As the credit bubble inflated, so did the business of collecting on bad debts. When a loan sours, lenders will often sell it to a third party that buys debts. On average, a buyer will pay 4¢ on the dollar for the IOUs and hope it can get people to pay up through letters, calls, threats of legal action, and sometimes questionable legal practices.
The debt buyer targets debtors by using account information acquired from the original lender. That data may not be reliable, though: A new report from the Federal Trade Commission, which analyzes nearly 90 million consumer accounts sold to buyers, with a face value of almost $143 billion, finds that lenders often provide no assurance that the information they’re selling is accurate. They also tend not to give enough info even for buyers to verify the debts, meaning consumers have plenty of room to contest them.
In the FTC’s study, 38 percent of the debts aren’t classified by type; credit-card debt isn’t distinguished from auto loans or medical bills. In a shocking 88 percent of sampled cases, the debts aren’t supported with any documentation, and in 94 percent the original lenders don’t provide account statements or loan terms and conditions. Debt sellers don’t provide enough information, that is, to break down a balance into principal, interest, and fees.
Debt buyers also sign contracts that the FTC says “could make it more difficult for consumers to learn that original creditors sold their debts to others.” Some contracts don’t let buyers use certain contact info in the subject line of letters sent to consumers, in some cases including the original creditor’s name.
To recap: Lenders give buyers lists of debts that may or may not be accurate—with incomplete documentation—which consumers are asked to pay. It’s perhaps no surprise, then, that the FTC says at a minimum, “debt buyers seek to collect on more than a million debts each year that consumers assert they do not owe or that they owe in a different amount.”
And this is the glass-half-full view. The FTC’s study was based on information from the nine largest debt buyers in the county, and “did not include data from any smaller debt buyers, firms that, in the FTC’s experience, are frequently a source of consumer protection problems.”