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A debt buyer is a company, sometimes a collection agency or a private debt collection law firm, that purchases delinquent or charged-off debts from a creditor for a fraction of the face value of the debt. The debt buyer can then collect on its own, utilize the services of another collection agency, repackage and resell portions of the purchased portfolio or any combination of these options.
The debt buying industry in the United States began as a result of the savings and loan crisis of the 1980s. During this time banks were closing at an alarming rate and the Federal Deposit Insurance Corporation (FDIC), which insures deposits up to a certain amount, received the assets of the bank to cover the expenses associated with repaying the closed banks' depositors.
When the FDIC and eventually the Resolution Trust Corporation (RTC) took control of the assets they had to find institutions, organizations and private investors that would be willing to purchase the assets of closed banks including both performing and non-performing (delinquent or charged-off) accounts.
The RTC held auctions around the country allowing various organizations to bid for portfolios of mixed assets. At these auctions, the bidders were not able to evaluate the assets prior to bidding and most purchasers had no idea what they had purchased until they had left the auction.
The availability of these assets to the general public was the fuel used to launch the debt buying industry.
Due to the historic profitability of the business, the debt buying industry has seen dramatic expansion since 2000. Debt buyers purchased approximately $110 billion in face value of delinquent debts in 2005, which is about double the amount bought in 2000. Credit card debt comprises seventy percent of the accounts sold to debt buyers, followed by automobile loans, telecommunications debt and retail accounts. However, purchased debts can also include personal loans, utility bills, medical bills, primary and secondary mortgages, etc.
Depending on the age and history of the debt, a buyer typically pays between 3 and 16 percent of the face value of the debt. Accounts that come directly from the original creditor without having been placed with a collection agency have the highest value, with prices decreasing based on the number of agencies that have previously attempted to collect the debt. As a result of the 2008 economic downturn, prices for the best accounts have fallen from the 2007-2008 high of 14 cents on the dollar to 4-7 cents. However, the large increase in delinquent accounts as a result of the recession has also resulted in sizable growth in the debt buying industry overall.
Debt buyers range in size from very small private businesses to multimillion-dollar publicly traded companies - there are currently four publicly traded debt buyers. NCO, previously the largest debt collector, was taken private in 2006 after merging with One Equity Partners. As the visibility and profitability of the industry has grown, so too has competition, both in terms of the number of debt buyers and the rising prices of bad debt. Additionally, there is a secondary market in this debt, with the debt buyers reselling the debt.
Debt buyers may be classified as "active"—those who attempt to collect on the accounts they purchase, or "passive"—those who invest in the debt and then outsource the collection activities to a separate collection agency or collection law firm.
Due to the varying size of debt buying organizations, not all organizations have the capital required to purchase large portfolios directly from the debt issuer. Historically, smaller debt-buying firms would have to wait and purchase their debt accounts from a larger buyer after that larger buyer had already collected on the account.
Debt buying has historically taken place via the purchase and sale of whole portfolios consisting of a static group of accounts. Debt issuers usually prefer to sell their entire portfolio to a single debt buyer because the issuer is responsible for supplying the debt buyers with the documentation needed to prove the account in a court of law. This documentation known as "media" in the debt buying industry may include the original account application, monthly statements, affidavits of sale and charge-off statements. This information is necessary to prove in court that the debtor owes the money and that the debt buyer owns the account.
Most of the major banks that sell all or a portion of their charged-off assets sell their accounts to a small selection of pre-approved buyers who purchase using a vehicle known as a “Forward Flow Agreement”. A forward flow is an agreement between a debt buyer and debt seller to transact a fixed amount of debt over a fixed period of time for a predetermined price. For example, a debt buyer and debt seller may enter an agreement to transact $20 million face value of debt each month for 12 months at a price of 7%.
In the United States, the Debt Buyer Certification Program was established in 2013 to certify debt buying companies. The program is administered by DBA International. The program has established a national standard for the debt buying industry to ensure that certified companies are complying with state and federal statutory requirements, responding to consumer complaints and inquiries, and are following industry best practices. The program requires certified companies to conform to 20 standards ranging from data and document acquisition, chain of title, and data security to establishing consumer complaint and dispute resolution policies. Certified companies are subject to independent third party audits as well as remediation agreements if they do not conform to the standards. Failure to comply with program requirements will lead to the loss of certification.
At the corporate level the debt collection business model is highly lucrative as debt buyers purchase "huge swaths of soured bills from lenders for pennies on the dollar." Encore Capital enjoyed soaring revenues from $316 million in 2009 to $773 million in 2013. Corporate debt buyers, such as Encore Capital Group and Portfolio Recovery Associates, the United States two largest debt buyers purchase "portfolios of defaulted consumer receivables from major banks, credit unions, and utility providers." According to the Consumer Financial Protection Bureau, an official site of the United States government, they
"purchase delinquent or charged-off accounts for a fraction of the value of the debt. Although they pay only pennies on the dollar for the debt, they may attempt to collect the full amount claimed by the original lender. [By 2015], these two companies have purchased the rights to collect over $200 billion in defaulted consumer debts on credit cards, phone bills, and other accounts."
