Last week, the Consumer Financial Protection Bureau (CFPB) issued a report on the collection practices of third-party debt collectors. The report outlines the rise and fall of debt collection tradelines on credit reports over the past 15 years.
Categories: Buyer and Non-Buyer Tradelines
The report breaks down third-party collections tradelines into two categories: non-debt buyer third-party debt collection (in other words, collecting on behalf of the original creditor) and debt buyer third-party collections. One primary difference noted in the report about these two categories is the type of debt that underlies the reported tradelines. Debt buyers primarily reported on banking, retail, and financial debt, while a majority (although just barely) of non-buyer reporting was on medical debt.
Trends in Third-Party Debt Collection Credit Reporting
Overall, the number of debt collection tradelines saw a steep rise between 2004 and 2009 and remained at a high level until about 2014. After that, the trend saw a sharp decline through Q2-2018, the end of the report’s sample period.
Breaking this data into the two categories (buyer and non-buyer third-party collection tradelines), the chart looks as follows:
The CFPB’s explanation:
These data may reflect changes in the number of collection accounts being handled by buyers and non-buyers; the increases observed through 2012 for non-buyers and 2009 for buyers is consistent with the fact that during and after the Great Recession, an increasing share of consumers fell behind on their bills. These data may also reflect changes in the practice of furnishing information on such accounts.
Let’s stew on that final sentence—that these trends may reflect changes in the practice of furnishing information by third-party debt collectors. This could be due to multiple factors, which just so happen to have occurred right around when the trends in credit reporting began falling. The steady increase in FCRA lawsuits since 2011 increases the legal liability to debt collectors for furnishing data. Notice that around 2011 is where the buyer trend starts to fall. In 2016, the credit bureaus issued process changes for furnishing data, including prohibitions on reporting medical debt accounts less than 180 days old. Not surprisingly, the trend for non-buyer third party collection tradelines, which are two-thirds healthcare accounts, began its decline right around then.
And, of course, how can we talk about trends in debt collection credit reporting without discussing the issue of credit repair organizations like Lexington Law sending mass disputes to debt collectors? The credit repair practice of mass disputes significantly increases the compliance and investigation costs of credit reporting to third party debt collectors. Since credit reporting is not required, some collectors are opting out of furnishing data.
While some might tout the decline in reported debt collection accounts, it causes a larger issue in the consumer finance lifecycle and, ultimately, will impact access to credit.