Credit Cards: Fair Debt Collection Practices Act Could Better Reflect the Evolving Debt Collection Marketplace and Use of Technology
Published: 2009-09-21T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Approximately 6.6 percent of credit cards were 30 or more days past due in the first quarter of 2009--the highest rate in 18 years. To recover delinquent debt, credit card issuers may use their own collection departments, outside collection agencies, collection law firms, or sell the debt. GAO was asked to examine (1) the federal and state consumer protections and enforcement responsibilities related to credit card debt collection, (2) the processes and practices involved in collecting and selling delinquent credit card debt, and (3) any issues that may exist related to some of these processes and practices. To address these objectives, GAO analyzed documents and interviewed representatives from six large credit card issuers, six third-party debt collection agencies, six debt buyers, two law firms, federal and state agencies, and attorneys and organizations representing consumers and collectors.
section_title: What GAO Found
paragraphs: The primary federal law governing third-party debt collection is the Fair Debt Collection Practices Act (FDCPA), which contains provisions on how collectors can communicate with consumers and prohibits collectors from using abusive, deceptive, and unfair collection practices. Some states have fair debt collection laws that provide protections additional to those of FDCPA. The Federal Trade Commission (FTC) is the primary enforcement agency for the debt collection industry; it collects consumer complaints, enforces violations of relevant laws, and undertakes consumer education efforts. Federal depository regulators oversee credit card issuers' collection practices, and various state agencies enforce state fair debt collection laws. Collecting and selling delinquent debt involves multiple parties. Credit card issuers typically collect on accounts less than 6 months delinquent using internal collection departments or "first-party" agencies that collect under the issuer's name, and often hire third-party collection agencies or law firms to collect on older accounts. Contracts between issuers and collectors often specify the collection policies and practices used. Third-party collection agencies rely primarily on telephone calls and postal mail in their operations, but often use automated mail systems and other technologies to do so efficiently in large volume. Credit card accounts often are sold--and may be resold multiple times. Several factors influence the price of these accounts, including their age, location, and number of times previously placed for collection. State and federal enforcement actions, anecdotal evidence, and the volume of consumer complaints to federal agencies--about such things as excessive telephone calls or the addition of unauthorized fees--suggest that problems exist with some processes and practices involved in the collection of credit card debt, although the prevalence of such problems is not known. One issue is that collection agencies and debt buyers often may not have adequate information about their accounts--sometimes leading the collector to try to collect from the wrong consumer or for the wrong amount--or may not have access to billing statements or other documentation needed to verify the debt. Further, with the advent of the debt-buying industry, accounts are frequently sold and resold, which can make verification more difficult as the owner of the debt becomes farther removed from the original creditor. Communications technologies that are ubiquitous today, such as mobile telephones, e-mail, and voice mail, were not prevalent when FDCPA was enacted in 1977. Significant uncertainty exists about how to use these technologies in compliance with the statute--for example, a debt collector may violate FDCPA if someone other than the debtor overhears a voice mail message revealing the debt collection effort. Additionally, FDCPA does not provide FTC with rulemaking authority, which has limited the agency's ability to address concerns related to the adequacy of account information, collectors' use of modern technologies, and other issues that arise in an evolving marketplace.

section_title: Letter
paragraphs: Credit card debt has increased dramatically over the past several years  and Americans had more than $838 billion in outstanding credit card debt  in 2007, according to industry estimates. With the current economic  recession, the rate at which consumers are falling behind on credit card  debt also has increased. According to the Board of Governors of the  Federal Reserve System (Federal Reserve), approximately 6.6 percent of  credit cards were 30 or more days past due in the first quarter of 2009—the  highest delinquency rate in 18 years. To recover delinquent debt, credit  card issuers use a combination of methods, including use of their own in- house collection departments, third-party collection agencies, collection  attorneys, and the sale of debt to a debt buyer. The debt collection  industry recovers and returns to card issuers and other creditors billions  of dollars in delinquent debt each year that would otherwise go  uncollected. These efforts increase the availability of consumer credit and  reduce its cost.
Congress enacted the Fair Debt Collection Practices Act (FDCPA)—the  primary federal legislation governing debt collection—in 1977, but the  industry has changed considerably since that time. In October 2007, the  Federal Trade Commission (FTC) held a workshop to learn more about  the current state of debt collection and examine the adequacy of the  regulatory framework used to oversee the industry. Recognizing that  relatively little is known about the debt collection industry and the process  through which credit card debt is recovered, you asked us to examine this  process as well as other issues. Specifically, this report examines (1) the  protections provided consumers under federal and state laws related to  credit card debt collection, and the roles and responsibilities of federal  and state agencies in enforcing these laws; (2) the processes and practices  involved in collecting and selling delinquent credit card debt; and (3) any  issues that may exist related to some of these processes and practices.
This report focuses on the collection of consumer credit card debt.  However, because debt collection companies typically also service other  forms of consumer debt (such as health care or utility), it was not always  possible to separate processes and data related specifically to credit card  debt. In addition, this report focuses on the largest credit card issuers— which represent about 83 percent of outstanding credit card debt—and on  medium- to large-sized debt collection companies. As a result, the  collection processes and practices described in this report may not be  representative of smaller credit card issuers or debt collection companies.  To address our first objective, we reviewed relevant federal laws, rules,  and guidance and we interviewed staff from FTC and the federal  depository institution regulators—the Federal Deposit Insurance  Corporation (FDIC), Federal Reserve, Office of the Comptroller of the  Currency (OCC), and Office of Thrift Supervision (OTS). We also reviewed  selected state laws applicable to credit card debt collection, as well as two  compendiums of state laws. We relied on the appropriate state officials for  analysis of and information about the meaning and scope of state debt  collection laws. To address our second objective, we met with officials of  the six largest credit card issuers, six third-party debt collection  companies, six companies that purchase credit card debt, two law firms,  and industry trade groups representing these entities. We chose the  companies we interviewed because their collection business included  collection of credit card debt and because they ranged in size from  medium to very large. These companies included some of the largest  industry players, although data are not available on the share of the  respective markets that they represent. We also collected and analyzed  various documents from these entities, including public filings and sample  contracts. We also toured the collection facilities of one card issuer and  one debt collection company and observed telephone collection  operations. To address our third objective, we reviewed FTC’s annual  reports on FDCPA from 1998 to 2009, the report and public comments  deriving from FTC’s 2007 workshop, and documents related to the  agency’s enforcement actions. We reviewed federal depository regulators’  examination manuals, as well as formal and informal enforcement activity  the regulators took from 1998 to 2008. We also reviewed enforcement  actions taken by selected state agencies related to debt collection from  January 2006 to May 2009. We analyzed all of the consumer complaint data  from the depository regulators and FTC from 2004 to 2008. In addition, we  reviewed various studies and reports produced by advocacy and trade  organizations representing the interests of consumers and debt collection  firms. We conducted interviews with representatives of relevant federal  and state agencies and consumer and industry trade groups.
We conducted this performance audit from July 2008 to September 2009 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives. More information on our scope and  methodology is available in appendix I.
subsections: section_title: Background
paragraphs: Credit card usage has grown dramatically in recent years. From 1993 to  2007, the amount charged to U.S. credit cards rose from $475 billion to  more than $1.9 trillion, according to estimates from the Card Industry  Directory. While more than 6,000 depository institutions issue credit  cards, the majority of accounts are concentrated among a small number of  large banks. As shown in table 1, at the end of 2007, the top six credit card  issuers accounted for about 83 percent of the outstanding credit card  loans nationwide.
In 2008, issuers had more than $23 billion in nonsecuritized debt that was  from 30 to 180 days delinquent, according to data from Call Reports. As  seen in figure 1, credit card delinquency rates have fluctuated over time.  According to Federal Reserve data, these rates averaged about 4.4 percent  from 1991 to 2007, but since that time have risen sharply to about 6.6  percent in the first quarter of 2009.
When consumers fall more than 180 days behind on paying their credit  card bills, banks “charge off” the delinquent account. Charged-off loans  are generally considered uncollectible—usually because of cardholder  bankruptcy, death, or prolonged delinquency—and are removed from  issuers’ portfolios. Federal Reserve data show that in the first quarter of  2008, issuers charged off $4.2 billion, which represented about 4.7 percent  of their outstanding credit card debt. By contrast, in the first quarter of  2009, the amount charged off had increased to about $7.5 billion, which  represented a charge-off rate of 7.6 percent.
The debt collection industry comprises a variety of participants, including  companies that specialize in the collection of debt, debt collection law  firms, and debt buyers, which purchase delinquent debt for a fraction of its  face value. These companies handle credit card debt as well as other  forms of debt, including utility, health care, telecommunication, and  automobile loans, as well as delinquent taxes. According to the U.S.  Census Bureau, in 2006 more than 4,400 debt collection companies in the  United States collectively employed approximately 143,000 people. Many  of these companies were very small—43 percent employed 4 or fewer  employees, while about 3 percent had 500 employees or more. The small  agencies may operate within a limited geographic range, while the largest  corporations may operate in every state and internationally. The debt  collection industry has experienced consolidation in recent years, largely  due to mergers and acquisitions. The four largest debt collection  companies represented about 10 percent of total industry revenues in 1992  and 19 percent of total industry revenues in 2002, the most recent year the  Census Bureau collected this statistic.
Because most debt collection companies are privately held, limited data  exist on the debt collection industry’s precise size and other attributes.  However, several sources, including FTC and some industry participants  and analysts, state that the industry has grown in recent years. Kaulkin  Ginsberg, a firm that provides research and other services to the debt  collection industry, estimated that in 2006, revenues were about $10 billion  for third-party collection agencies and about $1.2 billion for law firms  specializing in debt collection. ACA International, a credit and collection  industry trade association, commissioned an industry survey that  estimated that in 2007 collection agencies recovered about $58 billion in  delinquent debts, although these estimates may not have been very  accurate.
One significant change in the debt collection business in recent years has  been the growth of debt buying. Debt buyers include firms whose business  model focuses on the purchase of debt, as well as collection agencies and  collection law firms who collect both on debt owned by others as well as  debt they purchase and own themselves. In addition, some firms are  passive debt buyers—investors that buy and resell portfolios but do not  engage in actual debt collection themselves. While little comprehensive  data exist on the debt-buying industry, Kaulkin Ginsberg estimated that  the amount of debt purchased grew from about $57 billion in 2003 to $100  billion in 2006, with credit card debt representing about 75 percent of the  2006 total. In May 2006, an industry trade journal, Collections and Credit  Risk, stated that the global debt-buying market had sales of an estimated  $158 billion annually and that $100 billion of credit card debt is sold  annually in the United States alone.
While the exact number is not known, hundreds, and possibly thousands,  of entities purchase debt, according to DBA International, a trade  association for debt buyers. The debt-buying industry is highly  concentrated, and according to The Nilson Report—which provides news  and conducts research on consumer payment systems—10 buyers were  responsible for 81 percent of all of the credit card debt purchased in fiscal  year 2007. Only five debt-buying firms are known to be publicly traded  companies, and our review of these firms’ filings with the Securities and  Exchange Commission found that four of them report purchasing credit  card debt. Portfolio Recovery Associates, Inc., reported it had purchased  more than $32 billion, face value, of credit card debt from 1996 to 2008,  representing 82 percent of its overall debt portfolio. Asset Acceptance  Capital Corp. had purchased more than $22 billion in credit card debt from  1999 to 2008, representing 64 percent of the face value of its debt portfolio.  In addition, Encore Capital Group reported it purchased more than $201  million in credit card debt in 2008. A fourth company, Asta Funding,  indicated it purchased credit card debt, but did not specify the amount.
section_title: Several Federal and State Laws Govern Fair Debt Collection, and Agencies’ Oversight Roles Vary
paragraphs: A variety of federal and state laws address debt collection practices, and a  number of federal and state agencies play a role in overseeing the debt  collection industry, conducting enforcement activities, and educating  consumers about debt collection.
subsections: section_title: FDCPA Is the Primary Federal Law Governing Third-party Debt Collection Practices
paragraphs: Congress has passed several laws that govern the practices of creditors or  third parties in the collection of debt, including FDCPA, the Federal Trade  Commission Act (FTC Act), and the Fair Credit Reporting Act (FCRA).
subsections: section_title: Fair Debt Collection Practices Act
paragraphs: The primary federal law governing third-party debt collection practices is  FDCPA, which Congress enacted in 1977 in response to concerns about  the practices of many debt collectors. FDCPA applies to third-party debt  collectors, a term that includes collection agencies that operate on a  contingency basis, collection law firms, and debt buyers, but generally  does not apply to original creditors collecting on their own debt.  According to the Senate report accompanying FDCPA, creditors were  exempted because it was believed that their incentive to protect ongoing  customer relationships made them less likely to engage in abusive  collection practices.
