Yesterday, we began discussing the Federal Trade Commission’s recent report, The Structure and Practices of the Debt Buying Industry.” Today, we’ll discuss the FTC’s analysis of the history of the debt buying industry, as well as how debt portfolios are packaged for sale.
The FTC study noted that today’s huge debt buying industry has its roots in the savings and loan scandals of the late 80s and early 90s, when the federal agency that liquidated failing S&Ls auctioned off outstanding loans owned by the S&Ls. Other creditors saw that sales of debt could be profitable, and thus started selling their own debt.
The FTC points to two other factors that brought boom times to debt buyers: the availability of credit leading up to the Great Recession, which caused consumers to rack up credit card and student loan debt; and a shift in the way large financial institutions (who issue credit cards) dealt with collections – namely by selling off large chunks of charged-off debt to debt buyers. Because of regulations that mandate that banks meet certain capital requirements, it makes financial sense for banks to sell their charged-off debt. The FTC reported that “bank sales of credit card debt directly to debt buyers account for 75% or more of all debt sold.”
When it comes to the business of debt buying, the FTC notes, “there now appear to be hundreds, if not thousands, of entities of varying sizes that purchase debts.” Moreover, the FTC implies that almost any company can become a debt buyer, and that it is a natural fit for third-party debt collection agencies that are already licensed in states that require licensure.
The FTC study is illuminating in its description of how debt portfolios are compiled and sold. It notes that, when an original creditor sells a debt portfolio, the accounts typically have elements in common. For example, they may be of a similar age or have been worked by the same number of debt collection agencies. Portfolios may be sliced and diced in a number of other ways: “For instance, some portfolios contain only debts from debtors with recent credit scores within a given range, or debtors whose last known address was within particular states,” the report states.
Debt portfolios are most often offered by age. The FTC report says that portfolios typically fall into one of four categories: “fresh debts,” zero to six months old, that are sold by original creditors who haven’t tried to collect post-charge-off; primary debts up to a year old where original creditors have had one third-party debt collection agency try and collect post-charge-off; secondary debts, which are up to 18 months old and which have been worked by two or more third-party debt collection agencies; and tertiary debts, which are up to 30 months old and which have been worked by two or more third-party debt collection agencies.
Some debt buyers purchase portfolios and then resell them. In some instances, they may sell it without attempting to collect on any of the accounts, while in other instances, the original purchasers further slice and dice the portfolios prior to resale. Other times, debt buyers will put the accounts through the process of debt collection prior to reselling those deemed uncollectible. Potential buyers bid on portfolios, and base their bids on a number of factors. These factors may include the time elapsed since charge-off, the time elapsed since the last payment was made, the states in which the account holders reside, and how many collection attempts have been previously made. As we mentioned yesterday, the FTC study found that for every dollar of debt, debt buyers paid an average of four cents. Not surprisingly, old debt (six to 15 years old) costs less (2.2 cents) than newer (less than three years old) debt (7.9 cents). Interestingly, debt buyers generally pay more for mortgage debt than for credit card debt, and less for medical and utilities debt than for credit card debt.
The FTC also examined the sales agreements between debt sellers and debt buyers. Interestingly, but not surprisingly, those who sell debts typically refuse to guarantee the accuracy of the information they’re selling. Unfortunately, determining how accurate or inaccurate debt portfolios were was outside of the scope of the FTC investigation. Given how often consumers complain about debt collectors who try and collect debt that doesn’t belong to the consumer, or debt that has previously been paid by the consumer, this is an area ripe for study.
One fascinating aspect of the FTC report is the ability (and restrictions) of debt buyers to obtain originating documentation and contracts for specific accounts. The FTC notes that a contract typically outlines a certain number of requests for documentation that the debt buyer can make; the debt buyer has to pay a fee for subsequent requests or for requests after a certain time period. This can mean that, when a consumer disputes a debt, the debt buyer may have to decide whether or not to use its allotment of requests to obtain the validation.
Tomorrow, we’ll take a look at the kinds of information debt buyers receive about consumers when they purchase debt portfolios.
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