 days after publication of this 
Final Consumer Debt Collection Rule.\30\ In balancing the requests for 
a longer pre-effective date period with the Bureau's view that too 
lengthy a period would be detrimental to consumers and the debt 
collection market, the Bureau believes it is reasonable to extend the 
effective date to January 2, 2013, to give larger participants, as 
defined by this rulemaking, more time to prepare for the possibility of 
Federal supervision. The Bureau therefore adopts this effective date 
for the Final Consumer Debt Collection Rule. As compared with the 
Proposal, this new effective date will provide more than double the 
time between the publication date and the date when consumer debt 
collectors may be subject to Bureau supervision under the Final 
Consumer Debt Collection Rule.
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    \29\ 5 U.S.C. 553(d).
    \30\ See 77 FR 42876. The Bureau decided to extend the effective 
date in the Consumer Reporting Rule to over 60 days after 
publication because companies affected by the Consumer Reporting 
Rule might not previously have been supervised at the Federal or 
State level and might need time to develop processes and engage in 
training to prepare for examinations. The Bureau declined to extend 
the effective date any further, as requested by commenters, because 
the Consumer Reporting Rule did not impose substantive conduct 
requirements requiring time to come into compliance. Furthermore, an 
extended delay in the Bureau's supervision program would have harmed 
consumers. Similar reasoning applies here.
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V. Section-by-Section Analysis of the Final Rule 31
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    \31\ The Bureau notes that the Final Consumer Debt Collection 
Rule is structured differently than the Proposed Rule. Unlike the 
Proposed Rule, 12 CFR 1090 is divided into Subparts A and B. Subpart 
A establishes generally applicable definitions and processes for 
assessing larger-participant status. Subpart B establishes market-
specific definitions and tests for assessing larger-participant 
status. The Final Consumer Debt Collection Rule amends 12 CFR 1090 
by adding Sec.  1090.105 to define larger participants of the 
consumer debt collection market to follow Sec.  104, which defines 
larger participants in a market for consumer reporting.
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Subpart B--Markets

Section 1090.105--Consumer Debt Collection Market
    As discussed in the Summary of the Final Rule above, consumer debt 
collection is important to the functioning of the consumer credit 
market and has a significant impact on consumers, with approximately 30 
million individuals in the United States having debt in collection.\32\ 
The market identified by the Final Consumer Debt Collection Rule 
generally includes third-party debt collectors, debt buyers, and 
collection attorneys.
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    \32\ Federal Reserve Bank of New York, Quarterly Report on 
Household Debt and Credit (May 2012), available at http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q12012.pdf.
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    Commenters criticized the Bureau's plan to supervise larger 
participants of the markets identified in the Proposed Rule. They 
stated that the Dodd-Frank Act requires the Bureau to consider the

[[Page 65779]]

four specific factors listed in 12 U.S.C. 5514(b)(2) \33\ when issuing 
a rule under 12 U.S.C. 5514(a)(2). As explained in the Consumer 
Reporting Rule, the Bureau believes that these commenters 
misinterpreted the scope and purpose of 12 U.S.C. 5514(b)(2).\34\ That 
subsection describes how the Bureau must ``exercise its authority under 
paragraph [(b)](1),'' \35\ which in turn authorizes the Bureau to 
supervise ``persons described in subsection (a)(1).'' \36\ The Final 
Consumer Debt Collection Rule does not exercise authority provided by 
subsection (b)(1). Instead, it ``describe[s],'' in part, a set of 
entities falling within subsection (a)(1), a category of larger 
participants to which the Bureau may apply the authority that 
subsection (b)(1) provides. Thus, the Bureau is not required to conduct 
a risk-based analysis when deciding in which markets it will define 
``larger participants.'' Instead, the Bureau will conduct the risk-
based analysis required under 12 U.S.C. 5514(b)(2) in choosing which 
persons to supervise among the larger participants in a given market.
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    \33\ These factors are ``the asset size of the covered person; 
the volume of transactions involving consumer financial products or 
services in which the covered person engages; the risks to consumers 
created by the provision of such consumer financial products or 
services; [and] the extent to which such institutions are subject to 
oversight by State authorities for consumer protection.'' 12 U.S.C. 
5514(b)(2).
    \34\ 77 FR 42883 (noting that the risk-based factors described 
in 12 U.S.C. 5514(b)(2) do not apply to ``larger participant'' 
rulemakings).
    \35\ 12 U.S.C. 5514(b)(2).
    \36\ 12 U.S.C. 5514(b)(1).
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    One commenter also asked the Bureau to explain why it is 
identifying consumer debt collection as the subject of this rule, 
instead of some other market for a different consumer financial product 
or service. The Bureau has wide discretion in choosing markets in which 
to define larger participants. The Bureau need not conclude, before 
issuing a rule defining larger participants, that the market identified 
in the rule has a higher rate of non-compliance, poses a greater risk 
to consumers, or is in some other sense more important to supervise 
than other markets. Indeed, 12 U.S.C. 5514(b)(1), by recognizing that 
the purposes of supervision include assessing compliance and risks 
posed to consumers, suggests that the Bureau is not required to 
determine the level of compliance and risk in a market before issuing a 
larger-participant rule.
    The consumer debt collection market is a reasonable choice for the 
Bureau. Because consumer debt collection is an important activity that 
affects millions of consumers, supervision of larger participants of 
this market will be beneficial to both consumers and the market as a 
whole. Supervision of larger participants in the consumer debt 
collection market will help the Bureau ensure that these market 
participants are complying with applicable Federal consumer financial 
law and thereby will further the Bureau's mission to ensure consumers' 
access to fair, transparent, and competitive markets for consumer 
financial products and services.
Section 1090.105(a)--Market-Related Definitions
    Annual receipts. The Bureau received a number of comments relating 
to ``annual receipts.''
    Overview of proposed definition. The proposed definition of 
``annual receipts'' was informed by the method of calculating ``annual 
receipts'' used by the SBA in determining whether an entity is a 
``small business'' concern.\37\ Under the proposed definition, for 
purposes of calculating ``annual receipts,'' the term ``receipts'' 
would mean ``total income'' (or in the case of a sole proprietorship, 
``gross income'') plus ``cost of goods sold'' as these terms are 
defined and reported on Internal Revenue Service (IRS) tax return 
forms. Under the Proposal, the term would not include net capital gains 
or losses. In addition, annual receipts would be measured as the 
average over a person's three most recently completed fiscal years, or 
over the entire period the person has been in business if that period 
is less than three completed fiscal years.\38\ The proposed calculation 
of annual receipts also would implement the aggregation requirement in 
12 U.S.C. 5514(a)(3)(B) by providing that the annual receipts of a 
person shall be added to the annual receipts of each of its affiliated 
companies. As proposed, such aggregation includes the receipts of both 
the acquired and acquiring companies in the case of an acquisition 
occurring during any relevant measurement period.
---------------------------------------------------------------------------

    \37\ 13 CFR 121.104.
    \38\ 12 CFR 1090.101 defines terms such as ``completed fiscal 
year,'' ``fiscal year,'' and ``tax year.''
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    Exclusion of receipts from collecting medical debt. In the 
Supplemental Information section of the Proposal, the Bureau stated 
that ``debt related to * * * consumer financial products or services'' 
generally does not include medical debt.\39\ In light of that 
statement, consumer debt collectors might expect that annual receipts 
resulting from the collection of medical debt would not be used to 
determine whether they were larger participants in the identified 
market for consumer debt collection. The Bureau received several 
comments both in favor of and opposed to counting annual receipts 
resulting from the collection of medical debt towards larger-
participant status. Several consumer groups stated that annual receipts 
resulting from the collection of medical debt should count towards 
larger-participant status because the collection of medical debt is 
conducted similarly to that of other debts and has similar impact on 
consumers. Another commenter pointed out that when a medical provider 
gives care first and then bills the consumer later, the medical debt 
arose from an extension of credit, so the collection of that debt is 
therefore related to a consumer financial product or service. Two 
industry commenters agreed with the Proposal that collection of medical 
debt should not be included in the market for consumer debt collection.
---------------------------------------------------------------------------

    \39\ 77 FR 9597.
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    The Bureau agrees with commenters who took issue with the 
categorical statement that the collection of medical debt generally is 
not a consumer financial product or service. In some situations, the 
collection of medical debt may be a consumer financial product or 
service. The Dodd-Frank Act defines as a ``financial product or 
service'' the activity of collecting debt ``related to any consumer 
financial product or service.'' \40\ If the underlying transaction 
involved a consumer financial product or service under the Dodd-Frank 
Act, such as ``extending credit'' to a consumer for personal, family, 
or household purposes,\41\ then the resulting debt arose from, and is 
thus ``related to,'' a consumer financial product or service. The 
collection of that debt is also a consumer financial product or service 
within the meaning of the Dodd-Frank Act. Under the Dodd-Frank Act, 
``credit'' is ``the right granted by a person to a consumer to defer 
payment of a debt, incur debt and defer its payment, or purchase 
property or services and defer payment for such purchase.'' \42\ In 
some situations, a medical provider may grant the right to defer 
payment after the medical service is rendered. In those circumstances, 
the transaction might involve an extension of credit.
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    \40\ 12 U.S.C. 5481(15)(A)(x).
    \41\ 12 U.S.C. 5481(15)(A)(i); 12 U.S.C. 5481(5)(A).
    \42\ 12 U.S.C. 5481(7).
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    However, the Bureau has decided to explicitly exclude from the 
definition of annual receipts those receipts that result

[[Page 65780]]

from the collection of medical debt.\43\ The Bureau is concerned that 
consumer debt collectors will find it impracticable to determine 
whether the medical debts they collect involved extensions of 
``credit,'' and therefore whether those medical debt collection 
receipts should be counted toward the threshold defining larger-
participant status. The Bureau expects that a consumer debt collector 
will know certain information about a debt it collects, such as whether 
the debt was originally owed to a medical provider.\44\ However, a 
consumer debt collector may not have enough information to determine 
whether the debt involved an extension of credit, because that question 
turns on additional details about whether the medical provider granted 
the consumer the right to defer payment. The Bureau believes that 
consumer debt collectors often do not have enough details to answer 
that question for each debt under collection, and they therefore may 
not have enough information to determine whether particular medical 
debts arose from consumer financial products or services.
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    \43\ As discussed above, this exclusion was implicit in the 
Proposed Rule. Annual receipts under the proposed definition 
included only receipts resulting from the collection of debt related 
to consumer financial products or services, and the Proposed Rule 
stated that this category does not include medical debt.
    \44\ Very often, debt collectors may obtain accounts from the 
original creditors. In addition, under the FDCPA, if a consumer 
makes a timely request for verification of a claimed debt, the debt 
collector must, if it persists in its attempts to collect the debt, 
respond with information that generally includes the name and 
address of the original creditor. 15 U.S.C. 1692g(b). For these 
reasons, the Bureau expects that debt collectors ordinarily make 
themselves aware of the original creditors for debts they collect.
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    Accordingly, the Final Consumer Debt Collection Rule excludes from 
the definition of annual receipts those amounts that result from 
collecting medical debt. For these purposes, medical debt means debt 
that was originally owed to a medical provider.\45\ As noted above, the 
Bureau expects that debt collectors already know the identities of the 
persons to whom the debts were originally owed. Therefore, an exclusion 
defined by reference to such persons will be straightforward for 
consumer debt collectors to apply. Neither the Bureau, in making its 
assessments regarding a consumer debt collector's larger-participant 
status, nor a consumer debt collector, in challenging an assertion by 
the Bureau that it qualified as a larger participant, would need to 
determine the specific details of each underlying transaction that gave 
rise to medical debt.
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    \45\ Many debts that arise as a consequence of medical care are 
not originally owed to the medical care provider. For example, a 
consumer might use a credit card to pay some or all of a medical 
bill. The Bureau would regard the resulting debt as originally owed, 
for purposes of the Final Consumer Debt Collection Rule, to the 
credit card issuer.
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    Notwithstanding this exclusion, the Bureau believes that the 
collection of medical debt has an important impact on consumers.\46\ 
The Bureau reiterates that the Final Consumer Debt Collection Rule 
excludes medical debt collection activities from receipts because of 
the difficulty, at the current time, of identifying whether particular 
medical debts resulted from extensions of credit. The Bureau will 
continue to seek more information relevant to that task, through 
supervision, through potential registration of nonbank covered persons 
under 12 U.S.C. 5512(c)(7) and 12 U.S.C. 5514(b)(7), and from other 
sources. In addition, in supervising a larger participant of the 
consumer debt collection market, the Bureau will examine the entity's 
collection of medical debt along with other activities subject to the 
FDCPA and other Federal consumer financial law.\47\
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    \46\ According to one survey, in 2010, medical debt constituted 
35% of new business for debt collectors. ACA International, ACA Top 
Collection Markets Survey, 2011. The same survey also reported that 
at least 53% of all debt collectors participate in the medical debt 
collection market. The 2007 Commonwealth Fund Biennial Health Survey 
found that 16% of working age adults, approximately 28 million 
people, had been contacted by debt collectors regarding medical 
debts, up from 13% in 2005. S. Collins et al., Losing Ground: How 
the Loss of Adequate Health Insurance is Burdening Working Families, 
Commonwealth Fund, Aug. 2008 at 12 available at http://www.commonwealthfund.org/usr_doc/Collins_losinggroundbiennialsurvey2007_1163.pdf?section=4039. In 2011, 54% 
of third-party debt collectors listed health care (hospital) as one 
of their top three markets, and 64% listed health care (non-
hospital). ACA International, 2012 Agency Benchmarking Survey, 2012.
    \47\ As the Bureau explained in the Consumer Reporting Rule, it 
has the authority to examine an entity's compliance with Federal 
consumer financial law, beyond the activities that rendered the 
entity subject to supervision. 77 FR 42880.
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    Other categories of debt. Commenters also asked the Bureau to 
clarify whether a number of other categories of debt are included in or 
excluded from the defined consumer debt collection market and as a 
result whether annual receipts resulting from such collection are 
counted towards larger-participant status. But these comments did not 
identify any comparable uncertainty in determining, given the 
identities of the originating creditors, whether debts in these various 
categories involve consumer financial products or services. As noted 
above, the Bureau expects that consumer debt collectors know the 
identities of the originating creditors for debts they collect. For 
many types of debt, that information should permit the consumer debt 
collector to determine, with a reasonable degree of accuracy, whether 
the underlying transaction involved a consumer financial product or 
service.\48\ Thus, the difficulty a consumer debt collector would face 
in assessing the status of a medical debt should not arise as a general 
matter in the collection of other debts. In essence, commenters asking 
the Bureau to clarify the status of various other kinds of debt were 
asking the Bureau to state whether such types of debt are related to 
consumer financial products or services, as a categorical matter. The 
Bureau declines at this point to identify specific types of debt that 
involve consumer financial products or services, or to provide an 
exhaustive list of such debts.
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    \48\ For example, consumer credit originated by a credit card 
issuer is a consumer financial product and the collection of that 
debt is therefore a consumer financial service. As another example, 
utility companies regularly extend credit to consumers who receive 
utility services. See, e.g., Mays v. Buckeye Rural Elec. Coop., 277 
F.3d 873, 879 (6th Cir. 2002); Mick v. Level Propane Gases, Inc., 
183 F. Supp. 2d 1014, 1019 (S.D. Ohio 2000); Williams v. AT&T 
Wireless Services, Inc., 5 F. Supp. 2d 1142, 1145 (W.D. Wash. 1998); 
Haynesworth v. South Carolina Elec. & Gas Co., 488 F. Supp. 565, 567 
(D.S.C. 1979). A consumer debt collector could reasonably expect 
that a debt originally owed by a consumer to a utility company arose 
from an extension of credit.
---------------------------------------------------------------------------

    Use of IRS guidance. A commenter asked whether the Bureau intends 
to bind itself to IRS guidance and related Federal tax law with respect 
to the calculation of annual receipts and recommended that the Bureau 
provide examples of how different industry participants should do that 
calculation. The Bureau noted in the Consumer Reporting Rule that to 
the extent a nonbank covered person uses IRS tax forms to calculate 
receipts, the person should rely on IRS guidance. Additionally, the 
Bureau declined to provide examples of how market participants should 
calculate annual receipts because there may be a variety of 
circumstances facing covered persons, and the Bureau is not in the best 
position to ascertain the most appropriate or useful calculation 
methods for each entity. The Bureau declines, for reasons similar to 
those articulated in the Consumer Reporting Rule, to provide examples 
of how participants in the consumer debt collection market should 
calculate annual receipts.
    Reimbursed amounts. The Bureau received a comment from an attorney 
representative expressing concern that the proposed definition of 
annual receipts included certain amounts for which attorneys or other 
consumer debt collectors receive reimbursement and recommending that 
such amounts be

