Consumer debt buyers rarely get thorough documentation of the defaulted loans they purchase, a Federal Trade Commission report found. The conclusion could lead to greater scrutiny of how banks recoup charged off debts by selling them to collectors.
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, 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 rather than the large debt buyers themselves. The report state that creditors impose limitations on the ability of debt buyers to obtain information and documents about accounts after sale.
Most contracts between creditors and debt buyers stated that the creditors did not warrant that the information they provided to buyers about debts was accurate.
Announced three years ago, the study examined practices of nine of the nation’s largest debt buyers, roughly 75% of the industry. The companies involved included: Arrow Financial Services LLC; Asta Funding Inc.; B-Line LLC; eCast Settlement Corp.; Encore Capital Group Inc.; NCO Portfolio Management Inc.; Portfolio Recovery Associates; Sherman Financial Group; and Unifund Corp.
The study analyzed more than 5,000 portfolios of consumer debt containing nearly 90 million consumer accounts with a face value of $143 billion.
The report, titled "The Structure and Practices of the Debt Buying Industry" said the review included the types of information debt buyers received from creditors both at and after the time of purchase, as well as the contracts governing the relationship between debt buyers and creditors.
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 study did not consider the practices debt buyers used when taking legal action against consumers, or the accuracy of the information debt buyers received and used to collect debts. Further research on these and other debt buyer topics would be beneficial to policymakers, the report concluded.
Of the disputed cases, debt buyers verified only about half of the debts, which means that buyers either could not verify or did not attempt to verify about 500,000 debts each year, according to the report.
DBA International, the non-profit trade association that represents the debt buying industry, issued a brief statement in response to the report:
"DBA appreciates the time and effort taken by the FTC to gain a better understanding of the debt buying industry. We agree with the FTC that consumers should have a clear understanding of the credit and collections industries and of their rights. DBA also appreciates the reference in the FTC report to DBA’s proposed Debt Buyer Certification Program that will require Certified Debt Buyers to comply with 19 uniform standards.
"Next week, DBA's membership will be voting to approve the creation of the industry's first certification program. If passed, the certification program will be an important step toward making sure that debt buying industry subscribes to a consistent set of rules and standards that represent the best practices of our industry."
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