Kathryn Haralson had already fielded calls from debt collectors at her home and work. They even phoned her daughter at college.
So when Haralson, 47, logged into her Facebook account one day, she was surprised by an unwelcome inbox message: a request to call “Mr. Rice” about her debt.
“It’s not like they needed to go on Facebook to find me,” Haralson said. “I was in contact with them all the time. That crossed the line.”
Federal regulators could wind up agreeing with Haralson as the U.S. Consumer Financial Protection Bureau and Federal Trade Commission examine how debt collectors use social media websites like those run by Facebook Inc. (FB) and Twitter Inc. to contact potential debtors.
U.S. regulators are mulling a series of actions in 2013 as they impose comprehensive federal oversight for the first time over the debt collection industry, which generated 180,000 consumer complaints to the FTC in 2011. In the 2010 Dodd-Frank Act, the CFPB gained new powers over debt collectors that no other federal agency ever had.
Richard Cordray, the CFPB director, has made debt collection a priority for the agency because about 30 million consumers -- “nearly one out of every 10 Americans” -- have accounts in collection totaling $1,500 on average, he said in an Oct. 24 speech.
“We will be using both our supervision authority and our enforcement authority to oversee the market and go after bad actors who flout the law,” Cordray said.
Regulations would affect credit-card issuers like Capital One Financial Corp. (COF) and JPMorgan Chase & Co. (JPM), who also face supervision over how they handle debtors. The CFPB sent a signal of its intent in October when it announced a $112.5 million settlement with American Express Co. (AXP) partly over claims of improper debt collection practices.
At the same time, debt buyers like Portfolio Recovery Associates Inc. (PRAA), Encore Capital Group Inc. (ECPG) and Asta Funding Inc. (ASFI) are also facing the first-ever federal oversight of their business. The CFPB approved a rule on supervision that took effect Jan. 2.
“As a company that engages in debt collection, we need to be prepared for the heavy oversight that CFPB will bring,” Asta wrote in a Jan. 18 regulatory filing.
Phillip Duff, president of Lighthouse Consulting Inc., a research firm whose focus includes debt buying, said the presence of CFPB is changing the industry’s structure already. Major credit-card issuers are increasingly selling only to large debt buyers who can handle tougher federal oversight.
“They are positioning themselves to do business with the big guys because they are more compliant and more ethical,” Duff said in an interview.
The accounts-receivable industry had revenues of $17 billion in 2011, according to Kaulkin Ginsberg, a Rockville, Maryland-based consulting firm. In addition to debt collectors, the industry includes debt buyers, who purchase written-off debt from creditors such as credit-card issuers. Debt collectors can be independent agents, employees of buyers or members of law firms.
Mark Schiffman, a spokesman for ACA International, a debt collection trade association, said the group has discouraged the use of social media by its members because the law is unclear, and court cases have not clarified how Facebook, Twitter and other sites can be used legally.
“We tell them to avoid” social media, Schiffman said in an interview. “The rules on it are not clear.”
A body of U.S. bank regulators, the Federal Financial Institutions Examination Council, on Jan. 22 asked for public comment about proposed supervisory guidance to banks on social media. Debt collectors use of these media “may violate the restrictions on contacting consumers imposed by” current law.
The request said a broad swath of social media could be affected by the guidance, including Google Inc. (GOOG)’s Google Plus, Twitter’s micro-blogging site, Yelp Inc. (YELP)’s business review site and LinkedIn Corp. (LNKD)’s professional network. It could also cover Second Life, a site owned by closely held Linden Research Inc. where users create virtual identities and communities, and online games created by Zynga Inc. (ZNGA), according to the request.
The CFPB, which shares jurisdiction over debt collection with the FTC, will begin taking complaints about the industry in the second quarter of this year, according to two people briefed on its plans.
The CFPB complaint system, required by Dodd-Frank, links federal regulators with the companies in order to find solutions for consumers. Collecting complaints would also let the bureau amass data on the industry as a prelude to issuing proposals for regulation later in the year, the people briefed on its plans said.
The CFPB’s supervisory authority covers about 175 debt collectors that account for more than 60 percent of the industry’s annual receipts, Cordray said.
