The Federal Trade Commission's study of nine of the largest consumer debt buyers has industry participants concerned the investigation will be one-sided and lead to an unfair industry clampdown. Ultimately, some insiders believe the fallout will cause delinquent debt prices to drop.
DBA International, which represents the nation's debt purchasers, hopes the FTC opens a dialogue with industry players ahead of a February 25 deadline for the nine buyers to comply with the agency's order.
“DBA has always worked openly with the FTC and would hope to be ... part of the conversation," Barbara A. Sinsley, DBA’s general counsel and a partner at Barron, Newburger & Sinsley PLLC in Lutz, Fla., tells Collections & Credit Risk. "Debt buying is an integral part of the credit cycle and debt buyers provide an economic benefit to consumers to resolve their debts amicably."
Results of the study could lead to enforcement actions or policy recommendations for Congress. Dating back to 1977, the Fair Debt Collection Practices Act (FDCPA), the existing collection law, stipulates that Congress must set the rules, not the FTC.
Thomas Kane, senior attorney in the FTC's Division of Financial Practices, tells Collections & Credit Risk the government agency wants to better understand how specific business practices may contribute to a rise in consumer complaints against the industry. He says it is possible the FTC will open discussions with DBA and ACA International, a leading collection industry trade group, but that no decisions have been made.
The FTC's order seeks detailed data and documents about portfolios purchased from 2006 to 2008, including: face value of accounts; purchase prices; number of accounts in each sale; seller names; accounts re-sold without collection attempts; names of secondary buyers; details on accounts sold to secondary buyers; total portfolios purchased yearly and all identification numbers; and total annual sales and earnings from purchased debt collections and subsequent sales.
Al Brothers, chief executive officer at debt buyer Cavalry Portfolio Services LLC, based in Phoenix, believes most large buyers already have invested heavily in safeguards to ensure they have strong compliance procedures in place. He believes consumer complaints represent a small percentage of accounts managed by debt buyers, but that the FTC appears to be seeking proposals and ideas to further limit complaints.
This may include, "self-policing practices by the industry that may shift the cost of resolving complaints from the FTC back to the industry," says Brothers. "These types of considerations may have the effect of increasing collection expense and will, by necessity, put downward pressure on prices that debt buyers will be able to pay for charged-off portfolios."
The FTC released the names of the buyers named in the order to Collections & Credit Risk last Friday, (CollectionsCreditRisk.com, Jan. 8). The companies are: Arrow Financial Services LLC, based in Niles, Ill.; Asta Funding Inc. of Englewood Cliffs, N.J.; B-Line LLC of Seattle; eCast Settlement Corp. of Whippany, N.J.; Encore Capital Group Inc. of San Diego; NCO Portfolio Management Inc. of Horsham, Pa.; Portfolio Recovery Associates of Norfolk, Va.; Sherman Financial Group of New York; and Unifund Corp. of Cincinnati.
Kane, with the FTC, says the nine companies were selected because they buy 75% of the nation's delinquent consumer debt, not because the FTC suspects any problems or wrongdoing. "This is meant to provide us with a strong picture of how the [debt-buying] industry operates and how decisions are made," he says.
A spokesperson for ACA International put a positive spin on the examination. "[The FTC's study] will give the industry the opportunity to educate regulators," says David Cherner, legal counsel at ACA International, based in Minneapolis. Cherner said that one of the most important issues the FTC should consider is how the flow of information actually begins, with creditors held accountable for supplying correct information.
Aaron Hadam, executive vice president at National Loan Exchange Inc., which brokers sales of consumer accounts, says he expects in the next few months to see more government scrutiny and intrusion - mostly on the state level - into debt-buying practices, particularly if high unemployment lingers.
Collection agencies commonly buy bad debt from banks and other financial institutions at pennies on the dollar and then pursue repayment. The FTC's investigation stems from the fact that many are frequently trying to collect wrong amounts or are contacting the wrong consumers, Kane says.
Over the past decade, debt buyers have become a significant part of the debt collection system. When buyers are not paid, they often sell the accounts to other buyers. Many debts are purchased and resold several times over a period of years before all collection efforts finally cease.
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