[[Page 65781]]

excluded. This commenter contended that certain reimbursements for 
expenses, such as recording or filing fees, are not considered income 
under Federal tax law. This commenter requested that the Final Consumer 
Debt Collection Rule make clear that such pass-through funds are not 
included in the calculation of annual receipts. The Bureau notes that 
the calculation of annual receipts in the Final Consumer Debt 
Collection Rule is built on the concepts of ``total income'' and ``cost 
of goods sold,'' as used in Federal income tax reporting. Quantities 
that consumer debt collectors do not include in those categories would 
not count as annual receipts. If, on the other hand, some amount of 
reimbursed expense is included in one of these categories, that amount 
would count as annual receipts. Such an amount could fairly be 
considered a cost of doing business and providing the relevant consumer 
financial service. That some consumer debt collectors may characterize 
such an expense as a ``reimbursed expense'' and bill clients separately 
for the expense does not alter that fact. For these reasons, the Bureau 
declines to amend the definition of annual receipts to add a specific 
exclusion for reimbursed amounts.
    Annual receipts and measurement period. The Bureau received several 
comments suggesting different measurement periods for assessing larger-
participant status. One recommended that an entity be deemed a larger 
participant if either the entity's average annual receipts over the 
last three fiscal years or its receipts in the most recent fiscal year 
met the applicable threshold. Another commenter suggested that an 
entity should qualify as a larger participant only if its receipts were 
above the threshold for each of three years in a row. Some commenters, 
incorrectly believing the Proposal already specified that larger-
participant status would be triggered by a single year's results, asked 
the Bureau to measure larger-participant status over a longer period of 
time. Otherwise, they stated, businesses would forego growing in order 
to avoid becoming subject to the Bureau's supervisory authority.
    In the Consumer Reporting Rule, the Bureau clarified that ``annual 
receipts'' are not based solely on the receipts of a single year, but 
are generally based on the average of an entity's receipts over a 
three-year period.\49\ Using a longer measurement period reduces the 
impact on the calculation of short-term and potentially temporary 
fluctuations in receipts a company may experience--both decreases and 
increases. Similar reasoning motivates the Bureau to adopt a three-year 
measurement period, as proposed, for the Final Consumer Debt Collection 
Rule.
---------------------------------------------------------------------------

    \49\ As noted in the Proposal, if an entity has not completed 
three fiscal years, its ``annual receipts'' will reflect an average 
based on the shorter period of its existence.
---------------------------------------------------------------------------

    Two consumer groups suggested that to prevent evasion of the rule, 
annual receipts should also include receipts of any person who is an 
agent or contractor of a consumer debt collector. One of these 
commenters expressed concern that a debt buyer, in particular, could 
evade coverage as a larger participant by engaging several third-party 
debt collectors to collect debts on its behalf.
    The Bureau understands commenters' concern regarding possible 
evasion of the Final Consumer Debt Collection Rule that could 
potentially occur by market participants engaging third-party debt 
collectors. However, the Dodd-Frank Act requires that an entity's 
activity levels be computed by aggregating the activities of affiliated 
companies.\50\ The definition of annual receipts implements this 
aggregation requirement by counting the receipts of affiliated 
companies.\51\ Control or common control is a prerequisite for being an 
``affiliate'' under the Dodd-Frank Act, and the Consumer Reporting Rule 
appropriately made control or common control a prerequisite for being 
an ``affiliated company'' under Part 1090. Commenters offered no reason 
to think a special, different understanding of the term should apply 
for the consumer debt collection market. The Bureau therefore declines 
to amend the Proposal to require aggregation of the annual receipts of 
companies that have only an agency or contractual relationship.
---------------------------------------------------------------------------

    \50\ See 12 U.S.C. 5514(a)(3)(B).
    \51\ See 12 U.S.C. 5481(1) (definition of ``affiliate''); 12 CFR 
1090.101 (definition of ``affiliated company'').
---------------------------------------------------------------------------

    The Bureau adopts the proposed definition of ``annual receipts'' 
with the amendment described above, excluding receipts that result from 
collecting debt that was originally owed to a medical provider, and 
with other minor technical amendments.
    Consumer debt collection. The Final Consumer Debt Collection Rule 
defines a market for ``consumer debt collection,'' which is among the 
consumer financial products or services described in 12 U.S.C. 
5481(5)(B) and 15(A).\52\ Activities covered under these provisions of 
the Dodd-Frank Act include ``collecting debt related to any consumer 
financial product or service.'' \53\ Under 12 U.S.C. 5481(5)(B), such 
activity is a ``consumer financial product or service'' when 
``delivered, offered, or provided in connection with a consumer 
financial product or service.'' The definition of ``consumer debt 
collection'' in the Final Consumer Debt Collection Rule is not meant to 
track these related provisions in the Dodd-Frank Act. The Final 
Consumer Debt Collection Rule's definition has a different function. 
Rather than describing the scope of a certain consumer financial 
product or service, it identifies a specific market for such a product 
or service.
---------------------------------------------------------------------------

    \52\ The Proposal defined the term ``consumer debt collection'' 
as collecting or attempting to collect, directly or indirectly, any 
debt owed or due or asserted to be owed or due to another and 
related to any consumer financial product or service. A person 
offers or provides consumer debt collection where the relevant debt 
is either collected on behalf of another person; or collected on the 
person's own behalf, if the person purchased or otherwise obtained 
the debt while the debt was in default under the terms of the 
contract or other instrument governing the debt. 77 FR 9607.
    \53\ 12 U.S.C. 5481(A)(x).
---------------------------------------------------------------------------

    The Bureau received a number of comments asking it to exclude 
various types of activity from the definition of consumer debt 
collection. As discussed more fully below, the Bureau is adopting a 
number of the suggested exclusions, either in part or in full, and 
rejecting some of the suggestions. Many of the suggested exclusions 
were based on exclusions from the FDCPA's definition of debt 
collector.\54\ For those suggestions the Bureau is accepting, it is 
incorporating into the rule's definitions language from the FDCPA that 
creates the corresponding exclusions in that statute.
---------------------------------------------------------------------------

    \54\ The Bureau notes that the usage, or omission, of specific 
language from the FDCPA in the Final Consumer Debt Collection Rule 
is not an endorsement by the Bureau of any specific interpretation 
of the FDCPA.
---------------------------------------------------------------------------

    To make the rule clearer in light of these changes, the Bureau is 
also restructuring the definition of consumer debt collection to track 
the FDCPA more closely. The Final Consumer Debt Collection Rule 
includes definitions of ``creditor'' and ``debt collector'' that are 
based on the FDCPA's definitions of those terms. Consumer debt 
collection, in turn, means the activity of a ``debt collector,'' as 
defined in the rule, to collect debt incurred by a consumer for 
personal, family, or household purposes, and related to a consumer 
financial product or service. For most purposes, the scope of the Final 
Consumer Debt Collection Rule's definition will be the same as that of 
the proposed definition. The difference in structure facilitates the 
Bureau's

[[Page 65782]]

response to the comments requesting various exclusions from the market.
    Specific exclusions. The Bureau received a number of comments 
urging the adoption of particular exclusions from the definition of 
consumer debt collection.
    First, the Bureau received several comments that the proposed 
definition of consumer debt collection appeared to include loan 
servicing or the collection of debt that is not in default. Many 
commenters suggested that the Bureau should explicitly exclude loan 
servicing from the defined consumer debt collection market by 
incorporating an exclusion contained in the FDCPA's definition of debt 
collector. Under the FDCPA, a person who collects ``debt which was not 
in default at the time it was obtained by such person'' \55\ is not, on 
the basis of that activity, a debt collector. Commenters stated that 
companies active in loan servicing rely on the FDCPA exclusion, with 
which they are familiar, to distinguish their servicing activities from 
debt collection.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 1692a(6)(F)(iii).
---------------------------------------------------------------------------

    The Bureau does not regard loan servicing as part of the same 
market, for purposes of this Final Consumer Debt Collection Rule, as 
consumer debt collection. Loan servicers send out billing statements, 
accept payments and assign them to accounts, and answer consumer 
questions. In many cases, loan servicing activities involve consumers 
who are current on payments of their loans and with whom creditors have 
ongoing relationships. Loan servicing in the traditional sense 
ordinarily does not involve attempts to locate a debtor by contacting 
relatives or employees; garnishment of wages or lawsuits. Attorneys are 
not often involved in loan servicing; they ordinarily do not become 
involved until debts are in default.\56\ In light of these 
characteristics, the Bureau believes that the purposes of the Final 
Consumer Debt Collection Rule are best served by excluding loan 
servicing, as described here, from the activity of ``consumer debt 
collection'' defined for purposes of the Final Consumer Debt Collection 
Rule.
---------------------------------------------------------------------------

    \56\ The Bureau recognizes that some loan servicing activity may 
involve techniques like those used in debt collection. And some 
consumer debt collectors may engage in collecting on accounts that 
are not in default. To the extent that developments in the markets 
for obtaining consumers' repayment of debts blur or alter the line 
between servicing and debt collection, the Bureau may in the future 
revisit the distinction that the Final Consumer Debt Collection Rule 
draws between the two activities. Meanwhile, as noted above, the 
Bureau may examine any consumer financial service provided by a 
person that is subject to Bureau supervision, such as a larger 
participant in the consumer debt collection market.
---------------------------------------------------------------------------

    Indeed, the Proposal did not contemplate including loan servicing 
in that market, as several commenters recognized.\57\ As such 
commenters pointed out, the Proposal's economic assessment of the 
consumer debt collection market was based on Economic Census data that 
generally covered debt collection and did not cover loan servicing.\58\ 
The scope of the economic data that the Bureau described in the 
Proposal was reasonably consistent with the scope of the market that 
the Proposal contemplated.
---------------------------------------------------------------------------

    \57\ Because the Bureau already has supervisory authority over 
mortgage servicing pursuant to 12 U.S.C. 5514(a)(1)(A), the Bureau 
did not consider including mortgage servicing within the market for 
consumer debt collection.
    \58\ The Economic Census classifies industries using the North 
American Industry Classification System (NAICS) codes. The Bureau 
based its estimate of market coverage for the Proposed Rule on the 
NAICS code for debt collection (561440). Loan servicing activities 
fall under a different NAICS code (522390).
---------------------------------------------------------------------------

    However, the Bureau acknowledges that the proposed definition could 
have been misunderstood on this point. To clarify that loan servicing 
is not within the defined consumer debt collection market, the Bureau 
accepts the commenters' suggestion and excludes from the definition of 
debt collection activity involving ``debt which was not in default at 
the time it was obtained by such person[s].'' The Bureau intends to 
include in the consumer debt collection market those entities that are 
engaged in debt collection activity and exclude those that only engage 
in loan servicing. The provision just described is an appropriate means 
to achieve that purpose, because it is similar to language in the FDCPA 
provision that, as commenters noted, many entities regard as 
distinguishing loan servicing from debt collection.\59\
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 1692a(6)(F)(iii).
---------------------------------------------------------------------------

    Two trade associations representing student lenders commented that 
the proposed definition of consumer debt collection would prevent their 
members from engaging in default prevention and loan modification 
activities that they said are a form of loan servicing. According to 
the commenters, the goal of these activities is to benefit consumers by 
offering payment plans and other services in an effort to prevent 
default. If, as these commenters suggested, their loan modification and 
default prevention services involve debt that was not in default at the 
time it was obtained, then those activities are not consumer debt 
collection under the Final Consumer Debt Collection Rule.
    Second, an association whose membership includes collectors of 
student loans suggested that the Bureau should exclude from the 
consumer debt collection market the activity of collectors of student 
loans made pursuant to Title IV of the Higher Education Act (Title IV 
loans).\60\ According to the commenter, the collectors of Title IV 
loans undergo independent audits as part of their obligations to the 
Federal government and to state guaranty agencies that guarantee 
student loans on behalf of the Federal government. The association 
states that the audits include an on-site review of calls to consumers, 
complaints, and other activities related to the debt collection 
process. The commenter states that the United States Department of 
Education (Department of Education) and the state guaranty agencies use 
the audit findings to rank their contractors and allocate future 
accounts for collection. Because of the audits, the association asserts 
that practices associated with the collection of Title IV loans are 
less risky to consumers than are other debt collection activities.
---------------------------------------------------------------------------

    \60\ Another commenter stated that courts have found that state 
guaranty agencies are not debt collectors pursuant to an FDCPA 
exception for collection activities that are ``incidental to a bona 
fide fiduciary obligation.'' 15 U.S.C. 1692a(6)(F)(i). However, some 
courts have held that when guaranty agencies collect debts for which 
they are not the guarantors, that activity is not ``incidental'' to 
any ``fiduciary obligation.'' See Murungi v. Texas Guaranteed, 402 
Fed. Appx. 849, 851 (5th Cir. 2010); Rowe v. Educ. Credit Mgmt. 
Corp., 559 F.3d 1028, 1035 (9th Cir. 2009).
---------------------------------------------------------------------------

    Unlike the typical audits by the Department of Education, the 
Bureau's supervision program will assess compliance with Federal 
consumer financial law. The Department of Education has specifically 
noted that third-party collectors of Title IV loans are subject to the 
FDCPA, notwithstanding its oversight of Title IV loan collection.\61\
---------------------------------------------------------------------------

    \61\ 55 FR 40120, 40121 (Oct. 1, 1990).
---------------------------------------------------------------------------

    Moreover, commenters' claim that student loan debt collectors pose 
relatively low risks to consumers does not, by itself, justify 
excluding those collectors from the overall consumer debt collection 
market. As noted above, the Dodd-Frank Act does not require the Bureau 
to consider risk in defining a larger participant market pursuant to 12 
U.S.C. 5514(a)(1). When choosing which nonbank covered persons to 
supervise among the larger participants defined by rule, the Bureau 
must consider the factors set forth in 12 U.S.C. 5514(b)(2) which 
include, among others, ``the risks to consumers created by the 
provision of such consumer financial products or

[[Page 65783]]

services.'' The Dodd-Frank Act does not mandate consideration of those 
factors before issuing a rule that establishes the scope of coverage of 
the Bureau's supervision authority under 12 U.S.C. 5514(a)(1).
    For these reasons, the Bureau declines to exclude collection of 
Title IV loans from the consumer debt collection market.
    Third, a representative of non-profit consumer credit counselors 
asked the Bureau to exclude from the market their activities in 
assisting individuals with debt repayment. According to the commenter, 
non-profit consumer credit counselors operate differently from consumer 
debt collectors. At the consumers' request, non-profit consumer credit 
counselors work with consumers to help them restructure their debts and 
formulate repayment plans. Non-profit consumer counselors act as 
intermediaries between consumers and their creditors. The counselors 
help consumers devise budgets and plans to pay their debts. Consumers 
can decide whether they will participate in such counseling programs 
and, if they do, whether to adhere to the repayment plans negotiated by 
credit counselors. The Bureau agrees that this business model 
distinguishes non-profit consumer credit counselors from other debt 
collectors that work on behalf of themselves or on behalf of creditors 
to collect debts. Therefore, the Bureau is excluding non-profit 
consumer credit counselors from the definition of ``debt collector.'' 
The FDCPA excludes such entities from its definition of ``debt 
collector,'' and the Bureau is adopting comparable language in the 
Final Consumer Debt Collection Rule.\62\
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 1692a(6)(E).
---------------------------------------------------------------------------

    Fourth, a consumer data trade association commented that the 
proposed definition of consumer debt collection requiring that the debt 
be ``related to'' a consumer financial product or service was too broad 
and may include, for instance, business debts related to a company's 
purchase of consumer reports or other consumer financial products. To 
make clear that such activities are not part of the consumer debt 
collection market, the Final Consumer Debt Collection Rule's definition 
adds to the proposed definition a requirement that the debts under 
collection be those incurred by consumers for personal, family or 
household purposes--not for business purposes and not by businesses.
    Finally, an attorney group commenter contended that a person who 
enforces security interests, for example by pursuing foreclosure 
actions, should not be included in the consumer debt collection market. 
The commenter cited cases in which courts have held that the practice 
of enforcing security interests does not constitute debt collection 
under the FDCPA. Relatedly, a number of courts, distinguishing between 
collecting debt and enforcing security interests, have concluded that a 
person can be a debt collector for purposes of the FDCPA even when the 
person enforces security interests, but only if it is also engaged in 
collecting debts that are subject to the security agreement.\63\ Other 
courts, however, have concluded that enforcing a security interest 
qualifies on its own as debt collection under the FDCPA.\64\ Regardless 
of whether enforcing a security interest can, on its own, qualify as 
collecting debt under the FDCPA, the Bureau does not deem a person who 
only enforces a security interest, and does not seek payment of money 
or transfer of assets that are not designated as collateral for the 
note or instrument, to be, on that basis, a part of the consumer debt 
collection market defined by the Final Consumer Debt Collection Rule. 
However, when a person both seeks payment of money and enforces a 
security interest, that person can qualify as a debt collector for 
purposes of the Final Consumer Debt Collection Rule.
---------------------------------------------------------------------------

    \63\ See, e.g., Reese v. Ellis, Painter, Ratterree & Adams, LLP, 
678 F.3d 1211 (11th Cir. 2012); Birster v. Amer. Home Mortgage. 
Servicing Inc., No. 11-13574, 2012 WL 2913786, at *2 (11th Cir. July 
18, 2012).
    \64\ See, e.g., Shapiro & Meinhold v. Zartman, 823 P.2d 120, 124 
(Colo. 1992) (``[A] foreclosure is a method of collecting a debt by 
acquiring and selling secured property to satisfy a debt.'').
---------------------------------------------------------------------------

    Collections by originating creditors. A commenter representing the 
debt buying industry suggested that the Bureau also include first-party 
debt collection by both banks and nonbanks within its definition of 
consumer debt collection. The commenter notes that originating 
creditors collect outstanding debts from their own customers. However, 
the Bureau regards such collections by originating creditors as part of 
a different market from third-party debt collection and debt buying. 
Collecting overdue debts is not the primary business of originating 
creditors. Rather, their primary business is to provide credit or other 
products or services. Collecting unpaid debts is usually an ancillary 
function. By contrast, neither third-party debt collectors nor debt 
buyers have originated the debts they collect or have ongoing business 
relationships with the consumers from whom they collect debts. Debt 
collectors are in the business of collecting on debts that were 
originated by a variety of creditors. Given these differences, the 
Bureau declines to include collection by originating creditors within 
the market for consumer debt collection.\65\
---------------------------------------------------------------------------

