The New Normal in Debt Buying: Waiting Around

Mike Ginsberg

A record number of attendees took part in the annual Debt Buyers Association (DBA International) conference last week in Las Vegas. Participants were abuzz about dramatic changes underway in the industry and the impact these changes are having on their businesses.

Two major themes consumed speaker topics and side-bar discussions: regulation and changes impacting debt sale operations. Credit grantors, debt buyers, sellers, collection agencies, law firms, and vendors are all feeling the impact. However since we are a week removed from the debt buying conference I will focus on the debt buyers.

On the regulatory front, by far the biggest discussion topic at the conference was the Consumer Financial Protection Bureau (CFPB) oversight currently unfolding with large issuers who have been the single largest source of revenue generation among debt buyers since the proliferation of credit cards began in the 1990s. A current belief among many of the active debt buyers is that once the issuers understand and adapt to the new norm imposed by the CFPB, then change will flow down to them. This will come through direct supervision from the regulators and is already being imposed by the some of the issuers directly on their vendors. For example, large banks have already substantially increased their vendor’s onboarding costs by requiring more sophisticated compliance implementation and data security protection resulting in a slimmed down vendor network.

A late addition to the agenda, Heather Allen, an FTC attorney and the co-author of the Federal Trade Commission’s report on the structure and practices of the debt buying industry, spoke about the report and its findings. Consistent with other government officials speaking at industry trade shows, Ms. Allen stuck to her script and did not provide any additional insights. insideARM covered this topic when the report was released and will continue to provide timely updates and insight.

Arguably the biggest point of contention being raised by debt buyers at last week’s conference was that the CFPB’s rules are not yet defined to a point where debt buyers can implement change and, as a result, are operating their businesses in a state of paralysis. To borrow a line from Tom Petty, “The waiting is the hardest part.”

On the operational front, one of the biggest points covered at last week’s conference was increased restrictions being placed on debt buyers regarding the resale of accounts. Some issuers are beginning to write resale restriction provisions into their agreements. A second provision that is front-and-center is possible restriction being imposed on debt buyers when it comes to the outsourcing of collections on accounts purchased. We will see how this plays itself out but it is my strong belief that issuers will continue to enable buyers to utilize select agencies that don’t put them at risk, follow the same vendor rules and perform well.

With restrictions being imposed on resale and a heightened focus placed on compliance and headline risk, accounts being sold will most likely be directed to select few buyers with the financial means to absorb the costs pushed down to them. In anticipation of these changes, and lack of product being sold by issuers directly, some small and mid-size buyers are selling off their amassed portfolio to the highest bidder. Others will service their existing portfolio and exit the industry. The consolidation train is on the tracks already and gaining speed. It started with the exodus of some of the largest debt buyers over recent years and will continue as smaller and mid-size players consider their alternatives.

I am challenged by the number of attendees I spoke to that appeared surprised by the regulatory and operational changes that were addressed at last week’s conference. Most forward-thinking debt buyers have been adapting to the changing playing field for the past 2 years, since the formation of the CFPB came into focus after the implementation of Dodd Frank.

When I ask issuers what’s most important to them in today’s dynamic market, the answer has been consistent: issuers are fixated on compliance and avoiding headline risk, not performance or pricing. That shift in focus may see even more changes in the debt sales market, with a potential result being the insourcing of some collection efforts among the large issuers.