Debt Buying: Overview

Introduction

Creditors such as banks, hospitals, and credit card companies routinely write off unpaid consumer debt that they have been unable to collect. There are tax advantages for the companies that declare these losses, and "charge-off" debt can be removed from their books. These companies are then able to sell portfolios of unpaid debts to independent debt-buying companies for pennies on the dollar. Debt buyers purchase more delinquent credit card debt than any other type of debt, but debt portfolios also include medical debt, student loans, car loans, utility and phone bills, and mortgage deficiencies. Often these debts are repackaged and sold, sometimes multiple times, and attempts to collect or resolve the debt may not be recorded as the debt moves from one buyer to another. The final purchaser of the debt attempts to collect the debt, often with incomplete records of previous communication with the consumer about the debt, and frequently uses the court system to do so. Billions of dollars in debt make their way through the debt-buying industry each year. In 2014, one in seven Americans was pursued by debt collectors and owed an average debt of fifteen hundred dollars.

Debt buyers are subject to various regulations such as the Fair Debt Collection Practices Act (FDCPA), a federal law enacted in 1977 and updated numerous times since then. Some states require that debt buyers be licensed. The Consumer Financial Protection Bureau (CFPB), established in 2011, safeguards consumers' rights and enforces rules about the way that debt can be collected. Supporters of the debt-buying industry argue that it is an important part of the United States economy, allowing banks and other creditors such as hospitals to recoup some value from bad debt and ensuring that consumers are held accountable for debt they have incurred. They argue that additional regulations and oversight are not necessary because of the consumer protections already in place.

Others argue that debt buyers, who are often unlicensed, engage in questionable collection tactics with incomplete or inaccurate information about the debt in their portfolio. Consumers may be harassed or taken to court for debt that is not even owed or that the consumer believed had been resolved. In extreme cases, consumers may learn of a court judgment against them when they find their accounts frozen and their wages garnished. Consumer advocates argue that additional oversight, licensure, and enforcement of the industry are needed, and consumer information must be carefully verified and protected.

Understanding the Discussion

• Charge-off: The decision by a creditor that a debt is unlikely to be paid or collected, so it is declared a loss for tax purposes, generally after six months of nonpayment. Charge-offs are often sold to debt buyers.
• Consumer Financial Protection Bureau (CFPB): A United States government agency established in 2011 to administer consumer finance protection regulation and to oversee banks, lenders, and debt collectors as they work directly with consumers. The CFPB was established as a response to the financial crisis of 2007–8, when predatory lending practices and poorly regulated debt sales were identified as primary contributors to the recession.
• Fair Debt Collection Practices Act of 1977: An amendment to the Consumer Credit Protection Act designed to protect consumers from abusive practices in debt collection and to allow consumers to access information about their debt and an avenue to dispute its accuracy. It established guidelines for debt collectors and penalties for violations. Initially administered by the Federal Trade Commission, the act is now primarily enforced and overseen by the Consumer Financial Protection Bureau.
• FICO score: The main type of credit score in the United States, used as a risk assessment that gives lenders an indication of how likely a consumer will be to pay a debt, such as a credit card balance, mortgage, car loan, or other consumer loan. FICO, originally an abbreviation for Fair, Isaac and Company, is the company that generates the score based on consumers' credit reports.
• Resolution Trust Corporation: A federal agency that operated from 1989 to 1995 in the wake of the savings and loan crisis of the 1980s, and oversaw the liquidation of assets from insolvent savings and loan institutions.

History

The debt-buying industry in the United States traces its roots to the savings and loan crisis of the 1980s, when the financial sector was hit hard by failing savings and loan associations. Savings and loan associations, or thrifts, were first set up in the 1830s, and by the twentieth century primarily existed to offer savings accounts and fund home loans in an era when commercial banks did not typically provide mortgages. By the late 1970s, rapidly rising inflation and interest rates worked against these organizations, which held fixed-rate mortgages that paid lower rates of interest than what the thrifts eventually had to pay on deposits and other borrowing. Steps were taken to allow the savings and loans institutions greater leeway to work their way out of this deficit, such as the Depository Institutions Deregulation and Monetary Control Act, passed in 1980. This allowed for rapid growth of the savings and loan industry, as they tried to make up their deficits by investing in high-risk projects and offering high interest rates to investors. This deregulation did not solve the problem and also led to high levels of fraud and abuse, so that by the end of the 1980s, savings and loans were failing en masse—ultimately around one in three such institutions failed. Congress intervened with the passage of the Financial Institutions Reform, Recovery and Enforcement Act, which created the Office of Thrift Supervision and the Resolution Trust Corporation (RTC). The RTC was charged with disposing of the assets of failed savings and loans, worth over $400 billion, according to the Federal Reserve, and it needed to sell these assets quickly. By the time the RTC was closed on December 31, 1995, it had helped to create a market for the sale of consumer debt, as it had sold debts owed to savings and loans in bulk to companies that collected on this debt at a significant profit.

