The Consumer Financial Protection Bureau (CFPB) released a first-ever report examining recent trends in debt settlement and credit counseling.
The big picture: The CFPB report shows:
- Nearly one in thirteen consumers with a credit record had at least one account reported by the creditor as settled or with payments managed by a credit counseling agency (CCA) from 2007 through 2019.
- Debt settlements rose dramatically during the Great Recession to a peak of $11.4 billion. More than half of these settlements occurred within a year of the account first becoming delinquent.
- Debt settlement and credit counseling became less common after that recession, but recently settlements have been on the rise following changes in delinquencies and credit tightness.
- Since 2017, there has been an uptick in reported settlement activity and balances settled alongside an increase in delinquency, but no corresponding increase in credit counseling. The report states the changes may reflect evolving creditor account management, CCA and debt settlement company (DSC) policies, as well as apparent increases in DSCs' market presence.
- CCA activities may not see corresponding increases if current trends hold and the menu of debt relief options for consumers does not change.
The report uses data from the CFPB's Consumer Credit Panel, a nationally representative sample of approximately five million de-identified credit records maintained by one of the three nationwide consumer reporting agencies. The CFPB notes: that the analysis only includes settlements furnished by the creditor and not accounts furnished by a debt buyer; debt buyer reporting practices varied over this period analyzed; and also, not all accounts managed by a CCA are necessarily reported as such by the furnisher, so the number of accounts is under-reported in that data. This report is part of a series of quarterly reports on consumer credit trends.
What to watch for: The CFPB states the report builds from recent foundational work undertaken by the Bureau to promote market discussions highlighting developments in options for consumers who are no longer able to manage their unsecured debts. In particular, the CFPB held "Evolutions in Debt Relief Convening," on March 10, 2020.
The backdrop: Debt relief services have long been one of the most highly regulated sectors in the United States, based on the role that the providers play in assisting consumers who are in financial distress. Debt relief services are also provided against a backdrop of contractual obligations of consumers to their creditors to repay amounts owed, and laws and regulations that govern creditors and their collection activities. The direct regulation of debt relief services occurs on both the federal and state level, including potentially under state laws that require licensure and open the company up to state supervisory examination. The Telemarketing Sales Rule (TSR) was amended in 2010 to address the telemarketing of debt relief services. The amendments to the TSR instituted various disclosure requirements and other consumer protections including the prohibition of upfront fees in the third-party debt settlement industry. The Federal Trade Commission and CFPB share authority to enforce the consumer protection laws with respect to non-bank financial institutions, including the TSR with respect to debt relief services.
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Jonathan L. Pompan, a partner in the Washington, DC office of Venable LLP, co-chairs the firm's Consumer Financial Services Practice Group. His practice focuses on providing comprehensive legal advice and regulatory advocacy to a broad spectrum of clients, such as nonbank financial products and services providers, nonprofit organizations, and trade and professional associations, before the CFPB, the FTC, state attorneys general, and regulatory agencies.
This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to specific fact situations.