    \65\ For similar reasons, the Bureau is also excluding from the 
definition of ``debt collector'' an entity that collects debt only 
for a person to which the entity is related by common ownership or 
control, if the principal business of such person is not the 
collection of debts.
---------------------------------------------------------------------------

    Moreover, the Bureau has the authority to supervise the first-party 
debt collection activities of many covered persons, regardless of 
whether the defined consumer debt collection market includes such 
activities.\66\ Specifically, the Dodd-Frank Act authorizes the Bureau 
to supervise large banks and credit unions, and the affiliates of such 
entities, pursuant to 12 U.S.C. 5515.\67\ In the course of such 
supervision, the Bureau can examine an entity's collection practices 
relating to mortgages, credit cards, auto loans, personal loans, 
deposit advance products, and other consumer financial products or 
services provided by the entity. In addition, pursuant to 12 U.S.C. 
5514, the Bureau has authority to supervise certain nonbank 
originators: mortgages, private education loans, and payday loans.\68\ 
In the course of such supervision, the Bureau can examine those 
persons' collection activities. Furthermore, to the extent the Bureau 
concludes it is important to examine collection activities conducted by 
nonbank institutions in other specific markets, the Bureau can define 
appropriate categories of larger participants in such markets. As 
earlier noted, this Final Consumer Debt Collection Rule is the second 
in what will be a series of larger-participant rulemakings. For these 
reasons as well, the Bureau declines to include collection by 
originating creditors in the defined market for consumer debt 
collection.\69\
---------------------------------------------------------------------------

    \66\ In addition, the Bureau may supervise all collection 
services--whether or not they are subject to the FDCPA--that a 
larger participant of the consumer debt collection market provides 
to other persons such as originating creditors.
    \67\ 12 U.S.C. 5515(a)(1).
    \68\ 12 U.S.C. 5514(a).
    \69\ The Bureau declines to define submarkets, as some 
commenters suggested. These comments focused, for example, on 
consumer debt collection activities that have a disproportionate 
impact on minority groups, military groups, students, or senior 
citizens, or on geographic submarkets. One of these commenters 
stated that at a minimum, the Bureau should collect data that would 
allow it to define submarkets at a later time. The Bureau notes that 
different types of consumer debt collectors all participate in the 
same activity--consumer debt collection--regardless of their 
respective business models. And the same legal requirements cover 
participants in any market segment suggested by commenters. To the 
extent that the activities of larger participants of the consumer 
debt collection market differ, the Bureau can adjust the scope and 
focus of its supervision activities accordingly. Further, by 
identifying the broader market and supervising larger participants 
as defined in the Final Consumer Debt Collection Rule, the Bureau 
will be able to address emerging issues across the various business 
models. This approach will promote consistency in supervision across 
the consumer debt collection market. Therefore, the Bureau declines 
to revise the proposed definition of consumer debt collection to 
define submarkets as commenters suggested. The Bureau notes that 
nonbank covered persons generally are subject to the Bureau's 
regulatory and enforcement authority, and any applicable Federal 
consumer financial law. The Bureau also has the authority to 
supervise any nonbank covered person that it ``has reasonable cause 
to determine, by order, after notice to the covered person and a 
reasonable opportunity * * * to respond,'' is ``engaging, or has 
engaged, in conduct that poses risks to consumers with regard to the 
offering or provision of consumer financial products or services.'' 
12 U.S.C. 5514(a)(1)(C).

---------------------------------------------------------------------------

[[Page 65784]]

    Attorneys. The Bureau received several comments from attorney 
groups asserting that attorneys should not be treated as participants 
of the consumer debt collection market that could, on that basis, be 
subject to the Bureau's supervision. This category of comments focused 
on 12 U.S.C. 5517(e)(1), a provision that restricts the Bureau's 
supervisory and enforcement authority, in some circumstances, over 
attorneys engaged in the practice of law.
    Two related provisions preserve the Bureau's authority despite that 
restriction.\70\ First, as provided in 12 U.S.C. 5571(e)(2), the Bureau 
retains its authority ``regarding the offering or provision of a 
consumer financial product or service'' (a) ``that is not offered or 
provided as part of, or incidental to, the practice of law, occurring 
exclusively within the scope of the attorney-client relationship;'' or 
(b) ``that is * * * offered or provided by [an] attorney * * * with 
respect to any consumer who is not receiving legal advice or services 
from the attorney in connection with that product or service.'' \71\ 
Second, 12 U.S.C. 5517(e)(3) preserves the Bureau's authority over 
attorneys who are otherwise subject to any ``enumerated consumer law'' 
within the meaning of the Act.\72\
---------------------------------------------------------------------------

    \70\ 12 U.S.C. 5517(e)(1), (e)(2).
    \71\ 12 U.S.C. 5517(e)(2).
    \72\ 12 U.S.C. 5517(e)(3). Paragraph (e)(3) also preserves the 
authorities transferred under subtitle F or H of Title X.
---------------------------------------------------------------------------

    Several commenters took the broad view that all attorneys and legal 
professionals engaged in collecting consumer debt should be excluded 
from the Final Consumer Debt Collection Rule. In support of this 
argument, commenters cited a floor speech by Representative John 
Conyers, one of the House's conferees with the Senate on the Dodd-Frank 
Act. According to these commenters, Representative Conyers expected the 
phrase ``practice of law'' in 12 U.S.C. 5571(e)(1) to be read as 
broadly as the term is construed by state courts and bar associations 
to prevent ``regulation from a new source [that] would unavoidably 
conflict with the existing rules and lines of accountability,'' and 
wanted any determinations by the Bureau, ``by rule, or otherwise, 
regarding what activities constitute the practice of law [to] be 
consistent with the view and practices of the State supreme court or 
State bar in question.'' \73\
---------------------------------------------------------------------------

    \73\ Cong. Rec. E1348-E1349 (Speech of Hon. John Conyers, Jr. on 
the Conference Report).
---------------------------------------------------------------------------

    The Bureau does not understand this statement to suggest that all 
activity conducted by attorneys is outside the Bureau's authority. 
Representative Conyers focused his remarks on attorneys who provide 
legal services to consumers, such as the ``consumer clients of 
bankruptcy lawyers, consumer lawyers, and real estate lawyers.'' \74\ 
He did not discuss legal services in which lawyers act on behalf of 
commercial clients with interests adverse to those of consumers, such 
as by collecting consumer debts.\75\
---------------------------------------------------------------------------

    \74\ Cong. Rec. E1349.
    \75\ Representative Conyers also observed that state courts and 
bar associations have a limited ability to regulate lawyers outside 
of the practice of law. He testified that ``our Committee recognized 
that attorneys can be involved in activities outside the practice of 
law, and might even hold out their law license as a sort of badge of 
trustworthiness. Although State supreme courts would have some 
authority to respond to abuses in even these outside activities, as 
reflecting on the attorney's unfitness to hold a law license * * * 
their disciplinary authority is not necessarily as extensive in 
these outside areas. The Committee was equally determined that these 
outside activities not escape effective regulation simply because 
the person engaging in them is an attorney or is working for an 
attorney.'' Cong. Rec. E1349.
---------------------------------------------------------------------------

    Moreover, the relevant statutory language clearly prescribes a 
different result.\76\ Consumer debt collection is a consumer financial 
service.\77\ The service is provided ``with respect to'' those 
consumers who owe (or are claimed to owe) the debts subject to 
collection. Because debt collection attorneys do not provide ``legal 
advice or services'' to those consumers in connection with the debt 
collection services--the attorneys represent clients with interests 
adverse to the consumers'--subparagraph (e)(2)(B) preserves the 
Bureau's authority regarding those services.\78\
---------------------------------------------------------------------------

    \76\ ``[C]lear evidence of congressional intent may illuminate 
ambiguous text. We will not take the opposite tack of allowing 
ambiguous legislative history to muddy clear statutory language.'' 
Milner v. Dep't of Navy, 131 S. Ct. 1259, 1266 (2011).
    \77\ In addition, consumer debt collection, as defined in the 
Final Consumer Debt Collection Rule, is generally subject to the 
FDCPA. That is true even if the debt collector is an attorney or law 
firm. ``[A]ttorneys who `regularly' engage in consumer-debt-
collection activity'' are subject to the FDCPA, ``even when that 
activity consists of litigation.'' Heintz v. Jenkins, 514 U.S. 291, 
299 (1995).
    \78\ The Bureau also notes that pursuant to paragraph (e)(3), 
the restriction in paragraph (e)(1) ``shall not be construed so as 
to limit the authority of the Bureau with respect to any attorney, 
to the extent that such attorney is otherwise subject to any of the 
enumerated consumer laws or the authorities transferred under 
subtitle F or H.'' 12 U.S.C. 5515(e)(3).
---------------------------------------------------------------------------

    One commenter also suggested that if the paragraph (e)(2)(B) 
exception applied to consumer debt collection, that exception would 
swallow the general rule limiting the Bureau's authority with respect 
to the practice of law. But subsection (e)(2)(B) only preserves the 
Bureau's authority when an attorney offers or provides a consumer 
financial product or service with respect to a consumer who is not 
receiving legal advice or services from the attorney in connection with 
the product or service.\79\ To fall within the scope of the Final 
Consumer Debt Collection Rule, attorneys must also collect debt related 
to a consumer financial product or service.\80\
---------------------------------------------------------------------------

    \79\ An association representing attorneys expressed concern 
that the Bureau would supervise attorneys representing larger 
participants in matters unrelated to the offering or provision of 
consumer financial products or services through its jurisdiction 
over service providers to larger participants. According to the 
commenter, the Bureau could intrude on the attorney-client 
relationship in non-consumer litigation matters or in cases in which 
an attorney defends a case on behalf of a client against a consumer. 
The Bureau need not address these comments in this rulemaking. The 
Final Consumer Debt Collection Rule establishes the Bureau's 
supervisory authority over the identified market. It does not alter 
the Bureau's supervisory authority over service providers, except 
insofar as it enlarges the set of supervisable firms whose 
activities might form the basis for supervising their service 
providers. A discussion of which types of service providers might be 
subject to the Bureau's supervisory authority would be beyond the 
scope of the Final Consumer Debt Collection Rule.
    \80\ The Business Law Section of the American Bar Association 
noted, in a comment, that ``attorneys who are engaged in offering or 
providing a consumer financial product or service (such as 
collection of consumer debt) but do not represent consumers in such 
activities may be subject to the Bureau's supervision.'' The Bureau 
takes this commenter to agree that the subparagraph (e)(2)(B) 
exception applies to consumer debt collection. Letter from American 
Bar Association, Business Law Section, to Monica Jackson, Office of 
the Executive Secretary, Bureau of Consumer Financial Protection 
(Apr. 11, 2012).
---------------------------------------------------------------------------

    An attorney group commenter suggested that the Bureau's supervision 
of debt collection attorneys would interfere with the established 
system of regulation by state bars. As the commenter notes, state bars 
issue law licenses and have the power to discipline and disbar lawyers 
for a variety of ethical and legal violations. The commenter concludes 
that the Bureau therefore ought not to impose

[[Page 65785]]

additional requirements upon attorneys. The commenter also raised the 
concern that the Bureau's supervision of debt collection attorneys will 
expose attorneys to the risk that the Bureau would adopt standards 
inconsistent with those of states. However, nothing in the Final 
Consumer Debt Collection Rule requires attorneys to engage or refrain 
from engaging in any particular conduct. Whatever standards might 
govern attorneys' consumer debt collection activities arise under 
existing substantive law, not the Final Consumer Debt Collection Rule. 
Furthermore, the Final Consumer Debt Collection Rule does not impose 
professional conduct rules specific to attorneys. Of course, Federal 
consumer financial law does impose some conduct rules that apply to 
attorneys. These requirements are unlikely to be inconsistent with 
state professional conduct rules, as such rules presumably do not 
obligate attorneys to violate Federal law, including Federal consumer 
financial law.
    This commenter also suggested that the Bureau's definition of 
consumer debt collection would bring into the market a myriad of 
attorneys who file legal claims against consumers. The commenter 
acknowledged that engaging in debt collection as defined by the FDCPA 
could bring an attorney under the Bureau's supervisory jurisdiction. 
But, the commenter pointed out, ``there are many instances in which an 
attorney may bring or assert a claim against a consumer for 
nonperformance of an obligation related to a consumer financial product 
or service'' yet not be ``engaged in `collecting debt' '' under any 
accepted meaning of the term. The commenter cited as an example an 
attorney asserting a claim against a high net-worth individual who has 
defaulted on a jumbo loan secured by her residence. As another example, 
the commenter hypothesized an attorney asserting counter-claims against 
a consumer or purported class of consumers in consumer-related 
litigation.
    The Bureau agrees that not every occasion on which an attorney 
seeks money from a consumer constitutes debt collection and that not 
all attorneys are fairly considered debt collectors active in the 
market defined by this Final Consumer Debt Collection Rule. Attorneys 
engage in a diverse set of activities, many of which do not fit into 
the defined market. For this reason, among others, the Bureau has 
amended the Proposed Rule to limit consumer debt collection activities 
to only those conducted by ``debt collectors,'' which are defined to be 
only those persons whose principal business activity is debt collection 
or that ``regularly'' engage in debt collection. Under this definition, 
filing an occasional counter-claim against a consumer would not 
necessarily make a law firm a debt collector. However, if a law firm is 
indeed a debt collector under the rule, filing a counter-claim against 
a consumer could qualify as consumer debt collection.
    Several commenters were concerned that, in the course of the 
Bureau's supervision of an attorney, the attorney would be forced to 
reveal information protected by the attorney-client privilege and 
thereby cause the privilege to be waived. The Bureau has noted 
previously that it has general authority to require supervised entities 
to provide it with privileged information. The Bureau has promulgated a 
regulation clarifying that complying with such a requirement does not 
constitute a waiver of privilege; materials produced in response to the 
Bureau's demand will remain confidential.\81\
---------------------------------------------------------------------------

    \81\ 77 FR 39617 (July 5, 2012).
---------------------------------------------------------------------------

    Moreover, the focus of the Bureau's supervision program will be the 
acts and practices of debt collectors as they relate to and impact 
consumers. Much of the relevant information is not privileged. For 
example, the Bureau might seek records of an attorney's communications 
with consumers. Thus, the Bureau can conduct meaningful supervisory 
activity of a debt collection attorney without asking for privileged 
information, and the attorney's possession of privileged information is 
not a reason to avoid examining the attorney. If the Bureau does seek 
privileged information from a debt collection attorney, it can address 
at that time any issues specific to that context.
    For all these reasons, the Bureau declines to revise the rule to 
exclude collection attorneys categorically from the consumer debt 
collection market.
Section 1090.104 (b)--Test To Define Larger Participants
    Criterion. The Bureau has broad discretion in choosing a criterion 
for determining whether a nonbank covered person is a larger 
participant of a market within which the Bureau will conduct 
supervision. For any specific market there might be several criteria, 
used alone or in combination, that could be viewed as reasonable 
alternatives. For the consumer debt collection market, the Bureau 
considered a variety of criteria, including annual receipts; number of 
consumers; number of accounts; annual recoveries; number of employees 
and annual amount of new business (debt purchased by or placed with a 
collector). The Bureau proposed to use annual receipts as the criterion 
for defining larger participants of the market for consumer debt 
collection. The proposed concept of ``annual receipts'' was based on 
the SBA's definition of ``annual receipts,'' as well as on the 
calculations relevant for Federal income tax and for Census reporting.
    The Bureau believes that annual receipts is a reasonable criterion 
because, among other things, it is a meaningful measure of the level of 
a consumer debt collector's participation in the consumer debt 
collection market and the consumer debt collector's corresponding 
impact on consumers. For example, third-party collectors, debt buyers, 
and collection law firms earn income from recovering consumer debt. 
Those recoveries are the result of market participation, either through 
traditional collection means or litigation. Thus, the level of a 
person's market participation is reflected by the amount of that 
person's annual receipts.
    In addition, ``annual receipts'' is a quantity that is familiar to 
nonbank covered persons and that reflects calculations already 
performed using records created in the ordinary course of business. The 
SBA's definition of ``annual receipts'' has been used by the SBA for 
purposes of measuring small business concerns since soon after the 
inception of its program.\82\ IRS tax forms require reporting of 
similar quantities. Thus, using ``annual receipts'' as the criterion 
should make it straightforward for firms to assess whether they qualify 
as larger participants.
---------------------------------------------------------------------------

    \82\ See ``SBA Size Standards Methodology'' at 4, available at 
http://www.sba.gov/sites/default/files/size_standards_methodology.pdf.
---------------------------------------------------------------------------

    In addition, using annual receipts as the criterion facilitates the 
Bureau's use of data from the Economic Census \83\ to determine the 
general contours of the market for consumer debt collection. The 
Economic Census undertakes a direct survey of domestic business 
establishments and releases comprehensive statistics about key features 
and activity levels of these businesses, including total annual 
receipts.\84\ To conduct an Economic

[[Page 65786]]

Census, the Census Bureau mails out data collection forms for all 
establishments of multi-unit companies, large single-unit employers, 
and a sample of small employers (generally defined as having three or 
fewer employees).\85\
---------------------------------------------------------------------------

