September 2009

CREDIT CARDS
Accountability Integrity Reliability

Highlights
Highlights of GAO-09-748, a report to
congressional requesters

Fair Debt Collection Practices Act Could Better

Reflect the Evolving Debt Collection Marketplace and
Use of Technology

Why GAO Did This Study

What GAO Found

Approximately 6.6 percent of credit

cards were 30 or more days past
due in the first quarter of 2009the
highest rate in 18 years. To recover
delinquent debt, credit card issuers
may use their own collection
departments, outside collection
agencies, collection law firms, or
sell the debt.

The primary federal law governing third-party debt collection is the Fair Debt
Collection Practices Act (FDCPA), which contains provisions on how
collectors can communicate with consumers and prohibits collectors from
using abusive, deceptive, and unfair collection practices. Some states have fair
debt collection laws that provide protections additional to those of FDCPA.
The Federal Trade Commission (FTC) is the primary enforcement agency for
the debt collection industry; it collects consumer complaints, enforces
violations of relevant laws, and undertakes consumer education efforts.
Federal depository regulators oversee credit card issuers collection practices,
and various state agencies enforce state fair debt collection laws.

GAO was asked to examine (1) the

federal and state consumer
protections and enforcement
responsibilities related to credit
card debt collection, (2) the
processes and practices involved in
collecting and selling delinquent
credit card debt, and (3) any issues
that may exist related to some of
these processes and practices. To
address these objectives, GAO
analyzed documents and
interviewed representatives from
six large credit card issuers, six
third-party debt collection
agencies, six debt buyers, two law
firms, federal and state agencies,
and attorneys and organizations
representing consumers and
collectors.

What GAO Recommends

Congress should consider
modifying FDCPA to (1) help
ensure that collectors and buyers
have adequate information about
debt transferred and have adequate
documentation to verify debts, (2)
reflect technologies that were not
prevalent when the act was written,
and (3) provide FTC with
rulemaking authority.

View GAO-09-748 or key components.

For more information, contact Alicia Cackley
at (202) 512-8678 or CackleyA@gao.gov.

Collecting and selling delinquent debt involves multiple parties. Credit card
issuers typically collect on accounts less than 6 months delinquent using
internal collection departments or first-party agencies that collect under the
issuers name, and often hire third-party collection agencies or law firms to
collect on older accounts. Contracts between issuers and collectors often
specify the collection policies and practices used. Third-party collection
agencies rely primarily on telephone calls and postal mail in their operations,
but often use automated mail systems and other technologies to do so
efficiently in large volume. Credit card accounts often are soldand may be
resold multiple times. Several factors influence the price of these accounts,
including their age, location, and number of times previously placed for
collection.
State and federal enforcement actions, anecdotal evidence, and the volume of
consumer complaints to federal agenciesabout such things as excessive
telephone calls or the addition of unauthorized feessuggest that problems
exist with some processes and practices involved in the collection of credit
card debt, although the prevalence of such problems is not known. One issue
is that collection agencies and debt buyers often may not have adequate
information about their accountssometimes leading the collector to try to
collect from the wrong consumer or for the wrong amountor may not have
access to billing statements or other documentation needed to verify the debt.
Further, with the advent of the debt-buying industry, accounts are frequently
sold and resold, which can make verification more difficult as the owner of
the debt becomes farther removed from the original creditor.
Communications technologies that are ubiquitous today, such as mobile
telephones, e-mail, and voice mail, were not prevalent when FDCPA was
enacted in 1977. Significant uncertainty exists about how to use these
technologies in compliance with the statutefor example, a debt collector
may violate FDCPA if someone other than the debtor overhears a voice mail
message revealing the debt collection effort. Additionally, FDCPA does not
provide FTC with rulemaking authority, which has limited the agencys ability
to address concerns related to the adequacy of account information,
collectors use of modern technologies, and other issues that arise in an
evolving marketplace.
United States Government Accountability Office

Contents

Letter

1
Background
Several Federal and State Laws Govern Fair Debt Collection, and
Agencies Oversight Roles Vary
Delinquent Credit Card Debt May Be Collected Internally,
Outsourced, or Sold
Certain Issues Exist about Some Debt Collection Practices and
FDCPA Does Not Address Some Changes That Have Occurred in
Technology and the Marketplace
Conclusions
Matter for Congressional Consideration
Agency Comments

30
50
51
52

Appendix I

Objectives, Scope, and Methodology

53

Appendix II

Comments from the Federal Deposit Insurance

Corporation

58

Appendix III

Comments from the Federal Trade Commission

59

Appendix IV

GAO Contact and Staff Acknowledgments

61

8
18

Tables
Table 1: Six Largest Credit Card Issuers by Outstanding Credit
Card Loans as of December 31, 2007
Table 2: Estimated Price Ranges for Credit Card Debt, Per Dollar of
Account Face Value, March 2007 and January 2009
Table 3: Number of Consumer Complaints Received by Federal
Depository Regulators and FTC, 2004-2008

4
29
31

Figures
Figure 1: Credit Card Delinquency Rates, 19912009 (first quarter)

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GAO-09-748 Credit Card Debt Collection

Figure 2: Illustrative Example of the Lifecycle of a Sample

Delinquent Credit Card Account
Figure 3: How Account Information Is Passed among Debt Buyers

19
45

Abbreviations
FCRA
FDCPA
FDIC
Federal Reserve
FTC
FTC Act
NACARA
NCUA
OCC
OTS

Fair Credit Reporting Act

Fair Debt Collection Practices Act
Federal Deposit Insurance Corporation
Board of Governors of the Federal Reserve System
Federal Trade Commission
Federal Trade Commission Act
North American Collection Agency Regulatory
Association
National Credit Union Administration
Office of the Comptroller of the Currency
Office of Thrift Supervision

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GAO-09-748 Credit Card Debt Collection

United States Government Accountability Office

Washington, DC 20548

September 21, 2009

The Honorable Carl Levin
Chairman
The Honorable Tom Coburn, M.D.
Ranking Member
Permanent Subcommittee on Investigations
Committee on Homeland Security and Governmental Affairs
United States Senate
The Honorable Claire McCaskill
United States Senate
Credit card debt has increased dramatically over the past several years
and Americans had more than $838 billion in outstanding credit card debt
in 2007, according to industry estimates. With the current economic
recession, the rate at which consumers are falling behind on credit card
debt also has increased. According to the Board of Governors of the
Federal Reserve System (Federal Reserve), approximately 6.6 percent of
credit cards were 30 or more days past due in the first quarter of 2009the
highest delinquency rate in 18 years. To recover delinquent debt, credit
card issuers use a combination of methods, including use of their own inhouse collection departments, third-party collection agencies, collection
attorneys, and the sale of debt to a debt buyer. The debt collection
industry recovers and returns to card issuers and other creditors billions
of dollars in delinquent debt each year that would otherwise go
uncollected. 1 These efforts increase the availability of consumer credit and
reduce its cost.
Congress enacted the Fair Debt Collection Practices Act (FDCPA)the
primary federal legislation governing debt collectionin 1977, but the
industry has changed considerably since that time. In October 2007, the
Federal Trade Commission (FTC) held a workshop to learn more about
the current state of debt collection and examine the adequacy of the
regulatory framework used to oversee the industry. Recognizing that
relatively little is known about the debt collection industry and the process

This report uses debt collection industry to describe businesses that engage in the
collection of debt for which the business is not the original creditor. The industry often
refers to itself as the accounts receivable management industry, although that term
sometimes encompasses the collection practices of original creditors as well.

