Debt buyer
A debt buyer is a company, sometimes a collection agency, a private debt collection law firm, or a private investor, that purchases delinquent or charged-off debts from a creditor or lender for a percentage of the face value of the debt based on the potential collectibility of the accounts. The debt buyer can then collect on its own, utilize the services of a third-party collection agency, repackage and resell portions of the purchased portfolio, or use any combination of these options.
The Federal Trade Commission administers the 1977 landmark federal Fair Debt Collection Practices Act, which established debt collection industry standards and depends on the industry self-regulating or "self-enforcing" the statute through "private action" as opposed to "government law enforcement". FDCPA protect consumers and ethical collectors.
From 1999 to 2009, the "advent and growth of debt buying", that is "the purchasing, collecting, and reselling of debts in default", was considered to be the "most significant change" in the debt collection business. According to Sacramento, California-based Debt Buyers Association, a debt buyers trade association, by 2008 there were "hundreds, and possibly thousands" of debt buyers. The debt buying industry was highly concentrated according to The Nilson Report with only ten debt buyers "responsible for 81 percent of all of the credit card debt purchased in fiscal year 2007".
DBA, which was established in 1997 and is now known as Receivables Management Association, provides the self-regulation tool for debt buyers, the International Receivables Management Certification Program, which has been obligatory for all RMA members since February 29, 2016.
In 2015, Encore Capital Group and subsidiaries form the largest debt buyer and collector in the United States and Portfolio Recovery Associates was the second largest.
According to the Federal Reserve Bank of New York's May 2017 Quarterly Report on Household Debt and Credit, Americans owe $12.73 trillion in consumer debt to creditors—credit card companies, student loans, mortgages, and car dealers, among others. These debts are usually paid off to creditors, but by 2017, unpaid debts were "increasingly likely to end up in the hands of professional debt collectors—companies whose business it is to collect debts that are owed to other companies". According to the annual CFPB 2017 report, there were 130,000 people employed by 6,000 collection agencies in the "$13.7 billion dollar industry".
Role of debt buyers
The debt collection industry which includes debt buyers, "in-house collection departments, third-party collection agencies, and collection attorneys", recover and return "billions of dollars in delinquent debt" to "card issuers and other creditors" annually which "increase the availability of consumer credit and reduce its cost". The "accounts receivable management industry" includes the "collection practices of original creditors". The GAO refers to the debt collection industry as "businesses that engage in the collection of debt for which the business is not the original creditor".According to ACA International, previously known as American Collectors Association, a trade group representing "collection agencies, creditors, debt buyers, collection attorneys and debt collection industry service providers", the collections industry as a whole provided over 230,000 jobs nationwide in 2013.
History
The debt buying industry in the United States began as a result of the savings and loan crisis in which from 1986 and 1995, 1,043 out of the 3,234 American savings and loan associations failed and hundreds of banks were closed by the Federal Savings and Loan Insurance Corporation and the Resolution Trust Corporation. The Federal Deposit Insurance Corporation, 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 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 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.
DBA, a trade association for the debt buyer industry, was established in 1997.
Due to the profitability of the industry, debt buying experienced dramatic expansion from 2000 through 2005, doubling its debt acquisition in those years.
According to a 2004 Healthcare Financial Management web page, credit card debt comprises 70% of the accounts sold to debt buyers, followed by automobile loans, telecommunications debt, and retail accounts.
By 2005 the total of consumer loans had climbed to a new high of over $2 trillion, representing a 25% increase since 2000. On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act came into effect with more stringent bankruptcy laws making it more difficult for debtors to use the courts to be released from debt. According to the National Consumer Law Center, these two factors contributed to the rapid growth of the debt buying industry. The increased debt load was further complicated by "rising interest rates and stagnant personal incomes". Other factors exacerbating a debt crisis included "identity theft and Internet fraud". BAPCPA "effectively repealed the fresh start principle for individuals".
Bankruptcy reform benefited "banks, credit card companies, and other creditors" who lobbied for the reform because they bear the loss when debts are discharged through bankruptcy. According to a 2009 article in Berkeley Business Law Journal, as a result of BAPCPA, "although bankruptcies and credit card company losses decreased, and credit card companies achieved record profits, the cost to consumers of credit card debt actually increased. In other words, the 2005 bankruptcy reforms profited credit card companies" and "increased the costs and decreased the benefits of bankruptcy to consumers". By 2007, the use of Chapter 11 as a debtor relief vehicle had eroded.
By 2005 debt buyers had purchased approximately $110 billion in face value of delinquent debts in 2005. According to SEC filings, by 2005, the largest debt buyers at that time purchased billions of dollars' worth of debt for pennies on the dollar. For example, Asset Acceptance purchased $4.2 billion of debt for $102.3 million which represented 2.4 cents on the dollar.
According to Christopher Palmeri, by 2005, the "$15-billion-a-year industry" by 2005 had gone "corporate". In the third quarter of 2005 alone, "private-equity firms, venture capitalists, and others invested a record $1.6 billion in the business, almost as much as in all of . Six firms publicly traded, and two made secondary share offerings ."
According to a 2005 publication by the Association of Credit and Collection Professionals, by 2005, as the visibility and profitability of the industry grew, so did competition, both in terms of the number of debt buyers and the rising prices of bad debt.
A July 2006 article in The New York Times reported that the Federal Trade Commission received 66,627 complaints from consumers about "third-party debt collectors" in 2005 compared to 11,820 in 1999.
In 2007 the total outstanding credit card debt rose to over $838 billion and the delinquency rate on credit cards payments rose to its highest level in 18 years during the Great Recession in the United States. IN December 2007, the six largest credit card issuers were Citigroup Inc., Bank of America, JPMorgan Chase & Co., Capital One Financial Corp., Discover Financial Services Inc, and American Express, with a total credit card debt of $692,879,725,000.
In 2008, collectively, "nine of the largest debt buyers" purchased 76.1% of the total debt. Six of the largest debt buyers participated in a three-year FTC study providing some data related to 5,000 portfolios—mainly credit card debt—purchased for about $6.5 billion representing almost "90 million consumer accounts". The total face value of the accounts was approximately $143 billion.
As a result of the 2008 financial crisis, prices for the best accounts fell from the 2007–2008 high of 14 cents on the dollar to 4–7 cents. According to the Payments Source 2009 webpage, depending on the age and history of the debt, a buyer typically paid between 3 and 20 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 amount of time that has passed since the account was charged off.
With the passing of Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010, debt buyer industry regulations were tightened. "Stymied in state courts, the debt buyers" began to file thousands of lawsuits in "bankruptcy courts – specifically, in cases governed by Chapter 13 of the Bankruptcy Code, which allows consumers earning regular incomes to restructure their debts and repay as many as they can over a period of several years."
Professional associations
;Association of Credit and Collection Professionals, International;Receivables Management Association