FEDERAL RESERVE BANK OF PHILADELPHIA

© Robert M. Hunt, 2013

1 : The views expressed here are those of the speaker and not nec

the Federal Reserve Bank of Philadelphia or the Federal Reserve statements here should be treated as legal advice.

“Life of a Debt: Data Integrity in Debt Collection”

An FTC – CFPB Roundtable 

June 6, 2013

Robert M. Hunt, PhD

Vice President and Director

Payment Cards Center 

Federal Reserve Bank of Philadelphia

Understanding the Model: 

The Life Cycle of a Debt1
Macroeconomic Context: Labor Marke

Total jobs as a percentage of previous business cycle peak

© Robert M. Hunt, 2013

Sources: Bureau of Labor Statistics & author’s calculations

Months since p
Macroeconomic Context: Household Net 

© Robert M. Hunt, 2013

Sources: Board of Governors, Flow of Funds & author’s calculations

Trillions, 2005$
Borrowers in Trouble

Sources: Administrative Office of U.S. Courts, TransUnion Trend Data, & author’s cal

*: Excludes accounts charged off

Millions

© Robert M. Hunt, 2013

Consumers 120 days or more late on any debt*
Composition of Serious Delinquencie

Sources: TransUnion Trend Data, & author’s calculations

*: Excludes accounts charged off; **: These categories are not mutually exclu

Millions

© Robert M. Hunt, 2013

Consumers 120 days or more late on a loan*
Credit Card Loans Written Off

Billions, $2005

© Robert M. Hunt, 2013

Sources: FDIC, BEA and author’s calculations.

$161 billion in charge-offs since 2008
Consumer Collections Involves Myriad Part

• Consumers who owe financial or non-financial d• Organizations who are owed funds

o Lenders of all sortso Non-financial firms serving consumerso Governments owed taxes, fines, etc.

• Third-party collection firms & debt buyers

o Specializing in collecting debts owed to othero Mostly on a contingency basis

• Service providers

o Credit reports, location services, collections so Call centers, auto-dialers, software & comput

© Robert M. Hunt, 2013
A Myriad of Participants (continued)

• Collections attorneys (at least 700 active firms)

o Obtain judgments, liens, garnishments, etc.

• State or local courts (literally thousands)

o Structure and process is highly diverseo Not always automated (especially in small cla

• State governments and the federal government

o Legislation governing collections occurs at boo Federal law sets a floor, not a ceilingo Creditor remedies and process are mostly sta

• Regulators and Attorneys General

o State licensing requirements are commono CFPB examination authority for larger firms

© Robert M. Hunt, 2013
Who Does Collections?

Domestic Employment of Bill & Account Collector

Sector Number 

Third-Party Collection Agencies* 98,310 Finance & Insurance 88,600 Health Care 60,870 Wholesale & Retail Trade 28,870 Legal & Accounting Services 18,030 Government 10,020 Other 81,290 

Total 385,890 

Source: Bureau of Labor Statistics & author’s calculations

*: Calculated as the number for NAICS 561400, Business Support S

less call centers

© Robert M. Hunt, 2013
The Third-Party Collections Industry ~ 2

• Approximately 4,200 firms• Employment of 143,000• About $54 billion in gross collections revenue (e• Industry revenues of $11.7 billion

o 70% from consumer collections (in 2007)

• More than 1 billion consumer contacts per year• Growth relative to 1972 (controlling for inflation)

o Consumer credit: 3.6 xo Industry employment: 4.7 xo Industry revenue: 6.7 x

Sources: Census Bureau, Bureau of Economic Analysis, Bureau of L

Statistics, Board of Governors, Ernst & Young, & author’s c

© Robert M. Hunt, 2013 
Third-Party Collections Performance (20

Median values:

• The Recovery Rate is 13% of face value of debt• Gross Collections are $69 per account

o On a balance of $538

• The Commission Rate is 26% of gross collection

o Commissions are $22 per account

• Expenses are $16 per account

o Profits are less than $2 per account 

• The median firm acquires 69,000 new accounts 

o On behalf of 200 clientso Mails 11,000 letters per month

Source: ACA International, 2012 Benchmarking Survey

© Robert M. Hunt, 2013 
Long Term Growth of Third-Party Collec

Source: U.S. Census Bureau, Census of Services

© Robert M. Hunt, 2013 
Long Term Growth of Third-Party Collec

Source: U.S. Census Bureau, Census of Services

Billions, $2005

© Robert M. Hunt, 2013 
Third-Party Collections Revenue 

Peaked with Home Prices

Source: U.S. Census Bureau, Annual Survey of ServicesBillions, $2005

© Robert M. Hunt, 2013 
Third-Party Collection Firms Are Getting B

Source: Bureau of Census & author’s calculations

© Robert M. Hunt, 2013 
Customers of Third-Party Collection Firms 

Source: ACA International, 2011 Top Collections Markets Sur

© Robert M. Hunt, 2013 
Sector Balance* Recove

Hospital $617 10Other Healthcare 315 15Credit Cards & Retail 1,500 17Banks & Finance Companies 1,157 9Student Loans 4,000 10Telecommunications & Utilities 392 14Government 364 21

Variation in Collections Accounts (201

Source: ACA International, 2011 Top Collections Markets Survey

*: Values are medians

© Robert M. Hunt, 2013 
Aspects of the Debt Buying Market

• Collections from purchased debt: $6 billion (est. 

o 34% of industry receipts (PWC)o At least 500 active debt buyers today 

• This market is fairly concentrated

o 10 firms bought 93% of bad credit card debt o Median share of revenues from purchased d

• Before the crisis, ample capital stimulated grow

o Wall Street invested at least $500 million o Several firms are public (40% of bad debt pu

• Bad debt prices follow the business cycle

o New charge-offs sold for 14¢ in 2006 (4¢ in 2

• Accounts are often re-sold several timesSources: PriceWaterhouseCoopers, ACA International, DBA InternaNilson Report

© Robert M. Hunt, 2013 
Sales of Consumer Debt in Default

© Robert M. Hunt, 2013

Source: The Nilson Report, various issues.*: Includes re-sales of debt previously sold by creditors.
Final Observations

• Effective collections is important for credit marke

o But there are also important consumer protection issu

o We need much more research on both of these aspec

• Consumer and commercial collections are very 

o Millions of consumers experience collections activityo Millions of accounts are placed for collections each yeo Balances are relatively small and recoveries much smo This influences collection strategy (including litigation)

• The U.S. collections market place is “Dis-Integra

o Creditors vs. third-party collectors, or debt buyerso Also collections attorneys and courtso Data providers, repositories, and software platforms

© Robert M. Hunt, 2013 
Final Observations (continued)

• This activity (and industry) is large and changing

o Industry is separating into smaller and very large firmso Widespread adoption of sophisticated information techo Also reacting to consolidation of consumer lending

• The legal process for collections is primarily loca

o Continues to rely on paper and idiosyncratic docket sy

• The regulatory environment is highly complex

o State and (multiple) federal laws & regulatorso Law is largely based on 1970s technology & marketso Applicability depends on specific roles or activities 

© Robert M. Hunt, 2013