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GAO-09-748 Credit Card Debt Collection

through which credit card debt is recovered, you asked us to examine this
process as well as other issues. Specifically, this report examines (1) the
protections provided consumers under federal and state laws related to
credit card debt collection, and the roles and responsibilities of federal
and state agencies in enforcing these laws; (2) the processes and practices
involved in collecting and selling delinquent credit card debt; and (3) any
issues that may exist related to some of these processes and practices.
This report focuses on the collection of consumer credit card debt.
However, because debt collection companies typically also service other
forms of consumer debt (such as health care or utility), it was not always
possible to separate processes and data related specifically to credit card
debt. In addition, this report focuses on the largest credit card issuers
which represent about 83 percent of outstanding credit card debtand on
medium- to large-sized debt collection companies. As a result, the
collection processes and practices described in this report may not be
representative of smaller credit card issuers or debt collection companies.
To address our first objective, we reviewed relevant federal laws, rules,
and guidance and we interviewed staff from FTC and the federal
depository institution regulatorsthe Federal Deposit Insurance
Corporation (FDIC), Federal Reserve, Office of the Comptroller of the
Currency (OCC), and Office of Thrift Supervision (OTS). We also reviewed
selected state laws applicable to credit card debt collection, as well as two
compendiums of state laws. We relied on the appropriate state officials for
analysis of and information about the meaning and scope of state debt
collection laws. To address our second objective, we met with officials of
the six largest credit card issuers, six third-party debt collection
companies, six companies that purchase credit card debt, two law firms,
and industry trade groups representing these entities. We chose the
companies we interviewed because their collection business included
collection of credit card debt and because they ranged in size from
medium to very large. These companies included some of the largest
industry players, although data are not available on the share of the
respective markets that they represent. We also collected and analyzed
various documents from these entities, including public filings and sample
contracts. We also toured the collection facilities of one card issuer and
one debt collection company and observed telephone collection
operations. To address our third objective, we reviewed FTCs annual
reports on FDCPA from 1998 to 2009, the report and public comments
deriving from FTCs 2007 workshop, and documents related to the
agencys enforcement actions. We reviewed federal depository regulators
examination manuals, as well as formal and informal enforcement activity
the regulators took from 1998 to 2008. We also reviewed enforcement

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GAO-09-748 Credit Card Debt Collection

actions taken by selected state agencies related to debt collection from

January 2006 to May 2009. We analyzed all of the consumer complaint data
from the depository regulators and FTC from 2004 to 2008. In addition, we
reviewed various studies and reports produced by advocacy and trade
organizations representing the interests of consumers and debt collection
firms. We conducted interviews with representatives of relevant federal
and state agencies and consumer and industry trade groups.
We conducted this performance audit from July 2008 to September 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives. More information on our scope and
methodology is available in appendix I.

Background

Credit card usage has grown dramatically in recent years. From 1993 to
2007, the amount charged to U.S. credit cards rose from $475 billion to
more than $1.9 trillion, according to estimates from the Card Industry
Directory. 2 While more than 6,000 depository institutions issue credit
cards, the majority of accounts are concentrated among a small number of
large banks. As shown in table 1, at the end of 2007, the top six credit card
issuers accounted for about 83 percent of the outstanding credit card
loans nationwide.

Includes both consumer and commercial credit card charge volume. See Card Industry
Directory: The Blue Book of the Credit and Debit Card Industry in North America, 20th
ed. (Chicago, Ill., 2008). SourceMedia, the publisher of the Card Industry Directory, told us
that the 20th edition is the last edition that will be published and that its information has
migrated into a Web-based product called PaymentsSource.

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GAO-09-748 Credit Card Debt Collection

Table 1: Six Largest Credit Card Issuers by Outstanding Credit Card Loans as of
December 31, 2007
Outstanding loans

Percentage of
total market

$196,811,000,000

23.5

Bank of America

183,691,119,000

22.0

JPMorgan Chase & Co.

Card issuer
Citigroup Inc.

148,391,000,000

17.7

Capital One Financial Corp.

62,432,633,000

7.5

Discover Financial Services Inc.

52,302,410,000

6.3

American Express

49,251,563,000

5.9

$692,879,725,000

82.9

Total
Source: GAO analysis of data from Card Industry Directory.

In 2008, issuers had more than $23 billion in nonsecuritized debt that was
from 30 to 180 days delinquent, according to data from Call Reports. 3 As
seen in figure 1, credit card delinquency rates have fluctuated over time.
According to Federal Reserve data, these rates averaged about 4.4 percent
from 1991 to 2007, but since that time have risen sharply to about 6.6
percent in the first quarter of 2009.

FDIC-insured institutions file financial data quarterly reports, often known as Call
Reports for banks and Thrift Financial Reports for thrift institutions, which provide
details on income and certain financial condition information. However, these reports do
not include detailed information on credit card balances that an institution may have sold
to other investors through a securitizationthe sale of credit card receivables as part of
pools of securitized assets to investors. Credit card-issuing banks generally securitize more
than 50 percent of their credit card balances.

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GAO-09-748 Credit Card Debt Collection

Figure 1: Credit Card Delinquency Rates, 19912009 (first quarter)

Percentage
7

0
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Year

2009
(Q1)

Source: GAO analysis of Federal Reserve data.

Note: Delinquent loans are those past due 30 days or more and still accruing interest, as well as
those in nonaccrual status.

When consumers fall more than 180 days behind on paying their credit
card bills, banks charge off the delinquent account. 4 Charged-off loans
are generally considered uncollectibleusually because of cardholder
bankruptcy, death, or prolonged delinquencyand are removed from
issuers portfolios. 5 Federal Reserve data show that in the first quarter of
2008, issuers charged off $4.2 billion, which represented about 4.7 percent
of their outstanding credit card debt. By contrast, in the first quarter of

4
Bank regulatory accounting requirements state that the accounts must be charged off after
180 days of delinquency for an open-end (revolving) account or 120 days for a closed-end
(installment) account. Uniform Retail Credit Classification and Account Management
Policy, 65 Fed. Reg. 36903 (June 12, 2000).
5
Fraudulent charges must be charged off within 90 days of discovery, or within the time
frames generally established in the Uniform Retail Credit Classification and Account
Management Policy. Id. at 36905.

