The Federal Trade Commission has issued a report, The Structure and Practices of the Debt Buying Industry, which the FTC has described as “the first of its kind” empirical study of debt buyers.
The study reflects the FTC’s continuing focus on consumer protection problems relating to debt collection. The FTC said it has received more consumer complaints about the debt collection industry than about any other industry and, as the debt buyer industry has expanded, the agency has seen a significant increase in the number of collection complaints. Concerned about a “possible link between debt buying and consumer protection problems,” the FTC determined that a better understanding of the industry “was critical to future policy and law enforcement work in this area.”
The study examined the process that debt owners use to sell debts to debt buyers and the terms and conditions of purchase and sale agreements. Observing that “serious concerns have been raised about the sufficiency and accuracy of the information that debt buyers have at all stages of the collection process,” the FTC also extensively evaluated the information that debt buyers obtain and use to collect debts.
Using data and information obtained through “compulsory process” from nine large debt buyers that collectively purchased 76.1 percent of the debt sold in the United States in 2008, the FTC analyzed more than 5,000 portfolios of consumer debt containing nearly 90 million accounts with a face value of $143 billion. Credit card debt represented 62 percent of all portfolios and 71 percent of the total amount spent to acquire debts.
The study’s key findings include the following:
In addition to the information required for validation notices, buyers typically receive information such as the original creditor’s name, the debtor’s Social Security number, the date of last payment, the charge-off date, and a breakdown of the outstanding balance into principal, interest, and fees. The FTC believes this information, if disclosed to consumers, might help consumers assess if they owe a debt and whether the amount is correct.
Buyers rarely receive information from sellers about the specifics of the collection history of the individual debts in a portfolio, such as whether the debt has previously been disputed or verified. The FTC observed that “[k]nowing the dispute history of debts could be very relevant to debt buyers in assessing whether consumers in fact owe the debts and whether the amounts of the debts are correct.”
Buyers receive few underlying documents, such as account statements or the terms of credit, but, under the terms of purchase and sale agreements, can typically obtain a defined maximum number of documents at no charge for a specified period of time after purchase. The agreements also typically specify the price and number of documents the buyer has the option of purchasing after such period ends or the buyer has obtained the maximum number of free documents, whichever occurs first.
Purchase and sale agreements typically provide for the sale of debts “as is,” meaning that sellers generally disclaim all representations and warranties concerning the accuracy of the information they provide about individual debts. While commenting that this practice does not necessarily mean inaccuracies were prevalent, the FTC stated that “it does raise concerns about how debt buyers handled purchased debts when such inaccuracies became apparent, and for which they had no recourse available from the seller.”
Based on dispute data received from four of the nine surveyed debt buyers, the FTC determined that consumers disputed 3.2 percent of the accounts on which such buyers attempted to collect themselves (rather than using a third-party collector). Noting that this rate is likely to understate information problems with debts collected by debt buyers, the FTC commented that if such a rate is applied to the entire debt buying industry, it indicates “each year buyers sought to collect about one million debts that consumers asserted they did not owe.” The FTC believes “[t]he proper handling of this large amount of disputed debts is a significant consumer protection concern.”
The four debt buyers reporting dispute data verified 51.3 percent of the disputed debts, with older debts less likely to be verified. The FTC observed that the application of this rate to the “one million debts estimated to have been disputed in the debt buying industry each year … would indicate that each year about 500,000 disputed debts were not verified by buyers.” The FTC also observed that sales of unverified disputed debts “likely contribute to collectors seeking to recover from the wrong consumer or the wrong amount.”
Most purchased debts fell within the applicable statute of limitations. But the FTC observed that this finding might not apply to debts purchased by smaller debt buyers not included in the study.
On February 21, 2013, from 12 p.m. to 1:30 p.m. ET, Ballard Spahr will hold a webinar titled “Creditors, Collectors, and Debt Buyers Beware: What the FTC's Debt Buying Study Means for the Consumer Financial Services Industry.” More information on the webinar and a link to register can be found here.
Although the Consumer Financial Protection Bureau was not involved in the FTC study, the CFPB will undoubtedly use the study as it supervises and investigates debt buyers and considers proposing debt buyer regulations. On January 2, 2013, the CFPB’s final rule defining larger participants of a market for consumer debt collection became effective.
Ballard Spahr’s Consumer Financial Services Group has created a team of lawyers who are already assisting debt collectors and debt buyers prepare for their first CFPB examinations. In addition, lawyers in the Group regularly consult with their clients engaged in consumer debt collection on compliance with the Fair Debt Collection Practices Act and state debt collection laws.
For more information, please contact Practice Leader Alan S. Kaplinsky at 215.864.8544 or firstname.lastname@example.org, John L. Culhane, Jr., at 215.864.8535 or email@example.com, Debt Collection Task Force Chair Christopher J. Willis at 678.420.9436 or firstname.lastname@example.org, Glen P. Trudel at 302.252.4464 or email@example.com, Stefanie H. Jackman at 678.420.9490 or firstname.lastname@example.org, or Heather S. Klein at 215.864.8732 or email@example.com.