CFPB Large Company Rule Clarifies Definition of Revenues for Debt Collectors

Any third party debt collection agency, debt buyer, or collection law firm with revenues over $10 million per year will be subject to the direct supervision of the Consumer Financial Protection Bureau (CFPB) beginning January 2, 2013. The CFPB anticipates that around 175 companies will fall under its direct supervision.

The CFPB announced Wednesday the completion of its Final Consumer Debt Collection Rule, which sets parameters for companies that will fall under its purview. The federal agency’s rule explicitly defines and covers three types of ARM company: third party debt collection agencies, debt buyers, and collection attorneys and law firms.

“Millions of consumers are affected by debt collection, and we want to make sure they are treated fairly,” said CFPB Director Richard Cordray. “Today we are announcing that we will be supervising the larger debt collectors in the market for the first time at the federal level.  We want all companies to realize that the better business choice is to follow the law — not break it.”

The Final Rule is largely unchanged from the proposed guidelines offered by the CFPB in February. The final guidelines for publication did, however, address many of the concerns voiced by the debt collection industry during the open comment period.

But despite the efforts of many in the ARM industry, the $10 million annual receipt threshold stayed pat. Debt collection industry trade group ACA International had vocally argued that defining companies with revenues of $10 million as “larger participants” goes against existing federal definitions for company size, most notably the Small Business Administration’s definition of a “small business,” which is currently pegged at $7 million.

“While we anticipated a final rule, it was our hope that the CFPB would provide greater consideration about how our industry is structured and broaden the large market threshold so that small businesses are not defined as larger market participants,” ACA Chief Executive Officer Pat Morris said. “We are reviewing the final rule and the new debt collection examination procedures to determine the full scope of impact on our members.”

The CFPB did clarify its definition of “receipts.” Officially, companies that average $10 million in annual receipts from debt collection activity over three years will be subject to supervision. Receipts are defined as “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).

Importantly, the CFPB said that “receipts” do not include “amounts collected for another.” The final rule states that fees earned in connection with these collections are considered receipts. This seems to indicate that only commissions will be counted as receipts rather than gross collections.

The CFPB reiterated that it expects around 175 ARM companies to fall under its definition of “larger participant” and be subject to supervision and examination. There was wide speculation in the industry that the companies had been specifically identified. But an analysis of tax data by insideARM.com indicates that this might be a purely estimated number.

North American Industry Classification System (NAICS) code 561440 – a federal classification for debt collection companies – covers exactly 175 companies with annual revenues over $10 million. This classification code is the same used in insideARM.com’s Collection Agency Financial Benchmark Report.

The CFPB will be holding a field hearing in Seattle today to discuss the final supervision rule. The event will start at 10am Pacific time.

For a look at what the CFPB says it will specifically do with companies under supervision, please see “Details on What CFPB Supervision will Mean for Larger ARM Firms.” This article also details the estimated costs to companies under supervision.

The CFPB has also published materials for anyone interested in further information:

A factsheet on today’s announcement can be found at: http://files.consumerfinance.gov/f/201210_cfpb_debt-collection-factsheet.pdf

A copy of the rule published today can be found at: http://files.consumerfinance.gov/f/201210_cfpb_debt-collection-final-rule.pdf

The Examination Procedures for Debt Collection can be found at: http://files.consumerfinance.gov/f/201210_cfpb_debt-collection-examination-procedures.pdf