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2009, the amount charged off had increased to about $7.5 billion, which
represented a charge-off rate of 7.6 percent. 6
The debt collection industry comprises a variety of participants, including
companies that specialize in the collection of debt, debt collection law
firms, and debt buyers, which purchase delinquent debt for a fraction of its
face value. These companies handle credit card debt as well as other
forms of debt, including utility, health care, telecommunication, and
automobile loans, as well as delinquent taxes. According to the U.S.
Census Bureau, in 2006 more than 4,400 debt collection companies in the
United States collectively employed approximately 143,000 people. Many
of these companies were very small43 percent employed 4 or fewer
employees, while about 3 percent had 500 employees or more. 7 The small
agencies may operate within a limited geographic range, while the largest
corporations may operate in every state and internationally. The debt
collection industry has experienced consolidation in recent years, largely
due to mergers and acquisitions. The four largest debt collection
companies represented about 10 percent of total industry revenues in 1992
and 19 percent of total industry revenues in 2002, the most recent year the
Census Bureau collected this statistic.
Because most debt collection companies are privately held, limited data
exist on the debt collection industrys precise size and other attributes.
However, several sources, including FTC and some industry participants
and analysts, state that the industry has grown in recent years. Kaulkin
Ginsberg, a firm that provides research and other services to the debt
collection industry, estimated that in 2006, revenues were about $10 billion
for third-party collection agencies and about $1.2 billion for law firms
specializing in debt collection. 8 ACA International, a credit and collection
industry trade association, commissioned an industry survey that

6
The Federal Reserve measures charge-off rates as the value of loans removed from the
books and charged against loss reserves net of recoveries as a percentage of average loans
and annualized.
7

U.S. Census Bureau, Statistics of U.S. Businesses: 2006: NAICS 56144 - Collection
Agencies.
8

Representatives of Kaulkin Ginsberg told us they developed their estimates from

discussions with industry participants as well as from financial statements and other data
obtained in the firms capacity as an industry advisor. We could not assess the reliability of
Kaulkin Ginsbergs estimates, and our review of its largely qualitative and unstandardized
methodology indicates that the potential for error may be large in its estimates about the
overall industry.

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estimated that in 2007 collection agencies recovered about $58 billion in

delinquent debts, although these estimates may not have been very
accurate. 9
One significant change in the debt collection business in recent years has
been the growth of debt buying. Debt buyers include firms whose business
model focuses on the purchase of debt, as well as collection agencies and
collection law firms who collect both on debt owned by others as well as
debt they purchase and own themselves. In addition, some firms are
passive debt buyersinvestors that buy and resell portfolios but do not
engage in actual debt collection themselves. While little comprehensive
data exist on the debt-buying industry, Kaulkin Ginsberg estimated that
the amount of debt purchased grew from about $57 billion in 2003 to $100
billion in 2006, with credit card debt representing about 75 percent of the
2006 total. In May 2006, an industry trade journal, Collections and Credit
Risk, stated that the global debt-buying market had sales of an estimated
$158 billion annually and that $100 billion of credit card debt is sold
annually in the United States alone. 10
While the exact number is not known, hundreds, and possibly thousands,
of entities purchase debt, according to DBA International, a trade
association for debt buyers. The debt-buying industry is highly
concentrated, and according to The Nilson Reportwhich provides news
and conducts research on consumer payment systems10 buyers were
responsible for 81 percent of all of the credit card debt purchased in fiscal
year 2007. 11 Only five debt-buying firms are known to be publicly traded
companies, and our review of these firms filings with the Securities and
Exchange Commission found that four of them report purchasing credit
card debt. Portfolio Recovery Associates, Inc., reported it had purchased
more than $32 billion, face value, of credit card debt from 1996 to 2008,
representing 82 percent of its overall debt portfolio. Asset Acceptance
Capital Corp. had purchased more than $22 billion in credit card debt from

PricewaterhouseCoopers, LLP, The Value of Third-Party Debt Collection to the U.S.

Economy in 2007: Survey and Analysis, June 12, 2008, study commissioned by ACA
International. While the methodology of this survey was generally sound, because of the
low response rate and the absence of nonresponse bias analysis, and the wide confidence
intervals around key estimates due to the small number of responses, the resulting survey
data may not be reliable for making precise quantitative estimates.
10

Figures represent face value of debt sold.

11

The Nilson Report, Issue 901, April 2008.

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GAO-09-748 Credit Card Debt Collection

1999 to 2008, representing 64 percent of the face value of its debt portfolio.
In addition, Encore Capital Group reported it purchased more than $201
million in credit card debt in 2008. A fourth company, Asta Funding,
indicated it purchased credit card debt, but did not specify the amount.

Several Federal and

State Laws Govern
Fair Debt Collection,
and Agencies
Oversight Roles Vary

A variety of federal and state laws address debt collection practices, and a
number of federal and state agencies play a role in overseeing the debt
collection industry, conducting enforcement activities, and educating
consumers about debt collection.

FDCPA Is the Primary

Federal Law Governing
Third-party Debt
Collection Practices

Congress has passed several laws that govern the practices of creditors or
third parties in the collection of debt, including FDCPA, the Federal Trade
Commission Act (FTC Act), and the Fair Credit Reporting Act (FCRA).

Fair Debt Collection Practices

Act

The primary federal law governing third-party debt collection practices is

FDCPA, which Congress enacted in 1977 in response to concerns about
the practices of many debt collectors. 12 FDCPA applies to third-party debt
collectors, a term that includes collection agencies that operate on a
contingency basis, collection law firms, and debt buyers, but generally
does not apply to original creditors collecting on their own debt. 13
According to the Senate report accompanying FDCPA, creditors were
exempted because it was believed that their incentive to protect ongoing
customer relationships made them less likely to engage in abusive
collection practices. 14
FDCPA prohibits debt collectors from using abusive, deceptive, and unfair
debt collection practices as well as other specific practices:

12

Pub. L. No. 90-321, title VIII, as added Pub. L. No. 95-109, 91 Stat. 874, codified at 15 U.S.C.
1692 1692p.

13

FDCPA does apply to original creditors in cases where a creditor collects its own debts
using a different name that would indicate a third party is collecting its debt.
14

S. Rep. No. 95-382, at 2 (1977).

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Communications. The act regulates how collectors can communicate

with consumers who may owe a debt and with others associated with the
consumer. For example, it prohibits a collector from informing a
consumers employer about the debt and prohibits collectors from calling
before 8:00 a.m. or after 9:00 p.m. Consumers also may request that the
collector cease further communication.

Treatment of debtor. Debt collectors may not harass, oppress, or abuse

consumers; use or threaten violence; use obscene language; or use a
telephone to engage in actions intended to annoy, such as causing the
telephone to ring repeatedly.

False or misleading representations. Debt collectors may not

misrepresent who they are, falsely represent the legal status of the debt,
fail to disclose to the consumer that they are attempting to collect a debt,
or imply that nonpayment is a crime.

