Could technology bring order to the Wild West of collections?
Reforming an industry notorious for its harassing phone calls and ruthless repo men as vividly described in Jake Halpern's new book, "Bad Paper" would be daunting for anyone.
"After creditors sell unpaid debts, those debts enter a financial netherworld where strange things can happen," Halpern writes in explaining the complex industry and the central role of data. "A gamut of players including publicly traded companies, hedge fund operators, professional debt collectors, street hustlers, ex-cons and lawyers all work together, and against one another, to recoup every penny on the dollar. In this often lawless marketplace, large portfolios of debt usually in the form of spreadsheets holding debtor names, contact information and balances are bought, sold and sometimes simply stolen."
Yet a relatively young tech company called Global Debt Registry thinks it can reform the consumer collection industry by replacing those questionable spreadsheets with a centralized, online clearinghouse of all delinquent consumer debt. It aims to start with charged-off credit card balances and auto loans and eventually encompass all kinds of medical and other debt.
Again, it's a formidable task. Similar ideas have been kicked around before, but experts interviewed for this story could not name any success stories. Global Debt Registry, under previous ownership, tried to create a database that tracked mortgage ownership but was stymied by the plethora of local land records tied to home loans.
The company says its latest venture, focused on the nonmortgage side of lending, can work. It has already begun building its online database, and it's hoping banks, collections agencies and consumers will contribute to it and use it. The public portion of the site, Debt Lookup, went live last week.
So far, four banks have signed up for the registry, and they use it to track loans they originated (whether they still own them or not) and to obtain "extinguishment reports" that prove a debt has been paid. Global Debt Registry declined to name the four banks or say how much it charges them in monthly fees.
The registry could help banks deal with the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and other regulators, which have stiffened their debt-collection rules and put banks on notice that they still have some reputational risk tied to, and responsibility for, debts they no longer own. That responsibility includes being a place borrowers past or present can go to if they have a problem with an existing or closed loan.
A loan for which a bank has outsourced collection or sold the loan outright could still come back to haunt it. The borrower might not realize, for instance, that the loan was sold and hold the bank accountable for any harassment or unfairness they experience. The borrower also might name the bank in a complaint to the CFPB, or vent to family members and friends who are bank customers.
"The CFPB still looks to the bank as a resource even if they've sold the debt," pointed out Todd Veale, the chief product officer at Global Debt Registry. "The bank says, 'Not only did I sell it years ago, I don't have any information available on that.' This enables them to have a permanent record of it. ... I think we're going to see increasingly this year more requirements of a bank to help consumers because they have really nowhere else to go if this loan goes downstream."
For consumers, the benefits of the registry are obvious. If a suspicious-sounding collector calls to, say, ask for $2,000 on a $5,000 balance they thought had been settled in full, they can check the registry to see if the organization is legitimate, if it actually owns the debt and how much of the debt still exists.
This could be especially helpful when the account was settled for less than the full amount owed.
"This is evidence for a consumer who is being hounded by someone about a debt they already paid," Veale said. "The extinguishment report shows it's been extinguished and who extinguished it. This kind of evidence doesn't exist today."
The debt buyer can also benefit from the registry. It can help the collectors reach and engage with the borrowers. And the extinguishment report can help reduce future consumer disputes.
"It's a way for the debt owner to ... make sure it's not fraudulently sold to someone else." About 50 collections agencies are using the service so far, Veale said.
According to Mark Parsells, executive chairman and CEO of Global Debt Registry, more than $1 trillion has been charged off and been in some form of collections over the past 10 years, and currently about 77 million people are being contacted by third-party debt collectors.
"The forecasts I have seen indicate it will be higher over the next 10 years, particularly with the growing balance after insurance in medical debt," he said.
Debating the Merits
The registry is an interesting idea that is fraught with challenges, according to Christine Pratt, senior analyst at Aite Group.
First of all, she said, banks lately have not been selling their charged-off consumer debt. Instead they've been sending it out to collections agencies or trying to recover on it themselves.
Banks are also likely to be concerned about Global Debt Registry due to privacy and bankruptcy laws and "the danger in not knowing who has control of the customers' nonpublic information," Pratt said. Global Debt Registry said it protects consumers' private data by not storing or displaying account numbers or Social Security numbers.
Parsells, who was formerly chief privacy officer of Bank One and chief compliance officer of American Express' merchant division, agreed that banks are concerned about privacy issues.
"There is a need to improve practices around secure data sharing and preserving data integrity in the debt industry," he said. "A debt registry that is monitored by banks and regulators is a much more efficient way to improve data security and to bring a rational solution to an endemic problem."
Another point Pratt raised is that credit card issuers have held onto the idea that after they sell a debt they are no longer responsible for it, and supporting something like this could weaken that stance.
How It Works
The original creditor that signs up for Global Debt Registry provides the company with a file of accounts it's about to sell to a collection agency. Global Debt Registry will extract the data it needs and document the transfer of ownership.
For its efforts, the creditor gets access to an ongoing tracking system and a "media management system" for the documentation of debt, so it can look up records on nonperforming debt.
The new debt owner also gets access to the account information. "Any time the account is touched, there's a recording of that," Veale said.
Consumers log in to the Debt Lookup portion of the site and search for debt associated with them. If they can't find a debt, they're prompted to ask the collector for validation.
"The validation letter is probably going to stop most of the fraudulent debt collection," Veale said. The site also provides links to the CFPB, the U.S. attorney general and other entities.
Consumers can also look up collectors' contact information, CFPB complaints and any pending litigation on the site. If they are satisfied that the information about the debt is accurate, they can send an inquiry to the collector about settlement.
"Most debt collectors would say that a consumer who has completed the validation process is a much better prospect for collecting because they're engaged," Veale said. "Finding and engaging the right party is the biggest challenge for a debt collector."