Are Debt Buyers Ever Going to Start Buying Paper Again?

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Ever since the new policies of the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) went into action over the past few months, bringing with them a sustained focus on collection agencies and collection law firms that has yet to abate, there has been a perceived shift in the industry.  Banks and other large players in the debt field have put severe restrictions on who they will sell “paper” to, restrictions which have had the practical effect of freezing out the smaller collection agencies.  At the same time, many small firms have shown a disinterest in buying all but the most sparklingly well-documented paper for fear of running afoul of the newly watchful Federal Government.  The spate of charges and lawsuits brought by the FTC in recent months has underscored the new reality: Shady practices and robo-signed no-doc debts or contested debts will no longer fly for very long.

The market for paper has thus been in a depressed state, as in many ways, the FTC has forced the larger collection agencies who meet the $10,000,000 revenue baseline to collude against smaller agencies as a form of self-defense. They want the scrutiny to go away, and as such feel they can’t afford to be connected to smaller firms who might play fast and loose with disclosure and documentation regulations.

There are signs that smaller firms are ready to start buying paper again.  After all, the debt business in the U.S. alone is worth $12.2 billion annually.  That means, no matter how large the big players are, there is a lot of money left over for small firms to reap.  And the larger firms can’t afford to take on smaller debts that aren’t cost-effective for them to handle, traditionally the impetus to sell paper off down the food chain.

However, while most experts in the field feel certain that the small firms will begin buying paper in bulk again soon, so far there has been no overt sign that this gold rush has begun.

FTC: When It Comes to the TCPA and FDCPA, Everything Counts

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For an industry that relies so heavily on communication devices to reach their targets, debt collectors have been carefully watching how the Federal Trade Commission interprets and enforces laws relating to their business for decades.  Collection agencies and collection attorneys have been paying particular attention to the Federal Debt Collections Practices Act (FDCPA) and the Telephone Consumer Protection Act (TCPA) because the language of both acts – the first written in 1977 and the latter amendment created in 1991 – predate many modern technologies, especially text messaging and ringless voicemail.

The FTC has no rulemaking authority, but frequently uses its enforcement authority to telegraph how it plans to interpret rules and regulations going forward.  Recently, the FTC brought the first case against a collection firm based in Glendale, California that involved the sending of text messages and found that the firm had violated the clear disclosure rule of the FDCPA when it used text messages that made no reference to debt and did not obtain prior permission from the consumer.  The company in question agreed to a $1 million settlement and to accept guidelines for future collection attempts.

The ruling was enlightening because the FTC chose its words very carefully to state that it does not matter where the transmission was targeted (i.e., a land-line phone or device).  In fact, the FTC underlined the issue in a post to its web site, writing ‘Regardless of the means you choose — mail, phone, text, or something else — the law applies across the board.’

Thus, the FTC’s policy going forward is relatively clear: There will be no tolerance for “loopholes” regarding text messages or so-called “ringless voicemail” messages that bypass a mobile phone’s ringer and allow direct recording to voicemail.  The FTC clearly intends to regard any communication without clear and prominent disclosure as a violation of the FDCPA and/or the TCPA.

FTC and CFPB Affecting Collections Large and Small

The recent change in focus and attitude on the part of the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) has brought an aggressive new strategy from the Federal Government against the tactics and business practices of collection agencies and related industries such as debt relief companies.  While the new rules and policies were welcomed by consumer advocates who have long complained that debt collection has been existing in a quasi-legal and certainly immoral space for some time, the new policies at first seemed to focus only on the larger firms that had revenues of $10,000,000 and up.  Many consumer advocates were unhappy with this baseline as it meant the vast majority of agencies would be excluded from review, as only 175 out of approximately 4,500 collection firms meet the revenue baseline.

However, in the months since the new rules went into effect, it’s become clear that this aggressive new policy will affect the smaller collection agencies that don’t meet the revenue baseline just as heavily.  This has been demonstrated in two ways, direct and indirect.

Directly, the FTC and CFPB have brought several complaints and suits against smaller agencies in Florida and California in recent months, seeking judgments for violations including charging fees for debt relief services and improperly withholding information from consumers.  Many of the firms targeted do not meet the revenue baseline.

Indirectly, the tightened rules and renewed focus have impacted the smaller collection shops and collection law firms by a trickle down affect. Hence, a large collection agency that is subject to the new rules will have to insure their subcontractors all meet the new stringent guidelines. Therefore, smaller collection firms are now impacted—therefore their bottom lines are being negatively affected as well.  Poorly documented or contested debts that were previously sold to smaller shops as well as larger firms are now being sold more or less solely to the largest debt firms in the country.  The result is that smaller collection agencies do not have access to a great deal of the existing collectible debt.  As a result, even without direct action from the Federal Government, the smallest debt collection shops are suffering a sizable reduction in business.

What the Consumer Financial Protection Bureau Means for Small Collections Firms

Due to recent changes that the Obama administration made in creating the Consumer Financial Protection Bureau, beginning January 2, 2013, there will be a federal agency that will oversee the country’s largest debt collection firms.  Under the new regulations, the Consumer Financial Protection Bureau (CFPB) will oversee any debt collection firm that brings in annual profits of more than $10 million.  Companies that do not meet this $10 million minimum will not be included in the CFPB’s crosshairs for increased regulation and oversight. 

The CFPB’s aim is to ensure that debt collectors follow the regulations and consumer protection practices that the Consumer Protection Act requires, including civil communication with debtors and maintaining fair debt collection practices.  However, although there are approximately 4,500 debt collection firms in the country, approximately 175 of these collections firms will be under the scrutiny of the Consumer Financial Protection Bureau.  The remainder will continue to be under the general regulations of the Federal Trade Commission but will not be under such close scrutiny. 

This recent push is due to the Federal Trade Commission’s attempt to crack down on unfair debt collection practices such as calling more than a certain number of times a day, harassing debtors at their place of employment, and calling outside of the hours of 8 a.m. to 9 p.m. in the debtor’s local time zone.  According to an FTC spokesman, the agency received 180,000 complaints in 2011 due to actions initiated by debt collectors in the attempt to collect upon unpaid debts that violated these restrictions, among others. 

While the FTC will continue to focus on collections firms of all sizes, the CFPB will regulate and enforce consumer protection law on the 175 firms that turn the biggest profits from collections.  This means that the smaller collections firms can breathe a sigh of relief that their own debt collections practices won’t be under such close scrutiny, although they must still follow the restrictions set forth in the Fair Debt Collection Practices Act.