This week, we’ve been discussing the Federal Trade Commission (FTC) report, “The Structure and Practices of the Debt Buying Industry.” (A copy of the report can be downloaded from http://www.ftc.gov/os/2013/01/debtbuyingreport.pdf.) The last aspect of our in-depth look at the study pertains to old debts.

The issue with old debts is the statute of limitations. Most states have a statute of limitations, after which debt collectors can’t take a consumer to court. However, different states have different statutes of limitations, typically ranging from three to six years. In addition, some debt collectors try and game the system. In some instances, they sue the consumer in court and obtain summary judgments when the consumer doesn’t defend himself or herself. Indeed, the FTC study found that at least 90% of consumers don’t appear in court to argue for dismissal based on the statute of limitations. There is typically no requirement that the debt collector prove that the debt is current. In other instances, debt collectors trick the consumer into either admitting that the debt is his or hers to pay, or into making a small payment toward the debt. Either of these can “reset the clock” and make the debt current again. This means that the debt collector can then continue with collection activities.

The FTC study acknowledges the deception involved when debt collectors sue or threaten to sue over time-barred debt (another term for debt that’s past the statute of limitations). The agency also says that, as debts age and are resold from one debt buyer to another, the data about the debts can become less accurate. This can result in a debt collector going after the wrong consumer or trying to collect the wrong amount.

Keeping in mind that the statute of limitations typically ranges from three to six years, the following FTC data about the age of debts when sold is illustrative:

“(1) 68.2% of the debt that debt buyers in the study purchased was less than three years old at the time it was acquired; (2) 19.3% of the debt was between three and six years old; (3) 11.3% of the debt was between six and fifteen years old; and (4) 0.8% of debt was over fifteen years old at the time of acquisition.”

While it appears that two-thirds of the debt purchased is generally within the statute of limitations (less than three years old), the FTC notes that the statistics don’t tell the whole story. The rest of the story is that the study only examined the largest debt buyers, who often buy from original creditors; that debt buyers resell debt, which increases the age of the debt; and age is defined as the moment the debt is purchased, not the time when it is collected.

According to the FTC, the age of debts skews upwards when one debt buyer sells debt to another debt buyer: “(1) 37.9% of the debt purchased from resellers was less than three years old; (2) 32.1% was between three and six years old; (3) 27.5% was between six and fifteen years old; and (4) 2.6% was over fifteen years old.”

Keep in mind that it is a violation of the Fair Debt Collection Practices Act for debt collectors to threaten to sue in order to collect time-barred debt. The FTC study notes that, although the debt collection industry says that it’s hard to know whether or not a debt is time-barred, the data say otherwise. The report says:

“(D)ebt buyers usually are likely to know or be able to determine whether the debts on which they are collecting are beyond the statute of limitations…. (T)he information debt buyers receive as part of the process of bidding on debts and the information they receive when purchasing debts usually indicates the date of last payment or the charge-off dates for debts. In most circumstances, this information should allow debt buyers to readily determine if debt is time-barred. Moreover, to the extent that there are questions about the date of last payment or charge-off information, it is unclear why debt buyers cannot seek this information from the original creditor or from a reseller of debt.”

While the FTC could have gone further in studying some aspects of the debt buying industry, the agency did an outstanding job in pulling back the curtain on what is generally a mysterious process.

Over the past two days, we’ve discussed various aspects of the Federal Trade Commission’s report on the debt buying industry. Today, we’ll explore the kinds of information debt buyers receive about consumers when they purchase debt portfolios, as well as how disputes are handled.

Knowing the kind of information debt buyers receive is important. All too often, when debt buyers call, they either call regarding debt that’s past the statute of limitations, they call the wrong person, or they don’t have the correct balance due. When a consumer disputes a debt, they often don’t seem to have the information to back up their claim that a debt is owed. So what’s up with that?

When the FTC examined five million accounts purchased by debt buyers, they found:

“(1) over 98% of debt accounts included the name, street address, and social security number of the debtor; (2) 70% set forth the debtor’s home telephone number, and 47% and 15% listed work and mobile telephone numbers, respectively; (3) 65% included the debtor’s birth date; and (4) less than 1% revealed the debtor’s credit score…. In addition, the debt buyers acquired the following information about the original creditor’s account: (1) 100% of accounts included the original creditor’s account number; (2) 10% stated the credit limit on the account; (3) 62% specified the type of debt; (4) 46% specified the name of the original creditor;148 and (5) 30% indicated the interest rate charged on the account. The debt buyers further obtained the following information about the amounts debtors owed: (1) 100% of accounts included the outstanding balance; (2) 72% listed the amount the debtor owed at chargeoff; (3) 11% stated the principal amount; and (4) 37% listed finance charges and fees.”