FDCPA prohibits debt collectors from using abusive, deceptive, and unfair  debt collection practices as well as other specific practices:    Communications. The act regulates how collectors can communicate  with consumers who may owe a debt and with others associated with the  consumer. For example, it prohibits a collector from informing a  consumer’s employer about the debt and prohibits collectors from calling  before 8:00 a.m. or after 9:00 p.m. Consumers also may request that the  collector cease further communication.
Treatment of debtor. Debt collectors may not harass, oppress, or abuse  consumers; use or threaten violence; use obscene language; or use a  telephone to engage in actions intended to annoy, such as causing the  telephone to ring repeatedly.
False or misleading representations. Debt collectors may not  misrepresent who they are, falsely represent the legal status of the debt,  fail to disclose to the consumer that they are attempting to collect a debt,  or imply that nonpayment is a crime.
Unfair practices. The act prohibits the use of unconscionable or unfair  practices, including trying to collect the wrong amount of debt; adding  unauthorized fees, interest or other charges to the debt; or causing the  consumer to incur collect-call telephone charges.
FDCPA also dictates the process debt collectors must use during the initial  communication with the consumer and the steps a consumer can take to  dispute a debt. Within 5 days of a collector’s initial communication about a  debt, the collector must send the consumer a written notice—a validation  notice—that includes the amount of the debt, the name of the owner of the  debt, and a statement informing the consumer that the debt is assumed  valid unless the consumer disputes the debt in writing within 30 days. If  the consumer disputes the debt within that period, the collector must  cease collection efforts until the collector provides the consumer with  verification of the debt.
FTC has primary government enforcement authority under FDCPA— except to the extent that this enforcement authority is given to seven other  federal agencies for entities under their jurisdiction. FTC has a number of  enforcement options for those who violate FDCPA. FTC can seek a court  order prohibiting defendants from engaging in conduct and requiring that  they pay monetary relief, including restitution to consumers, disgorgement  of ill-gotten gains, and civil penalties of $16,000 per violation. FDCPA  also provides consumers with a private right of action—allowing them to  bring civil actions and be awarded monetary damages if collectors engage  in prohibited collection practices or otherwise do not adhere to the act’s  requirements.
section_title: Federal Trade Commission Act
paragraphs: The FTC Act, enacted in 1914 and amended on numerous occasions, gives  FTC the authority to prohibit and take action against unfair or deceptive  acts or practices. Certain practices that violate FDCPA provisions may  also violate section 5 of the FTC Act, and FTC often will bring  enforcement actions under both statutes in its cases against third-party  debt collectors. In addition, FTC and federal depository regulators can use  the FTC Act to address unfair or deceptive debt collection practices by  original creditors, who are not covered by FDCPA. The FTC Act also  authorizes FTC to obtain a court-ordered injunction to halt the activities of  any entity that it believes is violating the laws it enforces, including  FDCPA.
section_title: Fair Credit Reporting Act
paragraphs: FCRA, enacted in 1970, is designed to ensure the accuracy of information  provided for “consumer reports”—reports containing information about an  individual’s personal and credit characteristics used to help determine  eligibility for such things as credit, insurance, and employment.  Consumer reporting agencies assemble consumer reports using  information provided by data furnishers that can include credit card  issuers, debt collectors, and debt buyers. FCRA requires that these data  furnishers provide accurate information to consumer reporting agencies  and specifies that information about delinquent accounts generally cannot  remain on a consumer’s credit report more than 7 years. The act also  prescribes how the date of delinquency of a consumer debt is to be  calculated, as well as the process that consumer reporting agencies and  data furnishers must follow when consumers dispute the accuracy of  information on credit reports. In July 2009, FTC and the federal depository  institution regulators issued a final rule to establish guidelines for  reasonably ensuring the accuracy and integrity of consumer information  reported to consumer reporting agencies and adding a new process for  addressing consumer disputes.
section_title: Other Federal Statutes
paragraphs: Provisions in other federal statutes also affect debt collection practices.  The Telephone Consumer Protection Act of 1991 regulates the use of  predictive dialers—a technology on which the debt collection industry  relies heavily in its collections operations.  Subtitle A of title V of the  Gramm-Leach-Bliley Act governs the collection, sharing, and safeguarding  of consumers’ nonpublic personal information by certain financial  institutions, including creditors and debt collectors, and requires that  these entities implement proper safeguards to protect the security and  integrity of consumer information.
In addition, a number of financial regulatory statutes grant federal  depository regulators the authority to examine banks’ safety and  soundness, as well as compliance with applicable laws and regulations. As  part of these examinations, the federal depository regulators may review  credit card issuers’ internal debt collection practices and their oversight of  third-party debt collectors (vendors), in connection with applicable laws,  regulations, or guidance.
section_title: Many States Have Their Own Fair Debt Collection Statutes
paragraphs: States cannot enforce FDCPA, but according to the National Consumer  Law Center, most states have fair debt collection statutes of their own.  According to state officials we spoke with, many of the state laws largely  mirror FDCPA but allow for local enforcement—however, some state laws  are more expansive than FDCPA because they define “debt collector”  more broadly or place additional requirements on debt collectors’  conduct. Examples among four states we reviewed include the following:    Applicability to creditors. Some state debt collection statutes may  regulate the activities of creditors collecting their own debts, unlike  FDCPA, which generally applies only to third-party collectors. For  example, California law expressly defines debt collector to mean “any  person who, in the ordinary course of business, regularly, on behalf of  himself or herself or others, engages in debt collection.”
Consumer notice requirements. Some states may have consumer notice  requirements additional to those in FDCPA. For example, California’s debt  collection statute among other things expressly requires third-party debt  collectors to provide a specific notice to a debtor describing the debtor’s  rights, including notice that collectors may not harass the debtor by using  threats of violence or arrest or by using obscene language. The Colorado  Fair Debt Collection Practices Act expressly requires collectors to provide  consumers with the Web site address of the Colorado Attorney General,  which contains information on the act.
Restrictions on debt collection activities. Some states may place  restrictions on collection activities additional to the restrictions in FDCPA.  For example, Massachusetts debt collection regulations state that it is an  unfair or deceptive act or practice for a creditor or debt collector to call a  consumer’s home more than twice a week per debt or call locations other  than home more than twice in 30 days.
Private civil enforcement. As with FDCPA, some states may allow  consumers to bring civil law suits against debt collectors that violate state  debt collection laws. According to one state official, such a private right of  action is designed to encourage compliance with the law while minimizing  the use of limited state enforcement resources. For example, Texas law  expressly provides that consumers can also be granted injunctive relief  that prevents a collector from continuing the unlawful harmful conduct.
Debt collection also is affected by applicable state statutes of limitations,  which place limits on when an issuer or debt collector can initiate legal  action against a consumer for collection of a debt. According to FTC, the  statute of limitations for credit card debt varies by state, but typically  ranges from 3 to 10 years, and generally begins to run from the date the  debt becomes delinquent. Some states may allow the statute of limitations  to restart under certain circumstances—for example, in Kansas, the  statute of limitations is restarted when a consumer makes a payment  toward the debt or acknowledges in writing owing the debt. According to  FTC, courts that have addressed the issue have found it illegal to sue or  threaten to sue to recover debt that is beyond the statute of limitations,  often referred to as “time-barred debt.” According to the National  Consumer Law Center, courts have generally found that attempting to  collect a time-barred debt without suing or threatening to sue does not  violate FDCPA, except in the few states in which debts are extinguished at  the end of the limitations period.
section_title: Federal and State Agencies Oversee Debt Collection Practices in a Variety of Ways
paragraphs: A number of federal and state agencies regulate the various participants  involved in debt collection and bring enforcement proceedings against  violators of the law by filing and prosecuting administrative or civil actions  and undertaking other consumer protection measures such as consumer  and industry education.
subsections: section_title: Federal Trade Commission
paragraphs: FTC has primary government enforcement responsibility to oversee the  debt collection industry and, in doing so, tracks consumer complaints,  takes enforcement actions, and provides consumer and industry  education. FTC receives consumer complaints about debt collection and  other matters online through its Complaint Assistant system or by  telephone or in writing through its Consumer Response Center and enters  these complaints into its Consumer Sentinel database. In addition, local  Better Business Bureaus and state and local law enforcement authorities  can also enter information into the Consumer Sentinel database regarding  complaints they receive. Some federal depository regulators are also  members of Consumer Sentinel and can access the database and review  complaints related to institutions they oversee. FTC and other law  enforcement authorities use the Consumer Sentinel database to target  their investigations and guide their enforcement activities.
FDCPA and the FTC Act provide FTC with enforcement authority to  investigate debt collection agencies it believes may be violating the law. As  noted earlier, if FTC’s investigation reveals violations of either act, the  agency can file suit in federal court for injunctive relief to prevent further  violations and seek restitution for consumers and disgorgement of ill- gotten gains by the collector. Alternatively, FTC can seek civil penalties  and other monetary relief by requesting that the Department of Justice file  suit against the collector on its behalf. FTC officials told us that the agency  has focused its enforcement efforts on practices that result in the greatest  harm to consumers or on cases that involve a particular legal issue it is  trying to clarify. FTC officials said that to maximize the deterrent effect of  its enforcement actions, they recently have been demanding greater  monetary penalties and naming as defendants individual corporate officers  and managers, rather than simply the company as a whole.
FTC also undertakes consumer education efforts to inform consumers of  their rights and the restrictions placed on debt collectors by FDCPA. In  2008, FTC distributed more than 110,000 English- and Spanish-language  copies of the brochure “Fair Debt Collection,” which seeks to describe  FDCPA in plain, easily understood language. FTC also issues consumer  alerts on its Web site on specific debt collection issues of concern. For  example, the agency issued an alert on the collection of time-barred debts  shortly after it had taken an enforcement action related to that issue. FTC  call center staff also seek to educate consumers who call to submit a debt  collection complaint—for example, informing them of their right to obtain  written verification of the debt. The agency also seeks to educate and  reach out to participants in the debt collection industry by speaking at  industry conferences, participating in panel discussions, and issuing  FDCPA advisory opinions.
section_title: Federal Depository Regulators
paragraphs: The major credit card issuers are structured as depository institutions and  their activities, including those related to debt collection, are therefore   overseen by federal depository institution regulators. OCC oversees four  of the largest consumer credit card issuers—Bank of America, Capital  One, Chase, and Citibank, while FDIC oversees two other large issuers,  American Express and Discover. The Federal Reserve, OTS, and the  National Credit Union Administration (NCUA) also oversee certain credit  card issuers. The depository regulators conduct examinations to evaluate  the safety and soundness of their institutions and ensure compliance with  federal laws and regulations, including the FTC Act and FCRA. While  FDCPA does not apply directly to credit card issuers collecting on their  own debts, some of the practices prohibited by the statute, if engaged in  by financial institutions, may support a claim of unfair or deceptive  practices in violation of the FTC Act, which is the statute on which the  federal depository regulators rely in overseeing collection activities.
