October 19, 2014
The big, debt-collection shakedown
The need to reform an industry that recovered $55.2 billion from Americans last year.
For the last two years, I have been chronicling the life of a former armed robber named Brandon Wilson. Wilson grew up in and around Boston, including in the housing projects known as “the Mystics” along Mystic Avenue in Somerville. As a kid, he was frequently getting into trouble with the law and running away from home. After spending roughly a decade in jail for a number of crimes, including larceny and armed assault, Wilson turned his life around. He started working as a debt collector, then opened his own collection agency.
When banks and original creditors can’t collect on accounts, they often sell them for pennies on the dollar (or less) to third-party collection agencies. According to ACA International, an industry trade group, roughly 130,000 people work in these companies, and last year they recovered $55.2 billion. Chances are you have received calls from such outfits. A recent study by the Urban Institute found that some 77 million Americans, or 35 percent of adults with a credit file, have a debt that is in collections. That keeps Wilson and his colleagues busy.
Wilson also now operates as a debt broker, buying and selling everything from old credit card debt to unpaid cellphone accounts. And this is where he really excels. He buys packages of debt at a huge discount and then resells them at a markup to collection agencies around the country. His clients are happy because the paper is generally good and, thus, so are their profit margins.
But here is an important thing to bear in mind: What’s being bought and sold is often essentially just a spreadsheet containing fairly scant information about debtors, including their names, addresses, phone numbers, Social Security numbers, and balances. What’s more, there is no government agency — or even one single private company — keeping track of who owns all of these debts. The result is something akin to chaos. In fact, as far back as 2009, the Federal Trade Commission stated in a report that information can be so flawed that collectors can seek payment from the wrong person, or demand the wrong amount from the right one. As Wilson acknowledged to me, “There is no way for us, who buy the debts, to confirm for certain whether the amounts owed are accurate.”
Since at least 2008, the FTC has ranked debt collection as its second-biggest source of complaints from consumers, following identity theft. (Wilson himself has had his fair share of complaints over the years, though records at the Better Business Bureau indicate that he has always been prompt in trying to resolve them.) The problems persist, but — at long last — reform may be on the horizon. Starting in 2015, the Consumer Financial Protection Bureau is expected to unveil fairly comprehensive rules governing how debt can be collected. Depending on what these rules say, they may have profound consequences, not just for consumers, but for debt-collection companies that try to bend or break them.
I have been reporting on the collections industry for my new book, an expose on just how lawless and dysfunctional much of the industry is. Wilson was my guide. He spoke with me candidly and thoughtfully about its problems and how they might be solved. He did so, however, with some trepidation, fearing that his colleagues might shun him for shedding light on problems within the industry.
Initially, at least, his fears appeared to be well founded. On the August day that an excerpt of my book appeared in The New York Times Magazine, Wilson was flipping a parcel of debt — buying it for $200,000 and selling it for $260,000. It was meant to be a quick deal, where he would own the debts for only one hour. Wilson made the purchase and then, during the pivotal hour, the buyer backed out: He had just read my article, and he didn’t want to risk drawing any attention from regulators. “Even a dim flashlight shining on me is more than I want,” Wilson recalls him saying.
But then something unexpected happened.
Over the next few days, Wilson says he received dozens of calls from prospective investors. Far from being scared off by looming regulations, they were eager to go into business with him. One woman with no industry experience offered to fly him down to Florida and invest $10 million. (He declined.) Wilson also says he received calls from investment bankers and other big financiers who would normally, as he put it, “turn their nose up at me.” His LinkedIn profile went from roughly 40 connections to well over 500. All of these new contacts were, in some fashion or another, hoping that this former armed robber could make them rich.
Isn’t that America?
I had hoped the primary lesson drawn from my reporting would be the need for reform. Instead, the most immediate lesson seems to be that there is still a chance to get rich here if one invests before the new federal regulations go into effect next year. If ever there was evidence that change needs to happen, and sooner rather than later, this seems to be it.