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State and federal authorities are taking a hard look at how banks collect consumer debts. A multi-billion dollar market may be remade through tighter rules or enforcement actions.
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Consumer debt buyers rarely get thorough documentation of the defaulted loans they purchase,
The FTC report — billed as the first comprehensive picture of the market for defaulted consumer debts — looked at all debts, from medical to utility bills. But defaulted credit card debts dominate the debt buying market, the FTC found, with more than $55 billion in such accounts selling every year. These debts — which sell for an average of 4 cents on the dollar — make up more than 70% of the total debt sales market.
Notably, the FTC aimed some of its harshest criticism at banks and other original creditors — not the large debt buyers themselves.
Banks and other creditors generally dictate the debts and records that are sold and the terms of the sale, the FTC report found. But they rarely provide thorough documentation, sometimes sell debt too old to be collected through the legal system, and regularly disavow the underlying accuracy of their own files, the FTC found.
These practices are especially problematic because according to FTC estimates consumers dispute around 3.5% of all debts, around a million a year. The commission's study did not delve into determining how often banks and other creditors sold incorrect debts, but called the sheer number of contested collection attempts a "significant consumer protection concern."
"We know enough from our law enforcement experience that of the million debts disputed, a large number are debts on which there are problems," says Thomas Pahl, assistant director of the FTC's Bureau of Consumer Protection.
That conclusion was met by immediate protest from industry attorneys such as Chris Willis, an attorney for Ballard Spahr who has advised banks and debt buyers on sale practices.
"My clients report routinely that they get a lot of those dispute letters downloaded off the Internet and mailed in," says Willis, arguing that many borrowers are simply trying to delay or stop collections by contesting the validity of debts.
The FTC's report should worry banks all the same, Willis says. "The biggest concern they identify, the amount of information sold to the buyer, is solely controlled by the banks."
With the exception of American Express, all of the major banks sell at least a portion of their defaulted credit card debts.
The FTC's report acknowledges significant limitations. It did not survey small debt buyers, which turn out to buy more controversial accounts, such as those that are old enough to be time-barred or those of consumers in bankruptcy. Moreover, it did not obtain information about debts that the debt buyers outsourced to other collection companies.
But the scope of the review, which included 5,000 portfolios of defaulted debt with a face value of $143 billion, vastly exceeds any research to date. In
Only 13% of the sold accounts reviewed by the FTC were accompanied by any account documents. Thirty-seven percent of the accounts sold failed to identify how much of the alleged debt was principal rather than interest or fees, essential information for collection purposes.
"Most purchase and sale agreements provided very limited, if any, right for debt buyers to put back debts to debt sellers on the grounds that information from debt sellers was missing or inaccurate," the report states. "No contracts required credit issuers (or subsequent resellers) to notify consumers that their debts had been sold to a debt buyer."
Beyond the FTC's general displeasure with the terms of debt sales and the paucity of documentation given to the buyer, the commission stressed concern about how banks have treated so called time-barred debts, which are too old to legally enforce.
Such debts are not inherently illegal to pursue — though consumer advocates and the FTC have long been skeptical that consumers would pay them if collectors disclosed they were legally invalid.
Most contracts "were either silent about out of statute debts or expressly stated that sellers' inclusion of out of statute debts was not a breach of the contract."
Time barred debt could be a regulatory flashpoint, Pahl and Willis say.
"The commission has never gone so far as to say that you shouldn't sell time barred debt," Pahl says. "But if you are going to sell it and collect on it, there are a lot of consumer risks that are created."
In the near-term, the report may shift the scrutiny on debt buying issues onto banks from the major debt collection firms to the creditors that supply them with claims. Although the report didn’t delve into the controversial topic of how major debt buyers use collections litigation, it did find that the big firms met the minimum standards of the fair debt collections act and refrained from selling disputed debts.
"The conventional wisdom as to how bad they are was probably too strong for this class of debt buyers," Pahl says, referring to the largest purchasers.
In a statement, the Debt Buyers Association, a trade association for companies that purchase defaulted debt, said it was working with its members on standards requiring certain documentation at the time of purchase.
The FTC analysis comes at a time when numerous state and federal agencies are looking at debt collection and documentation issues.
The report called on states to strengthen their laws governing debt collection, and commission staff has kept the Consumer Financial Protection Bureau's staff abreast of its research, Pahl says.
"The CFPB is very interested and debt collection and debt buying issues, and it is really well designed to tackle this kind of problem," he says. "A couple folks over there are former members of the industry, and really the idea is that we intend to keep pursuing this."