Unfair practices. The act prohibits the use of unconscionable or unfair

practices, including trying to collect the wrong amount of debt; adding
unauthorized fees, interest or other charges to the debt; or causing the
consumer to incur collect-call telephone charges.
FDCPA also dictates the process debt collectors must use during the initial
communication with the consumer and the steps a consumer can take to
dispute a debt. Within 5 days of a collectors initial communication about a
debt, the collector must send the consumer a written noticea validation
noticethat includes the amount of the debt, the name of the owner of the
debt, and a statement informing the consumer that the debt is assumed
valid unless the consumer disputes the debt in writing within 30 days. If
the consumer disputes the debt within that period, the collector must
cease collection efforts until the collector provides the consumer with
verification of the debt.
FTC has primary government enforcement authority under FDCPA
except to the extent that this enforcement authority is given to seven other
federal agencies for entities under their jurisdiction. 15 FTC has a number of

15

15 U.S.C. 1692l(b). These agencies are FDIC, Federal Reserve, OCC, OTS, the National
Credit Union Administration, the Department of Transportation, and the Department of
Agriculture. These seven agencies are authorized to enforce FDCPA under their authorities:
section 8 of the Federal Deposit Insurance Act for the federal depository regulators and the
Federal Credit Union Act for the National Credit Union Administration. 12 U.S.C. 1818; 12
U.S.C. 1751 et seq.

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enforcement options for those who violate FDCPA. FTC can seek a court
order prohibiting defendants from engaging in conduct and requiring that
they pay monetary relief, including restitution to consumers, disgorgement
of ill-gotten gains, and civil penalties of $16,000 per violation. 16 FDCPA
also provides consumers with a private right of actionallowing them to
bring civil actions and be awarded monetary damages if collectors engage
in prohibited collection practices or otherwise do not adhere to the acts
requirements.

Federal Trade Commission Act

The FTC Act, enacted in 1914 and amended on numerous occasions, gives
FTC the authority to prohibit and take action against unfair or deceptive
acts or practices. 17 Certain practices that violate FDCPA provisions may
also violate section 5 of the FTC Act, and FTC often will bring
enforcement actions under both statutes in its cases against third-party
debt collectors. In addition, FTC and federal depository regulators can use
the FTC Act to address unfair or deceptive debt collection practices by
original creditors, who are not covered by FDCPA. 18 The FTC Act also
authorizes FTC to obtain a court-ordered injunction to halt the activities of
any entity that it believes is violating the laws it enforces, including
FDCPA. 19

Fair Credit Reporting Act

FCRA, enacted in 1970, is designed to ensure the accuracy of information

provided for consumer reportsreports containing information about an
individuals personal and credit characteristics used to help determine
eligibility for such things as credit, insurance, and employment. 20
Consumer reporting agencies assemble consumer reports using
information provided by data furnishers that can include credit card
issuers, debt collectors, and debt buyers. FCRA requires that these data
furnishers provide accurate information to consumer reporting agencies
and specifies that information about delinquent accounts generally cannot

16

Disgorgement is having to give up profits or other gains illegally obtained. 15 U.S.C.

45(m)(1)(a); 16 C.F.R. 1.98(d).

17

Pub. L. No. 63-203, ch. 311, 38 Stat. 717 (1914), codified at 15 U.S.C. 41 58.

18

Federal depository institution regulators, but not FTC, have authority to enforce the FTC
Act against depository institutions. 15 U.S.C. 45(a)(2), 57a(f).

19

15 U.S.C. 53(b).

20

Pub. L. No. 90-321, title VI, as added Pub. L. No. 91-508, title VI, 601, 84 Stat. 1128 (1970),
codified at 15 U.S.C. 1681 1681x.

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GAO-09-748 Credit Card Debt Collection

remain on a consumers credit report more than 7 years. 21 The act also
prescribes how the date of delinquency of a consumer debt is to be
calculated, as well as the process that consumer reporting agencies and
data furnishers must follow when consumers dispute the accuracy of
information on credit reports. In July 2009, FTC and the federal depository
institution regulators issued a final rule to establish guidelines for
reasonably ensuring the accuracy and integrity of consumer information
reported to consumer reporting agencies and adding a new process for
addressing consumer disputes. 22

Other Federal Statutes

Provisions in other federal statutes also affect debt collection practices.

The Telephone Consumer Protection Act of 1991 regulates the use of
predictive dialersa technology on which the debt collection industry
relies heavily in its collections operations. 23 Subtitle A of title V of the
Gramm-Leach-Bliley Act governs the collection, sharing, and safeguarding
of consumers nonpublic personal information by certain financial
institutions, including creditors and debt collectors, and requires that
these entities implement proper safeguards to protect the security and
integrity of consumer information. 24
In addition, a number of financial regulatory statutes grant federal
depository regulators the authority to examine banks safety and
soundness, as well as compliance with applicable laws and regulations. As
part of these examinations, the federal depository regulators may review
credit card issuers internal debt collection practices and their oversight of
third-party debt collectors (vendors), in connection with applicable laws,
regulations, or guidance.

21

15 U.S.C. 1681c; 1681s-2(a).

22

Procedures to Enhance the Accuracy and Integrity of Information Furnished to Consumer

Reporting Agencies Under Section 312 of the Fair and Accurate Credit Transactions Act, 74
Fed. Reg. 31484 (July 1, 2009), to be codified at 12 C.F.R. pts. 41 (OCC), 222 (Federal
Reserve), 334 (FDIC), 571 (OTS), 717 (NCUA), and 16 C.F.R. pt. 660 (FTC). The effective
date for these final rules and guidelines is July 1, 2010.

23

47 U.S.C. 227. Predictive dialers are automated computer systems that determine the
number of calls to make based on the time of day, the number of call-center staff logged
onto the system, and the average length of time staff speak with consumers.

24

15 U.S.C. 6801-6809.

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Many States Have Their

Own Fair Debt Collection
Statutes

States cannot enforce FDCPA, but according to the National Consumer

Law Center, most states have fair debt collection statutes of their own. 25
According to state officials we spoke with, many of the state laws largely
mirror FDCPA but allow for local enforcementhowever, some state laws
are more expansive than FDCPA because they define debt collector
more broadly or place additional requirements on debt collectors
conduct. Examples among four states we reviewed include the following:

Applicability to creditors. Some state debt collection statutes may

regulate the activities of creditors collecting their own debts, unlike
FDCPA, which generally applies only to third-party collectors. 26 For
example, California law expressly defines debt collector to mean any
person who, in the ordinary course of business, regularly, on behalf of
himself or herself or others, engages in debt collection. 27

Consumer notice requirements. Some states may have consumer notice

requirements additional to those in FDCPA. For example, Californias debt
collection statute among other things expressly requires third-party debt
collectors to provide a specific notice to a debtor describing the debtors
rights, including notice that collectors may not harass the debtor by using
threats of violence or arrest or by using obscene language. 28 The Colorado
Fair Debt Collection Practices Act expressly requires collectors to provide
consumers with the Web site address of the Colorado Attorney General,
which contains information on the act. 29

Restrictions on debt collection activities. Some states may place

restrictions on collection activities additional to the restrictions in FDCPA.
For example, Massachusetts debt collection regulations state that it is an

25

Robert J. Hobbs et. al. National Consumer Law Center, Fair Debt Collection, App. E , p.
731 (6th ed., 2008). FDCPA does not preempt state law as long as the state law is not
inconsistent with the federal law. Explicitly, state law is not inconsistent if it provides
protections greater than those of FDCPA. 15 U.S.C. 1692n.