Debt-buying companies proliferated in the 1990s, as consumer credit became increasingly easy to obtain. Credit cards proliferated in all their forms, from department store cards to gas cards, and as a result, banks and other lenders dealt with more delinquent debt. Banks wrote off their uncollected debt and sold it to debt buyers, and the industry became accustomed to "the routine incorporation of sales of charged-off debts into creditor accounting strategies," according to a 2014 study by the Center for Responsible Lending. Even selling debt at deeply discounted rates allowed the lender to recover some capital and to pass on the costs, like book-keeping and auditing, of these debts to the buyer.

In 2007, United States consumers faced a financial crisis once again as the real estate bubble of the 2000s burst, home values plunged, jobs were eliminated, and savings disappeared. The easy access to credit that had marked the 1990s, combined with a sharp rise in the cost of basic needs such as transportation and housing, meant that many American consumers were deeply in debt. Predatory lenders who had proliferated in the first years of the 2000s had taken advantage of low- and moderate-income families who then owed more than they could possibly pay and went into default. According to the Consumer Financial Protection Bureau (CFPB), "Many lenders took advantage of gaps in the consumer protection system by selling mortgages and other products that were overly complicated." Even consumers who had been very careful with their use of credit saw their retirement accounts shrink, their home values plummet, and their sense of security shaken.

In the wake of this crisis, the administration of President Barack Obama proposed a new agency that would advocate for vulnerable consumers in the financial services market. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, creating the CFPB, which "consolidates most federal consumer financial protection authority in one place."

Debt Buying Today

The Federal Trade Commission (FTC) concluded in a 2009 report that the "most significant change in the debt collection business in recent years has been the advent and growth of debt buying." Debt buyers, who had enjoyed a decade of nearly unfettered growth, came under the scrutiny of the CFPB, and in 2015 and 2016, several high-profile debt-buying companies—including the two largest, Encore Capital Group and Portfolio Recovery Associates—were fined and forced to change what were identified as deceptive collection tactics. Supporters of the debt-buying industry argue that the CFPB offers a high level of protection for the consumer and that the industry has seen a correction as a result of new regulation, including a provision that lowers the threshold for consumers to prove that they were harmed by illegal collection practices and collect damages. Trade groups for debt buyers and other collectors, such as the Receivables Management Association (formerly the Debt Buyers Association) and the Association of Credit and Collection Professionals, argue that their industry is highly regulated, subject to an array of state and federal consumer protection laws, and also self-regulated, offering a code of ethics, compliance audits, and certification programs.

Though the debt-buying industry has seen some checks to its behavior, it is an enormous and complex industry. Many states do not require a license to purchase debt or collect on it, and with the Federal Reserve estimating in 2016 that Americans owed $436 billion of debt that was more than ninety days overdue, opponents argue that unscrupulous debt buyers and collectors have proliferated and need to be reined in. The FTC reported that in 2014 alone, consumers filed 280,000 complaints with federal authorities related to debt collection, leading to calls for more stringent regulation of the industry.

These essays and any opinions, information, or representations contained therein are the creation of the particular author and do not necessarily reflect the opinion of EBSCO Information Services.

About the Author

Bethany Groff Dorau is a freelance writer, museum manager, and local historian, based in West Newbury, Massachusetts. She holds a bachelor of arts degree in history and sociology and a master of arts degree in history, both from the University of Massachusetts at Amherst.

Bibliography

"Creating the Bureau." Consumer Financial Protection Bureau, www.consumerfinance.gov/about-us/the-bureau/creatingthebureau/. Accessed 4 Mar. 2018.

Davison, Lee. "Politics and Policy: The Creation of the Resolution Trust Corporation." FDIC Banking Review, vol. 17, no. 2, 2005, pp. 17–44, www.fdic.gov/bank/analytical/banking/2005jul/article2.pdf. Accessed 1 Mar. 2018.

"The State of Lending in America and Its Impact on U.S. Households." Center for Responsible Lending, 16 June 2015, www.responsiblelending.org/the-state-of-lending. Accessed 1 Mar. 2018.

The Structure and Practices of the Debt Buying Industry. Federal Trade Commission, Jan. 2013, www.ftc.gov/sites/default/files/documents/reports/structure-and-practices-debt-buying-industry/debtbuyingreport.pdf. Accessed 1 Mar. 2018.

Williams, Fred O. "FICO's New Credit Score Formula Helps Many, Hurts Some." Fox Business, 8 Jan. 2016, www.foxbusiness.com/features/ficos-new-credit-score-formula-helps-many-hurts-some. Accessed 4 Mar. 2018.