About 1 million U.S. consumers a year dispute the debts that
collectors hound them for, according to a new Federal Trade
And no wonder: When collectors buy the right to collect old
debt, they buy it cheaply -- at an average of 4 cents on the dollar
owed -- and only the skimpiest details about who really owes it
gets passed along. Fuller details cost extra, so debt collectors
often go hunting for their debt-owing prey armed with thin files
and bogus information.
This large number of debts that people say they do not owe "is a
significant consumer protection concern," the FTC concluded in its
report, "The Structure and Practices of the Debt Buying Industry,"
looked at 90 million accounts, 70 percent of them credit card
debts, that were sold by nine large debt buyers. It found that the
sold-off debts usually lacked key information that would help
collectors verify the debt was genuine or that the amount was
correct. Collectors with faulty information may target the wrong
people or demand incorrect amounts, the agency said.
Documents such as account records, which would substantiate the
debt, rarely went to the debt buyer. And sellers of debts rarely
noted when debts had been disputed previously, the report found, so
debts that had already been challenged were sold along with
Debts sold and resold
Critics of the debt-buying market said they were not surprised at
the findings. The report echoed some long-standing complaints about
the unregulated debt-buying market, where consumers' debts are
initially sold by creditors, then potentially resold multiple times
by debt collectors and intermediaries.
"They buy a few bits of information ... there is no
documentation," said Joseph Mauro, a consumer attorney on Long
Island. "To me, that sort of blind acceptance of minuscule amounts
of information is very problematic."
One of Mauro's clients was deluged with calls from multiple
collectors for the same debt, after a debt broker resold the same
accounts to multiple buyers, Mauro said.
The report comes as the Consumer Financial Protection Bureau
(CFPB) is conducting the first-ever on-site examinations of large
debt collectors. The CFPB could issue rules about the industry's
collection practices, including how much documentation collection
agencies need to have before setting their collectors loose. Some
state and local governments, including Minnesota and the City of
Chicago, have moved ahead of the federal government with standards
for debt documentation.
No standard for verification
"As of now there is no federal standard for documentation," said
Mark Schiffman, director of public affairs for the debt collection
industry association ACA International. "It would be our preference
to see uniformity from state to state."
The FTC report noted some positive findings. The debt buyers
resold only a very small number of disputed debts that could not be
verified, the FTC found. And most of the debts were within
state statute of limitations
for collection, meaning that the debtors were still legally
obligated to repay.
However, in announcing the results, the FTC said the report
indicated the need for more study about the conduct of smaller debt
buyers, and the accuracy of the information that debt buyers used
in their collection efforts, in order to inform policymakers.
The findings about thin documentation of debts may help explain
surge in complaints about debt collectors
that regulators have seen. Complaints to the FTC about debt
collection surpassed 185,000 last year, based on figures through
early November -- more than double the number five years earlier.
One of the most frequent gripes is that collectors are coming after
them for debts they don't owe or have already paid.
In the FTC study of debt buying, 3.2 percent of sold debts were
disputed by consumers. That volume of disputes, if applied to the
entire debt buying industry, "indicates that each year buyers
sought to collect about 1 million debts that consumers asserted
they did not owe," the report stated.
When consumers demanded verification of a debt, the buyer was
able to provide verification for only about half of the accounts
involved in those cases, the report said. The FTC said it did not
examine whether the verification provided by the debt buyer was
The information that buyers did receive with the debt usually
included the amount, original creditor, the original account number
and date of last payment, the charge-off date and the debtor's
Social Security number.
Documentation? That costs extra
When a debt is challenged, debt buyers have difficulties obtaining
account documents, the report said. Sellers told debt buyers that
they might not be able to obtain account documents, and that there
could be charges of typically $5 to $10 per document. Debt sellers
also typically took 30 days to 60 days to supply the documentation,
the report found.
Why would buyers of debts put up with a shoddy product?
The average price for debt was 4 cents per $1 of face value,
the FTC found, indicating that buyers may not expect high levels of
service. Their small investment in the debts means they can absorb
losses when some accounts turn out to be flawed, critics say.
However, consumers who are targeted by faulty collection efforts
also bear the costs of faulty debt sales.
"The consumer can scream that they don't owe $5,000 anymore,
they only owe $3,000 because they made a payment before the debt
was sent to the collector," Mauro said. "If the (debt) buyer
doesn't have the last statement from the credit card, they have no
way of knowing if the consumer is telling the truth."
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