26

As noted above, FDCPA does apply to a creditor collecting its own debt if the creditor
uses a different name that would indicate a third party is collecting its debt. 15 U.S.C.
1692a(6).

27

Cal. Civ. Code 1788.2(c) (2009), which provides further that, [t]he term includes any
person who composes and sells, or offers to compose and sell, forms, letters, and other
collection media used or intended to be used for debt collection, but does not include
attorney or counselor at law.

28

Cal. Civ. Code 1812.700(a) (2009).

29

Colo. Rev. Stat. 12-14-105(3)(c) (2009).

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GAO-09-748 Credit Card Debt Collection

unfair or deceptive act or practice for a creditor or debt collector to call a

consumers home more than twice a week per debt or call locations other
than home more than twice in 30 days. 30

Private civil enforcement. As with FDCPA, some states may allow

consumers to bring civil law suits against debt collectors that violate state
debt collection laws. According to one state official, such a private right of
action is designed to encourage compliance with the law while minimizing
the use of limited state enforcement resources. For example, Texas law
expressly provides that consumers can also be granted injunctive relief
that prevents a collector from continuing the unlawful harmful conduct. 31
Debt collection also is affected by applicable state statutes of limitations,
which place limits on when an issuer or debt collector can initiate legal
action against a consumer for collection of a debt. According to FTC, the
statute of limitations for credit card debt varies by state, but typically
ranges from 3 to 10 years, and generally begins to run from the date the
debt becomes delinquent. Some states may allow the statute of limitations
to restart under certain circumstancesfor example, in Kansas, the
statute of limitations is restarted when a consumer makes a payment
toward the debt or acknowledges in writing owing the debt. 32 According to
FTC, courts that have addressed the issue have found it illegal to sue or
threaten to sue to recover debt that is beyond the statute of limitations,
often referred to as time-barred debt. According to the National
Consumer Law Center, courts have generally found that attempting to
collect a time-barred debt without suing or threatening to sue does not
violate FDCPA, except in the few states in which debts are extinguished at
the end of the limitations period. 33

30

Mass. Regs. Code tit. 940, 7.05(3)(d) (2009).

31

Tex. Finance Code 392.403(a)(1) (2009).

32

Kansas law explicitly states that an action may be brought within the statutory period
after a payment on, or a signed written acknowledgment of, or promise to pay the debt is
made by the debtor when a consumer makes a payment toward the debt or acknowledges
in writing owing the debt. Kan. Stat. Ann. 60-520(a) (2008).

33

See for example Wis. Stat. 893.05 (2008), which states [w]hen the period within which
an action may be commenced on a Wisconsin cause of action has expired, the right is
extinguished as well as the remedy. Robert J. Hobbs et. al. National Consumer Law
Center, Fair Debt Collection, p. 222 (6th ed., 2008).

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Federal and State Agencies

Oversee Debt Collection
Practices in a Variety of
Ways

A number of federal and state agencies regulate the various participants

involved in debt collection and bring enforcement proceedings against
violators of the law by filing and prosecuting administrative or civil actions
and undertaking other consumer protection measures such as consumer
and industry education.

Federal Trade Commission

FTC has primary government enforcement responsibility to oversee the

debt collection industry and, in doing so, tracks consumer complaints,
takes enforcement actions, and provides consumer and industry
education. 34 FTC receives consumer complaints about debt collection and
other matters online through its Complaint Assistant system or by
telephone or in writing through its Consumer Response Center and enters
these complaints into its Consumer Sentinel database. In addition, local
Better Business Bureaus and state and local law enforcement authorities
can also enter information into the Consumer Sentinel database regarding
complaints they receive. Some federal depository regulators are also
members of Consumer Sentinel and can access the database and review
complaints related to institutions they oversee. FTC and other law
enforcement authorities use the Consumer Sentinel database to target
their investigations and guide their enforcement activities.
FDCPA and the FTC Act provide FTC with enforcement authority to
investigate debt collection agencies it believes may be violating the law. As
noted earlier, if FTCs investigation reveals violations of either act, the
agency can file suit in federal court for injunctive relief to prevent further
violations and seek restitution for consumers and disgorgement of illgotten gains by the collector. Alternatively, FTC can seek civil penalties
and other monetary relief by requesting that the Department of Justice file
suit against the collector on its behalf. FTC officials told us that the agency
has focused its enforcement efforts on practices that result in the greatest
harm to consumers or on cases that involve a particular legal issue it is
trying to clarify. FTC officials said that to maximize the deterrent effect of
its enforcement actions, they recently have been demanding greater
monetary penalties and naming as defendants individual corporate officers
and managers, rather than simply the company as a whole.

34

Section 184 of the proposed Consumer Financial Protection Agency Act of 2009, H.R.
3126, 111th Cong. 184, would create a new Consumer Financial Protection Agency, which
would have primary enforcement authority for FDCPA, among other consumer protection
laws. The bill was introduced on July 8, 2009, and was referred to the Committee on
Financial Services and the Committee on Energy and Commerce.

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FTC also undertakes consumer education efforts to inform consumers of

their rights and the restrictions placed on debt collectors by FDCPA. In
2008, FTC distributed more than 110,000 English- and Spanish-language
copies of the brochure Fair Debt Collection, which seeks to describe
FDCPA in plain, easily understood language. 35 FTC also issues consumer
alerts on its Web site on specific debt collection issues of concern. For
example, the agency issued an alert on the collection of time-barred debts
shortly after it had taken an enforcement action related to that issue. FTC
call center staff also seek to educate consumers who call to submit a debt
collection complaintfor example, informing them of their right to obtain
written verification of the debt. The agency also seeks to educate and
reach out to participants in the debt collection industry by speaking at
industry conferences, participating in panel discussions, and issuing
FDCPA advisory opinions.

Federal Depository Regulators

The major credit card issuers are structured as depository institutions and
their activities, including those related to debt collection, are therefore
overseen by federal depository institution regulators. OCC oversees four
of the largest consumer credit card issuersBank of America, Capital
One, Chase, and Citibank, while FDIC oversees two other large issuers,
American Express and Discover. 36 The Federal Reserve, OTS, and the
National Credit Union Administration (NCUA) also oversee certain credit
card issuers. 37 The depository regulators conduct examinations to evaluate
the safety and soundness of their institutions and ensure compliance with
federal laws and regulations, including the FTC Act and FCRA. While
FDCPA does not apply directly to credit card issuers collecting on their
own debts, some of the practices prohibited by the statute, if engaged in
by financial institutions, may support a claim of unfair or deceptive
practices in violation of the FTC Act, which is the statute on which the
federal depository regulators rely in overseeing collection activities. 38

35

FTC updated this brochure in February 2009 and renamed it Debt Collection FAQs: A
Guide for Consumers.
36

An American Express savings bank that issues credit cards is overseen by OTS.