As part of issuers’ safety and soundness examinations, regulators may  review the sale of credit card debt, as well as the programs issuers offer  delinquent consumers to help them pay their debt, since these issues can  affect the financial stability of the bank. Regulators told us they also  review issuers’ management and oversight of third-party vendors,  including third-party debt collection agencies. If they have reason to  suspect problems with these third-party debt collection relationships, they  can investigate the collection agency on site at the company workplace.  If the regulators identify violations related to debt collection, among th e  possible responses could be formal enforcement actions (such as cease  and desist orders, civil money penalties, removal orders, and suspension  orders) or informal enforcement actions (such as memorandums of  understanding and board resolutions). In addition, if appropriate,  regulators can seek restitution as a remedy for violations involving unfair  or deceptive debt collection practices. Like FTC, the depository regulators  collect and track complaints from consumers about issuers. They use  these data to focus their risk-based examinations, assess issuers’  compliance with consumer protection laws and regulations, and determine  the need for future regulations or educational efforts.
section_title: State Agencies
paragraphs: Our meetings with state regulators indicated that states vary in how they  regulate debt collectors and enforce fair debt collection laws. Agencies  that play a key role in overseeing debt collection can include the state’s  banking or finance division, office of consumer affairs, and the office of  the Attorney General. Some states also have collections or licensing  boards—comprising in some cases both government regulators and  industry representatives—that serve as the regulatory body for debt  collection agencies in the state.
Certain states require debt collection agencies doing business in the state  to be licensed. State agency officials noted that some states may require  debt collectors to pay a licensing fee or post a bond, and some states can  suspend or revoke an agency’s license if it has been found to violate state  debt collection laws or otherwise violate licensing requirements. One state  official also told us that licensing of debt collectors serves to keep debt  collectors in compliance with state law without having to expend state  resources bringing collectors to court. For example, in Colorado the  Attorney General’s office said that in recent years it had brought an  average of about 50 to 60 administrative enforcement actions a year— about half of which resulted in settlements and the other half resulted in  the issuance of letters of admonition (censures). The office said that one  or two cases have resulted in the revocation of a collector’s license—but  only rarely has court action been required.
Under the auspices of the North American Collection Agency Regulatory  Association (NACARA), we held a group meeting with agency staff who  oversee debt collection from 17 states. Many of the states represented  gather and analyze consumer complaints about debt collection, often  through telephone hotlines, postal mail, and online forms. States can also  receive referrals from district attorneys, Better Business Bureaus, and  other sources. Some states, such as Minnesota and Tennessee, review or  investigate every consumer complaint received about a debt collector.  Other states, the regulators told us, look collectively at complaint trends  or patterns to determine if an investigation or enforcement action may be  warranted. At least one state, North Dakota, conducts on-site  examinations of every licensed collection agency operating in the state,  either through an on-site visit or by mail. North Dakota bases its  examination cycle primarily on the complaint volume received against a  licensed collection agency, but examinations are still conducted even if  there are no complaints received against a particular agency.
From January 2006 through May 2009, states took approximately 28  enforcement actions against debt collectors and collection attorneys for  debt known to involve, or possibly involving, credit cards, according to the  National Association of Attorneys General. In many of these cases state  authorities said they imposed civil monetary penalties, recovered  consumer funds, or enjoined the collector from engaging in further  unlawful collection activities. Often, consumer complaints may serve as  the trigger for taking an enforcement action—for example, Minnesota  state officials told us that approximately 95 percent of such actions  stemmed from individual consumer complaints.
As with FTC, a number of state regulators make efforts to educate  consumers about their rights under federal and state fair debt collection  laws. Some states that we spoke with have developed Web sites,  brochures, or videos on public access channels to educate consumers. In  some states, regulators also deliver speeches and appear at conferences  related to debt collection. Some states and cities incorporate debt  collection issues into their broader efforts to improve consumers’ financial  literacy. For example, New York City’s Department of Consumer Affairs  addressed many debt collection issues during a weeklong “call-a-thon,”  from which consumers could get answers to financial questions.
States also coordinate with federal entities and among themselves. For  example, to coordinate oversight responsibilities, FTC staff said they  regularly communicate with state regulators and share information on  industry trends and concerns. FTC also shares information with state  Attorneys General and local law enforcement agencies through its  Consumer Sentinel complaint database. NACARA was created in 1994 to  help communicate and coordinate debt collection regulatory and  enforcement efforts among member states. In some instances, several  states jointly pursued enforcement actions against debt collectors. In  addition, 12 NACARA member states are in the process of developing a  uniform debt collector licensing application to improve the consistency of  information on debt collection agencies across different states. NACARA  members with whom we spoke said they have a good working relationship  with FTC and have participated in FTC conferences.
section_title: Delinquent Credit Card Debt May Be Collected Internally, Outsourced, or Sold
paragraphs: Large credit card issuers first seek to recover delinquent debt using  internal collection departments or first-party collection agencies that  collect debt using the issuer’s name. Issuers offer short- and long-term  repayment arrangements to assist delinquent debtors. When large issuers  are unable to collect these accounts, they typically send them to third- party collection agencies or collection law firms. But these creditors also  can sell delinquent debt to a debt-buying firm that may, in turn, seek  recovery using in-house collection, third-party collection agencies, or  resale of the debt to another debt-buying firm. Figure 2 provides an  illustrative example of the lifecycle of one delinquent credit card account.
subsections: section_title: Credit Card Issuers Maintain Internal Collection Operations
paragraphs: Large credit card issuers maintain internal collection departments that  attempt to recover money owed on delinquent credit card accounts.  Typically, these issuers use internal collection departments to contact  consumers with accounts that are no more than 180 days delinquent and  thus have not yet been charged off. Officials with whom we spoke at the  six largest issuers have internal policies and procedures that govern their  collection practices and audit departments that seek to ensure compliance  with applicable laws. While FDCPA does not apply to creditors collecting  on their own accounts, all of these issuers said they voluntarily use  FDCPA as guidance for their internal collection activities and regularly  monitor compliance with applicable state laws. Some issuers told us their  collection staff undergo training programs that range in length from 2 to 10  weeks and include topics such as the company’s collection policies,  procedures, and technologies; negotiation skills; and compliance with  applicable federal and state laws. The collection departments of five of the  six largest issuers each had from 850 to 8,390 collectors. (The sixth issuer  declined to provide the number of its collection employees.) The great  majority of issuers’ internal U.S. collection operations are based in the  United States, although one issuer had a call center located in Costa Rica.  Several of the large issuers we met with have recently expanded the size of  their collection staff due to increases in the number of delinquent  accounts; representatives of one issuer told us in February 2009 that its  collection staff had increased 20 percent since late 2008.
Issuers can assist delinquent debtors experiencing financial hardship by  using a short- or long-term payment arrangement to bring the account  current or offering to settle a cardholder’s account by accepting less than  the full balance due. Temporary hardship programs can last up to 12  months and help borrowers overcome financial difficulties, such as  unemployment or short-term illness, by reducing interest rates, finance  charges, and fees. Programs of more than 12 months (“work out”  programs) address longer-term financial hardships, such as divorce,  permanent disability, or the death of a household income provider.  Repayment terms for work out programs vary widely among issuers, but  the federal depository regulators’ guidance for credit card lending states  that the programs should strive to have borrowers repay their credit card  debt within 60 months. Issuers may choose to “re-age” the account—or  return a delinquent credit card account to current status without  collecting the total amount of principal, interest, and fees that are due—if  it meets certain criteria. Consumers can benefit from the re-aging of  accounts because it can improve their credit reports. Federal banking  guidelines exist on the frequency and circumstances under which issuers  can re-age credit card accounts.
section_title: Issuers Outsource Some Collection Activities
paragraphs: Credit card issuers can outsource debt collection to various types of  collection firms. Accounts that have not been charged off are generally  outsourced to first-party collection agencies and charged-off accounts are  generally outsourced to third-party collection agencies or collection law  firms. Contracts between issuers and these agencies often specify the  policies and procedures to be used in the collection process. An issuer can  also decide to sell credit card debts and the buyer of those debts can, in  turn, resell those debts to another buyer. Limited available data exist on  the specific amounts of the credit card debt that issuers collect in-house,  outsource, or sell because issuers generally consider this to be proprietary  business information.
subsections: section_title: First-party Collection Agencies
paragraphs: Some credit card issuers use “first-party” collection agencies to  supplement their in-house collection operations for delinquent accounts  that have not yet been charged off. First-party collection agencies use the  name of the issuer when contacting consumers and may not be subject to  FDCPA. These agencies typically are paid on a fee-for-service rather than  contingency basis. Using first-party collection agencies gives issuers  additional flexibility to manage fluctuations in the workload and resources  of their internal collection operations. Because first-party collectors use  the issuers’ name and are collecting from current customers, there is an  emphasis on preserving the relationship with the consumer and mitigating  the negative perception that consumers can have about their accounts  being forwarded to collection. Some issuers also mentioned that their first- party collection agencies are required to adhere to the same standards as  their internal collection departments.
section_title: Third-party Collection Agencies
paragraphs: If an issuer’s internal efforts to collect on accounts have been  unsuccessful or the accounts are more than 180 days delinquent and have  been charged off, the issuer may choose to place the account with a third- party agency (also known as a contingency agency). Third-party collection  agencies are generally paid on commission based on a percentage of the  amount recovered, with the percentage being higher for debts that are  older or otherwise harder to collect. Third-party agencies typically use  their own names when communicating with debtors and are subject to  FDCPA, as well as any relevant state laws. The length of time that  accounts are placed with these agencies can vary, but can range from  several weeks to several months or years. The agencies generally return  uncollected accounts to the issuer at the end of the placement period, at  which time issuers sometimes place the account with a different collection  agency. Some third-party collection agencies focus on recovering credit  card debt, while other agencies specialize in recovering other types of  debt, such as telecommunications or health care, although these  companies may collect credit card debt as well. Officials of one large  credit card issuer told us it had contracts with 15 to 20 different third-party  collection agencies, while another issuer had contracts with 20 such  agencies, and a third issuer with more than 50 agencies. Some of the  issuers explained that they choose their collection agencies selectively to  avoid legal or reputation risks and to maintain customer relationships. For  example, they may review companies’ records of legal compliance, data  security practices, and number of Better Business Bureau complaints.
Before an issuer provides a portfolio of credit card accounts to a third- party company for collection, it “scrubs” the portfolio to remove accounts  for which the debtor has died, filed for bankruptcy, previously settled the  debt, or disputed its validity, according to several issuers with whom we  met. Several collection companies told us that when they receive a  portfolio from an issuer or another collection company, they typically  conduct a scrub of their own, including checking the accuracy and  completeness of names, addresses, telephone numbers, and other  information to ensure the account is valid for collection. Collection  companies can use customized models to help determine the best  collection strategy for the portfolio. These models assess the likelihood of  payment and can help determine payment or settlement terms that the  debtor should be offered.
The collection process begins when the collection company initiates  contact with the debtor either by telephone or in writing. In general,  FDCPA requires collectors to provide a consumer with notice of their  rights under the law, called a validation notice, within 5 days of initial  contact with the debtor, although we spoke with officials from one agency  that sends the notice almost immediately. If a debtor cannot be located,  companies often use locator methods, such as “skip tracing”—the practice  of searching national telephone directories, credit reports, tax assessor  and voter registration records, and other sources, as well as contacting  employers, friends, and family members of the debtor. Collection  companies sometimes use the services of third-party vendors that  specialize in skip tracing.
Third-party debt collection efforts rely primarily on a combination of  telephone and postal mail contacts. Several large debt collection  companies have multiple call centers—for example, one large collection  company told us it operates about 125 call centers throughout the United  States and overseas and employs about 15,000 collectors. Technology  fundamentally has changed the practice of debt collection. We toured a  call center at one third-party collection company and observed that  collectors had on-screen access to detailed information about debtors and  their financial histories. The software systems used for collection can also  allow supervisors to monitor the collection activities of staff. Software  applications also help manage collectors’ workflows and can help ensure  compliance with federal and state law. Predictive dialers and other  telephone technology improve efficiency by reducing the wait time for  collection staff. For example, predictive dialing systems can be  programmed not to call consumers earlier, later, or more frequently than  permitted by FDCPA or applicable state law. One large agency told us it  recently designed a proprietary voice recognition system that tries to  recognize when collectors engage in inappropriate behavior, such as  speaking with an abusive tone or using profanity. Word processing and  automated mail sorting systems allow debt collectors to send customized  mass mailings relatively inexpensively. Some collection agencies contract  with third-party vendors to handle the design and mailing of their  customized FDCPA-compliant letters.
