The Federal Trade Commission has released its annual report on the Fair Debt Collection Practices Act for 2006, which documents complaint patterns and enforcement actions by the FTC during calendar year 2005. Consistent with recent years, the latest report shows that consumers complain more about debt collection than any other industry. “Last year, consumer complaints to the Commission about third-party debt collectors increased both in absolute terms and as a percentage of all complaints that consumers filed with the Commission during the course of the year.”
There are no real surprises here. The 66,627 complaints about debt collection activity received in 2005 represent a 14% increase over 2004. And of course, those 66,627 complaints are a drop in the bucket compared to what’s really going on out there in the world of collections. The simple fact is that people usually do not file a complaint even when it’s justified. Mostly they just take their lumps. So we have no real way of knowing the true scope of the problem, only that it’s getting worse instead of better, as measured by the FTC’s statistics.
Also, it’s important to note that the Fair Debt Collection Practices Act technically only applies to THIRD-PARTY debt collectors, meaning collection agencies or collection attorneys. The FDCPA does not apply to the in-house collectors employed by original creditors (like the major credit card banks). Even though the FDCPA does not apply to original creditors, the Commission still collects complaint data on in-house collections activity. In 2005, the FTC logged 23,605 complaints about in-house collectors, bringing the overall total of debt collection-related complaints to more than 25% of ALL complaints received in 2005. So the collection industry beats every other industry hands-down in terms of complaints logged.
The number one type of complaint received about third-party collectors is that they misrepresent the “character, amount, or legal status of consumers’ debts.” No surprise there, either. If a debt collector is flapping their gums, the odds are pretty good that they are either lying outright or saying something misleading in order to scare the consumer on the other end of the phone. But in this year’s report there was a big jump for this category of complaint, from 31.6% in 2004 to 42.7% in 2005. I feel that this has to do with the growing presence of debt buyers in the marketplace. And debt buyers routinely add what I call “phantom” interest to the accounts they purchase. In other words, they may buy a debt a year after chargeoff by the original creditor and then back-date interest charges to the time of chargeoff even though they did not own the debt at that time. This serves to greatly inflate the debt during the collection process, with the aim of driving up collection percentages and increasing portfolio return rates. So it’s no wonder that consumers feel they’ve been bamboozled by the debt buyers. This will only get worse as debt buying continues to displace contingency-based collection systems.
At least the FTC is proposing to Congress that legislation be passed requiring debt collectors to itemize their fees and other charges upon request. I doubt such a bill will pass anytime soon, but it would be hard to argue against such a measure, which certainly seems reasonable on the face of it, and comes recommended by the Federal Trade Commission. We can only hope, although I won’t be holding my breath on this one.