37

The Federal Reserve also serves as the consolidated supervisor for bank holding
companies, within which national banks, among certain other types of entities, may be
housed.
38

FTC lacks jurisdiction under the FTC Act over banks, thrifts, and federal credit unions.

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As part of issuers safety and soundness examinations, regulators may

review the sale of credit card debt, as well as the programs issuers offer
delinquent consumers to help them pay their debt, since these issues can
affect the financial stability of the bank. Regulators told us they also
review issuers management and oversight of third-party vendors,
including third-party debt collection agencies. If they have reason to
suspect problems with these third-party debt collection relationships, they
can investigate the collection agency on site at the company workplace. 39
If the regulators identify violations related to debt collection, among the
possible responses could be formal enforcement actions (such as cease
and desist orders, civil money penalties, removal orders, and suspension
orders) or informal enforcement actions (such as memorandums of
understanding and board resolutions). In addition, if appropriate,
regulators can seek restitution as a remedy for violations involving unfair
or deceptive debt collection practices. Like FTC, the depository regulators
collect and track complaints from consumers about issuers. They use
these data to focus their risk-based examinations, assess issuers
compliance with consumer protection laws and regulations, and determine
the need for future regulations or educational efforts.

State Agencies

Our meetings with state regulators indicated that states vary in how they
regulate debt collectors and enforce fair debt collection laws. Agencies
that play a key role in overseeing debt collection can include the states
banking or finance division, office of consumer affairs, and the office of
the Attorney General. Some states also have collections or licensing
boardscomprising in some cases both government regulators and
industry representativesthat serve as the regulatory body for debt
collection agencies in the state.
Certain states require debt collection agencies doing business in the state
to be licensed. State agency officials noted that some states may require
debt collectors to pay a licensing fee or post a bond, and some states can
suspend or revoke an agencys license if it has been found to violate state
debt collection laws or otherwise violate licensing requirements. One state
official also told us that licensing of debt collectors serves to keep debt
collectors in compliance with state law without having to expend state
resources bringing collectors to court. For example, in Colorado the
Attorney Generals office said that in recent years it had brought an
average of about 50 to 60 administrative enforcement actions a year

39

One regulator told us it has never exercised this authority.

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about half of which resulted in settlements and the other half resulted in
the issuance of letters of admonition (censures). The office said that one
or two cases have resulted in the revocation of a collectors licensebut
only rarely has court action been required.
Under the auspices of the North American Collection Agency Regulatory
Association (NACARA), we held a group meeting with agency staff who
oversee debt collection from 17 states. Many of the states represented
gather and analyze consumer complaints about debt collection, often
through telephone hotlines, postal mail, and online forms. States can also
receive referrals from district attorneys, Better Business Bureaus, and
other sources. Some states, such as Minnesota and Tennessee, review or
investigate every consumer complaint received about a debt collector.
Other states, the regulators told us, look collectively at complaint trends
or patterns to determine if an investigation or enforcement action may be
warranted. At least one state, North Dakota, conducts on-site
examinations of every licensed collection agency operating in the state,
either through an on-site visit or by mail. North Dakota bases its
examination cycle primarily on the complaint volume received against a
licensed collection agency, but examinations are still conducted even if
there are no complaints received against a particular agency.
From January 2006 through May 2009, states took approximately 28
enforcement actions against debt collectors and collection attorneys for
debt known to involve, or possibly involving, credit cards, according to the
National Association of Attorneys General. In many of these cases state
authorities said they imposed civil monetary penalties, recovered
consumer funds, or enjoined the collector from engaging in further
unlawful collection activities. Often, consumer complaints may serve as
the trigger for taking an enforcement actionfor example, Minnesota
state officials told us that approximately 95 percent of such actions
stemmed from individual consumer complaints.
As with FTC, a number of state regulators make efforts to educate
consumers about their rights under federal and state fair debt collection
laws. Some states that we spoke with have developed Web sites,
brochures, or videos on public access channels to educate consumers. In
some states, regulators also deliver speeches and appear at conferences
related to debt collection. Some states and cities incorporate debt
collection issues into their broader efforts to improve consumers financial
literacy. For example, New York Citys Department of Consumer Affairs
addressed many debt collection issues during a weeklong call-a-thon,
from which consumers could get answers to financial questions.

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States also coordinate with federal entities and among themselves. For
example, to coordinate oversight responsibilities, FTC staff said they
regularly communicate with state regulators and share information on
industry trends and concerns. FTC also shares information with state
Attorneys General and local law enforcement agencies through its
Consumer Sentinel complaint database. NACARA was created in 1994 to
help communicate and coordinate debt collection regulatory and
enforcement efforts among member states. In some instances, several
states jointly pursued enforcement actions against debt collectors. In
addition, 12 NACARA member states are in the process of developing a
uniform debt collector licensing application to improve the consistency of
information on debt collection agencies across different states. NACARA
members with whom we spoke said they have a good working relationship
with FTC and have participated in FTC conferences.

Delinquent Credit
Card Debt May Be
Collected Internally,
Outsourced, or Sold

Large credit card issuers first seek to recover delinquent debt using
internal collection departments or first-party collection agencies that
collect debt using the issuers name. Issuers offer short- and long-term
repayment arrangements to assist delinquent debtors. When large issuers
are unable to collect these accounts, they typically send them to thirdparty collection agencies or collection law firms. But these creditors also
can sell delinquent debt to a debt-buying firm that may, in turn, seek
recovery using in-house collection, third-party collection agencies, or
resale of the debt to another debt-buying firm. Figure 2 provides an
illustrative example of the lifecycle of one delinquent credit card account.

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GAO-09-748 Credit Card Debt Collection

Figure 2: Illustrative Example of the Lifecycle of a Sample Delinquent Credit Card Account
Issuer tries giving
account to a
different
third-party agency
Third-party
collector
#2

Delinquent
account

Issuer sells
the account

Collection
effort fails

Internal
collections

After account
is charged off

Credit card
issuer uses its
internal collection
department
operations

Debt buyer #2 places

the account with a
third-party agency

Debt buyer
attempts
collection
Debt
buyer

Debt buyer sells

the account

Debt
buyer
#2

Third-party
collector

Collection efforts
continue until
collection is
successful, statute
of limitations runs
out, or owner of debt
otherwise ceases
collection efforts

Third-party
collector
Issuer places
account with
a third-party
collection
agency
Source: GAO.

Credit Card Issuers

Maintain Internal
Collection Operations

Large credit card issuers maintain internal collection departments that

attempt to recover money owed on delinquent credit card accounts. 40
Typically, these issuers use internal collection departments to contact
consumers with accounts that are no more than 180 days delinquent and
thus have not yet been charged off. Officials with whom we spoke at the
six largest issuers have internal policies and procedures that govern their
collection practices and audit departments that seek to ensure compliance
with applicable laws. While FDCPA does not apply to creditors collecting
on their own accounts, all of these issuers said they voluntarily use
FDCPA as guidance for their internal collection activities and regularly
monitor compliance with applicable state laws. Some issuers told us their
collection staff undergo training programs that range in length from 2 to 10
weeks and include topics such as the companys collection policies,
procedures, and technologies; negotiation skills; and compliance with
applicable federal and state laws. The collection departments of five of the
six largest issuers each had from 850 to 8,390 collectors. (The sixth issuer
declined to provide the number of its collection employees.) The great
majority of issuers internal U.S. collection operations are based in the

40

Recovery of debt from debtors who have died or filed for bankruptcy generally involves a
different legal framework from typical debt collection and is not the focus of this report.