Officials at the 12 third-party collection companies and debt buyers with  whom we spoke required their collectors to participate in training  programs that ranged in length from 1 to 4 weeks. Topics can include debt  collection techniques, negotiation skills, compliance with applicable law,  and use of desktop technologies. Some collection companies told us they  periodically retest their staff and provide additional training to respond to  changes to any applicable state fair debt collection law. While  compensation plans can vary among companies, the incomes of collection  staff are typically some combination of hourly wage and a commission  based on their performance in recovering debts.
With the authorization of their creditor clients, collection companies can  offer a variety of repayment plans to debtors, which may include  installment payments (that is, fixed monthly payments) or settlements for  less than the amount due. If applicable, and authorized by their creditor  clients, companies can also elect to discount interest and fees that have  accumulated on the account. Options for methods of payment have  expanded in recent years and now include electronic fund transfers, debit  cards, and credit cards. Contracts between issuers and collection agencies  often specify the policies and procedures to be used during the collection  process. According to issuers and collection agencies we met with, this  can include details on how and when cardholders may be contacted,  options that can be offered for repayment and settlement, and how  consumer disputes are to be addressed. For example, several issuers  required collection agencies to forward disputed accounts to them for  investigation. Several issuers also told us that contracts typically include  data security requirements and provisions allowing issuers to monitor and  audit the collection agency. For example, large issuers sometimes have  access to the internal communications systems of the third-party agencies,  allowing them to listen to live collection calls from a remote location.  Issuers also said they conduct regular audits of their collection vendors,  which include reviews of data security, financial records, and compliance  with applicable law and any policies specified by the issuer. While  contracts usually specify how long the account will be placed with the  agency, some collection agencies told us that early termination is allowed  if the agency is not meeting compliance or performance standards.
section_title: Collection Law Firms
paragraphs: Collection law firms specialize in collecting debts. The National  Association of Retail Collection Attorneys stated in a June 2007 comment  letter to FTC that about 5 percent of delinquent accounts (including credit  card accounts) are referred to collection law firms for possible litigation,  typically after collection efforts by internal and third-party collectors have  failed. One issuer we spoke with places certain accounts with a collection  law firm as soon as the issuer determines that a delinquent debtor has the  ability to pay. Collection law firms involved in the recovery of debt are  generally paid by contingency fee and receive a set percentage of debt  recovered. In addition to using collection law firms, officials of some  issuers and third-party collection companies told us they also maintained  their own legal staff to litigate collection cases.
Many collection law firms use traditional collection methods, such as  telephone calls and letters, before starting litigation. These firms may  collect on various types of debt, such as installment loans, credit card,  automobile, or medical debt. Some of these firms also purchase portfolios  of debt. Issuers and debt collection agencies may also contract with a  network of collection law firms to facilitate the filing of lawsuits against  debtors in multiple states. Collection attorneys and law firms are subject  to FDCPA, although some states may exempt collection attorneys from  state debt collection laws under certain circumstances.
section_title: Credit Reporting
paragraphs: Issuers and other data furnishers, such as collection agencies, can furnish  data and information about debtor accounts to consumer reporting  agencies, which maintain up-to-date, account-level information on  consumer credit histories that is used to help make important decisions  about individuals, such as eligibility for credit, employment, or housing.  Federal law requires consumer reporting agencies and all data furnishers  to take responsibility for ensuring the accuracy of account information  being reported.
Furnishing data to consumer reporting agencies is optional. While all of  the issuers we met with chose to furnish data to consumer reporting  agencies, some issuers, third-party collection agencies, and collection law  firms may choose not to. Contracts for collection services generally  stipulate each party’s responsibility for credit reporting. For example, four  of the six large issuers told us that their contracts with collection agencies  generally stipulate that the issuer rather than the collection agency retains  responsibility for furnishing account data to consumer reporting agencies.  Collection companies collecting on their own debts may choose to furnish  data as a collection tool—consumers may be motivated to repay their  debts to avoid damaging their credit records. One stakeholder told us that  those companies that choose not to furnish account data may, among  other things, want to limit their exposure to liability related to FCRA  compliance.
Consumer reporting agencies and the great majority of data furnishers use  a standard data format, known as Metro 2, to help ensure consistency and  accuracy in the reporting of information. The original Metro format was  developed in the mid-1970s and by 1996, more than 95 percent of all data  were furnished using this format. The Metro 2 format was introduced in  1997. It requires furnishers to provide more specific and complete  information—such as the full account number and other fields that further  identify the account—to improve accuracy and completeness. Consumers  can dispute information in their credit reports related to delinquent credit  card accounts by contacting the issuer, debt collector, or consumer  reporting agency by telephone, mail, or online. Data furnishers, such as  card issuers or debt collectors, must investigate disputes they receive from  consumer reporting agencies and send the results back to the agency. The  consumer reporting agency has 30 days to complete its investigation and,  if necessary, update the consumer’s credit report. Data furnishers and  consumer reporting agencies can use a Web-based automated system  called e-Oscar to transmit information regarding consumer disputes.
section_title: Credit Card Debt Often Is Sold and Resold
paragraphs: Issuers often sell portfolios of delinquent credit card debt to debt-buying  companies. By selling accounts, issuers trade the longer-term cash flows  of collection agency recoveries for the short-term proceeds of a sale to  recover some of their losses. Credit card accounts can be resold multiple  times. Five of the six large issuers with which we spoke currently sell at  least some of their delinquent credit card debt to debt buyers. The issuer  that does not currently sell its debt told us it had done so in the past but  stopped 5 years ago because it believes its internal collection strategies  and outsourcing to third-party collectors yield better results. Reputation  risk can also be a factor in the decision to sell debts since issuers have  limited control over the debt collection practices of new owners of the  debt. Because the price issuers receive when they sell credit card debt has  declined in recent years, at least one issuer told us it had reduced its sale  of such debt—it sold 659,000 accounts with a face value of $3.6 billion in  2008, as compared with 750,000 accounts with a face value of $5.4 billion  in 2006. Another issuer told us that in 2009 it sold approximately 6.6  percent of the inventory of charged-off debt it had accrued since 2001,  which had been the year of its most recent prior sale of debt. In addition,  one issuer told us that it had sold a small percentage of its charged-off  debts from 2007 to 2009. Two other issuers declined to provide us with  data on their sale of credit card debt because they considered this  information proprietary.
Some debt-buying companies may purchase portfolios of debt that they  collect on themselves, while other debt buyers may outsource all of their  collections to third-party collection agencies or law firms. According to  the trade association DBA International, debt buyers that do not collect on  their own debt (sometimes called “passive” debt buyers) are generally not  subject to FDCPA since they take no action to collect on the debt and do  not communicate with the consumer. Portfolios of credit card accounts  can be sold through public or Web-based auctions or through direct  placements arranged by buyers and sellers. A portfolio of debts can be  sold in bulk for an agreed-upon price or in a “forward flow” arrangement  in which sellers agree to sell a steady volume of accounts for a specified  period of time. Forward flow contracts provide sellers with a predictable  stream of revenue for their charged-off accounts.
In addition, sales of credit card debt can be made through debt brokers— firms that facilitate the transaction between buyer and seller but never  themselves attempt to collect on the debt. These firms charge a fee that  may range from 6 to 8 percent of the portfolio’s purchase price. One  industry publication reported that in 2007 the top three debt brokers— National Loan Exchange, Garnet Capital Advisors, and LoanTrade—had  managed a total of $17 billion in credit card sales. We spoke with an  official at one of these three debt brokers, who explained its process for  brokering the sale of a portfolio of credit card debt: A financial institution  contacts the broker with information on the debt portfolio it wishes to sell  and the broker analyzes the portfolio and studies market conditions to  determine an appropriate price for the portfolio. The broker then  describes the portfolio in a detailed memo that is marketed to perhaps 200  potential buyers. A smaller number of interested buyers will receive  further information and conduct their own analysis of the portfolio. On  behalf of the seller, the broker will then offer the debt portfolio either  through a sealed bidding process or an online auction.
Sellers and buyers conduct due diligence before making a bid or  completing a transaction, which can include a review of the other party’s  policy and procedures regarding collection operations, compliance with  applicable state and federal laws, and professional references. Some credit  card issuers told us they sell accounts only to debt buyers with which they  are familiar because of concerns about reputation risk; one of these  issuers requires buyers to be certified annually to be eligible to purchase  its accounts. Similarly, on the debt buyer side, some buyers require the  seller to complete a survey to provide them with more information about  the accounts being sold.
According to several industry stakeholders we spoke with, when preparing  a portfolio for sale, a debt seller generally scrubs the accounts to remove  those in which the debtor has died, filed for bankruptcy, settled the debt,  or alleged fraud or identity theft. Prior to bidding on a credit card  portfolio, debt buyers typically do their own reviews and scrubs of the  accounts, according to DBA International. They may also review the  portfolio’s contents to determine the potential return on investment and if  the strategies required to collect on the accounts would be consistent with  the buyer’s operations. According to ACA International’s industry  guidance, once a bid has been accepted and a transaction completed,  certain documents, such as a bill of sale and a list of the accounts sold,  may be used to legally document transfer of ownership.
According to several industry stakeholders, as well as industry guidance  published by ACA International, contracts for sales of debt portfolios can  typically include provisions that specify the nature and extent of the  account data that will be provided to the buyer, as well as the buyer’s  access to account media—for example, credit card applications and billing  statements—or other documentation. Some contracts can include “buy- back” and “put-back” rights, which allow buyers and sellers to remove and  receive remuneration for certain accounts, such as those involving  evidence of fraud or deceased debtors. The contracts also may include  indemnification provisions—for example, holding the first buyer  responsible for any liability incurred as a result of the actions of a  subsequent buyer. Some contracts also may limit the terms under which  the buyer can resell the accounts. For example, one issuer with which we  spoke prohibits its debt buyers from reselling the accounts for 1 year after  purchase. Another issuer requires the debt buyer to receive its approval to  resell the accounts, noting that the criteria for selecting the secondary  buyer must be similar to that used by the issuer.
The price of a credit card portfolio is largely driven by certain key  characteristics—most notably, the age of the debt and the number of times  it has previously been placed for collection with a third-party agency. For  example, accounts that are 91 days to 6 months past due and never  previously placed for collection generally receive the highest prices, while  older accounts and those previously placed for collection typically receive  far lower prices. Some stakeholders told us that the geographic location of  accounts can also affect pricing since state laws on debt collection,  statutes of limitation, and other issues can affect the ability to recover on  the accounts. For example, one debt broker told us that prices may be  lower in states that prohibit the garnishment of wages in debt collection  judgments. The debt broker added that the issuer’s underwriting criteria,  the average account balance, and the amount of documentation available  all can affect the price of a portfolio.
Limited publicly available data exist on the exact prices of credit card  portfolios. As shown in table 2, Kaulkin Ginsberg estimated that in January  2009, accounts that were up to 6 months delinquent and had not been  placed with a collection agency typically sold for an estimated 5½-7½  cents for each dollar of face value. Older debt typically sold for much  less—for example, accounts that were more than 2 years delinquent or had  been previously placed with two collection agencies sold for an estimated  1-2 cents for each dollar of face value. Prices for all types of delinquent  credit card debt have declined significantly in recent years, which Kaulkin  Ginsberg attributes largely to a weakening economic environment that has  reduced consumers’ ability to repay debts and reduced buyers’ willingness  to pay as much for underperforming assets.
