UNIFORM LAW COMMISSION MEMORANDUM
TO:
Members of the Study Committee on the Transfer and Recording of
Consumer Debt
FROM:
Katherine Porter, Reporter
SUBJECT: Background Information and Current Legal Landscape
DATE:
November 2, 2015
This memorandum is an overview of the legal landscape that pertains to transfers of consumer
debt. It provides clarity on what is a debt transfer, the state of the industry, key actors and
perspectives to consider, and related laws or pending legislation. A bibliography is included to
assist the members of the Study Committee in learning more about topics of interest or
relevance.
This document is intended to be read as background to the accompanying Discussion Question
memorandum. The single most helpful additional resource is Dalie Jimenez, Dirty Debts Sold
Cheap, 52 HARV. J. ON LEGIS. 41 (2015).
What is a Debt Transfer?
A lender and a consumer enter into a loan contract. The consumer is obligated to make payments
on the loan over time. The lender may hold the debt until it is repaid or may sell it. Delinquent
debts are more likely to be sold.
When sold, consumer debts are normally transferred in bulk pursuant to a purchase and sale
agreement. Portfolios are made up of debts that share common attributes such as the type of
credit issued, the elapsed time since the consumer accounts went into default, and the number of
third party debt collection firms with which creditors placed the accounts prior the creditors
offering them for sale. The price of the debt is negotiated and reflects not only the amounts
owed, but also the credit risk of the portfolio. Upon consummation of the sale, the debt buyer has
the right to receive the consumer’s payments on the debts and inherits other rights, including
standing to sue to collect the debt, if defaulted under the terms of the loan. The consumer is not a
party to the purchase and sale debt contract and typically will not receive any notice that a sale
has occurred.
1
As part of the sale, debt buyers are given some information about the consumer debtor and the
nature of the debt. Often, particularly in some industries, the information received is inaccurate
or incomplete. Debt sellers are under no obligation to release additional information to either
debt buyers or consumers once the debt has been sold.
To collect from the consumer, however, the debt collector (here, the debt buyer or its agent) must
be able to provide a validation notice that includes (1) the amount of the debt; (2) the name of the
current owner of the debt; and (3) statements explaining, among other things, the right of
consumers under the Fair Debt Collection Practices Act (FDCPA) to dispute debts.1
If dunning is unsuccessful, debt buyers eventually move to collect by filing suit for judgment in
state court. Most of the time, consumer debtors do not answer complaints and default judgments
enter. It has been posited that as many as 90% of debt collections from debt buyers are achieved
through defaults in the court system.2 Legal requirements for default are easy to meet because the
lawsuit is usually filed as an “account stated” or “open account.” Bare information identifying
the debtor and the amount due is generally all that is contained in the complaint. Some debtors
have asserted that default judgments have been entered against them without knowledge of the
suit due to so-called sewer service.
This Study Committee’s focus is the transfer of unsecured debt from creditors to debt buyers or
from debt buyers to other debt buyers. The diagram below shows in gray the aspect of consumer
debt that is under consideration by the Committee. While collection procedures might be
improved if a debt registry or recordkeeping mechanism were enacted in all states, the
Committee should be clear that collection activities and civil procedure requirements for debt
lawsuits are already governed by considerable federal and state law. These are cognate areas of
law and not the focus of the Committee.
Debt transfers are largely unregulated. The initial debt buyers, subsequent debt buyers, and
consumers can all lack information about the debts because debt sellers can effectively isolate
themselves from a debt and refuse information after selling a debt based on the terms of the
purchase and sale agreement. A uniform law in the form of a recordkeeping requirement or an
unsecured debt registry could be warranted to allow all parties to verify the ownership of a debt.
This would help consumers to determine what debt they are being sued for and whether the debt
is legitimate and for the correct amount.3
1
15 U.S.C. 1692 § 809.
Letter from Ellen Taverna, National Association of Consumer Advocates, to Members United States
Senate Committee on Banking, Housing and Urban Affairs (May 12, 2014).
3 The Committee will not be studying the use of debt and mortgages as security and the involuntary
transfer that occurs if debt secured by mortgages is not paid.