The consumer agency may also take enforcement action against the debt-collection industry, something the FTC does regularly. The bureau has already issued civil investigative demands for documents, a step that can lead to enforcement penalties, according to two people briefed on its work.
L. Richard Fischer, an attorney with the law firm Morrison & Foerster LLP in Washington who has represented card issuers, called the Amex case a “Miranda warning” to similar companies about the bureau’s intentions on behalf of consumers. In the U.S., the Miranda warning specifies a citizen’s rights during interactions with the police.
In the settlement, Amex agreed to pay $112.5 million in restitution and penalties to settle claims by regulators that it violated consumer safeguards from marketing to collections in products sold to about 250,000 customers.
In the case, Fischer noted, CFPB aimed at the company’s practice of trying to collect old debt by falsely implying that reports of payments would improve customers’ credit scores. Amex also deceived some customers into settlement offers that despite promises didn’t wipe out their debt.
A joint CFPB-FTC working group on debt collection is examining how the government should regulate the industry, according to David Vladeck, until recently the director of the FTC’s bureau of consumer protection.
The underlying law, the Fair Debt Collection Practices Act, dates from 1978. At that time, the debt-buying industry, which purchases charged-off debt at a discount and attempts to collect it, barely existed.
“Either Congress needs to modernize the statute or CFPB needs to interpret the statute,” Vladeck said. “We are urging the CFPB to engage in rulemaking.”
In particular, Vladeck, who left the FTC in December and is now a consultant to the agency, argued that the CFPB needs to limit the ability of debt collectors to use electronic tools that are not entirely private, since the law prohibits debt collectors from disclosing information on debts to third parties. That could include not only Facebook and other social media, but also work e-mail addresses, he said.
Haralson, a medical office assistant who lives in Dunedin, Florida, is embroiled in a dispute with MarkOne Financial LLC, a Jacksonville, Florida company that finances auto sales and collects debts. Haralson said the company overcharged her, and that she stopped making payments after shelling out $18,000 for a $12,000 Jeep Cherokee. Since then, she complains of harassing phone calls to her work, her cell phone and family members.
The use of Facebook is a “cherry atop the harassment dessert,” Haralson’s lawyer, Billy Howard, said in an interview.
MarkOne general counsel, Ryan Johnson, declined in a telephone interview to comment on the Haralson case, saying it is the subject of pending litigation. He also declined to outline the company’s policy on use of social media.
Howard said he’s seen more aggressive use of social media by debt collectors, including rude postings on a person’s “wall,” the part of a Facebook account that a person’s friends can see. Some collectors masquerade as friendly personalities to catch an alleged debtor’s attention.
“You get a friend request from some chick in a bikini,” said Howard, a lawyer with Morgan & Morgan P.A. in Tampa, Florida. “You say yes, and then somebody says ‘‘by the way, I’m a debt collector.’”
“The law should not stand in the way of a consumer’s desire to communicate in these new ways,” Bedard said in an interview.
Bedard said that people have to expect that debt collectors could use tools like Facebook “since it’s not unlawful to search the Internet and view publicly available information.” The law does not require them to obtain consumer consent to use Facebook, but “wise collectors” do so, Bedard said.
Jodi Seth, spokeswoman for Facebook, declined to comment.
Some collectors choose not to exploit social media at all. Portfolio Recovery Associates has a policy against its use, spokesman Rick Goulart said in an e-mail.
Consumers contacted through social media may be especially disconcerted because collectors often don’t provide information about the origin of the debt. Peter Holland, an instructor at the University of Maryland law school, said contracts for the sale of debt often limit the rights of collectors to identify the originator.
“You may have no clue what the origin of the debt is when you have first contact with the collector,” Holland said in an interview.
Vladeck said the CFPB should also write regulations requiring the disclosure of that information to potential debtors so they can determine whether they in fact paid the debt. The fair debt collection law of 1978 didn’t foresee that debt could be sold to other collectors.
“Debt does not die the way it did before debt buying,” Vladeck said.
To contact the reporter on this story: Carter Dougherty in Washington at firstname.lastname@example.org