After a debt buyer purchases a portfolio of accounts it has similar options  as an issuer in choosing how to collect on the accounts. It can choose to  collect or litigate using internal resources, contract the collection of the  account to a third-party agency or law firm, or resell the accounts, or a  portion of them, to a secondary buyer. The resale of debt has increased in  recent years, according to Kaulkin Ginsberg, and debt can be resold  multiple times. One debt buyer estimated that almost half of all credit card  accounts purchased directly from original creditors eventually are resold.  As with the original sale of a debt portfolio, resale can occur through a  public auction, directly between debt buyers, or through a debt broker  serving as intermediary. The extent to which debt buyers resell their debt  depends to some extent on their business model. “Passive” debt buyers do  not attempt to collect debts directly, but rather resell or outsource  everything they purchase to collection agencies or law firms. Other debt  buyers purchase portfolios, attempt collection for a certain period, and  then resell accounts for which collection was not successful. Several  industry stakeholders with whom we spoke noted that a debt buyer’s due  diligence becomes especially important for portfolios that have been sold  multiple times because fraud or inaccurate account data can be more  prevalent in these accounts.
section_title: Certain Issues Exist about Some Debt Collection Practices and FDCPA Does Not Address Some Changes That Have Occurred in Technology and the Marketplace
paragraphs: State and federal enforcement actions, anecdotal evidence, and the  volume of consumer complaints to federal agencies—about such things as  excessive telephone calls or the addition of unauthorized fees—suggest  that problems exist with some processes and practices involved in the  collection of credit card debt, although the prevalence of such problems is  not known. FDCPA, which was enacted in 1977, does not reflect certain  changes that have occurred since that time with regard to modern  technology and the debt collection marketplace.
subsections: section_title: Issuers’ In-house Collection Operations Have Been the Source of Complaints, but Regulators Have Identified Relatively Few Serious Problems
paragraphs: The federal depository regulators—FDIC, Federal Reserve, OCC, and  OTS—and FTC track consumer complaints related to issuers’ in-house  debt collection practices.
subsections: section_title: Complaints about Issuers
paragraphs: As shown in table 3, during 2004-2008, the depository regulators received  an average of about 2,000 complaints per year about the credit card debt  collection practices of the institutions they supervise. These complaints  constituted, on average, about 12 percent of all complaints that the  depository regulators received about credit cards and 4 percent of  complaints received about any topic during that time frame. FTC does not  track whether complaints are related specifically to credit card debt, but  during the same 5-year period it received about 22,400 complaints annually  about original creditors’ overall debt collection practices. Our review of  FTC complaint data indicates that roughly 25 percent of the complaints  FTC received about debt collection were complaints about original  creditors (as opposed to third-party collectors). However, data were not  available on the extent to which the consumer complaints were against  larger versus smaller creditors.
FDIC and OTS complaint data showed that common allegations in  complaints received about issuers included attempts to collect debt not  owed and inappropriate practices such as excessive telephone calls or  harassment. Among the most common complaints that FTC received about  creditor debt collection were excessive telephone calls, creditors  misrepresenting the amount or legal status of a debt, the addition of  unauthorized fees and interest to accounts, and telephone calls from  creditors looking for other individuals. However, consumer complaints  may not be a reliable indicator of the extent of problems that may be  occurring, for several reasons. Many consumers who experience problems  with debt collection likely do not complain to any government agency—in  many cases because they may not know to which agency to complain or  because they do not know that their rights have been violated.  Additionally, FTC has noted that a complaint does not necessarily indicate  that a violation of law has occurred—either because the complaint is  inaccurate or, if accurate, does not represent an actual violation.
section_title: Enforcement Actions against Issuers
paragraphs: As discussed earlier, federal depository regulators conduct examinations  of the entities they supervise and may take formal or informal  enforcement actions when they find noncompliance with applicable laws  and regulations. From 1999 to 2008, OCC, OTS, and Federal Reserve did  not find any problems in their bank examinations related to credit card  debt collection that resulted in a formal enforcement action. FDIC took  formal enforcement action during that time frame against three issuers  related, among other things, to their oversight of CompuCredit  Corporation, a third-party vendor used to market, service, and collect debt  on some of the issuers’ credit card accounts. The issuers themselves  were not alleged to have engaged in improper debt collection, but they  were each found to have had inadequate compliance systems to conduct  proper oversight of CompuCredit, which was accused of engaging in  deceptive collection practices. The issuers entered into a consent  agreement, in which they agreed to a cease and desist order and to pay  restitution and civil money penalties, without admitting or denying the  alleged violations.
Depository regulators also can take informal enforcement actions—s as commitment letters, memorandums of understanding, and board  resolutions—when they find weaknesses that are more technical in nature,  but for which corrective action still is needed. From 1999 through 2008,  OCC told us it took one informal enforcement action against an issuer that  related to credit card debt collection, and the Federal Reserve, FDIC, and  OTS told us they did not take any.
In addition to the enforcement actions taken by the federal depo regulators, in the late 1990s FTC reached settlements with four  department stores related to the collection practices of their private-label  sitory  credit cards. FTC alleged that the stores had induced cardholders who  filed for bankruptcy protection to “reaffirm” their credit card accounts and  falsely represented that these “reaffirmation agreements” would be filed  with the bankruptcy courts. The resulting consent agreements with the  four department stores ensured that at least $183 million would be  returned to consumers whose debts had been collected illegally.
The Department of Justice’s U.S. Trustee Program has taken one  enforcement action against an issuer related to credit card debt collection.  In November 2008, the program settled with Capital One for allegedly  collecting on credit card debts that had been discharged in bankruptcy,  which is a violation of the U.S. Bankruptcy Code. According to the  Trustee Program, Capitol One did not have effective procedures for  identifying customers who had filed for bankruptcy. As a result, the issuer  had improperly filed proof of claims in approximately 5,600 cases when it  knew or should have known that the debt had been discharged, and the  issuer improperly collected approximately $340,000 from debtors’ Chapter  13 bankruptcy estates nationwide in violation of federal bankruptcy law.
The scope of this report is largely on the debt collection practices of the  very largest credit card issuers—all of which are federally supervised  banks—but it should be noted that concern about debt collection  practices has often focused on the smaller, subprime credit card issuers.  Representatives of the National Consumer Law Center told us that  subprime issuers, which are often small, local banks, have been very  aggressive in their debt collection efforts, and a report by the center  alleged that some high-fee subprime card issuers frequently employ  abusive debt collection practices. FDIC staff told us that to the extent  that debt collection abuses occur, they may be more common among  smaller issuers, particularly subprime issuers, since large issuers tend to  have more compliance resources and may be more mindful of the  collection practices they use since they are sensitive to preserving their  reputations in a mature credit card marketplace. Data on the proportion of  consumer complaints on debt collection practices that were made against  larger versus smaller issuers are not readily available.
Some consumer group representatives have raised concerns about some  issuers’—including large issuers—debt collection practices, such as the  use of arbitration in resolving debt collection matters. Cardmember  agreements sometimes require that disputes about a cardholder’s account  be handled through arbitration, a form of alternative dispute resolution in  which disputes are resolved by an independent arbitrator, rather than by a  judge in a formal court. Some consumer advocates expressed concern that  requiring arbitration is unfair because they believe the arbitration system  can be biased against consumers. A September 2007 report by Public  Citizen that reviewed arbitration cases in California found that business  entities prevailed in about 94 percent of debt collection cases. In July  2009, the Minnesota Attorney General announced that it had reached a  settlement with the National Arbitration Forum—the country’s largest  administrator of credit card and consumer collections arbitrations—in  which the company agreed to permanently stop administering arbitrations  involving consumer debt. The representatives of the large issuers with  whom we spoke said that they rarely or never engage in arbitration  involving delinquent or charged-off accounts.
section_title: Some Debt Collection Industry Practices Have Been the Source of Much Concern, but the Extent of Problems Is Unknown
paragraphs: No comprehensive data exist on the extent to which abusive practices may  be occurring among third-party debt collectors and debt buyers.  Nevertheless, FTC, state agencies, and consumer groups have expressed  concerns in recent years that abusive practices are occurring. Although  the extent of problems is not known, several indicators—primarily  complaint data, government enforcement actions, private lawsuits, and  anecdotal evidence—suggest they may not be uncommon.
subsections: section_title: Complaints about Third-party Collectors
paragraphs: FTC receives more complaints about the debt collection industry than it  does any other specific industry. In 2008, the agency received about 79,000  complaints on third-party debt collectors, which represented almost 19  percent of all consumer complaints it received on any topic. These figures  are for complaints related to the collection of any debt—not just credit  card debt—because FTC does not track complaints by type of debt.  Complaints about debt collection have increased in recent years and grew  34 percent from 2004 through 2008. Our analysis of FTC complaint data  found that the most common complaints from 2004 through 2008 related  to debt collectors were, in order of prevalence, (1) misrepresentation of  the amount or legal status of a debt; (2) excessive telephone calls; (3)  telephone calls from collectors looking for other individuals; (4) use of  obscene, profane, or abusive language; and (5) threatening to sue if  payment was not made.
The Better Business Bureau, which also collects consumer complaints,  reported receiving about 16,000 complaints about debt collection  companies in 2008. These companies represented the sixth most common  source of complaints received during 2005-2008. Some state agencies also  collect consumer complaints about debt collection practices. The National  Association of Attorneys General found that debt collection complaints  were the number one topic of complaints received by state Attorneys  General in 2008. Representatives from three state agencies also told us  that they receive more complaints about the debt collection industry than  any other topic.
As noted earlier, complaint data may not be an accurate gauge of the  extent of problems. One debt collection industry representative noted that  because of the nature of their work, it is unsurprising that large numbers  of people have grievances with them. Moreover, consumers’ complaints  are not always valid. Industry representatives also point out that the  number of complaints against the debt collection industry represents a  very small fraction of the more than 1 billion consumer contacts the  industry makes each year. Furthermore, increases in consumer complaints  may result, in part, from the ease with which technologies such as the  Internet allow consumers to file a complaint. These effects would tend to  overstate the number of actual problems; on the other hand, consumer  complaints are self-reported and there are likely to be a number of  complaints that are unreported.
section_title: Enforcement Actions against Third-party Collectors
paragraphs: Since FDCPA was enacted in 1977, FTC has taken at least 60 enforcement  actions alleging violations related to debt collection. We analyzed the 24  actions initiated in 1998-2008 against collection companies and found that  13 of them involved or may have involved the collection of credit card debt  (as opposed to other forms of debt). In these actions, FTC alleged  violations of FDCPA and/or the FTC Act, which included, among other  activities, harassing and abusing consumers, communicating with the  consumers’ employers and co-workers about their debts, threatening to  initiate lawsuits or criminal actions against consumers if they failed to pay,  and failing to notify consumers of their right to dispute and obtain  verification of their debts. FTC reached a settlement agreement with the  defendant in all 13 cases, and penalties included requiring collectors and  debt buyers to pay civil monetary penalties and return wrongfully  collected funds to consumers. In some cases, FTC also required debt  collection agencies to develop procedures to address the alleged abusive  practices. For example, one collection agency had to develop a  comprehensive consumer complaint and resolution program and  implement a training program that had to be approved by FTC.
Examples of FTC’s actions against third-party debt collection companies  include the following:  In March 2004, FTC alleged that Capital Acquisitions & Management—a  debt buyer that purchases credit card debt—violated FDCPA by  threatening and harassing numerous consumers to get them to pay debts  they did not owe or that were beyond the statute of limitations.  According to FTC, the firm bought lists of debts that were outdated and  frequently contained no documentation about the original debt and in  many cases inadequate information about the original debtor. In its press  release, FTC alleged that the firm made efforts to find people with the  same name in the same geographic area and tried to collect the debts from  them, whether or not they were the actual debtor. The firm would tell  these consumers that they were legally obligated to pay the debt and, if  they failed to, could be arrested, jailed, or have their property seized, FTC  alleged. Capital Acquisitions & Management settled with FTC in March  2004, without admitting liability for any matter alleged in the complaint,  and paid a civil penalty of $300,000. In the 8 months following the  settlement, FTC reported receiving more than 2,000 consumer complaints  against the firm and filed another complaint about the firm’s practices. A  second enforcement action against this company and other named  defendants resulted in a $1 million judgment as equitable monetary relief  and permanently barred the corporate defendants and some of the  company’s management from engaging in debt collection activities.