    \83\ U.S. Census Bureau 2007 Economic Census, available at 
http://www.census.gov/econ/census07/ census07/.
    \84\ As noted in the section-by-section discussion of the 
definition of ``annual receipts,'' the SBA and the Economic Census 
use the term ``annual receipts'' somewhat differently. As used by 
the Economic Census, the term includes receipts from all business 
activities, including net investment income, interest, and 
dividends, whether or not payment was received in the census year. 
The SBA, by contrast, defines the term to exclude net capital gains 
and losses and thus does not capture investment income. 
Notwithstanding this difference in the meaning of the term, the 
Economic Census data regarding annual receipts remain useful for 
purposes of developing a general understanding of the market for 
consumer debt collection and establishing a test for defining larger 
participants of that market.
    \85\ Response to these forms is required by law. No firm-level 
data are released; rather, the data are aggregated by sector 
according to North American Industry Classification System (NAICS) 
codes. When categorizing the data by industry sector, both the SBA 
and the Economic Census use the NAICS codes. See infra n.86 and 
accompanying text.
---------------------------------------------------------------------------

    The Bureau recognizes that there are limitations to the use of the 
Economic Census data on annual receipts in the debt collection market 
for purposes of the Final Consumer Debt Collection Rule. The Economic 
Census data may be both over-inclusive and under-inclusive.\86\ The 
Economic Census data are not limited to the collection of consumer 
financial debt, but rather include both business and non-financial 
consumer debt. They may also be under-inclusive because entities that 
fall within the NAICS code may not correctly identify themselves or may 
otherwise fail to respond accurately to the Census. Moreover, the NAICS 
code may not include all persons engaged in activities that meet the 
definition of consumer debt collection. However, the Economic Census 
data are nevertheless useful in showing the general contours of the 
consumer debt collection market, the relative size of participants 
within it on an aggregated basis, and how participants are distributed 
by size.
---------------------------------------------------------------------------

    \86\ Entities whose activities fall within this NAICS code are 
described as: ``establishments primarily engaged in collecting 
payments for claims and remitting payments collected to their 
clients'' and include, among others, collection agencies, debt 
collection services, and account collection services. NAICS code 
56144 (collection agencies), available at http://www.census.gov/cgi-bin/sssd/naics/naicsrch. The Bureau also believes that debt buyers 
often self-identify in this NAICS code, although the description 
does not explicitly mention them. See, e.g., SquareTwo Financial 
Corp., Registration of Securities Issued in Business Combination 
Transactions (Form S-4/A) (Mar. 4, 2011), available at http://pdf.secdatabase.com/178/0001047469-11-001751.pdf.
---------------------------------------------------------------------------

    Commenters suggested a variety of alternative criteria such as the 
number of accounts, the number of complaints about an entity, the 
number of employees, an entity's relative market share, or the annual 
receipts of an entity in a given geographic or demographic segment. One 
commenter representing third-party debt collectors stated that annual 
receipts is not an appropriate criterion to measure participants in the 
consumer debt collection industry because it would capture amounts 
collected by an agency on behalf of the debt owner. This commenter 
suggested measuring gross revenue instead.
    The Bureau does not believe these other suggested criteria are 
superior alternatives. The available data do not permit the Bureau 
meaningfully to measure the general contours of the market based on 
these criteria and thus, on such bases, to devise a test for defining 
larger participants of the consumer debt collection market or to apply 
the test efficiently. Further, as set forth in the Proposal, the Bureau 
believes that the number of employees is not a suitable alternative 
criterion because it could be difficult for a multi-line company to 
apportion employee time between market-related and other activities and 
because many responsibilities may be fulfilled by contractors rather 
than employees. With respect to the suggestion of gross revenues as a 
criterion, the Final Consumer Debt Collection Rule's definition of 
``annual receipts'' is functionally similar to what the commenter 
proposed. Amounts collected on behalf of another are excluded from the 
proposed calculation for annual receipts, just as they would be from 
the commenter's proposed gross revenues criterion.
    A representative of the debt buying industry argued that the annual 
receipts criterion discriminated unfairly between debt buying and 
third-party debt collection.\87\ The proposed definition of annual 
receipts, in accordance with Federal income tax reporting and Census 
reporting, excludes amounts collected on behalf of and remitted to 
others.\88\ This commenter observed that for a given amount of annual 
receipts, calculated per the proposed definition, a debt buyer would 
have recovered substantially less debt from consumers than would a 
comparable third-party debt collector.\89\ The commenter contended that 
the amounts recovered from consumers (gross recoveries) was the proper 
criterion for market participation. The commenter suggested that the 
Bureau could use an amount such as annual receipts as a substitute if 
the calculation included amounts recovered on behalf of others. Under 
that calculation, a debt buyer and a third-party debt collector with 
the same amount of gross recoveries would also have about the same 
amount of annual receipts.
---------------------------------------------------------------------------

    \87\ The Bureau notes that some firms function both as third-
party debt collectors and as debt buyers. The discrepancy that the 
commenter observes is a difference between business models, not 
necessarily between firms.
    \88\ The Census quantity ``receipts'' ``exclude[s] * * * gross 
receipts collected on behalf of others.'' Census Bureau, American 
Factfinder Help, http://factfinder2.census.gov/help/en/american_factfinder_help.htm (select ``Glossary''; select ``Sales, 
shipments, receipts, revenue, or business done''; select ``sector 
specific definitions''), last visited Oct. 19, 2012. This is in 
accord with the usual treatment of such amounts under income tax 
accounting. See generally Commissioner v. Glenshaw Glass Co., 348 
U.S. 426, 431 (1955) (defining income as ``instances of undeniable 
accessions to wealth, clearly realized, and over which the taxpayers 
have complete dominion.'').
    \89\ A third-party debt collector receives a contingency fee 
based on the amounts recovered. For 2011, the average rate was 28%. 
ACA International, 2012 Agency Benchmarking Survey, at 21. According 
to the ACA's 2012 Benchmarking Survey, collection agency commission 
rates averaged 28.4% in 2011, with a median of 25.5%. Thus, for 
annual receipts of $10 million, an average entity will have 
recovered around $36 million. By contrast, a debt buyer with $10 
million of annual receipts will presumably have recovered only 
around $10 million.
---------------------------------------------------------------------------

    The Bureau disagrees that the Final Consumer Debt Collection Rule's 
concept of annual receipts should correspond directly to gross 
recoveries, because the Bureau does not consider gross recoveries to be 
the sole or proper measure of market participation relevant for 
purposes of the Final Consumer Debt Collection Rule. Given that the 
goals of supervision include assessing risks to consumers and to 
consumer financial markets, the Bureau has chosen to view a firm's 
level of participation in this market chiefly in terms of the firm's 
overall impact on consumers. Actually receiving a sum of money from 
consumers is, to be sure, an important type of impact. But a consumer 
debt collector also can substantially affect consumers from whom it 
does not succeed in recovering money. For example, a firm affects 
consumers by having authority to collect and by attempting to collect 
their debts, regardless of how much it succeeds in recovering. In 
addition, a consumer debt collector may report to consumer reporting 
agencies those debts that go unrecovered. Furthermore, a firm's conduct 
in collecting debt--by contacting consumers, contacting third parties, 
filing lawsuits, garnishing wages, and using other debt collection 
techniques--affects even those consumers who actually do not owe or are 
not liable for the debts under collection.
    Thus, a myriad of indicia reflect various types of impact on 
consumers. Among those indicia are the number of consumer contacts, the 
number of consumers or number of consumer accounts under collection, 
the frequency of reports to consumer

[[Page 65787]]

reporting agencies, the number of lawsuits filed or judgments obtained, 
the total face value of debt under collection, the total fair value of 
debt under collection, and the amount recovered from consumers. Another 
measure of impact on consumers would be the scale of a firm's 
operations--such as the number of employees available to call consumers 
or the volume of mail the firm sends. The Bureau does not regard any of 
these indicia on its own as the true measure of market participation; 
rather, it has attempted to reflect all of them, albeit imperfectly, in 
a single criterion. Several options for the criterion might serve that 
purpose to some degree. For example, total face value, gross 
recoveries, and annual receipts should all generally correlate with the 
various types of consumer impact.
    For none of these criteria is the relationship between the single 
numerical value and the various forms of consumer impact identical for 
all types of firms, all models of debt collection, or all types or ages 
of debt.\90\ In particular, each criterion produces some variation 
between debt collection conducted on a debt buying model and performed 
as a third-party debt collector.\91\ Total face value of debt under 
collection, as a criterion, would tend to magnify the apparent market 
participation of debt buyers. Debt buyers hold debts on their books for 
years, often purchase debts for a small fraction of their face values, 
and expect to recover relatively small fractions of the debts' face 
values. Thus, measuring the total face value of a debt buyer's 
portfolio at a given point in time could overstate its amount of 
consumer impact, as compared to a debt collector that turns over that 
volume of debt (measured by face value) on a much shorter time scale. 
On the other hand, gross recoveries, as a criterion, could tend to 
understate the impact of debt buyers as compared to third-party debt 
collectors. Third-party collectors tend to work with relatively 
recently defaulted debt and to retain accounts for fairly brief periods 
of time.\92\ To the extent that a debt buyer focuses on older and 
longer-defaulted debt, and persists over years in its attempts to 
collect debts on its books, a given amount of gross recoveries will 
represent substantially more contact with consumers than would that 
same amount if recovered by a third-party collector.
---------------------------------------------------------------------------

    \90\ All other things being equal, a firm that contacts a larger 
number of consumers is probably collecting on a larger face value of 
debt, will probably recover more, and will probably have greater 
annual receipts. However, the correlation is imperfect for each 
possible criterion, because the relationship between consumer impact 
and each criterion varies depending on a number of circumstances 
such as the age and type of the debts involved and the techniques 
and business models applied to collecting them. For example, a 
recent survey found liquidation rates ranging from 12.0 to 28.8 
percent depending on the type of debt being collected. ACA 
International, 2012 Agency Benchmarking Survey, at 21 (2012). As 
another example, recent studies have shown prices for charged-off 
debt that range from less than 1% of face value to over 15% of face 
value. See, e.g., Kaulkin Ginsberg, U.S. Credit Card Sector Update: 
Market Trends, Liquidation, and Portfolio Pricing, Presentation to 
ACA International Fall Forum, Nov. 2010. And five publicly traded 
debt buyers have reported recovering from 150 percent to 250 percent 
of the purchase price of their debts. Asset Acceptance Capital 
Corp., Annual Report (Form 10-K) (Mar. 6, 2012), Portfolio Recovery 
Associates, Inc., Annual Report (Form 10-K) (Feb. 28, 2012), 
SquareTwo Financial Corp., Annual Report (Form 10-K) (Feb. 24, 
2012), Encore Capital Group, Inc., Annual Report (Form 10-K) (Feb. 
9, 2012); Asta Funding, Inc., Annual Report (Form 10-K) (Dec. 14, 
2011).
    \91\ The Bureau reiterates that these are different business 
models and do not necessarily involve different firms. Some firms 
operate both as debt buyers and as third-party debt collectors.
    \92\ The Bureau roughly estimates that third-party collectors, 
on average, collect on new accounts for approximately 220 days. That 
figure is the difference between the average account age for primary 
accounts (those with their first debt collectors after default) and 
for secondary accounts (those with their second debt collectors, 
after a first period as primary accounts). ACA International, 2011 
Top Collection Markets Survey (2011). In general, the age of a 
secondary account reflects the age at which it reached its first 
debt collector, plus the time that debt collector held the account 
before it was transferred to a second debt collector. Thus, the 
difference between primary and secondary ages is a rough indicator 
of how long debt collectors tend to hold primary accounts. ACA 
International's 2011 survey reported average ages for each of eight 
sub-markets; to reach the estimate of 220 days, the Bureau averaged 
the hold time, calculated in this manner, across all eight sub-
markets. Debt buyers, on the other hand, collect on accounts for 
much longer; on average, the five publicly traded debt buyers' 
portfolios appear to yield, on average, 17% of their purchase price 
five years after purchase. This figure represents estimated 
remaining collections divided by purchase price, as reported in 2011 
filings for debt purchased in 2006. Asset Acceptance Capital Corp., 
Annual Report (Form 10-K) (Mar. 6, 2012), Portfolio Recovery 
Associates, Inc., Annual Report (Form 10-K) (Feb. 28, 2012), 
SquareTwo Financial Corp., Annual Report (Form 10-K) (Feb. 24, 
2012), Encore Capital Group, Inc., Annual Report (Form 10-K) (Feb. 
9, 2012); Asta Funding, Inc., Annual Report (Form 10-K) (Dec. 14, 
2011).
---------------------------------------------------------------------------

    That is not to say that total face value under collection or gross 
recoveries would be an illegitimate or improper measure of market 
participation. Each captures aspects of impact on consumers and thus of 
participation in the consumer debt collection market. Nor do the 
observations above suggest that the Bureau should treat third-party 
debt collectors and debt buyers separately. The Bureau regards the two 
types of activity as part of the same market. They fulfill the same 
purpose in consumer financial markets by generating recoveries that 
reduce creditors' losses on defaulted debts. Debt buyers and third-
party debt collectors also use many of the same techniques to collect 
debts; their activities are therefore similar from consumers' 
perspectives. Moreover, the differences between the two business 
models, in terms of how the possible criteria of market participation 
measure them, are not necessarily greater than differences that exist 
among firms practicing each model. For example, total face value under 
collection might treat a debt buyer that focuses on recently defaulted 
debt similarly to a third-party collector and differently from a debt 
buyer that works with comparatively old debts. The Bureau concludes 
that the fact that a criterion tends to produce different results for 
different forms of debt collection activity is not, alone, a reason not 
to use a particular criterion.
    Annual receipts, as the commenter pointed out, is not the best 
measure of gross recoveries, one aspect of consumer impact. However, 
annual receipts, as compared to the other two criteria just discussed, 
seems the most appropriate measure of overall market participation. 
Compared to those other criteria, it is a better measure of an entity's 
capacity to contact consumers, engage in debt collection techniques, 
and collect debts, as well as the likelihood of recovery.
    In addition, the concept of ``annual receipts'' has practical 
advantages, as discussed above. First, the proposed criterion can 
generally be calculated using existing business records because 
consumer debt collectors already prepare IRS filings on an annual basis 
and maintain accounting systems that support those filings.\93\ Third-
party debt collectors do not include amounts remitted to others in 
their income calculations for purposes of Federal income tax reporting. 
Using gross recoveries as the criterion, as the commenter suggested, 
would force consumer debt collectors to depart significantly from their 
IRS reports.\94\ Second, the proposed criterion facilitates the 
Bureau's analysis of the market and development of a threshold for 
larger-participant status because

[[Page 65788]]

third-party debt collectors already report their incomes to the Census 
on this basis. The Bureau is not aware of comparable market data on the 
gross recoveries of various consumer debt collectors.\95\
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    \93\ Another alternative the Bureau considered was to exclude 
from annual receipts the price of debt buyers pay to purchase debt. 
But this alternative would be administratively difficult for debt 
buyers and for the Bureau. Because debt buyers typically amortize 
their debt purchases over a number of years, it would be difficult 
to know what amount to exclude when counting the income from 
recovering debts many years after purchase.
    \94\ Under the commenter's proposed method, a third-party debt 
collector would need to revise its annual receipts upwards by about 
350 percent, with the actual amount of the change depending on the 
details of its pricing as agreed with various creditors.
    \95\ Such information would also be difficult for the Bureau to 
infer from the Census data, in part because some firms function both 
as third-party debt collectors and as debt buyers. To use gross 
recoveries as the criterion, the Bureau would need to understand 
what proportions of these firms' receipts came from which type of 
activity.
---------------------------------------------------------------------------