2
2
Debt Transfer Industry
Credit card debt makes up 65% of debt bought by large debt buyers. Only 6% of individual debts
have specific documentation provided to the debt seller by the debt buyer. Instead, debts include
just the name, last known address, the amount allegedly owed, the charge-off date, and the date
and amount of the last payment sold.4
About 1 million debts are disputed by consumers each year. Only 51.3% of debts that have been
disputed have been verified by the debt buyer. Additionally, more than $143 billion in face value
of debt was purchased in the United States in 2008. $55.5 billion came directly from credit card
Lisa Stifler & Leslie Parrish, The State of Lending in America & its Impact on U.S. Households, Center
for Responsible Lending (April 2014).
4
3
debt. This represents 76.8% of all consumer debt. On average, debt buyers spent only $.04 cents
per dollar buying the delinquent debts.5
The top 9 largest debt buyers purchased 76.1% of consumer debt in 2008. The top 9 debt buying
companies are:
(1) Arrow Financial Services LLC;
(2) Asta Funding Inc.;
(3) B-Line LLC;
(4) eCast Settlement Corp.;
(5) Encore Capital Group Inc.,
(6) NCO Portfolio Management Inc.;
(7) Portfolio Recovery Associates, L.L.C.;
(8) Sherman Financial Group LLC; and
(9) Cincinnati-based Unifund Corp.6
Lenders are willing to sell delinquent or high-risk debts for much less than the face value of the
debts owed. Some of this is regulatory-driven because particularly for a depository institution, a
delinquent loan is a liability that increases capital requirements. Charging the loan off and selling
it creates income and reduces the cost of operation. If debt buyers are able to price the debt
accurately with regard to their recovery and costs of collection, they make substantial income
from purchasing the debt portfolio.
Major Laws Related to Debt Transfers
Historically, the Federal Trade Commission (FTC) has been the primary law enforcement actor
with regard to consumer debt at the federal level. Since 2011, the Consumer Financial Protection
Bureau (CFPB) has responsibility for consumer financial services law, although a role continues
for the FTC. State attorneys general also have been active in debt collection law, usually under
their states’ unfair or deceptive acts or practices laws.
In 2012, nearly 200,000 complaints were made to the FTC regarding consumer debt collection,
and over 30,000 complaints were made in just January of 2014 regarding debt collection.7 Nearly
30% of all consumer complaints received by the FTC are for debt collection issues, and that
number has steadily been rising over the past decade.8 In 2014, the CFPB received
Thomas Kane et al., The Structure and Practices of the Debt Buying Industry, Federal Trade
Commission (January 2013).
6 Id.
7 Letter from Ellen Taverna, National Association of Consumer Advocates, to Members United States
Senate Committee on Banking, Housing and Urban Affairs (May 12, 2014).
8 Robert E. Bostrom et al., CFPB’s first Annual Report regarding the Fair Debt Collection Practices Act,
Lexology (April 12, 2012).
5
4
approximately 88,300 debt collection complaints.9 Consumer debt collection complaints were the
greatest daily and monthly volume of complaints received and handled by CFPB in 2014.10
In recent years, the FTC, CFPB, and state legislatures have focused on identifying and
addressing consumer protection problems relating to debt collection.11 Additionally, newspaper
articles and other consumer law advocates have stressed the importance of regulation
surrounding the debt buying and collection practice.12
The Fair Debt Collect Practices Act is the primary federal law that relates to debt transfers.
Notably, it does not govern debt collection activities of creditors collecting their own debts but
only those acting as “debt collectors.” FDCPA, Section 803(6).13 Debt buyers are generally
subject to the FDCPA because they purchase debt in default. See Kimber v. Federal Financial
Corp., 668 F. Supp. 1480 (M.D. Ala. 1987).
Other applicable law includes Section 5 of the Federal Trade Commission Act which prohibits
“unfair or deceptive acts or practices in or affecting commerce.” A practice is unfair if it “causes
or is likely to cause substantial injury to consumers which is not reasonably avoidable by
consumers themselves and not outweighed by countervailing benefits to consumers or to
competition.” 14 State “UDAP” laws offer parallel protection based on allegations that a practice
is unfair or deceptive but offer consumers a private right of action.
Finally, the Fair Credit Reporting Act (FCRA) imposes data privacy and accuracy standards on
consumer reporting agencies and entities, including debt buyers and other debt collectors. Debt
collectors and other entities that furnish information to consumer reporting agencies violate the
FCRA if they report information they know or have reasonable cause to believe is inaccurate.