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GAO-09-748 Credit Card Debt Collection

United States, although one issuer had a call center located in Costa Rica.
Several of the large issuers we met with have recently expanded the size of
their collection staff due to increases in the number of delinquent
accounts; representatives of one issuer told us in February 2009 that its
collection staff had increased 20 percent since late 2008.
Issuers can assist delinquent debtors experiencing financial hardship by
using a short- or long-term payment arrangement to bring the account
current or offering to settle a cardholders account by accepting less than
the full balance due. Temporary hardship programs can last up to 12
months and help borrowers overcome financial difficulties, such as
unemployment or short-term illness, by reducing interest rates, finance
charges, and fees. Programs of more than 12 months (work out
programs) address longer-term financial hardships, such as divorce,
permanent disability, or the death of a household income provider.
Repayment terms for work out programs vary widely among issuers, but
the federal depository regulators guidance for credit card lending states
that the programs should strive to have borrowers repay their credit card
debt within 60 months. 41 Issuers may choose to re-age the accountor
return a delinquent credit card account to current status without
collecting the total amount of principal, interest, and fees that are dueif
it meets certain criteria. Consumers can benefit from the re-aging of
accounts because it can improve their credit reports. Federal banking
guidelines exist on the frequency and circumstances under which issuers
can re-age credit card accounts. 42

Issuers Outsource Some

Collection Activities

Credit card issuers can outsource debt collection to various types of

collection firms. Accounts that have not been charged off are generally
outsourced to first-party collection agencies and charged-off accounts are
generally outsourced to third-party collection agencies or collection law

41

For example, see Board of Governors of the Federal Reserve System Supervisory Letter
SR 03-1 on Account Management and Loss Allowance Guidance (Jan. 8, 2003).

42

Under federal depository regulators guidelines, an account should exhibit certain criteria
to be eligible for re-aging, such as the borrower having demonstrated a renewed
willingness and ability to repay the loan, the account has existed for at least 9 months, and
the borrower has made at least three consecutive minimum monthly payments or the
equivalent cumulative amount. Issuers may not re-age an account more than once within
any 12 month period and no more than twice within any 5 year period. Different limits
apply to accounts that have entered into work out programs. Uniform Retail Credit
Classification and Account Management Policy. 65 Fed. Reg. 36903, 36905 (June 12, 2000).

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firms. Contracts between issuers and these agencies often specify the
policies and procedures to be used in the collection process. An issuer can
also decide to sell credit card debts and the buyer of those debts can, in
turn, resell those debts to another buyer. Limited available data exist on
the specific amounts of the credit card debt that issuers collect in-house,
outsource, or sell because issuers generally consider this to be proprietary
business information.

First-party Collection Agencies

Some credit card issuers use first-party collection agencies to

supplement their in-house collection operations for delinquent accounts
that have not yet been charged off. First-party collection agencies use the
name of the issuer when contacting consumers and may not be subject to
FDCPA. These agencies typically are paid on a fee-for-service rather than
contingency basis. Using first-party collection agencies gives issuers
additional flexibility to manage fluctuations in the workload and resources
of their internal collection operations. Because first-party collectors use
the issuers name and are collecting from current customers, there is an
emphasis on preserving the relationship with the consumer and mitigating
the negative perception that consumers can have about their accounts
being forwarded to collection. Some issuers also mentioned that their firstparty collection agencies are required to adhere to the same standards as
their internal collection departments.

Third-party Collection Agencies

If an issuers internal efforts to collect on accounts have been

unsuccessful or the accounts are more than 180 days delinquent and have
been charged off, the issuer may choose to place the account with a thirdparty agency (also known as a contingency agency). Third-party collection
agencies are generally paid on commission based on a percentage of the
amount recovered, with the percentage being higher for debts that are
older or otherwise harder to collect. Third-party agencies typically use
their own names when communicating with debtors and are subject to
FDCPA, as well as any relevant state laws. The length of time that
accounts are placed with these agencies can vary, but can range from
several weeks to several months or years. The agencies generally return
uncollected accounts to the issuer at the end of the placement period, at
which time issuers sometimes place the account with a different collection
agency. Some third-party collection agencies focus on recovering credit
card debt, while other agencies specialize in recovering other types of
debt, such as telecommunications or health care, although these
companies may collect credit card debt as well. Officials of one large
credit card issuer told us it had contracts with 15 to 20 different third-party
collection agencies, while another issuer had contracts with 20 such
agencies, and a third issuer with more than 50 agencies. Some of the

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GAO-09-748 Credit Card Debt Collection

issuers explained that they choose their collection agencies selectively to

avoid legal or reputation risks and to maintain customer relationships. For
example, they may review companies records of legal compliance, data
security practices, and number of Better Business Bureau complaints.
Before an issuer provides a portfolio of credit card accounts to a thirdparty company for collection, it scrubs the portfolio to remove accounts
for which the debtor has died, filed for bankruptcy, previously settled the
debt, or disputed its validity, according to several issuers with whom we
met. Several collection companies told us that when they receive a
portfolio from an issuer or another collection company, they typically
conduct a scrub of their own, including checking the accuracy and
completeness of names, addresses, telephone numbers, and other
information to ensure the account is valid for collection. Collection
companies can use customized models to help determine the best
collection strategy for the portfolio. These models assess the likelihood of
payment and can help determine payment or settlement terms that the
debtor should be offered.
The collection process begins when the collection company initiates
contact with the debtor either by telephone or in writing. In general,
FDCPA requires collectors to provide a consumer with notice of their
rights under the law, called a validation notice, within 5 days of initial
contact with the debtor, although we spoke with officials from one agency
that sends the notice almost immediately. 43 If a debtor cannot be located,
companies often use locator methods, such as skip tracingthe practice
of searching national telephone directories, credit reports, tax assessor
and voter registration records, and other sources, as well as contacting
employers, friends, and family members of the debtor. Collection
companies sometimes use the services of third-party vendors that
specialize in skip tracing.
Third-party debt collection efforts rely primarily on a combination of
telephone and postal mail contacts. Several large debt collection

43

FTC staff guidance has indicated that if the debt collectors first communication with the
consumer is oral (e.g., a telephone conversation), the debt collector may make the required
disclosure at that time and need not send a written notice. However, if the notice is not
included in the initial communication with the consumer, the notification must be provided
in writing within 5 days after the initial communication in connection with the collection of
any debt. See FTC Statements of General Policy or Interpretation Staff Commentary on the
Fair Debt Collection Practices Act, 53 Fed. Reg. 50097, 50108 (Dec. 13, 1988) and 15 U.S.C.
1692g(a).