Jake Halpern author of Bad Paper, described Encore Capital as a "behemoth" in the American debt-industry complex. The firm is a publicly traded NASDAQ Global Select company, a component stock of the Russell 2000, the S&P SmallCap 600, and the Wilshire 4500.:235
In September 2015, both Encore and Portfolio Recovery Associates were charged with violating the Fair Debt Collection Practices Act, the Dodd–Frank Wall Street Reform and Consumer Protection Act by filing "lawsuits against consumers without having the intent to prove many of the debts, winning the vast majority of the lawsuits by default when consumers failed to defend themselves." U.S. federal regulators - Consumer Financial Protection Bureau imposed an enforcement action on Encore for pressuring borrowers "to pay with false statements, with lawsuits and with the use of using so-called robo-signed court documents," that was also used in mortgage processing in the subprime market. According to the New York Times Encore must pay "$42 million in consumer refunds and a $10 million penalty" and an injunction to "stop collections on debts totaling more than $125 million."
A debt buyer does not have the same incentive to maintain the customer relationship with a debtor as the original creditor, and some debt buyers may be unconcerned about negative publicity and complaints. Thus, there are reports that some debt buyers engage in abusive debt collection practices, which are illegal under the Fair Debt Collection Practices Act, including the following:
- Filing lawsuits with no documentation showing that the debt was ever purchased or assigned to the plaintiff
- Pursuing debts that are not actually owed by the person being targeted
- Attempting to collect, improperly suing, or threatening to sue people on debts that are past the applicable statute of limitations or were settled and closed via bankruptcy
- Reporting inaccurate creditor information to a credit bureau
- Impersonating law enforcement and threatening to have a person arrested, or threatening to directly garnish a person's wages, seize their property, etc.
- Failing to validate debt in writing when requested
- Continuing to call a person's place of employment when instructed not to
- Ignoring cease-and-desist notices to stop telephoning and communicate only via mail
- Verbally abusing, using obscene language, threatening and harassing consumers
While original creditors are often exempt from fair debt collection laws, courts and regulators have generally taken the position that debt buyers and any other third-party collection agency are covered by these laws. Thus, debt buyers who engage in abusive collections practices are subject to lawsuits under the Fair Debt Collection Practices Act, the Fair Credit Reporting Act and other state and federal laws. They may also be subject to regulatory action by state attorneys general or the Federal Trade Commission, which in 2004 shut down Capital Acquisitions and Management Corporation, a debt buyer that allegedly engaged in extensive abusive collection practices.
To address many of the controversies surrounding debt buyers and to learn more about the business, the FTC in January 2010 asked nine of the largest debt purchasers in the country to submit detailed information about their businesses and the debt portfolios they have bought in the past.
- "CFPB Takes Action Against the Two Largest Debt Buyers for Using Deceptive Tactics to Collect Bad Debts: Encore and Portfolio Recovery Associates Must Refund Millions of Dollars and Overhaul Debt Collection and Litigation Practices", Consumer Financial Protection Bureau, 9 September 2015, retrieved 23 December 2015 Cite error: Invalid
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- Weston, Liz Pulliam. "'Zombie' debt is hard to kill". MSN Money. Retrieved 2006-09-18.
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- "CONFERENCE REPORT: Credit Card Debt Prices Will Level Off, Say Buyers". CreditAndCollectionsWorld.com. 2007-03-13. Retrieved 2007-03-13.
- "Bad-Debt Prices Down More Than Half". Collections & Credit Risk. 2009-09-21. Retrieved 2009-09-22.
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- Chumbler, Joe (2005-07-07). "Debt Purchasing Outlook for 2005" (PDF). ACA International. Archived from the original (pdf) on 2006-11-18. Retrieved 2006-09-18.
- DBA International Debt Buyer Certification Program, version 2.0 2014-03-11.
- Greenberg, Jessica-Silver (8 January 2015). "Debt Buyer Faces Fine and Loss of Thousands of Court Judgments". New York Times. Retrieved 23 December 2015.
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- "Nature of Our Business". Encore Capital Group. U.S. Securities and Exchange Commission. 2012. Retrieved 23 December 2015.
- Halpern, Jack (14 October 2014). Bad Paper: Chasing Debt from Wall Street to the Underworld. Farrar, Straus and Giroux. p. 256. ISBN 0374108234.
- Carnns, Ann (9 September 2015). "Debt Collectors to Pay $61 Million in Consumer Refunds and Amend Their Practices". New York Times. Retrieved 23 December 2015.
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- "Pay Garnishments Rise as Debtors Fall Behind". The New York Times. 2010-04-01.
- Dwyer, Jim November 29, 2009 The New York Times "Hello, Collections? The Worm Has Turned" Article about Pressler and Pressler, LLP who sued the wrong person and refused to drop the law suit http://query.nytimes.com/gst/fullpage.html?res=950DE1DD1238F93AA15752C1A96F9C8B63
- Massachusetts Division of Banks (2006-10-03). "Industry Letter Regarding Practices Of Debt Collectors And Debt Buyers In The Commonwealth". Commonwealth of Massachusetts. Retrieved 2007-02-14.
- "FTC Asking for Detailed Portfolio Information from Debt Buyers". insideARM.com. 2010-01-12. Retrieved 2010-08-11.