The FCRA allows consumers to dispute the completeness or accuracy of information.15
Debt Buying Laws or Pending Legislation
Consumer Financial Protection Bureau Consumer Response Annual Report (Jan. 1- Dec. 31, 2014),
available at http://files.consumerfinance.gov/f/201503_cfpb_consumer-response-annual-report2014.pdf.
10
Id.
11
Kathy Kristof, Feds, states cracking down on debt-collectors, CBS News (February 18, 2012).
12 Hunter Stuart, Debt Collection ‘Factory’ Preyed On Broke Americans: Lawsuit, Huffington Post (July
15, 2014); Margot Saunders, Recommendations to the CFPB Regarding Debt Collection Problems,
National Consumer Law Center (April 2013).
13 Thomas Kane et al., The Structure and Practices of the Debt Buying Industry, Federal Trade
Commission (January 2013).
14 15 U.S.C. § 45(a)(1) (2006).
15 15 U.S.C. § 1681 et seq.
9
5
In many states, consumer debts are collected through a cause of action such as “account stated.”
For such suits, it is not required that a copy of the loan contract be attached to the complaint.
Instead, the plaintiff need only plead that there is an “open book account” and state the amount
due.
In 2013, California passed the “Fair Debt Buying Practices” law.16 The law requires that a
default judgment should not enter unless a debt collector provides the following information:
(1) The debt buyer must be the sole owner of the debt;
(2) Must have an explanation of the amount, nature, and reason for all post-charge-off
interest and fees;
(3) Date of default or date of last payment;
(4) Name and address of the charge-off creditor;
(5) Name and last known address of the debtor;
(6) Name address of all persons or entities that purchased the debt after charge-off.17
Additionally, the debt collector must have access to a copy of the contract or other document
evidencing the debtor’s agreement to the debt (complete with the debtor’s signature).
A number of other states have passed legislation similar to the California debt buyer law. These
laws vary somewhat but generally require certain information be included in a complaint before
a default judgment may be entered.
(a) North Carolina – Consumer Economic Protection Act; N.C. Gen. Stat. §50-70-150 and
155 (2013);
(b) Minnesota – Minn. Stat. §§ 491A.02, 550.011, 588.04 (2013);
(c) Maryland – Md. Ct. R. 3-306;
(d) Delaware – Admin. Directive of the Chief Judge of the Ct. of Common Pleas, No. 20122;
(e) Massachusetts – 940 Mass. Code Regs. 7.03 & 7.08;
(f) Colorado – Colo. Rev. Stat. § 12-14-109 (2011);
(g) New York – N.Y. Gen. Bus. Law § 600 et seq. (passed in 2015; effective August 2015);
(h) Michigan – Mich. Ct. R. rule 2.111(1);
(i) Pennsylvania – 18 Pa. Cons. Stat. Ann. § 7311 (West 2012);
(j) Washington – Wash Rev. Code § 19.16.250 (2012);
(k) Idaho – Idaho Code Ann. § 26-2223.
Some states have gone the opposite direction and passed legislation specifically making it easy
for debt collectors to win default judgments:
16
17
Cal. Civ. Code §§ 1788.50-1788.64 (2013).
Cal. Civ. Code § 1788.52(a).
6
(a) Arizona – Ariz. Rev. Stat. § 44-7804 (2012);
(b) Tennessee – Tenn. Code Ann. §§ 47-22-301 et seq. (2013);
(c) Arkansas – Ark. Code Ann § 4-107-302 et seq. (2013).
Conclusion
While there is ample law regulating the origination and collection of debt, there is no law other
than the common law of contracts that regulates debt purchase agreements. The result is that debt
buyers have difficulty complying with collection and litigation requirements and consumers lack
information about the debt, such as the identity of the original creditor and an itemization of the
amount due. A debt transfer law would provide a set of recordkeeping requirements, and perhaps
a mechanism for the records, that would limit the liability of debt buyers at the time of collection
and provide consumers with a better ability to confirm or challenge the validity of the debt.
7
Bibliography
Robert E. Bostrom et al., CFPB’s First Annual Report Regarding the Fair Debt Collection
Practices Act, Lexology (April 12, 2012),
http://www.lexology.com/library/detail.aspx?g=58a878cb-cc2f-48e2-8eba-91c90bc3de1d
Consumer Financial Protection Bureau, Consumer Response Annual Report (Jan. 1- Dec. 31,
2014), available at http://files.consumerfinance.gov/f/201503_cfpb_consumer-response-annualreport-2014.pdf.