    For the reasons set forth above, the Bureau declines to depart from 
the proposed criterion for the larger-participant test for the consumer 
debt collection market and adopts the use of annual receipts as 
proposed.
    Threshold. As noted in the Proposal, the Bureau has broad 
discretion in setting the threshold above which an entity would qualify 
as a larger participant in the consumer debt collection market. The 
Bureau proposed $10 million in annual receipts as the threshold. For 
the reasons stated below, the Bureau adopts that proposed threshold in 
the Final Consumer Debt Collection Rule.
    Available data indicate that a threshold of $10 million in annual 
receipts resulting from consumer debt collection activities will enable 
the Bureau to cover in its nonbank supervision program a broad range of 
consumer debt collectors. The Bureau believes that this threshold will 
cover a sufficient number of market participants to enable the Bureau 
effectively to assess compliance and identify and assess risks to 
consumers, but at the same time cover only consumer debt collectors 
that can reasonably be considered ``larger'' participants in the 
market. Although the Bureau's supervision program would cover only a 
small percentage of firms in the market, the Bureau would have 
supervisory authority over nonbank entities interacting with a 
significant portion of consumers with debt under collection.\96\
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    \96\ As discussed below, the Bureau estimates it may examine the 
majority of larger participants at an average rate of up to once 
every five years. Individual consumer debt collectors may be subject 
to examination more frequently, as a result of the Bureau's 
consideration of the risk-based factors enumerated in 12 U.S.C. 
5514(b)(2). The $10 million threshold is not set to enable the 
Bureau to supervise every larger participant on a regular basis but 
rather to permit the Bureau, using the available resources and 
exercising its discretion with respect to those risk-based factors, 
to focus its supervisory activity at those entities where it would 
most effectively serve the Bureau's missions.
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    As explained in the Proposal, based on the Economic Census, a 
threshold of $10 million would likely bring within the Bureau's 
supervisory authority approximately 175 out of the 4,500 entities 
engaged in debt collection under NAICS code 561440.\97\ Thus, larger 
participants would include about 4% of all consumer debt collection 
firms, representing about 63% of annual receipts in the consumer debt 
collection market.\98\ The Bureau must deploy its limited resources in 
an efficient manner in order to encourage lawful behavior and assess 
risks to consumers. Consumer debt collectors that are larger 
participants play a greater role in the market, and therefore have a 
greater impact on consumers, than consumer debt collectors that are not 
larger participants. Although consumer debt collectors that are not 
larger participants may commit abuses, lowering the threshold to cover 
them would require significant additional resources yet would add less 
than half the market--measured by annual receipts--to the Bureau's 
supervisory authority. Meanwhile, the Bureau has the authority to 
supervise any nonbank covered person who it determines, on the basis of 
reasonable cause, is engaging or has engaged in conduct that poses risk 
to consumers.\99\ In addition, nonbank covered persons generally are 
subject to the Bureau's regulatory and enforcement authority, and any 
applicable Federal consumer financial law, regardless of whether they 
are subject to the Bureau's supervisory authority.
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    \97\ One ex parte submission noted that out of 745 collection 
agencies licensed in Colorado, 162 reported in an informal survey 
that they would meet the proposed threshold for larger-participant 
status in the consumer debt collection market. However, these 
figures are not comparable to the Bureau's estimates based on the 
nationwide Census data. A collection agency is required to obtain a 
Colorado license if it is located in Colorado; if it regularly 
collects from debtors located in Colorado; if it solicits the 
business of companies located in Colorado or if it collects debts on 
behalf of companies located in Colorado. Colo. Rev. Stat. Sec.  12-
14-102; Colo. Att'y Gen., Persons Required to be Licensed as a 
Colorado Collection Agency, pp. 4-5 (Aug. 12, 1994). As a result of 
Colorado's expansive licensing requirements, neither the count of 
larger participants that are operating in Colorado nor the count of 
debt collection agencies licensed there can be extrapolated (on the 
basis of population or other factors) to the overall counts of 
larger participants or consumer debt collectors.
    \98\ The Bureau recognizes that because the Economic Census data 
include the collection of medical debt, which, according to the ACA 
Survey, was 35% of new business for debt collectors in 2010, the 
Bureau may be overestimating market coverage. ACA International, ACA 
Top Collection Markets Survey, 2011. A hypothetical collector might 
have $14 million in actual receipts, but, if 35% of them resulted 
from collecting medical debt, its annual receipts as defined by the 
rule would be just at the $10 million threshold. In reality, some 
debt collectors have portfolios with higher percentages of medical 
debt than average and some have lower. In addition, because recovery 
rates may vary depending on the type of debt being collected, 
medical debts may not account for the same proportion of receipts 
that they do of debts under collection. In sum, the Bureau does not 
have a way of ascertaining in detail how any overestimation with 
respect to medical debt might affect the scope of the supervisory 
authority established by the rule. The Bureau does not believe the 
effect is large. Even if the Bureau were to change the threshold to 
$14 million to account for the exclusion of medical debt, a $14 
million threshold would cover approximately 144 firms, or 
approximately 3% of total firms, and approximately 61% of market 
share.
    \99\ 12 U.S.C. 5514(a)(1)(C).
---------------------------------------------------------------------------

    Several commenters suggested that the Bureau adopt a threshold 
lower than the one proposed. One suggested that the threshold be 
lowered to $7 million, the threshold that the Bureau adopted for the 
consumer reporting market. Another did not advocate a particular 
threshold but argued that the Bureau could reasonably supervise more 
than 4% of participants in the debt collection market. One commenter 
argued that 4% of the market is not sufficient coverage because small 
debt collectors commit the greatest abuses. Many consumer-group 
commenters recommended an approach that would effectively lower the 
threshold by counting a firm's receipts from any source, as long as at 
least $3.5 million of its receipts resulted from the collection of 
debts related to consumer financial products or services. For the 
reasons discussed above, the Bureau believes that a threshold of $10 
million serves the purposes and objectives of its supervision 
program.\100\
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    \100\ The Bureau also will examine depository institutions, 
credit unions, and nonbanks, insofar as such entities are subject to 
its supervisory authority, with regard to those entities' processes 
for managing the risks of service-provider relationships with any 
third-party debt collectors whose services they use. The Bureau 
expects covered persons to take steps to ensure that their business 
arrangements with service providers do not present unwarranted risks 
to consumers. Such steps should include monitoring to ensure whether 
service providers are complying with Federal consumer financial law 
and reviewing service providers' policies, procedures, internal 
controls, and training materials to ensure that service providers 
conduct appropriate training and oversight of employees or agents 
that have consumer contact or compliance responsibilities. See 
Consumer Financial Protection Bureau, CFPB Bulletin 2012-03 (Apr. 
13, 2012), available at http://files.consumerfinance.gov/f/201204_cfpb_bulletin_service-providers.pdf.
---------------------------------------------------------------------------

    One consumer group commented that the Bureau did not explain why 
the threshold for consumer debt collection differs from the $7 million 
threshold for consumer reporting. As stated in the Proposal, the Bureau 
considers each market separately and may adopt different criteria and 
thresholds for each market. Among other differences between the two 
markets that are the subjects of the Bureau's first two larger-
participant rules, consumer reporting entities and consumer debt 
collectors perform entirely different functions; firms in the two 
markets interact with consumers in different ways; the market

[[Page 65789]]

structures are different; \101\ the substantive Federal consumer 
financial law principally relevant to the two markets have major 
differences; \102\ and the manner in which annual receipts connect to 
consumer interactions is different in the two markets.\103\ The Bureau 
does not mean to suggest that each such difference determines the 
Bureau's views with respect to the criterion or the threshold or that 
each difference would be important to justify using different criteria 
or thresholds for larger-participant status with respect to the two 
different markets. Rather, the Bureau recites these differences in 
order to explain that the thresholds for the consumer reporting and 
consumer debt collection markets, while they are both expressed in 
dollar figures related to annual receipts, are simply not comparable.
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    \101\ For instance, the consumer debt collection market is 
diffuse and is made up of approximately 4,500 entities, a number 
which is more than 10 times greater than the number of consumer 
reporting entities.
    \102\ The statute principally relevant for the consumer 
reporting market is the Fair Credit Reporting Act (FCRA), 15 U.S.C. 
1681 et seq., while the statute primarily relevant to the consumer 
debt collection market is the FDCPA.
    \103\ See 77 FR 9594-9600.
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    For these reasons, the Bureau declines to lower the threshold for 
larger-participant status in the consumer debt collection market.
    The same consumer group commenter suggested that the Bureau 
undertake another rulemaking to supervise smaller debt collectors. The 
Bureau will continue to research and monitor the consumer debt 
collection market to determine if additional rulemakings are necessary. 
In addition, as discussed above, nonbank covered persons may be subject 
to the Bureau's enforcement, regulatory, and supervisory authority even 
if they are not larger participants.
    A handful of commenters suggested raising the threshold. A 
commenter representing third-party debt collectors suggested that the 
threshold should be raised to $250 million in annual receipts.\104\ The 
commenter also argued that its suggested threshold would be consistent 
with what the commenter said is the Bureau's mandate under the Dodd-
Frank Act, to supervise only very large nonbank covered persons. This 
commenter, referring to the Bureau's supervisory authority over ``very 
large'' depository institutions and credit unions, i.e., those with 
over $10 billion in assets, and their affiliates,\105\ argued that the 
Bureau correspondingly should supervise only very large nonbank 
entities. But, as the Bureau explained in the Consumer Reporting Rule, 
the Dodd-Frank Act's division of supervisory authority for insured 
depository institutions and credit unions does not govern the 
supervision of nonbank entities. Unlike depository institutions and 
credit unions with less than $10 billion in assets, nonbanks in the 
consumer debt collection market that are not subject to Bureau 
supervision under 12 U.S.C. 5514 generally will not be subject to other 
Federal supervision for assessing compliance with Federal consumer 
financial law or for other purposes. Moreover, the Dodd-Frank Act 
authorizes the Bureau to supervise entities that are ``larger'' 
participants of a market, not merely ``very large'' participants.\106\ 
Accordingly, the Bureau declines to raise the proposed annual receipts 
threshold to $250 million for the consumer debt collection market in 
response to this comment.
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    \104\ The commenter stated that a $250 million threshold would 
account for the economics of the debt collection industry in which 
consumers make payments in trust to a consumer debt collector which 
then distributes the payment to the credit grantor, less a 
contingency fee. The commenter did not explain, and the Bureau is 
not aware, why a cash flow arrangement of this type should affect 
the selection of the larger-participant threshold, particularly 
given that for third-party debt collectors the amounts collected for 
others do not count towards the threshold.
    \105\ 12 U.S.C. 5515.
    \106\ 12 U.S.C. 5514.
---------------------------------------------------------------------------

    Additionally, the Bureau does not believe that a $250 million 
annual receipts threshold would result in sufficient market coverage to 
allow it effectively to assess compliance with Federal consumer 
financial law and detect and assess risks to consumers in the overall 
market. The Bureau estimates that a $250 million threshold would cover, 
at most, 7 consumer debt collectors, less than 0.2 percent of market 
participants and representing approximately 20 percent of overall 
collection industry receipts.\107\ The approximately 168 additional 
entities (for a total of about 175) covered by the Bureau's proposed 
threshold represent an additional 43 percent of annual receipts in the 
market. The proposed threshold would provide the Bureau with the 
ability to supervise a broader range of market participants and 
identify and evaluate risks to consumers.
---------------------------------------------------------------------------

    \107\ Estimated from 2007 U.S. Economic Census, available at 
http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_56SSSZ6&prodType=table, scroll 
to NAICS code 561440.
---------------------------------------------------------------------------

    A commenter representing debt buyers suggested that the Bureau 
raise the threshold to $50 million in annual receipts to provide 
``regulatory relief'' to the many debt buying companies that are small 
businesses. But the SBA's size standard in the debt collection market 
is $7 million.\108\ Therefore, under the larger-participant threshold 
as proposed and adopted--$10 million--no businesses that qualify as 
small businesses for SBA purposes would ordinarily be classified as 
larger participants. Additionally, the Bureau does not believe that a 
$50 million annual receipt threshold would result in sufficient market 
coverage to allow it effectively to assess compliance with Federal 
consumer financial law and detect and assess risks to consumers. A $50 
million threshold would cover fewer than 30 consumer debt collectors, 
less than one percent of market participants and representing only 
approximately 39 percent of overall collection industry receipts.\109\
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    \108\ A commenter noted that the SBA has proposed to amend its 
size standard for the category corresponding to debt collector. 
Under the SBA's proposed rule, a debt collector would be a ``small 
business'' if it has $14 million or less in annual receipts. 76 FR 
63510 (Oct. 12, 2011). This commenter urged the Bureau to increase 
the larger-participant threshold to avoid capturing would-be small 
businesses as larger participants. However, even if the SBA 
finalizes a regulation in accordance with its proposal, the change 
would not alter the degree to which various entities participate in 
the consumer debt collection market. Thus, the Bureau declines to 
raise the threshold for the consumer debt collection market to $50 
million in annual receipts.
    \109\ See 2007 U.S. Economic Census, available at http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_56SSSZ6&prodType=table, scroll 
to NAICS code 561440.
---------------------------------------------------------------------------

    The Bureau also received comments from the debt buying industry and 
a trade association for consumer credit agencies asserting that the 
proposed threshold would not reflect the middle market for consumer 
debt collection. According to the commenters, there must be a market of 
mid-sized firms that includes more than just those between $7 and $10 
million in annual receipts. But the Bureau notes that the SBA's small-
business standard and the Bureau's larger-participant threshold cannot 
be compared in this way. ``[L]arger participants,'' in 12 U.S.C. 
5514(a)(2), does not refer to the absolute size of the businesses in 
question. As explained in the Consumer Reporting Rule, the Bureau 
interprets ``larger participants'' to mean those persons that 
participate to a relatively large degree in the relevant market. Given 
the structure of the consumer debt collection market, the Bureau 
believes it is reasonable to set a threshold for larger-participant 
status at $10 million in annual receipts. In fact, the median annual 
receipts for businesses within the NAICS code for debt collection is 
less than $500,000.\110\
---------------------------------------------------------------------------

    \110\ See id.
---------------------------------------------------------------------------

    Finally, two commenters recommended that the Bureau index the

[[Page 65790]]

threshold for annual receipts for inflation. At this time, the Bureau 
does not intend to index for inflation. To the extent necessary or 
appropriate, the Bureau anticipates making adjustments to the threshold 
through future rulemakings. These future rulemakings may reflect 
inflation, shifts in the market, and other data that may be available 
to the Bureau.
    For the reasons stated above, the Bureau adopts the proposed 
threshold of $10 million in annual receipts for the consumer debt 
collection market.
    Apportionment. As noted in the Proposal, some multi-line companies 
derive only portions of their annual receipts from consumer debt 
collection activities. The Proposed Rule provided that the only annual 
receipts to be considered for purposes of determining larger-
participant status are those ``resulting from'' activities related to 
the consumer debt collection market.
    The Bureau received a number of comments on the issue of 
apportionment. One industry representative said that apportionment 
would present substantial difficulties for multi-line companies because 
IRS forms generally do not differentiate between income streams within 
organizations, and a multi-line company will need to perform burdensome 
calculations beyond the calculations IRS forms require.\111\ A group 
representing attorneys engaged in commercial law stated that the 
Proposed Rule would likely require participants to overhaul their 
accounting systems to segregate revenue by activity type, at a 
significant cost, in order to determine whether they are larger 
participants or to respond to Bureau assertions on that point. Two 
consumer groups suggested that the Bureau should count a company's 
total annual receipts, from any of its revenue streams, toward the 
larger-participant threshold. These commenters stated that determining 
a company's status as a larger participant using total annual receipts 
would be much simpler than trying to segregate annual receipts from 
market-related activities, and would serve to prevent evasion by 
reducing the temptation for companies to misclassify the source of 
their revenues to avoid supervision. Another commenter said that the 
Bureau should define the term ``apportionment'' and use that definition 
when describing the aggregation of annual receipts for affiliated 
companies.\112\ Finally, one commenter representing third-party debt 
collectors supported the concept of apportionment and asked the Bureau 
to issue a simple form by which market participants could report 
apportioned data.
---------------------------------------------------------------------------

    \111\ This commenter also appears to have misapprehended the 
Proposed Rule to make IRS forms the only permissible source of 
information about a company's annual receipts. The commenter 
recommended that the final rule state expressly that a market 
participant may make a good faith determination of its annual 
receipts based on records maintained in the ordinary course of 
business. The Bureau does not believe such an addition to the 
regulation is necessary, because the rule does not require companies 
to rely solely on their IRS forms. The criterion by which market 
participation is measured is annual receipts resulting from consumer 
debt collection; the Bureau is aware that this specific quantity 
does not necessarily correspond, for every company, to a figure 
reported to the IRS. In addition, Sec.  1090.103(a) establishes that 
a person wishing to dispute whether it is a larger participant may 
provide the Bureau records, documents, or other evidence reasonably 
identifying what portion of its annual receipts result from 
activities falling outside a covered market.
    \112\ The Bureau also received a comment from a representative 
of the loan servicing industry recommending that the concept of 
apportionment should apply to both the multi-line entities and their 
affiliates. This commenter apparently interpreted the Proposal to 
mean that only an affiliated company's receipts would be subject to 
apportionment, which would then be aggregated with the parent 
company's annual receipts from any activity. In fact, the rule 
permits a company to apportion both its receipts and its affiliates' 
to calculate its annual receipts for purposes of the rule.
---------------------------------------------------------------------------

    The Bureau declines to define the term ``apportionment.'' The term 
is not used in the regulatory text; rather, apportionment is a concept 
that conveys the inclusion of receipts ``resulting from'' activities 
related to the consumer debt collection market. The Bureau believes it 
is appropriate to permit apportionment of annual receipts. In some 
instances there may be nonbank covered persons that have significantly 
different business lines, with certain business lines not relating to 
the consumer debt collection market. In addition, as noted above, 
participants of the consumer debt collection market should be 
reasonably aware of the sources of their revenue, and should thus be 
able to apportion without undue burden. To clarify, market participants 
are not required to apportion their annual receipts on a periodic or 
other basis under the Final Consumer Debt Collection Rule. Accordingly, 
the Bureau finds it unnecessary to publish a form by which market 
participants could report such data. On the contrary, the Bureau has 
decided to permit apportionment, in part to enable a nonbank covered 
person to apportion its annual receipts if it wishes to challenge an 
assertion by the Bureau that it qualifies as a larger participant. In 
such a case, the person may provide records, documents, or other 
evidence to the Bureau reasonably identifying that portion of its 
annual receipts that do not result from market-related activities. 
However, if the person does not wish to apportion receipts in 
challenging such an assertion, it may forego doing so, with the sole 
result being that it will have higher annual receipts counted toward 
the $10 million threshold for larger-participant status.
    Accordingly, the Bureau adopts in the Final Consumer Debt 
Collection Rule the provision that the only receipts counting toward 
the calculation of ``annual receipts'' are those ``resulting from'' 
activities related to the covered market.