In June 2008, FTC alleged that Jefferson Capital Systems, LLC, a debt  collection company, and CompuCredit Corporation violated the FTC Act  and Jefferson Capital Systems, LLC also violated FDCPA by engaging in  deceptive marketing and abusive collection practices. According to FTC,  the firms marketed a preapproved credit card to consumers with charged- off debt, telling them that their old debt balance immediately would be  transferred to the new credit card and reported as paid in full to consumer  reporting agencies. However, consumers who accepted the offer  immediately were enrolled in a debt repayment plan and did not receive a  credit card until they paid 25 to 50 percent of their charged-off debt.  Additionally, FTC alleged that Jefferson Capital used obscene or profane  language in debt collection and caused telephones to ring or engaged  persons in telephone conversation repeatedly with the intent to annoy,  abuse, or harass. The settlement prohibited Jefferson Capital from  engaging in the alleged conduct and required it to comply with FDCPA.
In November 2008, FTC settled with the debt collection agency Academy  Collection Service, Inc. and its owner for $2.25 million, which FTC said  was the largest civil penalty FTC assessed in a debt collection action.
Academy’s collectors allegedly engaged in false threats of wage  garnishment, arrest, and legal action; communicated with third parties  about consumers’ debts; and called consumers at their workplace when  employers prohibited such calls. Other practices included unauthorized  withdrawals from consumers’ bank accounts and the early deposit of  consumers’ postdated payment checks. According to its press release, FTC  also alleged that Academy dismissed consumers’ complaints without  sufficient investigation or did not properly discipline collectors who were  found to have violated FDCPA. In addition to the civil money penalty, FTC  also required Academy to make certain disclosures, such as consumers’  right to have the company stop contacting them about their debt.
FTC also has taken enforcement actions against debt collection companies  for allegedly violating FCRA by reporting inaccurate information to  consumer reporting agencies. In 2000, FTC alleged that Performance  Capital Management maintained old, inaccurate information and failed to  report disputes to consumer reporting agencies. The consent decree  settling this action imposed a civil penalty of $2 million, which was waived  because of the company’s poor financial condition. In 2004, FTC alleged  that NCO Group reported accounts using incorrect delinquency dates,  which can cause negative information to remain on a consumer’s credit  report beyond the 7-year reporting period permitted under FCRA. NCO  Group paid a $1.5 million civil penalty to settle FTC’s charges.
section_title: State Enforcement Actions and Private Lawsuits
paragraphs: While comprehensive data on state actions are not available, our analysis  of information provided by the National Association of Attorneys General  found at least 60 enforcement actions were taken by state attorneys  general against debt collection companies from January 2006 through May  2009, of which 28 involved or may have involved the collection of credit  card debt. These actions alleged a variety of illegal debt collection  practices, such as deducting money from consumers’ bank accounts  without authorization, operating in states without proper licenses, and  refusing or failing to provide consumers with proof of their debts.  Generally, state attorneys general either negotiated a settlement with the  debt collection company or brought a court action against the company.  Settlements included penalties such as refunds to consumers, cancellation  of consumers’ debts, civil penalties, and injunctive relief aimed at  preventing future collection violations.
Among these state enforcement actions were the following:  In 2006, the Massachusetts Office of the Attorney General settled with a  debt collection law firm for allegations of unfair debt collection practices  that violated state and federal debt collection laws. According to the  state’s office, representatives of the firm, among other violations, used  obscene language, harassed and embarrassed consumers, exceeded the  number of permissible calls, placed calls to consumers at improper hours,  disclosed debts to persons other than the consumer, and failed to provide  proof of the validity of debts. Under the settlement, the firm is required to  pay a total of $75,000, including $20,000 in consumer restitution, and  agreed to implement new policies and procedures.
In 2007, the Office of the Illinois Attorney General sued a debt buyer for  violations of the Illinois Consumer Fraud and Deceptive Business  Practices Act. According to the Illinois office, the company used abusive  practices to attempt to collect on time-barred debts more than 10 years  old, debts that had been discharged in bankruptcy, and debts that had  been settled. Additionally, the company allegedly refused or failed to  provide proof of debts, illegally contacted consumers’ family members and  workplaces, and withdrew money without authorization from consumers’  bank accounts. Under the stipulated final judgment, the company paid  $100,000 to the state.
As noted earlier, FDCPA provides consumers with a private right of action,  allowing them to bring civil actions against debt collectors that violate its  provisions and be awarded monetary damages. The Senate report that  accompanied FDCPA indicates that Congress intended these private  lawsuits to provide an important incentive to debt collection companies to  comply with the act. While the exact number of private lawsuits for  violations of FDCPA is not known, representatives of the debt collection  industry told us that such suits were relatively common. The FDCPA Case  Listing Service, LLC—a private firm that tracks such litigation—reported  that 5,383 cases were filed against collection agencies, collection law  firms, and debt buyers in U.S. District Court in 2008 for alleged violations  of FDCPA. A representative of the firm noted that this figure does not  include FDCPA lawsuits filed in state courts, of which there are also  believed to be a substantial number.
While consumers’ private right of action can provide an incentive for debt  collectors to comply with FDCPA, representatives of the debt collection  industry told us that many of the FDCPA lawsuits filed are for what they  consider to be technical violations of the statute that have caused no  actual harm to the debtor. For example, the National Association of Retail  Collection Attorneys believes that a significant burden has been placed  upon debt collectors that have been forced to defend FDCPA suits that  claim that the collectors’ validation notice is somehow confusing or  misleading. Industry officials told us they believe that some consumer  attorneys file FDCPA lawsuits largely for their own personal gain, taking  advantage of the attorneys’ fees awarded under FDCPA for attorneys who  prevail against collection agencies. Representatives of several debt  collection companies told us that in many instances they choose to settle  FDCPA cases even when they believe they have done no wrong to avoid  the expense of bringing the cases to trial.
FDCPA provides that collectors that violate the law are liable to an  individual consumer for any actual damages suffered by the consumer,  plus any additional damages allowed by the court, not to exceed $1,000  per violation. The court also may award reasonable attorneys’ fees to a  consumer who prevails in the action. Damages for class actions are set at  the lesser of $500,000 or 1 percent of the debt collector’s net worth. In its  2009 workshop report, FTC proposed that Congress, at a minimum, update  these damages to reflect inflation since 1977. Some consumer attorneys  with whom we spoke said the amounts were too low to serve as a  meaningful deterrent for collection companies. In contrast, one industry  representative expressed the view that the amounts paid for attorney fees  often far exceed the damage award to the consumer, particularly for  technical violations of FDCPA that, in their view, caused no actual  consumer harm.
section_title: Debt Collection Litigation
paragraphs: FTC’s workshop report noted that lawsuits seeking to collect on credit  card debt are usually filed in state court and, depending on the amount of  the debt, may be filed either in small claims court or civil court of general  jurisdiction. Courts typically apply state contract law to decide collection  cases and use state rules of civil procedure and local court rules, the  report noted, and state rules of civil procedure require that after filing the  debt collector serve the debtor with notice of the action, which can  include the date and time the debtor must appear in court. If the debtor  does not appear in court to respond to the lawsuit, the judge can generally  enter a default judgment in favor of the creditor. Once the owner of a debt  receives a favorable judgment, the owner can generally collect on that  judgment or award, and in some states can seek to put a lien on the  debtor’s property or garnish the debtor’s wages or bank accounts.
While no national figures are readily available on the number of debt  collection lawsuits filed in the United States—involving credit card or any  other form of debt—the numbers are widely recognized to be very large.  FTC’s 2009 workshop report noted that the majority of cases on many  state court dockets on any given day are debt collection cases. A report by  the Urban Justice Center estimated that in 2006, 320,000 debt collection  cases were filed just in New York City’s Civil Court. In Chicago’s Cook  County Circuit Court, more than 119,000 civil debt collection lawsuits  were pending as of June 2008, according to a review by the Chicago  Tribune. State officials in Ohio told us that municipal court judges there  handle as many as 1,000 debt collection cases per week. A review by the  Boston Globe found that at least 60 percent of small claims cases filed in  Massachusetts in 2005 were filed by debt collectors. Consumer groups,  attorneys, and FTC all acknowledge that the number of these state court  cases has increased in recent years and is putting a strain on the state  court systems. Kaulkin Ginsberg and the National Association of Retail  Collection Attorneys have noted that the growth of the debt-buying  industry has resulted in increases in collection lawsuits because entities  that purchase delinquent debt often use collection law firms as their  primary tool for recovery.
FTC’s workshop report highlighted concerns related to the prevalence of  default judgments in debt collection litigation. For example, in Cook  County, Illinois, it is estimated that debt collectors obtained a default  judgment in more than 45 percent of debt collection lawsuits filed in 2007.  The Urban Justice Center estimated that 80 percent of the debt collection  cases it reviewed for 2006 in New York City resulted in default judgments.  When a consumer does not show up in court to respond to the suit, a  default judgment generally may be entered against them. Consumer  advocates and consumer attorneys have raised concerns that debt  collectors often file suits with weak evidence supporting the alleged debt,  knowing that most likely the consumer will not appear in court and they  will receive a default judgment. Moreover, advocates say consumers often  do not appear to contest a debt collection lawsuit because they have not  been properly served with notice of the lawsuit. In response to concerns  about the number of default judgments, representatives of the debt  collection industry say that in many debt collection cases, defendants may  legitimately owe the debt but do not appear in court because they want to  avoid the associated costs of offering a defense that they know will be  unsuccessful.
section_title: Other Concerns
paragraphs: Representatives of the National Consumer Law Center, the National  Association of Consumer Advocates, Consumer Union, and attorneys at  legal aid clinics have stated that they have observed a number of other  debt collection practices that raise concern. Because there is limited  information about the extent to which these practices occur, most of the  evidence remains anecdotal.
Collection of debt discharged in bankruptcy. Under the federal  Bankruptcy Code, creditors are prohibited from taking any form of  collection action on debts discharged in bankruptcy, including legal action  and communications with the debtor, such as telephone calls and letters.  As noted earlier, federal agencies have reached settlement with companies  alleged to have engaged in collection activities on discharged debt. In  addition, at least one debt buyer we identified purchases discharged  bankruptcy debt. There may be instances in which debts that have been  initially designated as discharged can later become collectable—such as  cases where the courts discover additional assets that can be divided  among creditors or where debtors may choose to repay discharged debts  out of a sense of moral duty. However, some consumer representatives  have expressed concerns that the purchase and sale of discharged debt  may foster improper collection practices.
Collection of time-barred debt. As noted earlier, while it is generally illegal  to sue or threaten to sue to recover debt that is beyond the statute of  limitations (time-barred debt), FDCPA does not prohibit other attempts to  collect on such debt, such as through telephone calls or letters. Some  consumer advocates have reported to FTC that some collectors still make  false threats of suit or actually sue on time-barred debts—and in some  cases obtain a default judgment on time-barred debts from consumers who  may be unaware that a collector may not lawfully sue on debt over a  certain age. FTC addressed this issue in a recent roundtable it held in  August 2009 on debt collection litigation and arbitration issues. FTC plans  to hold two other roundtables on these issues later this year.
Revival of time-barred debt. Some consumer attorneys have also reported  that some debt collectors have used unlawful tactics in an attempt to  revive a time-barred debt—that is, to extend the time available to sue a  debtor if the statute of limitations has past or is approaching. Consumer  representatives have alleged that some companies have unjustly sought to  extend the limitations period by altering a debt’s recorded delinquency  date or by persuading consumers to make a very small payment or making  unauthorized payments in the debtor’s name.
section_title: Debts May Not Always Be Adequately Verified
paragraphs: Having adequate information is a key element in ensuring a fair and  efficient system for collecting debt. According to FTC and other  stakeholders, collection agencies and debt buyers sometimes may not  have adequate information about their accounts and may not always have  access to documentation needed to verify the debt.
subsections: section_title: Amount of Information Transferred to Collection Companies Varies
paragraphs: The flow of information plays an important role in the process of debt  collection. Credit card issuers provide their third-party collection agencies  with information about the debtor—including name, address, telephone  number, date of birth, Social Security number, and employer—and about  the debt itself, including account number, balance, date of first  delinquency, and date of charge off. Additional information that may be  provided by issuers includes the last date of payment; a breakout of the  principal, interest, and fees that compose the amount due; monthly  payment date; minimum payment amount; and any notes describing the  issuer’s internal collection efforts on the account. Some issuers allow  third-party agencies to access account information through the issuer’s  own data system during the collection process.
