Collection and Credit Firms Facing Broad New Oversight

     Andrew Harrer/Bloomberg NewsRichard Cordray, director of the Consumer Financial Protection Bureau, before a Senate panel in January.

8:56 p.m. | Updated

      Debt collectors and credit reporting companies are bracing for intense scrutiny after the government’s consumer finance watchdog unveiled a broad plan to regulate financial firms that have largely evaded federal oversight.

     On Thursday, the Consumer Financial Protection Bureau proposed regulations that would allow the agency to supervise those two controversial corners of the finance industry, which have drawn complaints of aggressive tactics and unfair practices.

The draft rule is the most significant proposal yet to emerge from the consumer agency — a symbol of the government’s new regulatory powers and a favorite target of Congressional Republicans — and the first of several efforts to police financial companies that are not banks.

“Debt collectors and credit reporting agencies have gone unsupervised by the federal government for too long,” Richard Cordray, the bureau’s director, told reporters on Thursday. “It is time to provide the kind of oversight of these markets that will help ensure that federal laws protecting consumers in these financial markets are being followed.”

• Documents: Proposed Rule on Debt Collectors

       The proposal now enters a 60-day comment period. The bureau expects to complete the rule by July, the two-year anniversary of its creation. The rule, like many of the bureau’s actions, could become bogged down in a larger political battle that has bedeviled many regulators in the Obama administration. Republicans have threatened to rein in the consumer agency’s budget and authority.

      The bureau, a product of the Dodd-Frank regulatory overhaul, has a broad mandate to police Wall Street banks as well as the more shadowy corners of the financial industry. Such firms are unmarked territory for the federal government. Until now, state authorities largely have licensed and supervised these companies.

But the agency was hamstrung without a leader at the helm, the result of a bitter battle in Congress over the appointment of Mr. Cordray. Republicans refused to bless his nomination unless Democrats agreed to subject the bureau to stricter Congressional oversight.

       In a sharp challenge to Republican lawmakers in January, President Obama circumvented Congress and opted for a recess appointment of Mr. Cordray. The move empowered the bureau to take on the lightly regulated world of payday lenders, mortgage firms and student lenders. The bureau can also oversee the “larger participants” in industries like debt collection, credit reporting and check cashing.

The bureau began its new effort on Thursday with the proposal to define the largest debt collectors and credit reporting companies. The bureau can also sanction smaller firms that run afoul of federal rules.

Some financial firms, on and off Wall Street, are squirming at the thought of an emboldened regulator. New oversight means rising compliance costs and the likelihood of additional penalties.

“I expect increased diligence and increased costs in light of the pronouncement from Mr. Cordray,” said Donald N. Lamson, a former regulator who now works at the law firm Shearman & Sterling. “It would be incumbent on them to beef up those areas that deal with consumer complaints.”

Under the debt collector proposal, the consumer bureau would keep watch over companies that make more than $10 million a year from their consumer business, limiting the scope to about 175 firms. These companies account for about two-thirds of the business in the debt collection market.

The oversight comes after a prolonged upheaval for the industry, which for years has been ensnared in lawsuits and regulatory actions for questionable collection practices. Debt collectors habitually rank as the most common topic of nonfraud consumer complaints at the Federal Trade Commission.

The F.T.C. recently cracked down on debt collectors for harassing consumers, sometimes for money that is not even legally owed. The agency last month levied a $2.5 million fine on Asset Acceptance, one of the nation’s largest debt collectors, to settle accusations that the company deceived consumers.

But the F.T.C.’s powers are limited. While it can sanction a debt collector for violating consumer protection laws, the Consumer Financial Protection Bureau has authority to root out wrongdoing and keep a closer eye on the industry to try and prevent bad acts.