VI. Section 1022(b)(2)(A) of the Dodd-Frank Act

A. Overview

    In developing the Final Consumer Debt Collection Rule, the Bureau 
has considered potential benefits, costs, and impacts.\113\ The 
Proposal set forth a preliminary analysis of these effects, and the 
Bureau requested and received comments on the topic. In addition, the 
Bureau has consulted or offered to consult with the Federal Trade 
Commission, the Board of Governors of the Federal Reserve System, the 
Federal Deposit Insurance Corporation, the Office of the Comptroller of 
the Currency, the Federal Housing Finance Agency, the National Credit 
Union Administration, and the United States Departments of Education, 
and Housing and Urban Development, in connection with this rulemaking, 
including regarding consistency with any prudential, market, or 
systemic objectives administered by such agencies.
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    \113\ Specifically, 12 U.S.C. 5512(b)(2)(A) calls for the Bureau 
to consider the potential benefits and costs of a regulation to 
consumers and covered persons, including the potential reduction of 
access by consumers to consumer financial products or services, the 
impact on depository institutions and credit unions with $10 billion 
or less in total assets as described in 12 U.S.C. 5516, and the 
impact on consumers in rural areas. In addition, 12 U.S.C. 
5512(b)(2)(B) directs the Bureau to consult, before and during the 
rulemaking, with appropriate prudential regulators or other Federal 
agencies, regarding consistency with objectives those agencies 
administer. The manner and extent to which the provisions of 12 
U.S.C. 5512(b)(2) apply to a rulemaking of this kind that does not 
establish standards of conduct is unclear. Nevertheless, to inform 
this rulemaking more fully, the Bureau performed the analysis and 
consultations described in those provisions of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Final Consumer Debt Collection Rule defines a category of 
``larger participants of other markets for consumer financial products 
or services'' that will be subject to the Bureau's nonbank supervision 
program pursuant to 12 U.S.C. 5514(a)(1)(B). The category defined by 
the rule includes ``larger participants'' of a market for ``consumer 
debt collection'' that the rule

[[Page 65791]]

describes. Participation in this market is assessed on the basis of 
annual receipts, generally averaged over three years, resulting from 
consumer debt collection activities. If a nonbank covered person's 
annual receipts from consumer debt collection are over a threshold of 
$10 million, the entity is a larger participant in that market and thus 
subject to the Bureau's supervisory authority. With the rule in place, 
the Bureau will be able to commence supervisory activities in the 
identified consumer debt collection market.

B. Potential Benefits and Costs to Consumers and Covered Persons

    This analysis considers the benefits, costs, and impacts of the key 
provisions of the rule against a pre-statutory baseline; that is, the 
analysis evaluates the benefits, costs, and impacts of the relevant 
statutory provisions and the regulation combined.\114\ Before the Dodd-
Frank Act, there was no Federal program for supervision of nonbank 
participants of the consumer debt collection market. With the statute 
and the Final Consumer Debt Collection Rule in effect, the Bureau will 
be able to supervise participants of the consumer debt collection 
market who have annual receipts from consumer debt collection of more 
than $10 million.
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    \114\ The Bureau has discretion in any rulemaking to choose an 
appropriate scope of analysis with respect to potential benefits and 
costs and an appropriate baseline. The Bureau, as a matter of 
discretion, has chosen to describe a broader range of potential 
effects to more fully inform the rulemaking.
---------------------------------------------------------------------------

    The Bureau notes at the outset that limited data are publicly 
available with which to quantify the potential benefits, costs, and 
impacts of the rule. For example, although the Bureau has general 
quantitative information, discussed above, on the number of market 
participants and their receipts, the Bureau lacks detailed information 
about their rate of compliance or non-compliance with Federal consumer 
financial law (including the FDCPA) and about the range of compliance 
mechanisms and their costs to market participants. The Proposal 
requested information to support the analysis of benefits, costs, and 
impacts, but commenters did not provide, or identify sources for, 
relevant data.\115\ Over time, the Bureau expects to develop 
information related to these topics through its supervisory and other 
activities.
---------------------------------------------------------------------------

    \115\ One commenter asserted without explanation that medium-
sized firms would need to dedicate between three and eight employees 
to the supervision process during the two weeks before and two weeks 
of an examination.
---------------------------------------------------------------------------

    In light of these data limitations, this analysis generally 
provides a qualitative discussion of the benefits, costs, and impacts 
of the Final Consumer Debt Collection Rule. General economic 
principles, together with the limited data that are available, provide 
insight into these benefits, costs, and impacts. Where possible, the 
Bureau has made quantitative estimates based on these principles and 
data as well as its experience of supervision.
    The discussion below describes three categories of potential 
benefits and costs. First, after the rule authorizes the Bureau's 
supervision in the consumer debt collection market, larger participants 
in the market may respond to the possibility of supervision by changing 
their systems and conduct. Second, when the Bureau undertakes 
supervisory activity at specific consumer debt collectors, those 
consumer debt collectors will incur costs from participating in 
supervision, and the results of these individual supervisory activities 
may also produce benefits and costs.\116\ Third, the Bureau analyzes 
the costs associated with entities' efforts to assess whether they 
qualify as larger participants under the rule.
---------------------------------------------------------------------------

    \116\ Pursuant to section 12 U.S.C. 5514(e), the Bureau also has 
supervisory authority over service providers to nonbank covered 
persons encompassed by 12 U.S.C. 5514(a)(1), which includes larger 
participants. The Bureau does not have data on the number or 
characteristics of service providers to the roughly 175 larger 
participants of the consumer debt collection market. The discussion 
herein of potential costs, benefits, and impacts that may result 
from the Final Consumer Debt Collection Rule generally applies to 
service providers to larger participants.
---------------------------------------------------------------------------

1. Benefits and Costs of Responses to the Possibility of Supervision
    The Final Consumer Debt Collection Rule subjects larger 
participants of the consumer debt collection market to the possibility 
of Bureau supervision. That the Bureau is authorized to undertake 
supervisory activities with respect to a nonbank covered person who 
qualifies as a larger participant does not necessarily mean the Bureau 
will in fact undertake such activities regarding that covered person in 
the near future or at all. Rather, as explained in the Proposal, 
supervision of any particular larger participant as a result of this 
rulemaking will be probabilistic in nature. For example, the Bureau 
will examine certain larger participants on a periodic or occasional 
basis. The Bureau's decisions about supervision will be informed, as 
applicable, by the factors set forth in 12 U.S.C. 5514(b)(2), relating 
to the size and transaction volume of individual participants, the 
risks their consumer financial products and services pose to consumers, 
the extent of State consumer protection oversight, and other factors 
the Bureau may determine are relevant. Each entity that believes it 
qualifies as a larger participant will know that it might be supervised 
and may gauge, given its circumstances, the likelihood that the Bureau 
will initiate an examination or other supervisory activity.
    As the Proposal pointed out, the prospect of potential supervisory 
activity may create an incentive for larger participants to increase 
compliance with Federal consumer financial law. They may anticipate 
that by doing so (and thereby decreasing risks to consumers), they can 
decrease their chances of actually being subjected to supervision as 
the Bureau evaluates the factors outlined above. In addition, an actual 
examination would likely reveal any past or present noncompliance, 
which the Bureau may seek to correct through supervisory activity or, 
in some cases, enforcement actions. Larger participants may therefore 
judge that the prospect of supervision has increased the potential 
consequences of noncompliance with Federal consumer financial law, and 
they may seek to decrease that risk by curing or mitigating any 
noncompliance.
    The Bureau believes it is likely that market participants will 
increase compliance in response to the Bureau's supervisory activities 
authorized by this rule. However, because the Final Consumer Debt 
Collection Rule itself does not require any consumer debt collector to 
alter its conduct of consumer debt collection, any estimate of the 
amount of increased compliance would be a prediction of market 
participants' behavior. The data the Bureau currently has do not 
support a specific quantitative prediction. But, to the extent that 
consumer debt collectors increase their compliance in response to the 
Final Consumer Debt Collection Rule, that response will result in both 
benefits and costs.\117\
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    \117\ Another approach to considering the benefits, costs, and 
impacts of the rule would be to focus almost entirely on the 
supervision-related costs for larger participants and omit a broader 
consideration of the benefits and costs of increased compliance. As 
noted above, the Bureau has, as a matter of discretion, chosen to 
describe a broader range of potential effects to more fully inform 
the rulemaking.
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a. Benefits From Increased Compliance
    Increased compliance would be beneficial to consumers that are 
affected

[[Page 65792]]

by consumer debt collection. As discussed above, the potential pool of 
consumers who are directly affected by debt collection is broad and 
includes, on average, 14% of the population. Lawful consumer debt 
collection is important to the functioning of the consumer credit 
market, because participants in this market reduce creditors' losses 
from nonpayment and thereby help to keep consumer credit accessible and 
potentially more affordable to many consumers. Unlawful debt collection 
can damage consumers' finances and harm them in other ways. Unfair, 
deceptive, and abusive practices, to the extent they succeed in 
recovering more from consumers (including perhaps more than is owed) 
can also damage the broader debt collection market by altering the 
competitive balance. A number of Federal consumer financial laws, 
including, among others, the FDCPA, the FCRA, and Title X of the Dodd-
Frank Act, and related regulations, offer substantive protections to 
consumers regarding consumer debt collection. Increasing the rate of 
compliance with such laws will benefit consumers and the consumer 
financial market by providing more of the protections mandated by those 
laws.
    For example, the FDCPA prohibits debt collectors from recovering 
amounts that are not expressly authorized by agreement or permitted by 
law.\118\ The FDCPA also prohibits certain forms of communication with 
consumers that debt collectors might otherwise be tempted to make.\119\ 
And it requires debt collectors to make information available to 
consumers, in certain circumstances, about the origins, status, and 
amounts of debts under collection.\120\ Thus, increased compliance by 
debt collectors with the FDCPA would likely result in a decrease in the 
collection of invalid debt claims, and an increase in the protections 
of consumers and of the market that the FDCPA affords.
---------------------------------------------------------------------------

    \118\ 15 U.S.C. 1692f(1).
    \119\ 15 U.S.C. 1692c.
    \120\ 15 U.S.C. 1692g (validation of debts).
---------------------------------------------------------------------------

    As another example, the Fair Credit Reporting Act imposes certain 
duties on businesses that furnish information about consumers to 
consumer reporting agencies.\121\ Debt collectors frequently furnish 
such information, and the Bureau's supervision program may lead to 
their increased fulfillment of FCRA obligations. Those obligations may 
include, among others, not furnishing information that a furnisher has 
reasonable cause to believe is inaccurate; updating or correcting 
information, already furnished, that the furnisher determines to have 
been inaccurate; and carrying out reasonable investigations of consumer 
disputes. Thus, in general, an increase in a furnisher's compliance 
with the FCRA can lead to an improvement in the accuracy of information 
the furnisher provides to consumer reporting agencies. Such an 
increase, to the degree it occurs, would tend to benefit consumers. An 
increase would also benefit consumer reporting agencies, which sell 
consumer reports, based in part on information gathered from 
furnishers, that are meant to be reliable sources of information about 
consumers' past credit experiences, and would also benefit users of 
such reports.
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    \121\ See 15 U.S.C. 1681s-2.
---------------------------------------------------------------------------

b. Costs of Increased Compliance
    On the other hand, as discussed in the Proposal, increasing 
compliance involves costs. In the first instance, those costs will be 
paid by the market participants that choose to increase compliance. 
Consumer debt collectors may need to hire or train additional personnel 
to effectuate any changes in their practices that are necessary to 
produce the increased compliance. They may need to invest in systems 
changes to carry out their revised procedures. In addition, consumer 
debt collectors may need to develop or enhance compliance management 
systems, to ensure that they are aware of any gaps in their compliance. 
Such changes would also require investment and may entail increased 
operating costs.
    An entity that does incur costs in support of increasing compliance 
may try to recoup those costs by demanding increased revenue for 
collecting debt.\122\ Whether and to what extent this increase occurs 
will depend on competitive conditions in the consumer debt collection 
market. In addition, if increasing compliance leads to lower recovery 
rates, creditors may perceive the risk of loss on loans to be greater. 
In either case, consumers' access to credit may decrease, although 
whether and to what extent such a decrease might occur would also 
depend on competitive conditions in the consumer credit markets.\123\ 
At the same time, to the extent the decrease in recovery resulted from 
the collection of fewer debts for which consumers were not legally 
responsible--such as debts not truly owed--the change ought to 
represent an improvement in the allocation of credit. Credit should be 
allocated to reflect the real risk of loss--without that risk's being 
masked by collectors' recovering amounts that are not actually owed.
---------------------------------------------------------------------------

    \122\ How a participant receives its revenue depends on the 
participant's business model. Because third-party debt collectors 
often collect debt on commission, they may demand larger 
percentages. Debt buyers typically buy debt at a substantial 
discount to its face value, and their revenue is based on the 
difference between the amount collected and the price paid for the 
debt. These participants might lower the amount they were willing to 
pay for a given amount of debt.
    \123\ The Bureau is aware that changes in bankruptcy law that 
affect creditors' ability to recover amounts lent to consumers have 
been found to affect the pricing and availability of credit offered 
to consumers. If recovery rates for debt subject to collection 
decrease, that change may also affect the pricing and availability 
of credit for those consumers whose debts are considered relatively 
likely to end up in collection. However, the Bureau is not aware of 
any published research estimating the quantitative magnitude of the 
latter effect. The Bureau notes that the Equal Credit Opportunity 
Act would prohibit creditors from undertaking underwriting or 
pricing actions on a prohibited basis. Equal Credit Opportunity Act, 
15 U.S.C. 1691 et seq.
---------------------------------------------------------------------------

2. Benefits and Costs of Individual Supervisory Activities
    In addition to the responses of market participants anticipating 
supervision, the possible consequences of the rule include the effects 
of individual examinations or other supervisory activity that the 
Bureau may conduct in the consumer debt collection market.
a. Benefits of Supervisory Activities
    The information gathered during supervisory activity will be useful 
in several ways. For example, when an examination uncovers deficiencies 
in a company's policies and procedures, both the company and the Bureau 
will become aware of those deficiencies. The Bureau's examination 
manual calls for the Bureau to prepare a report of each examination and 
to assess the strength of the subject entity's compliance mechanisms 
and the risks the entity poses to consumers, among other topics. The 
Bureau will share the examination report with the subject entity, 
because one purpose of supervision is to inform the entity of problems 
detected by examinations.
    Thus, for example, an examination may reveal that, due to the 
design of its procedures, a company frequently collects on debt that 
cannot be validated. Or an examination may determine that a company has 
sometimes failed to provide consumers required notices while attempting 
to collect debts, or has engaged in inappropriate communications with 
third parties regarding debts subject to collection. Examiners may find 
evidence of widespread noncompliance with Federal consumer financial 
law, or they may identify specific areas where a company has 
inadvertently failed to

[[Page 65793]]

