Debt Portfolio Documentation to Impact Consumer Debt Prices

New regulations by some states that require debt collection agencies and attorneys representing debt buyers to provide more debt history before seeking payment or filing lawsuits could affect the price of consumer debt.

A recovery manager for a U.S. firm with major credit card operations told insideARM that future debt pricing will depend on how much documentation, or media, issuers are willing to provide and when.

“If issuers are unable or unwilling to provide what buyers need, I can see it lowering the price of paper. If issuers are able to do that (provide documentation), that would positively impact the price, because the buyer has everything they need right there,” the recovery manager said.

For years debt collectors and attorneys have gotten by with using a spreadsheet of consumer names, some identifying information, and debt balances as proof of debt owed to contact consumers and to sue them in court. But some new state regulations and court rulings have condemned the practice and a growing number of legal challenges threaten to put an end to it.

Some states are requiring more loan history to file claims, immediate debt verification upon request, or proof of debt ownership to file lawsuits. Some state regulators have filed suit or opened investigations into debt buyers based on documentation issues.

Encore Capital Group Inc., and its subsidiary Midland Funding, LLC, was most recently accused by Minnesota Attorney General Lori Swanson of filing thousands of false and unreliable affidavits produced by “robo-signers” as proof of debt owed.

Encore and Midland have denied any wrong-doing but offered to settle one lawsuit in Ohio level and said that it shifted its collections strategy more towards collections versus litigation.

The growing wave of regulations and lawsuits may give debt buyers more ammunition to demand account documentation upfront if issuers want to sell the paper.

DBA International, a trade group for debt buying professionals, has actively worked with the American Bankers Association on improving the amount of documentation in debt sales, as is evidenced by the increased amounts of documentation now provided in sales, noted DBA spokesman David Rubinger.

Rubinger said the investments by issuers may carry some initial pricing increases that will be offset by less information requested at a later date. But increased documentation reduces creditor liability as well, and therefore reduces the overall cost to all. Those savings can be passed on to the consumer.

Documentation, however, isn’t the only consideration.

“In the end, supply and demand will determine the ultimate price for a portfolio,” Rubinger said.

Al Brothers, CEO of Cavalry Portfolio Services, a Phoenix, Ariz.-based debt purchaser, agrees.  “If the documentation makes the accounts more collectible, then a higher price will be paid for it,” he said.

One day that may not an option given that state regulation is driving the trend for documentation on every account.

“Within five years, (documentation) will be the norm,” the recovery manager said.