FTC, state agencies, consumer advocates, and others have expressed  concerns that debt collection companies sometimes have inadequate  information about the accounts for which they are collecting—increasing  the likelihood that the collector reaches the wrong consumer or tries to  collect the wrong amount. Consumer groups and others note that this  problem appears to be most acute when debt is sold and the transfer of  information between seller and buyer may not be complete. It is common  for a debt buyer to receive only a computerized summary of the issuers’  business records, and the specific account data transferred to a debt buyer  varies with each sale. Problems with the sufficiency of data that are  transferred can be exacerbated when accounts are sold multiple times,  and there are numerous areas in which account integrity could be  compromised, according to industry data specialists with whom we spoke.  For example, important account information—such as results of disputed  account investigations, consumer complaints about billing errors, and  information on settlement agreements and identity theft—may not always  be transferred to debt buyers.
To help improve information flows, FTC’s 2009 workshop report proposed  that Congress modify FDCPA to require that the initial validation notices  provided to consumers include three additional pieces of information.  First, the agency recommended that validation notices notify consumers of  two significant rights they have under FDCPA: the right to have collection  efforts suspended prior to debt verification and the right to require  collectors to cease contact upon written request. Second, FTC  recommended that validation notices include the name of the original  creditor. FTC and consumer groups have noted that this would benefit  consumers as well as collectors by making it easier for consumers to  recognize their debts when they have been sold to a debt buyer under a  different name than that of the original creditor. Third, FTC recommended  that validation notices include not just the total amount of the debt, but  also an itemization of principal, interest, and fees, which it said would  allow consumers to determine if any charges being demanded by a debt  collector were erroneous or subject to dispute.
A related area of concern has been the availability of account media—that  is, billing statements, credit card agreements, card applications, or other  items that help substantiate the validity of the debt. Contracts between  issuers and debt buyers usually specify the terms of the account media  provided to the buyer. For example, in our discussions with issuers and  debt buyers and our review of sample contracts, we found that oftentimes,  buyers will have the right to request media either for a certain period of  time subsequent to the purchase of a portfolio or for a certain number of  accounts in the portfolio. Debt buyers may use such media to support a  lawsuit or to address a consumer dispute. Some contracts between  primary debt buyers and secondary debt buyers provide that if the  secondary debt buyers request account media, the primary debt buyers  will attempt to obtain them from the original creditor. Similarly, contracts  between secondary debt buyers and tertiary debt buyers provide that the  tertiary buyer can request media from the secondary buyer—which then  requests them from the primary buyer, which requests them from the  issuer (see fig. 3).
This process can be problematic because if any company in the chain fails  to respond (or goes out of business), it can be difficult to obtain the media  needed to document and verify an account. The credit and collection  industry trade association ACA International has suggested that Congress  require by statute that creditors and debt buyers maintain specific account  documentation until the time they sell, forward, or assign a debt to  another entity, at which time the documentation would be required to be  made available to that entity.
Some industry representatives have noted that improving information  flows in the debt collection process would have costs as well as benefits.  For example, they note that requirements for maintaining and transferring  media (such as credit card agreements) for all accounts would impose  financial costs to creditors and collectors. Moreover, industry  representatives say that the need for account media is relatively rare—for  example, one collection attorney estimated that such media from issuers  or previous debt buyers would be relevant to fewer than 1 percent of his  firm’s collection disputes. In addition, representatives of the credit card  industry have said that the transfer of more account information can raise  privacy and data security concerns—for example, by allowing more  parties to hold sensitive account information there may be an increased  risk for data breaches and identity theft. While these issues would need to  be considered, FTC and consumer advocates maintain that it remains  important nonetheless to find ways to better ensure that debt collectors  have adequate information about the accounts for which they are  collecting.
section_title: Adequacy of Verification Has Been a Concern
paragraphs: FDCPA requires that, if a consumer disputes the validity of a debt in  writing, the debt collection agency must provide the consumer with  documented verification of the debt. However, the statute does not  precisely set out what constitutes verification of the debt. Collection  companies’ policies for responding to requests for verification vary. In  many cases, contracts between issuers and collection agencies stipulate  how the agency responds to requests for verification. FTC, consumer  advocates, and state agencies have said that, in practice, many debt  collectors and debt buyers do very little to verify debts that consumers  dispute. In particular, they say that the verification provided by debt  buyers sometimes consists of little more than a written statement that the  amount being demanded is what the creditor claims is owed. Collection  agencies’ ability to provide adequate documentation to verify a debt may  be limited if they do not have access to account media, as is sometimes the  case.
Debt collection industry representatives claim that considerable confusion  exists about what constitutes adequate verification under FDCPA, and  collectors largely have had to rely on case law. In one key case, the Fourth  Circuit of the U.S. Court of Appeals found in 1999 that while the debt  collector must obtain verification from the creditor for the amount  demanded, the collector is not required to keep detailed files of the alleged  debt. To clarify and improve the debt verification process, FTC’s 2009  workshop report proposed that FDCPA be amended to require debt  collection agencies to conduct reasonable investigations that are  responsive to the specific disputes consumers have raised. FTC points out  that such a requirement would be comparable to the “reasonable  investigation” standards for addressing consumer disputes that are  imposed by FCRA and Regulation Z, which implements the Fair Credit  Billing Act. FTC officials told us that what constitutes a reasonable  investigation would depend on the specific facts of the dispute, including  the type of debt and the cost of obtaining information. Some debt  collection industry participants say that because the circumstances of a  dispute can vary, any new statute or implementing regulations should  avoid requiring a specific checklist of items required for verifying a debt.  However, in general, FTC, consumer representatives, and industry  participants agree that clarification is needed on what constitutes  adequate verification of a debt under FDCPA.
section_title: Most Stakeholders Believe That FDCPA Needs Updating
paragraphs: FDCPA was enacted in 1977. While some sections have been amended, it  has not been substantially revised to reflect changes that have occurred in  technology and in the debt collection marketplace. Most stakeholders  involved in the process of debt collection with whom we spoke— representing consumers, state and federal agencies, credit card issuers,  debt collectors, and debt buyers—have expressed support for updating  FDCPA.
subsections: section_title: FDCPA Does Not Address Some Key Modern Technologies
paragraphs: Communication technologies that are ubiquitous today—mobile  telephones, e-mail, caller identification, answering machines, and fax  machines—were not prevalent when FDCPA was enacted in 1977.  Collection companies sometimes have faced difficulties in trying to use  these technologies while remaining in compliance with the act:    Answering machines and voice mail. FDCPA requires that a collection  agency identify itself as such to a debtor and also not state that a debtor  owes any debt to any other party who might answer the telephone. A  debt collector may violate FDCPA if the collector leaves a message on a  consumer’s answering machine or voice mail that fails to disclose that the  collector is calling in an attempt to collect a debt. However, the debt  collector may also violate FDCPA if someone other than the debtor  overhears a telephone recording revealing the debt collection effort. One  court acknowledged the difficulty a debt collector has in complying with  all of the provisions of FDCPA at the same time when leaving voice mail,  and inferred that debt collectors may need to reach debtors by postal mail,  in-person contact, or by speaking directly to them via telephone instead of  using voice mail.
Mobile telephones. FDCPA restricts the hours in which debt collectors can  call consumers and prohibits collectors from imposing additional  telephone charges on consumers. However, because mobile telephone  users may not be, at a given time, in the geographic location indicated by  the telephone’s area code, debt collectors calling a mobile telephone  cannot be certain they are calling within the permitted hours.  Furthermore, unlike users of land lines, mobile telephone users often  incur charges of some sort whenever they receive a call.
Caller identification. When debt collectors call consumers who have  caller identification on their telephones, the collectors may be disclosing  their names and telephone numbers, which could be construed as a  violation of FDCPA if a third party sees that a debt collector is calling.  However, some stakeholders have questioned if conveying false or  blocked information through caller identification would be a violation of  FDCPA’s and the FTC Act’s prohibitions on making a false or misleading  representation, as well as FDCPA’s prohibition of making telephone calls  without meaningful disclosure of the caller’s identity.
E-mail and faxes. Debt collection agencies have been reluctant to use e- mail and faxes to communicate with debtors because of the risk that  someone other than the debtor may read the transmission, which could  violate FDCPA’s prohibition on disclosure to third parties.
Predictive dialers. Predictive dialers—which are used heavily in the debt  collection industry to efficiently manage high call volumes—sometimes  can result in inadvertent hang-ups or dead air, which could be a violation  of FDCPA’s prohibition on causing a telephone to ring repeatedly with  intent to annoy, abuse, or harass a consumer.
Because FDCPA does not address these technologies, collectors often  have had to rely on case law to determine their appropriate use, and this  has created challenges for debt collection industry participants wanting to  comply with the law. In a comment letter to FTC, ACA International stated  that “onflicting court decisions make it challenging to comply with all  applicable laws” and that without guidance on the application of FDCPA  to these new methods of communication, debt collectors are without a  reference point to assess the legality of using these technologies to  communicate with consumers. Similarly, the National Association of Retail  Collection Attorneys noted in a comment letter that “conflicting court  decisions have made regulatory compliance a guessing game, rather than a  predictable endeavor.”
section_title: FTC Lacks Rulemaking Authority for FDCPA
paragraphs: FDCPA requires FTC to provide Congress with an annual report  describing its FDCPA enforcement efforts and provide any  recommendations for statutory changes. However, FDCPA does not  authorize FTC or any other agency to issue rules to implement the act.  The legislative history of the act indicates that rulemaking authority was  not provided to any agency because the relevant committee regarded the  legislation as comprehensive and believed it would fully address all  collection abuses. However, because no administrative agency can  promulgate rules for FDCPA, limited means exist for clarifying ambiguities  or filling gaps in the statute and addressing issues that arise as technology  and the marketplace evolve. As we have seen, the advent of the debt- buying industry has created new challenges with regard to information  flows that were not envisioned when FDCPA was drafted. FTC officials  noted that if FDCPA were amended to require collectors to respond to  consumer disputes with reasonable verification measures, a rulemaking  would be the appropriate method for determining what constitutes a  “reasonable” verification process. Similarly, FTC and some industry  representatives note that rulemaking authority would allow the agency to  address current and future technologies in the marketplace.
Representatives of some consumer groups and state agencies told us that  they support providing FTC with rulemaking authority for FDCPA. Among  debt collection trade associations, the National Association of Retail  Collection Attorneys has supported giving FTC rulemaking authority,  which it says would help resolve potentially conflicting court  interpretations and help ensure industry compliance. ACA International  has not explicitly called for amending FDCPA to give FTC rulemaking  authority, but has recommended that FTC “make regulatory changes” as it  deems necessary. Officials from DBA International, a trade association for  debt buyers, told us it had not taken a position on FTC rulemaking  authority. FTC already has rulemaking authority to implement other  consumer protection statutes—for example, the agency issued the  Telemarketing Sales Rule in 1995, revised in 2003, to respond to changes in  telephone technologies and the marketplace. FTC has issued four FDCPA  “advisory opinions,” which protect debt collectors from liability for  actions taken in good faith reliance on the opinions. In addition, FTC  staff have issued a commentary on FDCPA and also have issued a number  of “staff opinions,” but the commentary and these opinions are not legally  binding and have not always carried much weight in the courts, according  to FTC staff. As a result, debt collectors have often had to rely on case  law—which they note has sometimes been ambiguous or contradictory— in interpreting how to comply with FDCPA, and there has been no  regulatory process to help address the changing marketplace for debt  collection.
section_title: Conclusions
paragraphs: The rise in credit card delinquencies and charge offs that has accompanied  the current economic recession has focused new attention on the  practices of creditors and third-party companies in collecting on  delinquent credit card debt. FDCPA, enacted in 1977, has been an  important tool in addressing unfair third-party debt collection practices,  but it has not kept up with the evolving marketplace or with changes in  technology, and FTC has previously recommended that Congress make  certain changes to the statute. We believe that in at least three areas,  FDCPA would benefit from modification to provide needed clarity for  industry and to enhance consumer protections.