comply. These examples are only illustrative of what kinds of 
information an examination might deliver.
    Detecting and informing companies about such problems should be 
beneficial to consumers. When the Bureau notifies a company about risks 
associated with an aspect of its activities, the company is expected to 
adjust its practices to reduce those risks. That response may result in 
increased compliance with Federal consumer financial law, with benefits 
like those described above. Or it may avert a violation that would have 
occurred had Bureau supervision not detected the risk promptly. The 
Bureau may also inform companies about risks they pose to consumers 
short of violating the law. Action to reduce those risks would also be 
a benefit to consumers.
    Given the obligations consumer debt collectors have under Federal 
consumer financial law and the existence of efforts to enforce such 
law, the results of supervision may also benefit consumer debt 
collectors under supervision by detecting compliance problems early. 
When an entity's level of noncompliance has resulted in litigation or 
an enforcement action, the company must face both the costs of 
defending its actions and the penalties for noncompliance--including 
potential liability for statutory damages to private plaintiffs--and 
must also adjust its systems to cure the breach. Changing practices at 
this point can be expected to be relatively difficult, because a level 
of noncompliance that has attracted the attention of enforcement 
authorities or private plaintiffs will sometimes be severe enough to 
represent a serious failing of a company's systems. Supervision may 
detect flaws at a point when correcting them is relatively inexpensive. 
And catching problems before they involve a company in costly private 
litigation or administrative enforcement, and potentially the payment 
of legal penalties or other forms of relief, could save the company 
substantial time and money. In short, supervision might benefit 
consumer debt collectors under supervision by reducing the need for 
other more expensive activities, like enforcement and private 
litigation, to achieve a given compliance rate. Accordingly, a shift of 
some amount of regulatory oversight from enforcement to supervision 
would be beneficial to market participants.
    Further potential benefits to consumers, covered persons, or both 
may arise from the Bureau's gathering of information during supervisory 
activities. The goals of supervision include informing the Bureau about 
activities of market participants and assessing risks to consumers and 
to markets for consumer financial products and services. The Bureau may 
use this information to improve regulation of consumer financial 
products and services and enforcement of Federal consumer financial 
law, in order to better serve its mission of ensuring consumers' access 
to fair, transparent, and competitive markets for such products and 
services. Benefits of this type will depend on what the Bureau learns 
during supervision and how it uses that knowledge.
b. Costs of Supervisory Activities
    The potential costs of actual supervision arise in two categories. 
The first involves the costs of individual consumer debt collectors' 
increasing compliance in response to the Bureau's findings during 
supervisory activity and to supervisory actions. These costs are 
similar in nature to the possible compliance costs, described above, 
that larger participants in general may incur in anticipation of 
possible supervisory activity. This analysis will not repeat that 
discussion. The second category is the cost of supporting supervisory 
activity.
    Supervisory activity may involve requests for information or 
records, on-site or off-site examinations, or some combination of these 
activities. For example, in an on-site examination, generally, Bureau 
examiners begin by contacting the entity for an initial conference with 
management. That initial contact is often accompanied by a request for 
information or records. Based on the discussion with management and an 
initial review of the information received, examiners will determine 
the scope of the on-site exam. While on-site, examiners will spend some 
time in further conversation with management about the entity's 
processes and procedures. The examiners will also review documents, 
records, and accounts to assess the entity's compliance and evaluate 
the entity's compliance management systems. As with the Bureau's bank 
examinations, examinations of nonbank covered persons will involve 
issuing confidential examination reports and compliance ratings. The 
Bureau's examination manual describes the supervision process and 
indicates what materials and information an entity can expect examiners 
to request and review, both before they arrive and during their time 
on-site. The primary cost an entity faces in connection with an 
examination is the cost of employees' time to collect and provide the 
necessary information.
    At this early stage in its nonbank supervision program, the Bureau 
does not have precise estimates of the expected duration and frequency 
of its examinations and the resources that entities may expend to 
cooperate with such examinations. The frequency and duration of any 
examinations of any particular entity will depend on a number of 
factors, including the size of the entity, the compliance or other 
risks identified, whether the entity has been examined previously, and 
the demands on the Bureau's supervisory resources imposed by other 
entities and markets. Nevertheless, some rough estimates may be useful 
to provide a sense of the magnitude of potential staff costs that 
entities may incur.
    Typical examinations of consumer debt collectors within the 
category of larger participants with annual receipts close to the $10 
million threshold might be relatively brief. Bureau examiners might 
review materials and interview employees for four weeks, and an entity 
might devote the equivalent of one full employee during that time and 
for two weeks beforehand to prepare materials for the examination. The 
typical cost of the employee involved in responding to supervision can 
be expected to be roughly $49 per hour.\124\ Six weeks of such an 
employee's time would cost less than $12,000.\125\ For a larger 
participant with annual receipts from consumer debt collection of more 
than $10 million, this cost would represent 0.12 percent of those 
annual receipts.\126\ Even if an examination required twice as much 
employee time, the cost would still come to only 0.24 percent of annual 
receipts for such an entity.
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    \124\ Bureau of Labor Statistics, (BLS), National Compensation 
Survey, Employment Cost Trends, available at http://www.bls.gov/ncs/ect/. BLS data for ``nondepository credit intermediation'' indicate 
that the mean hourly wage of a compliance officer in that sector is 
$33.40. BLS data also indicate that salary and wages constitute 67.5 
percent of the total cost of compensation. Dividing the hourly wage 
by 67.5 percent yields a wage (including total costs, such as 
salary, benefits, and taxes) rounded to the nearest dollar of $49 
per hour.
    \125\ All figures assume 40 hours of work per week.
    \126\ The Proposal described four business-weeks of employee 
time as ``a fraction of a percent'' of revenues, for a service 
provider that was a small business. Six business-weeks is also a 
fraction of a percent, as estimated above.
---------------------------------------------------------------------------

    By contrast, at the very largest consumer debt collectors in the 
market, supervisory activity could last much longer. Given the 
complexity of a very large entity, Bureau examiners might need months 
to review the relevant materials. Such an entity might dedicate the 
equivalent of two full-time employees to participate in the 
examination.\127\ The cost of eight

[[Page 65794]]

months of employee time (four months each for two employees) would be 
about $68,000, or about 0.07 percent of annual receipts for an entity 
with $100 million in receipts.
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    \127\ Of course, multiple individuals, both inside and outside a 
firm, might participate in a supervisory activity. For example, a 
firm might seek an attorney's advice on how to respond to and 
participate in an examination. The Bureau of Labor Statistics 
estimates the relevant attorney wage as $112.34, and it is 
conceivable that attorney activity might constitute 10 percent of a 
firm's overall activity during the course of an examination. The 
rough estimate provided above is meant to represent the aggregate 
amount of labor resources a company might dedicate to responding to 
supervisory activity.
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    For an entity of a more typical size, which would be between the 
two size groupings discussed above, Bureau examiners might review 
materials and interview employees for eight weeks, and an entity might 
devote the equivalent of one full employee during that time and for two 
weeks beforehand to prepare materials for the examination. Thus, a 
typical examination would take ten weeks of such an employee's time and 
would cost less than $20,000.
    To put the market-wide impact of supervision in perspective, the 
Bureau estimates that the average annual market-wide cost of 
supervision is 0.015 percent of receipts. The Bureau does not expect to 
supervise every larger participant in every year. For purposes of 
estimation, the Bureau assumes that each of the sixteen largest market 
participants will be examined at most every other year, at a cost of 
$68,000 each, for an aggregate annual cost of $544,000. By way of 
estimation, the Bureau assumes that each of the remaining larger 
participants, about 160 in total, will be examined up to once every 
five years, at a cost of $20,000 each, giving an aggregate annual cost 
of $640,000. The total staff cost of responding to supervision comes to 
approximately $1,184,000 annually.\128\ This figure represents 0.015 
percent of the aggregate annual receipts--$7.7 billion \129\--of the 
larger participants of the consumer debt collection market.
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    \128\ As noted above, there are roughly 175 entities whose 
annual receipts from consumer debt collection exceed the $10 million 
threshold.
    \129\ See http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_56SSSZ4&prodType=table, 
scroll to NAICS code 561440. $7.7 billion represents 63 percent of 
all receipts for ``collection agencies,'' which total $12.2 billion.
---------------------------------------------------------------------------

    The Bureau declines to predict, at this point, precisely how many 
examinations in the consumer debt collection market it will undertake 
in a given year. Once the rule takes effect, the Bureau will be able to 
undertake supervisory activity in the identified market; neither the 
Dodd-Frank Act nor the Final Consumer Debt Collection Rule specifies a 
particular level or frequency of examination. The frequency of 
examination will depend on a number of factors, including the Bureau's 
understanding of the conduct of market participants and the specific 
risks they pose to consumers; the responses of larger participants to 
prior examinations and the demands that other markets make on the 
Bureau's supervisory resources. These factors can be expected to change 
over time, and the Bureau's understanding of these factors may change 
as it gathers more information about the market through its supervision 
and by other means.
3. Costs of Assessing Larger-Participant Status
    Finally, the Bureau acknowledges that in some cases consumer debt 
collectors may incur costs in assessing whether they qualify as larger 
participants and potentially disputing their status. The rule is 
designed to minimize those costs.
    Larger-participant status depends on annual receipts, a quantity 
that for many consumer debt collectors should correspond to data they 
already report to the IRS. For such consumer debt collectors, assessing 
whether they satisfy the Final Consumer Debt Collection Rule's 
definition of larger participant in the consumer debt collection market 
will involve minimal expense. Potential differences from the IRS 
figures arise only for consumer debt collectors that have annual 
receipts arising from activities besides consumer debt collection as 
defined in the Final Consumer Debt Collection Rule. Some consumer debt 
collectors may have multiple distinct lines of business. The Bureau 
believes that such consumer debt collectors ordinarily have records for 
each division of the accounting quantities underlying the calculation 
of annual receipts.
    If, in addition, a consumer debt collector sometimes engages in 
debt collection that is excluded from the market and sometimes in debt 
collection within the defined market, the consumer debt collector's 
accounting systems might not distinguish the two types of activity. 
However, most market participants should not need such detailed 
information. The rule does not require market participants to submit 
data on their annual receipts. Most of the time, a consumer debt 
collector only needs to know its annual receipts resulting from market-
related activity to the extent it wants to determine in advance of any 
supervisory activity by the Bureau whether it is a larger participant. 
A consumer debt collector with receipts from all activities that are 
above the threshold will not necessarily need to trace precisely what 
quantity derives from activities other than consumer debt collection 
(as defined by the Final Consumer Debt Collection Rule). A rough 
estimate would suffice to inform such an entity whether its consumer 
debt collection receipts cross the threshold. Most likely, the only 
consumer debt collectors that might need a more precise calculation of 
annual receipts would be those that have total receipts not greatly 
exceeding the threshold and significant receipts from activities (like 
collection of medical debt) that would be excluded from the 
calculation.
    The data the Bureau currently has do not support a detailed 
estimate of how many consumer debt collectors will incur such costs, or 
how much they might spend. Regardless, consumer debt collectors would 
be unlikely to spend significantly more on specialized accounting 
systems to enable these calculations than it would cost them to be 
supervised by the Bureau as larger participants. It bears emphasizing 
that expenditures on an accounting system intended to prove a consumer 
debt collector is not a larger participant will not necessarily mean 
that the consumer debt collector cannot be supervised. The Bureau can 
supervise a consumer debt collector whose conduct the Bureau 
determines, pursuant to 12 U.S.C. 5514(a)(1)(C), poses risks to 
consumers. Thus, a consumer debt collector choosing to spend 
significant amounts on an accounting system directed toward the larger-
participant test could not be sure it would not be subject to Bureau 
supervision notwithstanding those expenses. The Bureau therefore 
believes it is unlikely that any but a very few consumer debt 
collectors would undertake such expenditures.
4. Consideration of Alternatives
    The Bureau considered selecting different thresholds for larger-
participant status in the consumer debt collection market. If the 
threshold were much higher--say $250 million, as one commenter 
suggested--then the Bureau's supervisory authority under the rule would 
reach only the very largest consumer debt collectors--approximately 7--
in the market. Such an approach would reduce both the expected benefits 
to consumers and the costs to covered persons, because fewer consumer 
debt collectors would be subject to the Bureau's supervisory authority. 
As the Proposal explained, if a change in an consumer debt collector's 
systems or practices results in increased compliance with Federal 
consumer financial law, such a change would

[[Page 65795]]

produce greater benefit at a large consumer debt collector than at a 
smaller consumer debt collector. The largest consumer debt collectors 
are expected to affect the most consumers, and any increase in 
compliance by such consumer debt collectors would benefit a relatively 
large number of consumers.
    At which market participants supervision produces the greatest 
benefits or costs due to increased compliance depends on where the 
greatest risks to consumers lie. If some consumer debt collectors below 
$250 million in annual receipts have particular compliance problems, 
bringing such consumer debt collectors within the Bureau's supervisory 
authority, and conducting actual examinations at those consumer debt 
collectors, can be expected to produce larger increases in compliance 
than would supervising larger consumer debt collectors. The statutory 
criteria regarding supervision should ensure that those larger 
participants that are supervised are the same consumer debt collectors 
where the benefits from supervision are likely to be highest.\130\ The 
selected threshold of $10 million gives the Bureau the flexibility to 
direct its supervisory resources to the consumer debt collectors where 
supervision will be of greatest use, even if they are not the very 
largest in the market.
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    \130\ 12 U.S.C. 5514(b)(2).
---------------------------------------------------------------------------

5. Responses to Comments
    The Bureau received a number of comments on its preliminary 
analysis under 12 U.S.C. 5512(b)(2).
    Several comments related to the Bureau's characterization of 
supervision as probabilistic. One commenter criticized the Bureau for 
asserting that the rule only authorizes supervisory activities and that 
the Bureau will likely not supervise all larger participants in any 
given year. According to this commenter, the Bureau was trying to avoid 
acknowledging the costs of supervision. Later, when the Bureau actually 
undertakes supervisory activity, the commenter claims that the Bureau 
will not consider benefits, costs, and impacts because such 
consideration is only necessary for rulemaking, not supervision. 
Another commenter argued that the Bureau had assumed the rule would 
produce increased compliance yet had discounted the costs as 
``probabilistic.'' One commenter suggested that consumer debt 
collectors will make additional efforts at compliance, in anticipation 
that they might be supervised, and will therefore bear the resulting 
costs regardless of how often the Bureau actually conducts supervisory 
activity.
    As reflected above, the Bureau continues to believe that 
supervision of specific consumer debt collectors pursuant to the Final 
Consumer Debt Collection Rule is probabilistic in nature. The Bureau 
has recognized two stages in which the rule could increase compliance, 
with its attendant benefits and costs. First, the Bureau acknowledges 
that consumer debt collectors may respond to the possibility of the 
Bureau's supervision activity by changing their systems and conduct to 
produce more compliance with Federal consumer financial law. The 
discussion above presented benefits and costs associated with consumer 
debt collectors' changing their conduct in anticipation of possible 
supervision. Second, in the course of actual examinations, the Bureau 
may uncover specific problems that consumer debt collectors then 
correct. The benefits resulting from this second stage, like the costs 
of actual supervisory activity, are indeed probabilistic in nature for 
the reasons described above.
    Commenters offered somewhat contradictory comments regarding the 
rate of existing compliance. Some suggested that the Bureau had 
underestimated the efficacy of consumer debt collectors' existing 
incentives--from sources such as enforcement and supervision by State 
regulators--to comply with the law. Such commenters asserted that 
market participants are already aware of the risks of enforcement 
action and regulatory oversight and have effective compliance 
mechanisms. Thus, the commenter concluded, the benefits of the rule are 
smaller than the Proposal assumed. Another commenter stated that the 
rule will be more costly than the Proposal acknowledged, because 
consumer debt collectors will have to develop compliance policies and 
procedures, by hiring new staff and developing new systems. Yet another 
commenter contended that because the rule is not substantive, but only 
establishes the possibility of supervision, the Bureau cannot assume 
that consumer debt collectors will increase their legal compliance in 
response.
    The comments do not lead the Bureau to different conclusions 
regarding the benefits and costs of increased compliance as a potential 
effect of the rule. If the rule incentivizes consumer debt collectors 
to develop compliance management systems that they do not already have, 
that result will likely both produce benefits in the form of improved 
compliance and the costs involved in creating and administering such 
systems. As a general matter, the Bureau believes it is unlikely that 
consumer debt collectors can consistently comply with the law without 
having reasonably thorough systems for promoting and monitoring 
compliance. Without such systems, a consumer debt collector may happen 
to comply with the law, but it cannot be assured that it is doing so; 
cannot reliably learn of problems and fix them; and cannot modify its 
practices to keep up with changes in the law.
    If, on the other hand, compliance levels are already high--in part 
because of incentives that one commenter pointed out, arising from 
Federal and State enforcement and State supervisory activity--then the 
benefits of the rule will be lower. However, to achieve high levels of 
compliance, consumer debt collectors presumably already incur 
corresponding costs. The compliance-related costs of the rule will 
therefore be lower as well. In addition, the Bureau's likely level of 
supervisory activity over time may also be lower. The commenters 
provided no evidence of the existing level of compliance of consumer 
debt collectors. In any event, whatever increase in compliance may 
occur as a result of the rule is accompanied by the associated benefits 
and costs of that increase.\131\
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    \131\ According to several commenters, the Bureau also 
overlooked the cost of firms' organizing their compliance management 
policies in a format consistent with the Bureau's supervision 
manual. These commenters asserted that companies would, anticipating 
the possibility of supervisory activity, expand their compliance 
management systems beyond what is appropriate for assuring 
compliance. The Bureau notes that its examination manual does not 
specify a particular format for compliance management policies. Of 
course, it is nonetheless possible that some companies may develop 
more comprehensive compliance management systems than would be 
necessary or appropriate for their circumstances. The Bureau has, 
and commenters provided, no information with which to assess the 
possible magnitude of such an effect.
---------------------------------------------------------------------------

    Commenters also questioned the Bureau's estimates of how much 
supervision would cost entities. An industry association asserted that 
the Bureau's estimate, for actual supervisory activity, of four full 
weeks of employee time at a small consumer debt collector was a 
significant underestimate. The commenter did not offer an alternative 
estimate, but the commenter argued that even a month of employee time 
would be burdensome for a small business.
    The Bureau acknowledges that staff time can be a cost for an entity 
responding to particular supervisory activity. The Bureau has estimated 
the magnitude of that cost for consumer debt collectors of various 
sizes. The estimated amount of staff time involved

[[Page 65796]]

represents the Bureau's experience of supervision. Depending on the 
circumstances, that amount may be an underestimate or overestimate for 
some supervisory activities. But even if all supervisory activity cost 
twice as much as the Bureau estimated, the cost would still, as noted 
above, be 0.24 percent of the annual receipts of an individual entity 
with receipts just above the $10 million threshold.
    Several commenters suggested that the rule would force consumer 
debt collectors to develop new accounting systems to generate data on 
the amount of receipts attributable to consumer debt collection. It 
bears emphasis that the rule imposes no such requirement. The Bureau 
has not required market participants regularly to submit accounting 
data. Market participants might be motivated to alter accounting 
systems to some degree to improve their assessments of whether they 
qualify as larger participants, but the Bureau is not persuaded by 
these commenters that consumer debt collectors will spend significant 
amounts on such alterations. As noted above, a consumer debt collector 
with multiple lines of business presumably knows basic accounting 
information, such as receipts, for each division. If existing 
accounting systems do not provide detailed information corresponding to 
the rule's test for assessing larger participant status, the 
discrepancy would only relate to the amount of receipts related to 
activities that the rule excludes from the consumer debt collection 
market. As discussed above, an entity would only need to know such 
information in detail to the degree that the precise facts might render 
the entity not a larger participant. Moreover, consumer debt collectors 
would be unlikely to spend significantly more on accounting systems 
than it would cost them to be supervised by the Bureau.
    One commenter also discussed how the costs of supervision will 
affect the consumer debt collection market. The commenter argued that 
the cost of undergoing examination will be most easily borne by large 
businesses. The commenter inferred that the existence of supervision 
would create an economy of scale that would favor the growth of large 
consumer debt collectors in the market at the expense of smaller 
participants. The commenter did not explain whether this hypothesized 
market effect would be beneficial or harmful, either to consumers or to 
covered persons.
    Even if, as the commenter contends, a larger entity is better able 
to bear the costs of supervision, the rule as a whole does not 
necessarily burden smaller firms disproportionately. The Bureau may 
supervise the largest consumer debt collector more frequently than 
those that are just above the threshold to qualify as larger 
participants. As the Proposal noted, the benefits gained from detecting 
noncompliance are likely to be greater when the consumer debt collector 
under examination is larger. Larger consumer debt collectors affect 
larger numbers of consumers. The benefit from any improvement in 
policies and processes will therefore be multiplied across the 
experiences of more consumers. In addition, participants' asset sizes 
and transaction volumes are among the 12 U.S.C. 5514(b)(2) factors that 
the Bureau may consider in prioritizing its supervisory activities. 
There is little reason to believe that the Bureau's general supervision 
of larger participants of this market will skew the playing field in 
favor of the largest consumer debt collectors--particularly in view of 
the fact, explained above, that the staff costs of responding to 
supervisory activity are likely to be small even for entities just 
above the larger-participant threshold.
    This commenter also argued that the costs of examination will be 
passed on to creditors and will therefore lead to a decrease in 
consumers' access to credit.\132\ The commenter offered no data or 
argument to support this assertion. As noted above, an increase in the 
cost of consumer debt collection may lead to an increase in the price 
or a decrease in the availability of credit to those consumers whose 
debts are regarded as likely to need the work of consumer debt 
collectors. However, whether and to what extent newly supervised 
consumer debt collectors shift the cost of supervision, or of increased 
compliance, to creditors will depend on complex market conditions. The 
Bureau believes any such effects are likely to be very small.
---------------------------------------------------------------------------

