Third-party debt collectors have contributed to a large number of consumer complaints over the years. Due to a large number of complaints, the Federal Trade Commission has been working on identifying and addressing the consumer protection problems that arose due to poor debt collection practices. Complaints tend to be categorized as collections against the wrong person, collections for the wrong amount or collections on debts no longer owed. According to a 2009 report of the FTC, the law should be changed and should require the debt collectors to have proper information so that they can collect the right amount of money from the right consumers.
The 2009 report also revealed a significant change that took place in the debt collection business - the introduction and growth of debt buying. Often times the delinquent debts are sold to debt buyers by the creditors along with information about the debt. When the buyers resell the debts to another buyer, the collections process may sometimes take years, wherein the end, either the debtor settles the debt, or shelves it as too old to be collected.
The expansion in the debt buyer industry has resulted in an increased number of complaints alongside the ones against the third-party collection groups.
Debt Buying Framework
Various federal and state laws apply to the conduct and practices of debt buyers. The Fair Debt Collection Practices Act or FDCPA was passed in 1977 to discard any kind of abusive or harmful debt collection practices by debt collectors. This encourages all states to take proper measures to protect consumers from unfair debt collection practices.
The FDCPA is applicable to debt buyers who purchase debt accounts. Some of the rules and the regulation set by FDCPA are as follows:
- Prohibition of deceptive, unfair, or abusive debt collection practices
- Provision of a 'validation notice' to the consumers upon initial interaction that includes basic debt information and debt collection rights
- Verification of a debt if a consumer disputes a debt within 30 days of the validation notice.
In addition to FDCPA, buyers also abide by Section 5 of The Federal Trade Commission Act. This act forbids buyers to carry out any kind of unfair or deceptive acts that affect commerce. An additional federal statute is the Fair Credit Reporting Act or FCRA that imposes data privacy and accuracy on various consumer reporting agencies, which includes debt buyers and debt collectors who use consumer credit reports. If a creditor knows that a piece of information is not accurate, yet decides to furnish false information to consumer reporting agencies, the action violates the FCRA. The consumers also have the right to dispute the completeness or accuracy of the information, according to FCRA.
Apart from the federal statutes, various states have taken measures to limit debt collecting activities. In addition to prohibiting deceptive, unfair, and abusive collection practice, some states even require debt collectors and buyers to have a license in order to carry out debt collection practice in that state.
Lastly, in addition to the legal requirements, various trade associations such as the Receivables Management Association International (RMA, formerly known as the DBA – Debt Buyers Association) and ACA International, Inc. have also set some self-regulation in the industry to manage the conduct and practice of debt buyers.
The methodology of the Study
The findings and conclusion in the report are based on the information obtained from debt buyers.
Data Collection From Debt Buyers the ninelargest debt buyers in the United States were issued orders by the FTC in December 2009. These debt buyers were:
- Sherman Financial Group, LLC
- Encore Capital Group, Inc.
- B-Line, LLC
- Asta Funding, Inc
- eCAST Settlement Corp.
- Portfolio Recovery Associates, L.L.C.
- Unifund Corp.
- NCO Portfolio Management, Inc.
- Arrow Financial Services, LLC
The most common type of debt purchased by these debt buyers was credit card debt. These debt buyers purchased over 78% of all credit card debt the card issuers sold.
According to the Federal Trade Commission's order, the recipient had to give broad data about their business practice, which included how they get and transfer information about consumer debts. Debt buyers submitted over 5000 portfolios that were purchased in 3 year study period that included about 90 million consumer accounts, which amounted to over $140 billion consumer debt.
Three firms, namely Arrow Financial Services, LLC, B-Line, LLC, and eCAST Settlement Corp., were excluded from the Study due to variance in the data and their specializations. Arrow Financial Services, LLC withdrew from the debt buying business.
- Data From Other Sources
The FTC also took the help of research, professional literature, articles, and reports for a better understanding. The FTC staff drew more information towards the Study by meeting various consumer advocates and representatives from the industry. The staff also had a meeting with two industry organizations ACA International and (as it was known then) DBA International.
Lastly, FTC relied on its own experience in debt collection while preparing the report. FTC has a good record of conducting searches and other work related to debt collection issues.
Debt Buying Market
- Consumer Credit And Debt Buying
When a credit transaction occurs, the creditor and the consumer enter into a contract wherein the consumer receives an amount of money from the creditor and promises to repay it with interest over a certain period of time. When a consumer fails to repay the debt, then creditors take help from debt collectors to recover these contracts,
Creditors themselves can use various methods to collect the debt. However, some creditors retain third-party debt collectors to recover the debt. These third-party debt collectors have a good experience in collecting debts, and thus the chances of getting back the money are higher.
