A Federal Trade Commission study of nine of the largest buyers of delinquent consumer debt has participants in this industry worried that a clampdown is coming.

The FTC said last week that it had "ordered" the companies to "turn over" information about their purchasing and collection practices so the agency can determine whether they are working with accurate information about borrowers.

Collection companies regularly buy bad debt from banks and other financial institutions at pennies on the dollar and then pursue repayment. According to the FTC, many debt-buying firms frequently try to collect the wrong amounts or contact the wrong consumers. The FTC wants to determine if the companies buying the debt are contributing to the problem.

Over the past decade, debt buyers have become a significant part of the debt collection system. But the industry has faced increased scrutiny from state regulators.

"The current economic and political environment gives reason for pause," said Aaron Hadam, executive vice president at National Loan Exchange Inc., which brokers sales of consumer accounts.

"We will have the greatest exposure to government scrutiny and intrusion over the next few months," primarily on the state level, he said. "It will be interesting to see the political posturing in these months leading up to the elections. Unfortunately, if the economic recovery continues to be jobless, I would not be surprised to see more of a spotlight on debt-buying practices."

The FTC order seeks details about the companies' use of technology, reasons behind decisions to buy and contract language.

Thomas Kane, a senior attorney in the FTC's division of financial practices, said the agency wants to learn: What information about accounts are buyers receiving when they purchase a portfolio?

What information do they have before deciding to purchase a portfolio? And what information do they receive from sellers and seek from consumers after the purchase?

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.

The FTC also wants to understand how resales are handled and whether data on accounts is being transferred.

In February of last year, the FTC issued a report based on an agency debt collection workshop in which it found major problems in the flow of information among creditors, debt buyers and collectors.

Kane said the nine companies were selected for the study because collectively they buy 75% of the delinquent consumer debt on the market, not necessarily because the FTC suspects any problems or wrongdoing.

"This is meant to provide us with a strong picture of how the industry operates and how decisions are made," he said.

The nine companies are: Arrow Financial Services LLC 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.

DBA International, the trade group for debt purchasers, hopes the FTC opens a dialogue with the industry about debt-buying practices beyond the information sought in the order, said Barbara A. Sinsley, the group's general counsel.

"DBA has always worked openly with the FTC and would hope to be … part of the conversation. Debt buying is an integral part of the credit cycle and debt buyers provide an economic benefit to consumers to resolve their debts amicably," said Sinsley, who is also a partner at Barron, Newburger & Sinsley PLLC in Lutz, Fla.

Kane said he is not sure whether the FTC will open discussions with DBA International or ACA International, a collection agency trade group.

"It's certainly possible. It might be good for the commission and debt buyers if there is somebody who ultimately acts as a go-between coordinating efforts," he said. "We're still in the early stages of this, so nothing has been decided yet."

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