Debt sales are broken. Brokers, buyers and sellers offer books of debt that may be double- or triple-sold, lack documentation, or even be illegally originated.
Some tertiary and junk debt buyers, also known as shifty "paper boys," are guilty of these violations. But leading financial institutions are also implicated in the Consumer Financial Protection Bureau's recent reports on debt sales and collection.
In a May 2014 report, the CFPB wrote that examiners "identified one instance in which a creditor had sold an account to a debt buyer after that creditor had issued the consumer an IRS Form 1099-C (Cancellation of Debt' form), indicating that the debt had been cancelled and the consumer was no longer liable for it."
An October 2014 report found that "when at least one financial institution received payments from consumers on accounts post-sale, forwarding the payments to the appropriate debt buyer was significantly delayed, with delays ranging from two months to over two years."
These are just a few of the findings that will inform the CFPB's debt collection rule, expected later this year. As chief executive of a tech startup in the debt collection space, I might be expected to come out against any type of increased regulation in my market. More regulation raises costs and barriers to entry in the industry and creates many challenges as we continue to build our businesses. Yet I'm not against the move towards greater regulation. The CFPB is purging the dark corners of debt collecting and buying, and it's a revolution that's been a long time coming.
At the moment, regulatory uncertainty has caused many financial institutions to limit debt sales, leaving many debt buyers to struggle and some to close their doors. With less debt sales and far fewer secondary sales, originators and major debt buyers find themselves with more inventory, requiring increasing investments in data and processing infrastructure to meet regulatory requirements while maintaining steady returns. With defaults at historically low levels, the situation is not yet catastrophic, although that could change.
Yet all this is worth it in order for the CFPB to put originators and debt buyers under increased scrutiny.
The fact is the industry needs stronger regulation. It is still very easy for debt collectors to start out at the state level, buy debt portfolios and start exploiting consumers. The CFPB only regulates large debt collection agencies, and state attorneys general lack the resources to regulate the small ones.
Creating a choke point upstream with the originators is the right course of action. Reducing the number of portfolios that are sold "as is" and placing more liability on banks to provide data and audit their service providers will have a positive effect on the market as a whole. For decades, originators have turned a blind eye to what happens to consumers after they sell their debt. This has aided debt collectors' unscrupulous tactics, and these practices can no longer be tolerated.
Moreover, the CFPB's new rules will require originators and debt buyers to invest in infrastructure and automation to fulfill expected data consistency and disclosure requirements. That's a good thing, since the industry has suffered from underinvestment for years.
Finally, these changes will have a measurable, positive impact on consumers. Insourcing will tie debt collection closer with the overall user experience. The required infrastructure improvements will add transparency. And much-needed investments in automation and digitization will turn an adversarial process into a more tolerable one maybe even one that's focused on retaining and rehabilitating customers.
Changes in regulation are always scary, and it's easy for incumbents to succumb to kneejerk reactions. However, upon closer examination of the effects of the CFPB's forthcoming rule, it's clear they are a step in the right direction. The sooner the debt collection industry recognizes that, the better prepared we will be. In the long term, everyone will benefit.
Ohad Samet is a co-founder and chief executive of the debt-recovery company TrueAccord. Follow him on Twitter @ohadsamet.