In certain circumstances, creditors decide to sell the debts off to debt buyers. The buyer then either tries to collect the debts itself or hires a third-party collection agency to do the job. Selling debts reduces the losses of the creditors and increases their amount of credit.
Often, creditors prefer third-party debt collection rather than selling the debts as they can have control over the debt collection process and thus do not have to worry about their reputation being harmed by unfair practices. Often creditors try to recover their debts internally or through third-party debt collection before they finally decide to sell the debt.
Debt Buying Industry
Debt Sellers and Debt Sold
Two main trends that promoted the debt buying industry in the 21st century are as follows:
- Consumers took out large amounts of debts, including credit card debt, student loans, personal debts; this resulted in creditors having more debt available for sale or collection
- Data across industry depicts that the banks' sales of credit card debt to debt buyers add up to 75% of the total debts sold. The FTC's Study revealed that over 60% of the portfolios purchased by debt buyers were credit card portfolios. Credit card issuers changed account receivable management practices to include routine sales of debt to outside groups.
- Study revealed that over 60% of the portfolios purchased by debt buyers were credit card portfolios.
The debt buying industry has seen various fluctuations and changes over the years. Although there are various debt collection agencies, most of the debts are bought by the large debt collection agencies.
Getting in the debt buying industry is not difficult since there are not many barriers. However, a few states may require a license for debt collection. Various third-party collectors can potentially enter the debt buying industry to resolve issues with delinquent debtors easily if they have good expertise in the field. Analysts think that a firm's ability to purchase debt depends on the availability of finance in the market.
Debt Buying Process
The debt owners offer and sell a portfolio of debt to potential debt buyers. As debt buyers first identify and bid the portfolios. The purchase and sale agreements include the terms under which the debt owner sells their debt portfolio.
- How Sellers Create Debt Portfolios
Portfolios By Original Creditors
Before selling any debts, the original creditors try to recover the debt by themselves or through a third-party collection agency. When the creditor cannot recover a certain amount, they decide to sell off the debt to debt buyers.
When the original creditor sells the debt, it is compiled into a portfolio with similar debts that contains common information like credit type, time since the consumer's account became delinquent, and location. The debts that are settled, bankrupt, or challenged by consumers are not added in the portfolio.
Portfolios By Debt Buyers As Resellers
If the ability to resell in the portfolio is not limited in the purchase and sale agreement, then a buyer can re-organize debts into portfolios and sell them to other debt buyers, becoming a reseller in the process. The debt buyer who will purchase the debt becomes known as the 'secondary debt buyer,' and the seller will be known as the 'secondary debt seller.'
To develop portfolios for secondary debt buyers:
- Purchase a portfolio from the original creditor and immediately sell it to another debt buyer.
- Purchase the portfolio from an original creditor. Try to collect the debts and then sell off the rest of the debts that to other debt buyers.
- Purchase a portfolio from original creditors, but the debt into a new portfolio based on specific criteria with debts from other portfolios, and resell the new portfolio to other buyers.
Most of the time, resellers create portfolios at the particular request of the debt buyers.
- How Sellers' Market Debt Portfolios
Once a portfolio is created for sale, the seller or the original creditor markets it to the debt buyers. If a seller determines that a buyer is qualified enough, the seller can directly contact them and persuade them to purchase the portfolios. Some sellers use mailing lists, phone calls, and clearinghouses or brokers to market their portfolios. Many sellers market their portfolios on websites where they are seeking bids from.
Apart from replying to the sellers' marketing efforts, some buyers themselves seek various opportunities to purchase portfolios. They also network with other people in the industry or other groups to get in touch with potential sellers.
If buyers are determined to purchase a portfolio, they must figure out whether they have to make a bid. Sellers even provide information and documents to the buyers so they can look and make potential purchases.
- How Buyer's Analyse The Sellers Portfolio Information
When a buyer receives the marketing and bid file, they will analyze the information to figure out at the right price to purchase the portfolio. Purchasers often use various methods that include quantitative analysis and experience to determine how much to bid on. Buyers will look at the lenders' underwriting polices, media such as original contract, monthly statements, etc. to determine portfolio value as well. When a price is determined and agreed upon, both parties negotiate a Sale Agreement which lays out all the terms and protections for the buyers and sellers, as well as the price.