FTC Releases Large Multi-Year Debt Buying Study

The Federal Trade Commission today announced the results of the first empirical study of debt buyers. In January 2010, the FTC asked several prominent debt purchasers to submit information about their portfolios.

As the Commission has found in its prior work, collectors who have insufficient information may approach the wrong consumers, try to collect the wrong amount, or both.  The report, titled The Structure and Practices of the Debt Buying Industry, found there is room for improvement in the information these companies have when they contact consumers and try to collect.

The study analyzed more than 5,000 portfolios of consumer debt containing nearly 90 million consumer accounts with a face value of $143 billion.  By dollar amount, most of the debt studied (71 percent) was credit card debt, but the study also included mortgage, medical, utility, telecommunications, and other consumer debt.  The study evaluated the types of information debt buyers received from creditors both at and after the time of purchase, as well as the contracts governing the relationship between debt buyers and creditors.

The report finds that debt buying grew rapidly in recent years.  Creditors received pennies on the dollar (an average of about 4 cents and even less for older debts) for debts they sold to debt buyers.  The proceeds from these sales have helped to reduce creditors’ losses from lending money, allowing them to provide more credit at lower prices.

But, as the report points out, debt buying also raises significant consumer protection concerns:  One million or more consumers each year disputed debts because debt buyers were trying to collect from the wrong person or collect the wrong amount.  Debt buyers also verified only about half of these debts, which means buyers never resolved whether the data they used to collect approximately 500,000 debts each year was accurate.

The report cites a need for further research.  The study focused on nine of the nation’s largest debt buyers, which comprised more than 75 percent of the industry, and did not include data from any smaller debt buyers.  The study also did not consider the practices debt buyers used when taking legal action against consumers, or the accuracy of the information debt buyers received and used to collect debts.  Further research on these and other debt buyer topics would be beneficial to policymakers.

The Commission vote to issue the report was 4-0-1, with Commissioner Joshua D. Wright not participating.