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In recent months, the federal watchdog tasked with protecting consumers’ finances has cast its regulatory spotlight on how bank and nonbank financial institutions handle delinquent and defaulted debt. That attention might lead many financial institutions to reconsider their collections practices.

The Consumer Financial Protection Bureau began regulating nonbank debt collection agencies with annual receipts exceeding $10 million earlier this year. In turn, that will likely lead to significant regulatory changes to the entire industry, according to a report from the American Bankers Association’s Banking Journal. Many financial institutions, both those that specialize in collections and those that sell bad debts to the former, may soon consider overhauling their practices for doing so as a means of staying ahead of the game.

Currently, experts believe there are about 23 million auto loans, credit card balances and both personal and business loans that are considered delinquent in some way, and those outstanding debts have a combined value of an estimated $278 billion, the report said. This is in addition to the more than $1 trillion in student loan debts seen nationwide.

Already, regulatory action has been taken in some form against some debt collectors, as a recent investigation by the U.S. Office of the Comptroller of the Currency caused a number of credit card lenders to halt their collections efforts and lose billions in revenues, the report said. In general, it seems that federal regulators want there to be more stringent requirements for verifying and documenting what consumers owe on bad debts and why.

Though about 95 percent of collections cases that go to court end up being in favor of the lenders that brought the suit, that’s because the vast majority of debtors simply don’t show up to court, the report said. When they do, plaintiffs win far more often than they lose, often due to improper or insufficient documentation.

Because they can see the changes coming now, many experts advocate that banks should do all they can to get in compliance with existing rules and similarly gird themselves for those related to collections as well, the report said. Doing so will help to keep them from running afoul of regulators and avoid any penalties that may come as a result.

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Consumers who are worried about being blamed for debts for which they are not responsible may want to order a copy of their free annual credit report to determine whether any accounts have been unfairly listed in their name.

Image: keeeeegan, via Flickr

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