Debt buyer
Encyclopedia
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.
of the 1980’s. 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.
debt comprises seventy percent of the accounts sold to debt buyers, followed by automobile loans, telecommunication
s debt and retail accounts. However, purchased debts can also include personal loans, utility bills, medical bills, primary and secondary mortgage
s, 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 multi-million 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.
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%.
, including the following:
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.
Collection agency
A collection agency is a business that pursues payments of debts owed by individuals or businesses. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed....
or a private debt collection law firm
Law firm
A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service rendered by a law firm is to advise clients about their legal rights and responsibilities, and to represent clients in civil or criminal cases, business transactions, and other...
, that purchases delinquent or charged-off
Charge-off
A charge-off or chargeoff is the declaration by a creditor that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent on a debt. Traditionally, creditors will make this declaration at the point of six months without payment...
debts from a creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
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.
History
The debt buying industry in the United States began as a result of the savings and loan crisisSavings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
of the 1980’s. During this time banks were closing at an alarming rate and the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(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
Resolution Trust Corporation
The Resolution Trust Corporation was a United States Government-owned asset management company run by Lewis William Seidman and charged with liquidating assets, primarily real estate-related assets such as mortgage loans, that had been assets of savings and loan associations declared insolvent by...
(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.
Industry overview
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 cardCredit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
debt comprises seventy percent of the accounts sold to debt buyers, followed by automobile loans, telecommunication
Telecommunication
Telecommunication is the transmission of information over significant distances to communicate. In earlier times, telecommunications involved the use of visual signals, such as beacons, smoke signals, semaphore telegraphs, signal flags, and optical heliographs, or audio messages via coded...
s debt and retail accounts. However, purchased debts can also include personal loans, utility bills, medical bills, primary and secondary mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
s, etc.
Depending on the age and history of the debt, a buyer typically pays between 3 and 16 percent of the face value
Face value
The Face value is the value of a coin, stamp or paper money, as printed on the coin, stamp or bill itself by the minting authority. While the face value usually refers to the true value of the coin, stamp or bill in question it can sometimes be largely symbolic, as is often the case with bullion...
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 multi-million 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
One Equity Partners
One Equity Partners is a private equity firm focused on leveraged buyout and growth capital investments in middle-market companies across a range of industries....
. 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.
Secondary market
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%.
Controversies
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 ActFair Debt Collection Practices Act
The Fair Debt Collection Practices Act , et seq., is a United States statute added in 1978 as Title VIII of the Consumer Credit Protection 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 limitationsStatute of limitationsA statute of limitations is an enactment in a common law legal system that sets the maximum time after an event that legal proceedings based on that event may be initiated...
or were settled and closed via bankruptcyBankruptcyBankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor.... - 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 noticesCease and desistA cease and desist is an order or request to halt an activity and not to take it up again later or else face legal action. The recipient of the cease-and-desist may be an individual or an organization....
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
Fair debt collection
Fair debt collection broadly refers to regulation of the United States debt collection industry at both the federal and state level. At the Federal level, it is primarily governed by the Fair Debt Collection Practices Act . In addition, many U.S...
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
Fair Credit Reporting Act
The Fair Credit Reporting Act is a United States federal law that regulates the collection, dissemination, and use of consumer information, including consumer credit information. Along with the Fair Debt Collection Practices Act , it forms the base of consumer credit rights in the United States...
and other state and federal laws. They may also be subject to regulatory action by state attorneys general or the Federal Trade Commission
Federal Trade Commission
The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
, which in 2004 shut down Capital Acquisitions and Management Corporation
Capital Acquisitions and Management Corporation
Capital Acquisitions and Management Corporation was a United States debt collection agency and subsidiary of Risk Management Financial Services, Inc., that was fined and closed down for repeated violations of the Fair Debt Collection Practices Act . Its closure marked the first time a Federal...
, 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.