Rob Earnshaw, VU Law Clinic Going After Debt Buyers Targeting Porter County Residents, The
Times (Oct. 1, 2015, 3:45 PM), http://www.nwitimes.com/news/local/porter/vu-law-clinicgoing-after-debt-buyers-targeting-porter-county/article_839e2be6-897d-55c2-a5bda39c25278df2.html.
Fed. Trade Comm’n, The Structure and Practices of the Debt Buying Industry, (2013),
https://www.ftc.gov/sites/default/files/documents/reports/structure-and-practices-debt-buyingindustry/debtbuyingreport.pdf.
Jake Halpern, Bad Paper: Chasing Debt from Wall Street to the Underworld (2014).
Jake Halpern, Paper Boys: Inside the Dark Labyrinthine, and Extremely Lucrative World of
Consumer Debt Collection, N.Y. TIMES (Aug 15, 2014),
http://www.nytimes.com/interactive/2014/08/15/magazine/bad-paper-debt-collector.html?_r=0.
Robert Hunt, Collecting Consumer Debt in America, Q2 2007 Fed. Reserve Bank of Philadelphia
Bus. Rev. 11 (2007).
Dalie Jimenez, Dirty Debts Sold Cheap, 52 HARV. J. ON LEGIS. 41 (2015).
Paul Kiel and Annie Waldman, The Color of Debt: How Collection Suits Squeeze Black
Neighborhoods, Pro Publica (Oct. 8, 2015), https://www.propublica.org/article/debt-collectionlawsuits-squeeze-black-neighborhoods.
Kelly Knepper-Stephens, Three Take Aways From the Dallas Debt Collection Dialogue, inside
ARM (Sept. 30, 2015), http://www.insidearm.com/daily/debt-collection-news/accountsreceivables-management/three-take-aways-from-the-dallas-debt-collection-dialogue/.
Kathy Kristof, Feds, States Cracking Down on Debt-Collectors, CBS News (February 18, 2012),
http://www.cbsnews.com/news/feds-states-cracking-down-on-debt-collectors/.
8
Statement of the Office of the Comptroller of the Currency Provided to the Subcommittee on
Financial Institutions and Consumer Protection, Senate Committee on Banking, Housing, and
Urban Affairs, Shining a Light on the Consumer Debt Industry (July 17, 2003), available at
http://www.occ.treas.gov/news-issuances/congressional-testimony/2013/pub-test-2013-116oral.pdf.
Patrick Lundsford, FTC’s Settlement with Two Debt Portfolio Brokers a Continuation of a Trend
in ARM Industry, inside ARM (Apr. 14, 2015), http://www.insidearm.com/daily/debt-buyingtopics/debt-buying/ftcs-settlement-with-two-debt-portfolio-brokers-a-continuation-of-a-trend-inarm-industry/.
Jonnelle Marte, Debt Buyers Fined for Using Misleading Practices to Collect Payments,
Washington Post (Sept. 9, 2015), http://www.washingtonpost.com/news/getthere/wp/2015/09/09/debt-buyers-fined-for-using-misleading-practices-to-collect-payments/.
Margot Saunders, Recommendations to the CFPB Regarding Debt Collection Problems,
National Consumer Law Center (April 2013),
https://www.nclc.org/images/pdf/debt_collection/recommendations-to-CFPB-DebtCollection.pdf.
Mary Spector, Debts, Defaults, and Details: Exploring the Impact of Debt Collection Litigation
on Consumers and Courts, 6 VA. L. & BUS. L. REV. 258 (2011).
Lisa Stifler and Leslie Parrish, The State of Lending in America & its Impact on U.S.
Households, Center for Responsible Lending (April 2014),
http://www.responsiblelending.org/state-of-lending/reports/11-Debt-Collection.pdf.
Hunter Stuart, Debt Collection ‘Factory’ Preyed On Broke Americans: Lawsuit, Huffington Post
(July 15, 2014), http://www.huffingtonpost.com/2014/07/15/debt-collection-agencylawsuit_n_5585264.html.
Letter from Ellen Taverna, National Association of Consumer Advocates, to Members United
States Senate Committee on Banking, Housing and Urban Affairs (May 12, 2014),
https://www.nclc.org/images/pdf/debt_collection/letter-toomey-2014.pdf.
9