Billions of dollars of debts go unpaid every year. This fact is not surprising. But what may surprise you is that the majority of bills that go several months late will never get paid, and there is a huge market for these unpaid bills. Investors are willing to buy bad uncollected debts (already proven to be owed by someone who could not pay), expecting further collection efforts to turn a profit for them. And profit they do! But the world of debt collection and debt buying is changing, and in ways that will matter to those of us trying to bounce back from a financial setback.
The Consumer Financial Protection Bureau now shares supervisory and enforcement duties over the debt collection and debt buying industries with the Federal Trade Commission. The CFPB and FTC are working closely to curb unfair and deceptive collection practices by dealing with the debt collectors directly. Having interacted with both of these agencies regarding consumer debt issues in the past, I am optimistic that collection abuses will be reduced significantly in the coming months and years.
Additional regulatory developments this year could bring even more changes. The Office of the Comptroller of Currency serves as a primary regulator over national banks. In a recent prepared statement to a Senate Banking Committee, Shining a Light on the Consumer Debt Industry, the OCC telegraphs to the largest credit card issuers about new guidance it wants to see implemented regarding the outsourcing of collections, and the selling of unpaid debts.
The OCC is effectively working at limiting potential credit card and unsecured loan collection abuse by addressing the root of the problem — banks’ selling of unpaid collection accounts to debt collectors and debt purchasers.
First, I want to point out how large the debt buying market is. From the OCC statement:
“The majority of bank debt sales activity is concentrated among the 19 largest banking organizations, with the five largest making up about 82 percent of the annual total average sales of debt. On average, the 19 largest banking organizations have sold about $37 billion in charged-off debt sales in each of the past few years.” The report goes on to identify that “The vast majority of debt charged off by these large financial institutions and sold to third-party debt collectors involves delinquent debt related to credit cards, but also includes other types of consumer credit such as auto, home equity, mortgage, and student loans.”
I could spill much virtual ink highlighting all of the exciting ways the proposed guidance would lead to a fairer debt collections market. For now, focusing on credit card debts, I’ll look at two OCC policies and guidance changes contained in the report that could potentially help millions of people who struggle with debt each year.
No Reselling of Debts
From the OCC report:
“Limit the resale of debt—contractually limiting the ability of the third party to resell the debt to another entity allows the bank to control who ultimately will pursue collection from ‘their’ customers and helps prevent legal validity and ownership questions later.”
Here, we get a good sense that the agency is aware of the nightmare people can go through when debts get packaged up; sold to the first debt buyer; who may repackage debts for resell to someone else; who collects what they can, then sells off some of the accounts they bought; to a new buyer who sells what they couldn’t collect…. I will stop there, but reselling of debt can and does continue to the point that you cannot even locate the legitimate debt owner.
The nightmare that debt-reselling creates for a consumer can include:
- Multiple collections showing on their credit report from a single debt.
- Multiple collection agencies demanding payment for the same debt.
- Debt collectors left unable to provide validation of the debt they are collecting.
- Debt collection attorneys being unable to substantiate their claims in court after initiating a lawsuit.
- The inability to find who to pay when your finances improve.
The OCC’s suggestion that banks limit their debt sales to buyers sophisticated and large enough to make purchases without the ability to resell has huge (and welcome) implications. This, along with several other audit and compliance suggestions for banks in the OCC report would lead to consolidation in the debt buying markets. This, in turn, will lead to an industry that may finally have the capacity to self regulate, while also providing a smaller amount of market participants for the FTC and CFPB to enforce regulatory compliance on. It gets better.
Reducing Debt Collection Lawsuits
From the OCC report:
“Limit the litigation strategy—banks should evaluate the litigation strategies of debt buyers, consider selecting debt buyers who limit their use of litigation, or use contractual provisions or other means to limit the use of litigation by buyers of their debt.”
Consumers on the financial edge often get pushed over the cliff by collection lawsuits. There are some fairly well-established patterns of abuse that have occurred with the collection of debts in the courts, and through other legal processes like arbitration forums, in recent years. Placing a limit on how fast, and how often, a debt collector can race to the courts to collect, would bring a host of benefits. This would:
- Reduce the drain on court resources at a time local government budgets are strained.
- Reduce collection lawsuits on smaller balance accounts that can double and triple from legal costs.
- Curb the growth of “mill-style” collection law firms. Some were found to have cut collection costs by cutting corners, to the detriment of the courts and consumers.
- Reduce garnishment and bank levies placed against an already financially stressed consumer.
- Cause debt purchasers to invest in alternatives to resolving debts with consumers that could lead to broader education-based solutions.
There are indeed “buy to sue” debt purchasers. And there are debt buyers that use the collection litigation strategy overly much. Contractually limiting a percentage of accounts debt buyers can sue to collect on to say, less than 10% of purchased accounts, could be audited by banks. Debt buyers will want to meet this contractual provision in order to continue making additional purchases from that same bank. Debt buyers will develop better selection criteria for accounts they attempt to collect through the courts. I have recently seen encouraging signs that some debt buyers are open to more broad and fair efforts to collect before filing lawsuits.
While the CFPB and FTC are cooperating with supervision and enforcement of collection laws right now, the OCC guidance changes are a work in progress. However, two of the top credit card banks have all but stopped debt sales this year.
Steps You Can Take to Resolve Debt Today
Debt buyers do legitimately purchase debts from your original creditors. Regardless of the purchase prices paid, these debts are purchased along with the rights to collect on the full balances owed.
If you know your debt is valid, and you want to resolve it, you can call and work directly with many debt buyers, or the collection agencies they hire. I generally encourage you negotiate the best deal you can with debt buyers by settling for less than the balance owed. It is not complicated, or nerve wracking. You can often get the best results when you simply, but briefly, outline the tough financial position you are in. Just be sure to get the details you arrange in writing before you make any payment.
You will often have the best shot at flexible payments, and the best savings from settling with a debt buyer, by tackling the problem before it reaches the courts. If you are sued by a debt buyer, look into different ways to defend collection lawsuits.
Be sure your state’s statute of limitations has not expired for a debt buyer to legitimately sue you to collect. You may still want to resolve a debt, even if your state’s SOL has passed. You may, in fact, have to resolve old debts in order to qualify for a loan to purchase or refinance a home. But you are in a better negotiating position when you can no longer be sued. Just don’t tip a debt buyer off to the fact that you have a goal you are trying to reach, like home ownership. You lose some of your negotiating power when they know you need to get something resolved for a specific purpose.
Do not expect a debt buyer to be able to impact how your original creditor shows up on your credit reports. They have no way to influence that. Do not get hung up on trying to get a debt buyer to delete any collection account they have on your credit report. Most won’t jeopardize their relationship with the credit reporting agencies over your debt. But you can expect a debt buyer to update any credit reporting they have already made to show that you’re account is paid. They have to.