Debt collectors’ ‘pay to pay fees’ are ‘often illegal,’ consumer watchdog agency says

Certain “junk” fees often levied by debt collectors are illegal under federal law, the Consumer Financial Protection Bureau said Wednesday.

Debt collectors charge so-called “pay-to-pay” fees, also known as convenience fees, when consumers make a payment online or over the phone, according to the federal agency.

These fees violate the Fair Debt Collection Practices Act when they aren’t “expressly authorized by the agreement creating the debt” or in instances when they’re not “expressly authorized by law,” the CFPB said in an advisory opinion.

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“Federal law generally forbids debt collectors from imposing extra fees not authorized by the original loan,” CFPB Director Rohit Chopra said Wednesday in a written statement. “Today’s advisory opinion shows that these fees are often illegal, and provides a roadmap on the fees that a debt collector can lawfully collect.”

The Consumer Financial Protection Act transferred primary responsibility for the Fair Debt Collection Practices Act, including issuing regulations and ensuring compliance, to the CFPB in 2010, according to the agency announcement.

The bureau issued a request in January asking consumers for input on hidden and excessive fees from a range of lenders. Last week, CFPB officials indicated they may tighten rules governing late fees charged by credit card companies, which the agency categorized as another type of “junk” fee.

The U.S. Chamber of Commerce on Tuesday called Chopra’s agenda “ideologically driven” and “unlawful,” creating “uncertainty” that would lead financial companies to limit mortgages, car loans and personal credit to consumers.

Among other criticisms, the business trade group said the bureau director “coined the term ‘junk fees’ as ‘exploitive income streams’ in a heavy-handed attempt to vilify legal products that have well-disclosed terms.”

Leah Dempsey, a shareholder at the lobbying firm Brownstein Hyatt Farber Schreck and a consultant for ACA International, a trade group representing debt collectors, cast doubt on the legality of the CFPB’s actions Wednesday.

“There is judicial precedent in various states that contradicts the actions today of a single, unelected director at the CFPB,” Dempsey said in a written statement.

But some consumer groups see additional action on debt-collection fees as welcome to relieve financial burdens on struggling households.

“People in those situations are probably least able to carry any additional burden of cost” associated with debt they’ve already had trouble repaying, according to Bruce McClary, senior vice president of membership and communications at the National Foundation for Credit Counseling, a nonprofit offering debt advice to consumers.