    \132\ See supra n.123 and accompanying text.
---------------------------------------------------------------------------

C. Impact on Depository Institutions and Credit Unions With Total 
Assets of $10 Billion or Less, and Impact on Consumers in Rural Areas

    The Final Consumer Debt Collection Rule does not apply to 
depository institutions or credit unions of any size.\133\ Nor would 
the rule have a unique impact on rural consumers. The Bureau is not 
aware of any evidence suggesting that rural consumers have been subject 
to unlawful collection practices at a rate higher than other consumers, 
or that the size distribution of consumer debt collectors operating in 
rural areas differs from that of participants in the overall market.
---------------------------------------------------------------------------

    \133\ As potential users of consumer debt collection services, 
depository institutions and credit unions might see changes in the 
quality and pricing of such services. The Bureau knows of, and 
commenters have suggested, no reason to think that these entities 
would be negatively affected by the Final Consumer Debt Collection 
Rule.
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VII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996, requires each 
agency to consider the potential impact of its regulations on small 
entities, including small businesses, small governmental units, and 
small not-for-profit organizations.\134\ The RFA defines a ``small 
business'' as a business that meets the size standard developed by the 
Small Business Administration pursuant to the Small Business Act.\135\
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    \134\ 5 U.S.C. 601 et seq. The Bureau is not aware of any 
governmental units or not-for-profit organizations to which the 
Final Consumer Debt Collection Rule would apply.
    \135\ 5 U.S.C. 601(3). The Bureau may establish an alternative 
definition after consultation with the SBA and an opportunity for 
public comment.
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    The RFA generally requires an agency to conduct an initial 
regulatory flexibility analysis (IRFA) and a final regulatory 
flexibility analysis (FRFA) of any rule subject to notice-and-comment 
rulemaking requirements, unless the agency certifies that the final 
rule will not have a significant economic impact on a substantial 
number of small entities. The Bureau also is subject to certain 
additional procedures under the RFA involving the convening of a panel 
to consult with small entity representatives prior to proposing a rule 
for which an IRFA is required.\136\
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    \136\ 5 U.S.C. 609.
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    The undersigned certified that the Proposal, if adopted, would not 
have a significant economic impact on a substantial number of small 
entities and that an initial regulatory flexibility analysis was 
therefore not required. The Final Consumer Debt Collection Rule adopts 
the Proposal, with some modifications that do not lead to a different 
conclusion. Therefore, a final regulatory flexibility analysis is not 
required.
    The Final Consumer Debt Collection Rule will define a class of 
consumer debt collectors as larger participants of the consumer debt 
collection market and thereby authorize the Bureau to undertake 
supervisory activities with respect to those consumer debt collectors. 
Because the Final Consumer Debt Collection Rule adopts a test for 
larger-participant status of more than $10 million in annual receipts 
resulting from consumer debt collection activities, larger market 
participants

[[Page 65797]]

would generally be above the existing SBA small-business size standard 
for this market: annual receipts at or below $7 million. Moreover, the 
rule does not itself impose any obligations or standards of conduct on 
businesses outside the category of larger participants. The rule 
therefore does not have a significant impact on a substantial number of 
small entities.\137\
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    \137\ The Proposal hypothesized two circumstances in which a 
business might be a larger participant of the consumer debt 
collection market yet be a small business for RFA purposes. First, a 
nonbank covered person that was not a small business might become a 
small business during the second year after it qualified as a larger 
participant. This occurrence would be rare, because relatively few 
nonbank covered persons appear (according to the Economic Census 
data) to have annual receipts near the $10 million threshold. The 
second hypothesized circumstance involves the rule's definition of 
``control,'' which is somewhat more expansive than the SBA's. A 
company might be affiliated with another company for purposes of 
this rule, so that the two company's receipts would be aggregated in 
assessing whether the threshold was met. Yet the SBA's method might 
not treat the two companies as affiliated, and their separate 
receipts might not exceed the $10 million threshold. The Bureau 
anticipates no more than a very few such cases in the market covered 
by the Final Consumer Debt Collection Rule. Commenters provided no 
reason to alter the Bureau's evaluation of these issues.
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    Additionally, and in any event, the Bureau believes that the Final 
Consumer Debt Collection Rule would not result in a ``significant 
impact'' on any small entities that could be affected. As previously 
noted, whether the Bureau would in fact engage in supervisory activity, 
such as an examination, with respect to a larger participant (and, if 
so, the frequency and extent of such activity) would depend on a number 
of considerations, including, among others, the Bureau's allocation of 
resources and the application of the statutory factors set forth in 12 
U.S.C. 5514(b)(2). Given the Bureau's finite supervisory resources, and 
the range of industries over which it has supervisory responsibility 
for consumer financial protection, whether and when a consumer debt 
collector would be supervised is probabilistic. Moreover, even in cases 
where supervisory activity were to occur, the costs that would result 
from such activity are expected to be minimal in relation to the 
overall activities of the consumer debt collector.\138\
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    \138\ As discussed above, the cost of participating in an 
examination might be roughly 0.12 percent of annual receipts for a 
firm near the $10 million threshold. The proportion would be larger 
for a smaller firm, but the impact will still not be substantial.
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    Finally, 12 U.S.C. 5514(e) authorizes the Bureau to supervise 
service providers to nonbank covered persons encompassed by 12 U.S.C. 
5514(a)(1), which includes larger participants. As the Bureau noted in 
the Proposal, because the rule does not address service providers, 
effects on service providers need not be addressed for purposes of this 
RFA analysis. Even were such effects relevant, the Bureau continues to 
believe that it is very unlikely that any supervisory activities with 
respect to the service providers to the approximately 175 larger 
participants in the consumer debt collection market delineated in the 
Final Consumer Debt Collection Rule would result in a significant 
economic impact on a substantial number of small entities.\139\
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    \139\ As the Bureau noted in the Proposal, it reaches this 
judgment in light of the number of relevant small firms in the 
relevant NAICS codes. For example, many of these service providers 
would be considered to be in the industries with NAICS code 522390, 
``Other activities related to credit intermediation,'' or 518210, 
``Data Processing, Hosting, and Related Services.'' According to the 
2007 Economics Census, there are more than 5,000 small firms in the 
first industry group and nearly 8,000 in the second. The number of 
firms connected to the 175 larger participants of the consumer debt 
collection market is likely to be a fraction of these two figures. 
Moreover, the impact of supervisory activities at such service 
providers would likely be no more intensive--and probably much less, 
given the Bureau's exercise of its discretion in supervision--than 
at the larger participants themselves. As discussed above, 
supervisory activities at larger participants would not be expected 
to give rise to a significant economic impact. Finally, because it 
is very unlikely that the Bureau would supervise many of such 
entities, a substantial number of entities would not likely be 
affected.
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    One commenter pointed out that the SBA has issued a notice of 
proposed rulemaking, considering an increase in the small business size 
standard for the debt collection market to $14 million in annual 
receipts. The SBA's proposal does not affect the accuracy of the 
Bureau's RFA analysis, because the size standard has not yet changed. 
In any event, even if a $14 million standard applied, the rule would 
still not impact a ``substantial number'' of small entities. The Bureau 
estimates, using the Economic Census data, that the rule treats as 
larger participants approximately 175 consumer debt collection entities 
out of approximately 4,500 entities in the market. Out of these 4,500 
entities, the Bureau estimates that approximately 4,356 market 
participants would be small business entities under the SBA's proposed 
size standard of $14 million. Among the approximately 175 larger 
participants of the consumer debt collection market, about 31 might 
fall below a $14 million threshold. Thus, the Final Consumer Debt 
Collection Rule would impact only 0.7 percent of consumer debt 
collectors that might be considered small businesses under the SBA's 
proposal, and the impact on these consumer debt collectors would not be 
significant in any event, for the reasons previously articulated. The 
Final Consumer Debt Collection Rule would thus not have a significant 
impact on a substantial number of small entities, even if the SBA were 
to adopt its proposed change to the relevant definition of small 
business.
    One commenter argued that the Bureau was incorrect in taking the 
positions that ``[t]he rule would not itself impose any obligations or 
standards of conduct on larger participants for purposes of [Regulatory 
Flexibility Act] analysis'' and that ``whether and when an entity in 
the * * * consumer debt collection market[] would be supervised is 
probabilistic.'' \140\ This commenter stated that the actual imposition 
of examination requirements will have an effect on small businesses, 
because the consequences of supervision could include an increase in 
the cost of credit and a diminution in access to credit. The commenter 
argued that the Bureau should not have certified the Proposed Rule and 
should have convened a panel and consulted representatives of small 
entities in compliance with the requirements set forth in the Small 
Business Regulatory Enforcement Fairness Act (SBREFA), as amended by 
Section 1100G of the Dodd-Frank Act.
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    \140\ 77 FR 9606.
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    The Bureau believes that its certification of the Proposed Rule was 
appropriate and that, as a result, the convening of a panel to consult 
with small entities was not required under the RFA. The Proposed Rule 
would not have imposed any standards of conduct on entities for 
purposes of RFA analysis, but rather would have authorized the Bureau 
to exercise its supervisory authority with respect to a class of 
entities. Furthermore, the Bureau does not have any evidence suggesting 
that this rule would increase small entities' cost of credit. Thus, the 
Proposal, like the Final Consumer Debt Collection Rule, does not give 
rise to a regulatory compliance burden for small entities. In any 
event, the Bureau properly found (as described above with respect to 
the Final Consumer Debt Collection Rule) that even if the Proposed Rule 
were considered to impose regulatory obligations for purposes of RFA 
analysis, it would not have created a significant impact on a 
substantial number of small entities.
    Accordingly, the undersigned certifies that this rule will not have 
a significant economic impact on a substantial number of small 
entities.

[[Page 65798]]

VIII. Paperwork Reduction Act

    The Bureau determined that the Proposed Rule would not impose any 
new recordkeeping, reporting, or disclosure requirements on covered 
entities or members of the public that would constitute collections of 
information requiring approval under the Paperwork Reduction Act, 44 
U.S.C. 3501, et seq. The Bureau did not receive any comments regarding 
this conclusion, to which the Bureau adheres. The Bureau concludes that 
the Final Consumer Debt Collection Rule, which adopts the Proposal in 
relevant respects, also imposes no new information collection 
requirements subject to the Paperwork Reduction Act.

List of Subjects in 12 CFR Part 1090

    Consumer protection, Credit.

    For the reasons set forth in the preamble, the Bureau amends 12 CFR 
Part 1090 as follows:

PART 1090--DEFINING LARGER PARTICIPANTS OF CERTAIN CONSUMER 
FINANCIAL PRODUCT AND SERVICE MARKETS

0
1. The authority citation for part 1090 continues to read as follows:

    Authority: 12 U.S.C. 5514(a)(1)(B); 12 U.S.C. 5514(a)(2); 12 
U.S.C. 5514(b)(7)(A); and 12 U.S.C. 5512(b)(1).

0
2. Add a new Sec.  1090.105 to subpart B to read as follows:

Sec.  1090.105  Consumer debt collection market.

    (a) Market-Related definitions. As used in this subpart:
    Annual receipts means, for the consumer debt collection market, 
receipts calculated as follows:
    (i) Receipts means ``total income'' (or in the case of a sole 
proprietorship, ``gross income'') plus ``cost of goods sold'' as these 
terms are defined and reported on Internal Revenue Service (IRS) tax 
return forms (such as Form 1120 for corporations; Form 1120S and 
Schedule K for S corporations; Form 1120, Form 1065 or Form 1040 for 
LLCs; Form 1065 and Schedule K for partnerships; and Form 1040, 
Schedule C for sole proprietorships). Receipts do not include net 
capital gains or losses; taxes collected for and remitted to a taxing 
authority if included in gross or total income, such as sales or other 
taxes collected from customers but excluding taxes levied on the entity 
or its employees; or amounts collected for another (but fees earned in 
connection with such collections are receipts). Items such as 
subcontractor costs, reimbursements for purchases a contractor makes at 
a customer's request, and employee-based costs such as payroll taxes 
are included in receipts.
    (ii) Period of measurement. (A) Annual receipts of a person that 
has been in business for three or more completed fiscal years means the 
total receipts of the person over its three most recently completed 
fiscal years divided by three.
    (B) Annual receipts of a person that has been in business for less 
than three completed fiscal years means the total receipts of the 
person for the period the person has been in business divided by the 
number of weeks in business, multiplied by 52.
    (C) Where a person has been in business for three or more completed 
fiscal years, but one of the years within its period of measurement is 
a short tax year, annual receipts means the total receipts for the 
short year and the two full fiscal or calendar years divided by the 
total number of weeks in the short year and the two full fiscal or 
calendar years, multiplied by 52.
    (iii) Annual receipts of affiliated companies. (A) The annual 
receipts of a person are calculated by adding the annual receipts of 
the person with the annual receipts of each of its affiliated 
companies.
    (B) If a person has acquired an affiliated company or been acquired 
by an affiliated company during the applicable period of measurement, 
the annual receipts of the person and the affiliated company are 
aggregated for the entire period of measurement (not just the period 
after the affiliation arose).
    (C) Receipts are calculated separately for the person and each of 
its affiliated companies in accordance with paragraph (iii)(B) of this 
definition even though this may result in using a different period of 
measurement to calculate an affiliated company's annual receipts. Thus, 
for example, if an affiliated company has been in business for a period 
of less than three years, the affiliated company's receipts are to be 
annualized in accordance with paragraph (iii)(B) of this definition 
even if the person has been in business for three or more completed 
fiscal years.
    (D) The annual receipts of a formerly affiliated company are not 
included if affiliation ceased before the applicable period of 
measurement as set forth in paragraph (iii)(B) of this definition. This 
exclusion of annual receipts of formerly affiliated companies applies 
during the entire period of measurement, rather than only for the 
period after which affiliation ceased.
    (E) Annual receipts do not include receipts that result from the 
collection of debt that was originally owed to a medical provider.
    Consumer debt collection is a debt collector's collection of debt 
incurred by a consumer primarily for personal, family, or household 
purposes and related to a consumer financial product or service.
    Creditor means any person who offers or extends credit creating a 
debt or to whom a debt is owed, but such term does not include any 
person to the extent that the person receives an assignment or transfer 
of a debt in default solely for the purpose of facilitating the 
collection of debt for another.
    Debt collector means any person who uses any instrumentality of 
interstate commerce or the mails in any business the principal purpose 
of which is the collection of any debts, or who regularly collects or 
attempts to collect, directly or indirectly, debts owed or due or 
asserted to be owed or due to another. Notwithstanding the exclusion 
provided by paragraph (iii) of this definition, the term includes any 
creditor who, in the process of collecting his own debts, uses any name 
other than his own which would indicate that a third person is 
collecting or attempting to collect such debts. The term does not 
include:
    (i) Any person while acting as a debt collector for another person, 
both of whom are related by common ownership or affiliated by corporate 
control, if the person acting as a debt collector does so only for 
persons to whom it is so related or affiliated and if the principal 
business of such person is not the collection of debts;
    (ii) Any nonprofit organization which, at the request of consumers, 
performs bona fide consumer credit counseling and assists consumers in 
the liquidation of their debts by receiving payments from such 
consumers and distributing such amounts to creditors;
    (iii) Any person collecting or attempting to collect any debt owed 
or due or asserted to be owed or due another to the extent such 
activity:
    (A) Concerns a debt which was originated by such person; or
    (B) Concerns a debt which was not in default at the time it was 
obtained by such person; and
    (iv) Any person engaged solely in enforcing a security interest.
    Test to define larger participants. A nonbank covered person is a 
larger participant of the consumer debt collection market if the 
nonbank covered person's annual receipts resulting from consumer debt 
collection are more than $10 million.

[[Page 65799]]

    Dated: October 21, 2012.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2012-26467 Filed 10-30-12; 8:45 am]
BILLING CODE 4810-AM-P
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