All by way of saying that debt buyers receive an incredible amount of information about each account – more than the Fair Debt Collection Practices Act (FDCPA) requires for a validation notice. The FTC rightly noted that if validation notices contained more of the specific information that debt buyers already have on file, it would be much easier for consumers to figure out whether or not the debt was theirs to pay, as well as whether or not the amount was correct.

The FTC points out that the glaring omissions in the data that debt buyers receive are a given debt’s history of collections and disputes. In other words, any information gathered in a previous attempt to collect a debt – from new contact information for the consumer to attempts to verify disputed debts. One could surmise that having this information would cut down on a variety of FDCPA violations, such revealing debt to third parties.

When it comes to disputes, the FTC extrapolated data to determine that each year consumers likely dispute at least 1 million debts owned by debt buyers. The agency is quick to point out that this number is likely a lowball estimate, since not every person receives a validation notice and not every person who thinks the debt is wrong actually disputes the debt in writing.

It’s also telling that debt buyers only verify about half of the debts that are disputed. The FTC notes, “(D)ebt buyers were significantly less likely to report
verification of disputed medical, telecommunications, and utility debt, as compared to verification of credit card debt. Debt buyers also were significantly less likely to verify debt that was more than six years old, as compared to debt less than three years old.”

What’s the takeaway? First, debt buyers likely have more information about a given debt than they provide in a validation notices. Second, only about half of all disputed debts are verified. In other words, if you’re unsure whether or not you owe a debt, it’s worth your while to file a dispute. If the debt buyer can’t or won’t verify the debt, he can no longer attempt to collect it. Remember, though, to put your dispute in writing and send it within 30 days of receiving the debt validation notice. Also, send it certified mail, return receipt requested, and keep a copy for your records.

Tomorrow, we’ll take a look at the FTC study’s findings on time-barred debt.

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.

The Federal Trade Commission recently published a seminal report, “The Structure and Practices of the Debt Buying Industry.” A copy of the report can be downloaded from http://www.ftc.gov/os/2013/01/debtbuyingreport.pdf. While the FTC didn’t go quite far enough (see our press release here), it does contain some riveting information and analysis. Over the next few days, we’ll cover the highlights of the report.

But first things first. In many ways, debt buyers are a different breed of debt collector. While the FTC report covers the largest debt buyers, the smaller debt buyers are the proverbial vultures who peck at the carrion that is old debt. This is often debt that’s been deemed uncollectible any number of times, and so is sold for pennies on the dollar. Once the debt buyer purchases it, those debt collectors have to get creative to make a profit. Truth be told, even the debt collection industry seemingly holds debt buyers at arm’s length. About a year ago, there was a move within industry trade organization ACA International to split debt buyers from the mainstream debt collection community. It wasn’t successful, but debt buyers do have their own trade group, DBA International.

How is the Fair Debt Collection Practices Act applicable to debt buyers? The FDCPA doesn’t cover original creditors (those who initially owned the debt), but does cover third-party debt collectors and debt buyers. Debt buyers have been unsuccessful in arguing that, because they actually own the debt being collected, they are exempt from the FDCPA.

Now, on to the FTC report. The study, which began in 2009, examined nine debt buyers that purchased three-quarters of the debt sold in 2008. The debt buyers were Sherman Financial Group, Encore Capital Group, eCAST Settlement Corp, NCO Portfolio Management, Arrow Financial Services, Portfolio Recovery Associates, Unifund Group, B-Line, and Asta Funding. Of these nine, Arrow Financial Services wasn’t included in the FTC analysis because they stopped buying debt during the study period and weren’t able to provide the data the FTC required. B-Line and eCAST Settlement were also excluded, since they purchase bankruptcy debt (rather than straight consumer debt). The remaining six debt buyers provided the FTC with 5,000+ debt portfolios, from a three-year buying period, that encompassed 90 million accounts with a face value of $143 billion. How much did they pay for this enormous face value? An average of four cents per dollar.

Tomorrow, we’ll delve into the FTC’s analysis of the history of the debt buying industry and how debt portfolios are sliced, diced, and readied for the marketplace.