First, FDCPA is limited in addressing problems associated with  information flows. With the advent of debt buying has come the repeated  resale of accounts—making it more difficult to verify debts and obtain  appropriate documentation as credit card accounts get further from their  original owner. FDCPA does not, for example, address the account  information that should be provided when a debt is sold nor does it  address the procedures and information that constitute “verification” of  the debt. Statutory changes to better address these issues could help  ensure that participants in the debt collection industry have clear  guidelines on what information they must provide to each other and to  consumers, and could help reduce instances where collectors seek  payment from an incorrect party or for an incorrect amount.
Second, because FDCPA was enacted prior to the advent of technologies  such as mobile telephones, e-mail, and voice mail, its provisions on  communicating with consumers are outdated. This has resulted in  considerable ambiguity and confusion on using these technologies in  compliance with the law, and collection companies have been reluctant to  use some modern technologies. Statutory changes to ensure technology  issues are addressed could benefit both industry and consumers, allowing  the industry to more efficiently conduct its operations and consumers to  receive information expeditiously and with appropriate protections.  Finally, because FTC does not have rulemaking authority under FDCPA,  there is no regulatory process to keep up with an evolving marketplace  and changes in technology. With rulemaking authority, FTC could better  regulate the practices of debt collectors and ensure that consumers are  protected from unfair and abusive practices.
section_title: Matter for Congressional Consideration
paragraphs: To help ensure that the debt collection system better protects consumers  without unduly burdening the legitimate process of collection, Congress  should consider modifying the Fair Debt Collection Practices Act to  account for changes in the marketplace that have occurred in recent years.  Among such modifications, Congress should consider, in particular,  options for modifying FDCPA to    help ensure that debt collectors and debt buyers have adequate  information about the debts transferred and adequate documentation to  verify the debts they seek to collect from consumers, reflect technologies that were not prevalent when the act was originally  enacted, and   provide FTC with the authority to issue rules to implement the act.
section_title: Agency Comments
paragraphs: We provided a draft of this report to FDIC, Federal Reserve, FTC, OCC,  and OTS for comment.  FDIC, Federal Reserve, FTC, and OTS provided  technical comments that we incorporated as appropriate.  In addition,  FDIC and FTC provided written responses, which are reprinted in  appendixes II and III, respectively.  In its response, FDIC noted that it  takes seriously its responsibilities to enforce consumer protection laws  and regulations related to debt collection and that it has taken formal  enforcement actions and assessed civil money penalties against financial  institutions to address noncompliance with these laws and regulations.  In  FTC’s response, it noted that its February 2009 workshop report,  Collecting Consumer Debts: The Challenge of Change, concurred with our  view that Congress should consider amending FDCPA to give FTC the  authority to issue implementing rules.
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If you or your staff have any questions about this report, please contact me  at (202) 512-8678 or cackleya@gao.gov.  Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report.  GAO staff who made key contributions to this report are  listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our report objectives were to examine (1) the protections provided  consumers under federal and state laws related to credit card debt  collection, and the roles and responsibilities of federal and state agencies  in enforcing these laws; (2) the processes and practices involved in  collecting and selling delinquent credit card debt; and (3) any issues that  may exist related to some of these processes and practices. The focus of  our report was on the collection of consumer credit card debt as opposed  to other forms of debt. However, because collection agencies may collect  on multiple kinds of debt, it was not always possible to isolate debt  collection processes related specifically to credit card debt. We indicate in  the report whether data that we present are specific to credit card debt or  may include other types of debt. Our report also focuses on the largest  credit card issuers and debt collection companies that ranged in size from  medium to very large; therefore, the collection processes and practices  described in this report may not be representative of smaller credit card  issuers or debt collection companies.
To address our first objective, we reviewed and analyzed relevant federal  laws, rules, and guidance and we interviewed officials from the Federal  Trade Commission (FTC) and the federal depository institution  regulators—Board of Governors of the Federal Reserve System (Federal  Reserve), Federal Deposit Insurance Corporation (FDIC), Office of the  Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS),  and the National Credit Union Administration. We reviewed the  procedures the federal regulators use in their bank examinations to review  issuers’ debt collection policies and practices. We also reviewed two  compendiums that summarized state laws applicable to debt collection— the National Consumer Law Center’s Fair Debt Collection and Collection  Actions legal practice guides and ACA International’s Guide to State  Collection Laws and Practice. We did not conduct our own review of all  state fair debt collection statutes, but we did review the statutes of  selected states—California, Colorado, Massachusetts, and Texas—which  we selected because they included provisions that differed in some ways  from the Fair Debt Collection Practices Act. We interviewed staff with the  office of the attorney general in these four states and relied upon them for  the analysis of and information about the meaning and scope of their state  debt collection laws. In addition, we conducted a group interview,  coordinated by the National Association of Attorneys General, with staff  from the office of the attorney general of 15 additional states who chose to  participate. We also met with staff from state and local agencies  responsible for regulating the collection industry in a group meeting that  was coordinated by the North American Collection Agency Regulatory  Association to learn about state and local agencies’ activities, roles, and  responsibilities. Seventeen of the group’s 24 U.S. members elected to  participate in this meeting.
To address our second objective, we interviewed representatives of the six  largest credit card issuers as measured by total outstanding credit card  loans, as of December 31, 2007, in the Card Industry Directory. These  issuers, which represented about 83 percent of total outstanding U.S.  credit card debt, were American Express, Bank of America, Capital One  Financial Corp., Citigroup Inc., Discover Financial Services Inc., and  JPMorgan Chase & Co. We reviewed the internal collection department  policies of one issuer and the internal collection training materials used by  three issuers, as well as several sample contracts between issuers and debt  collection agencies and between issuers and debt buyers. We also  reviewed the Securities and Exchange Commission filings of selected  issuers and publicly held debt collection companies. In addition, we met  with six third-party debt collection agencies, six companies that purchase  credit card debt, one law firm that specializes in debt collection, and one  collection attorney. We chose these entities because some or a significant  portion of their business included the collection or purchase of credit card  debt and because they ranged in size from medium to very large. These  companies included some of the largest industry players, although data are  not available on the share of the respective markets that they represent.  We made several attempts to meet with at least one small debt collection  agency—fewer than 20 employees—but were unsuccessful in gaining the  cooperation of any such companies that we contacted. Additionally, we  met with trade associations that included ACA International (which  represents creditors, third-party collection agencies, collection attorneys,  and debt buyers), DBA International (which represents debt buyers), the  National Association of Retail Collection Attorneys, the American Bankers  Association, and the Consumer Data Industry Association (which  represents consumer reporting agencies). We also reviewed the guidance  and other information that ACA International provides to its members.  Finally, we toured the collection facilities of one card issuer and one large  debt collection agency and listened in on a number of calls to consumers  made by collections staff.
To address our third objective, we reviewed FTC’s annual reports to  Congress on the Fair Debt Collection Practices Act from 1998 to 2009, as  well as its consumer education materials and other relevant documents.  We also reviewed the transcript, report, and public comments resulting  from the workshop on debt collection that FTC hosted in October 2007.  We obtained and analyzed consumer complaint data from 2004 to 2008  that FTC maintains in its Consumer Sentinel database. Additionally, we  reviewed all of the enforcement actions that FTC filed against debt  collection agencies from 1998 to 2008 and examined their associated  complaints, press releases, consent orders and agreements, and  permanent injunctions. We did not include cases that clearly did not  involve debt specific to credit cards. However, sometimes the type of debt  involved could not be determined from the documents, and in those cases  we included the case but specified that it was not known if credit card  debt was involved. We also received information from the Department of  Justice’s U.S. Trustee Program on its role in taking enforcement action  related to the collection of credit card debt in cases involving bankruptcy  filings. In addition, we collected and analyzed data from FDIC, Federal  Reserve, OCC, and OTS on consumer complaints submitted in 2004-2008  related to credit card issuers’ debt collection activities. We also gathered  information from these agencies on the informal and formal enforcement  actions, if any, they had taken against issuers for violations identified  during bank examinations in 1999-2008. We reviewed bank examination  reports and relevant documents associated with enforcement actions,  such as orders to cease and desist. We did not gather complaint data or  information on enforcement actions from the National Credit Union  Administration because officials told us credit unions represent a very  small share of the credit card market. To assess the reliability of FTC’s  Consumer Sentinel database as well as the consumer complaint data  provided by the four federal depository regulators, we reviewed these data  for obvious errors in consistency and completeness and we interviewed  agency staff responsible for maintaining the data. We determined that the  data were sufficiently reliable for the purposes of this report. However,  complaint data may both over- and underestimate the number of actual  problems in the industry because complaints may not be accurate or they  may not represent a law violation. Consumer complaints are also self- reported and there are likely to be a number of complaints that are  unreported.
We identified enforcement actions related to debt collection at the state  level by reviewing the National Association of Attorneys General’s  biweekly Consumer Protection Reports from January 2006 through May  2009, which compile information on state and federal enforcement of  consumer protection laws, legislative initiatives, and consumer education  efforts. These reports may not be representative of all state attorney  general enforcement actions because they are a compilation of press  releases from their offices’ Web sites, not all of which may publish such  press releases. To the extent feasible, we identified those enforcement  actions related to credit card debt and, as available, reviewed related press  releases and other documents. We also reviewed and analyzed consumer  complaint data related to debt collection agencies that had been collected  by the national Better Business Bureau and the National Association of  Attorneys General. We reported these data because they provided  information relevant to our review, but we did not test the reliability of  these data because they appeared to corroborate FTC’s consumer  complaint data. We also reviewed studies and reports by consumer  organizations, such as the Urban Justice Center and Public Citizen, related  to debt collection. In addition, we met with attorneys who represent  consumers in debt collection cases and with representatives of consumer  organizations, including the National Consumer Law Center, Consumers  Union, and the National Association of Consumer Advocates.
Because the debt collection industry is mostly composed of privately held  companies, the amount of publicly available data about the industry is  limited. To identify information on the industry, we conducted a literature  search and we talked with a researcher from the Federal Reserve Bank of  Philadelphia and officials from ACA International and DBA International,  as well as other industry participants. We reviewed two industry surveys  commissioned by ACA International, as well as reports published by  Kaulkin Ginsberg and the Nilson Report. To determine the reliability of  industry data in the Kaulkin Ginsberg reports, we interviewed company  representatives about their methodology. They told us their estimates are  developed from discussions with industry participants, financial  statements, and other data obtained in the firm’s capacity as an industry  advisor. We could not assess the reliability of the firm’s data, but our  review of its methodology indicates that their data may not be  representative of the entire debt collection industry. Officials from the  Nilson Report declined our request to discuss the methodology used in  their reports. We reviewed the descriptions of the survey methodologies  contained in the ACA reports and determined that while their  methodology was generally sound, because of the low response rate and  the absence of nonresponse bias analysis, and the wide confidence  intervals around key estimates due to the small number of responses, the  resulting survey data may not be reliable for making precise quantitative  estimates. However, we report some of the results from these reports  because limited other publicly available sources of such data exist. During  the course of our review, we also found several companies on the Internet  that said they provided debt collection industry research and statistics for  a fee, but we did not pursue these because their methodology suggested  they faced potentially severe risks to reliability.
We conducted this performance audit from July 2008 to September 2009 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: Comments from the Federal Deposit Insurance Corporation
section_title: Appendix III: Comments from the Federal Trade Commission
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Jason Bromberg (Assistant  Director), Anthony Bova, Christine Houle, Tiffani Humble, Marc Molino,  Carl Ramirez, Linda Rego, and Barbara Roesmann made key contributions  to this report.