Increased Regulatory Scrutiny Is Credit Negative for the US Consumer Finance Industry

Increased Regulatory Scrutiny Is Credit Negative for the US Consumer Finance Industry

Last Monday, the US Federal Trade Commission (FTC) announced a $2.5 million settlement with Asset Acceptance Capital Corporation (AACC, B1 stable) related to charges that it coerced borrowers into paying debts that had passed the legal time limit for collection. The agreement came after Discover Financial Services (Ba1 stable) on 26 January reported in its 10-K filing that the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau (CFPB) plan to take a joint enforcement action regarding the credit card bank’s fee-based products. Increased regulatory focus on debt collectors and credit card banks is credit negative for both sub-sectors of the consumer finance industry as it is likely to result in increased settlement-related and compliance costs for industry participants.

While AACC’s settlement with the FTC resolves the specific matter of collecting debt expired under the statute of limitations, increased regulatory scrutiny of debt collection practices portends further investigations of the debt collection sector, whose major players include SquareTwo Financial Corporation (B2 stable), NCO Group (Caa1 stable), and the unrated Sherman Financial Group, Portfolio Recovery Associates, Encore Capital Group, and Unifund, in addition to AACC. In recent months, FTC officials have repeatedly identified debt collection practices as an important focus for the agency amid an increased number of customer complaints. The CFPB also identified the debt collection sector as a potential focus, although for non-banks active in this market the CFPB’s supervisory authority generally applies only to firms deemed to be “larger participants.” The CFPB must issue an initial rule to define larger participants by 21 July, the one-year anniversary of the creation of the CFPB.

The joint enforcement action against Discover regarding its fee-based products, including its payment protection fee product, also highlights increased regulatory focus on credit card banks. This federal regulatory action comes in the wake of lawsuits from several state attorneys general related to payment protection fee products.19 Although we expect the effects of this action to be manageable for Discover given its solid liquidity and capital position, it again underscores the heightened level of regulatory activism toward the consumer finance industry.

We believe regulators will be especially focused on the consumer finance industry in the next 12 months as consumer protection is a highly politicized issue, particularly during an election year. Furthermore, as a relatively new agency with a mission to protect consumers’ interests, we expect the CFPB to be aggressive in investigating firms perceived as violating these interests in 2012. We also expect collaboration between the FTC and the CFPB, as per the agreement signed by the two agencies on 23 January to lead to more investigations of firms they deem to be harming consumers’ interests. Such investigations may result in financial penalties for firms the agencies determine have harmed consumers, but the regulators’ activities will, at the very least, increase industry-wide compliance-related costs.