We’ve grown accustomed to using secondary markets – grocery store, used car dealerships, and the stock market – in many aspects of American life, even if we don’t realize it.
Another example is the receivables market. When it comes to the ARM industry, the receivables secondary market exists so that debt buyers and sellers can trade information and the right to collect on certain defaulted debts. The receivables secondary market has come under a wave of criticism from regulators recently, but a new report from DBA International argues that positive aspects of a robust receivables secondary market greatly outweigh the negatives.
This issue has come up in light of recent federal consent orders regulating debt sales, including one against Chase Bank. The Consumer Financial Protection Bureau’s (CFPB) consent order against Chase was issued in response to the bank’s failure to properly verify the account information for defaulted accounts it sold to debt buyers. Chase’s failure in this regard allowed accounts to be sold that the bank either knew or should have known were unenforceable and uncollectable, which harmed the debt buyers Chase did business with and any consumers subsequently subjected to collection activity. Due to this, the CFPB severely limited Chase’s ability to sell defaulted accounts in the future.
DBA International argues that such restrictions on the receivables secondary market would affect banks and other creditors in a variety of negative ways, specifically in regards to the calculations made by institutions when deciding whether to issue credit to consumers. DBA points out that the market provides businesses:
- with a place to monetize receivables
- the ability to move defaulted assets to businesses more equipped to collect on them
- the ability for originating creditors to change direction in an efficient and cost-effective way.
That said, the receivables secondary market doesn’t just benefit businesses – it’s a good thing for consumers, too. The first positive benefit for consumers highlighted in DBA International’s report is that the market gives businesses the ability to make credit widely available. If businesses are unable to sell defaulted assets in order to recoup their initial expenditures, they will be unlikely to take the necessary risks to extend credit to consumers who lack a great credit score, whether due to previous default or a consumer having a limited credit history. Another aspect to this is that if businesses feel uncomfortable extending credit to a wide range of consumers, the general cost of goods and services will rise for all consumers.
Another benefit mentioned in DBA’s report are the benefits consumers receive from debt files being sold to smaller, regional companies who do business in a certain market and understand the various nuances of that market, compared to large national corporations like Chase who are often the originators of the debt file. Another positive benefit for more debt being handled by regional companies is that such companies often have lower levels of complaints from consumers than their larger counterparts.
Use of the receivables secondary market by large firms to sell debt files to smaller companies can have additional benefits for consumers:
- more settlements
- cheaper settlements
- knowledge of and sensitivity to local concerns and circumstances
- convenience for consumers
- expertise regarding state and local laws in a given jurisdiction
- a likelihood of better customer service coming from smaller firms and companies
- potential credit rating improvements
- the protection of various statutes like the FDCPA designed to apply to third-party collections and purchased debt
- allows consumers to resolve any outstanding matters
- the fact that all debt buying companies are subject to federal data protection laws and regulations.
The receivables secondary market benefits the larger economy by stimulating the creation of lots of small business jobs in communities across the country and preventing large corporations from dominating and monopolizing the market.
Taking into account the various benefits for businesses and consumers alike, what sort of things can be done to improve the receivables secondary market? In order to eliminate violations like those detailed in the Chase consent order, DBA International proposes a few different options that would protect and regulate the market while avoiding overly-restrictive regulations by the CFPB:
- Adopt standardized industry best practices for debt buying, including requiring lots of personal data be included in any file that is sold.
- Require that all industry contracts contain identical representations and warranties
- Require credit originators to insist on certain conditions for any resale
- Be open to new technologies that can improve the way business is done.
Such steps, in DBA’s eyes, would go a long way toward making the receivables secondary market better for both businesses and consumers, instead of heading down the path towards eliminating it entirely.