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companies have multiple call centersfor example, one large collection

company told us it operates about 125 call centers throughout the United
States and overseas and employs about 15,000 collectors. Technology
fundamentally has changed the practice of debt collection. We toured a
call center at one third-party collection company and observed that
collectors had on-screen access to detailed information about debtors and
their financial histories. The software systems used for collection can also
allow supervisors to monitor the collection activities of staff. Software
applications also help manage collectors workflows and can help ensure
compliance with federal and state law. Predictive dialers and other
telephone technology improve efficiency by reducing the wait time for
collection staff. For example, predictive dialing systems can be
programmed not to call consumers earlier, later, or more frequently than
permitted by FDCPA or applicable state law. One large agency told us it
recently designed a proprietary voice recognition system that tries to
recognize when collectors engage in inappropriate behavior, such as
speaking with an abusive tone or using profanity. Word processing and
automated mail sorting systems allow debt collectors to send customized
mass mailings relatively inexpensively. Some collection agencies contract
with third-party vendors to handle the design and mailing of their
customized FDCPA-compliant letters.
Officials at the 12 third-party collection companies and debt buyers with
whom we spoke required their collectors to participate in training
programs that ranged in length from 1 to 4 weeks. Topics can include debt
collection techniques, negotiation skills, compliance with applicable law,
and use of desktop technologies. Some collection companies told us they
periodically retest their staff and provide additional training to respond to
changes to any applicable state fair debt collection law. While
compensation plans can vary among companies, the incomes of collection
staff are typically some combination of hourly wage and a commission
based on their performance in recovering debts.
With the authorization of their creditor clients, collection companies can
offer a variety of repayment plans to debtors, which may include
installment payments (that is, fixed monthly payments) or settlements for
less than the amount due. If applicable, and authorized by their creditor
clients, companies can also elect to discount interest and fees that have
accumulated on the account. Options for methods of payment have
expanded in recent years and now include electronic fund transfers, debit
cards, and credit cards. Contracts between issuers and collection agencies
often specify the policies and procedures to be used during the collection
process. According to issuers and collection agencies we met with, this

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can include details on how and when cardholders may be contacted,

options that can be offered for repayment and settlement, and how
consumer disputes are to be addressed. For example, several issuers
required collection agencies to forward disputed accounts to them for
investigation. Several issuers also told us that contracts typically include
data security requirements and provisions allowing issuers to monitor and
audit the collection agency. For example, large issuers sometimes have
access to the internal communications systems of the third-party agencies,
allowing them to listen to live collection calls from a remote location.
Issuers also said they conduct regular audits of their collection vendors,
which include reviews of data security, financial records, and compliance
with applicable law and any policies specified by the issuer. While
contracts usually specify how long the account will be placed with the
agency, some collection agencies told us that early termination is allowed
if the agency is not meeting compliance or performance standards.

Collection Law Firms

Collection law firms specialize in collecting debts. The National

Association of Retail Collection Attorneys stated in a June 2007 comment
letter to FTC that about 5 percent of delinquent accounts (including credit
card accounts) are referred to collection law firms for possible litigation,
typically after collection efforts by internal and third-party collectors have
failed. One issuer we spoke with places certain accounts with a collection
law firm as soon as the issuer determines that a delinquent debtor has the
ability to pay. Collection law firms involved in the recovery of debt are
generally paid by contingency fee and receive a set percentage of debt
recovered. 44 In addition to using collection law firms, officials of some
issuers and third-party collection companies told us they also maintained
their own legal staff to litigate collection cases.
Many collection law firms use traditional collection methods, such as
telephone calls and letters, before starting litigation. These firms may
collect on various types of debt, such as installment loans, credit card,
automobile, or medical debt. Some of these firms also purchase portfolios
of debt. Issuers and debt collection agencies may also contract with a
network of collection law firms to facilitate the filing of lawsuits against
debtors in multiple states. Collection attorneys and law firms are subject

44

In addition to taking legal action for the recovery of debt on behalf of creditors, some
firms also provide more traditional legal services for creditors, such as representing clients
in bankruptcy filings, against class action lawsuits, or in the sale of debt portfolios. These
services are typically billed on an hourly basis rather than paid through a contingency fee,
according to firms with which we spoke.

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to FDCPA, although some states may exempt collection attorneys from

state debt collection laws under certain circumstances.

Credit Reporting

Issuers and other data furnishers, such as collection agencies, can furnish
data and information about debtor accounts to consumer reporting
agencies, which maintain up-to-date, account-level information on
consumer credit histories that is used to help make important decisions
about individuals, such as eligibility for credit, employment, or housing.
Federal law requires consumer reporting agencies and all data furnishers
to take responsibility for ensuring the accuracy of account information
being reported.
Furnishing data to consumer reporting agencies is optional. While all of
the issuers we met with chose to furnish data to consumer reporting
agencies, some issuers, third-party collection agencies, and collection law
firms may choose not to. Contracts for collection services generally
stipulate each partys responsibility for credit reporting. For example, four
of the six large issuers told us that their contracts with collection agencies
generally stipulate that the issuer rather than the collection agency retains
responsibility for furnishing account data to consumer reporting agencies.
Collection companies collecting on their own debts may choose to furnish
data as a collection toolconsumers may be motivated to repay their
debts to avoid damaging their credit records. One stakeholder told us that
those companies that choose not to furnish account data may, among
other things, want to limit their exposure to liability related to FCRA
compliance.
Consumer reporting agencies and the great majority of data furnishers use
a standard data format, known as Metro 2, to help ensure consistency and
accuracy in the reporting of information. The original Metro format was
developed in the mid-1970s and by 1996, more than 95 percent of all data
were furnished using this format. The Metro 2 format was introduced in
1997. It requires furnishers to provide more specific and complete
informationsuch as the full account number and other fields that further
identify the accountto improve accuracy and completeness. Consumers
can dispute information in their credit reports related to delinquent credit
card accounts by contacting the issuer, debt collector, or consumer
reporting agency by telephone, mail, or online. Data furnishers, such as
card issuers or debt collectors, must investigate disputes they receive from
consumer reporting agencies and send the results back to the agency. The
consumer reporting agency has 30 days to complete its investigation and,
if necessary, update the consumers credit report. Data furnishers and

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consumer reporting agencies can use a Web-based automated system

called e-Oscar to transmit information regarding consumer disputes.

Credit Card Debt Often Is

Sold and Resold

Issuers often sell portfolios of delinquent credit card debt to debt-buying

companies. By selling accounts, issuers trade the longer-term cash flows
of collection agency recoveries for the short-term proceeds of a sale to
recover some of their losses. Credit card accounts can be resold multiple
times. Five of the six large issuers with which we spoke currently sell at
least some of their delinquent credit card debt to debt buyers. The issuer
that does not currently sell its debt told us it had done so in the past but
stopped 5 years ago because it believes its internal collection strategies
and outsourcing to third-party collectors yield better results. Reputation
risk can also be a factor in the decision to sell debts since issuers have
limited control over the debt collection practices of new owners of the
debt. Because the price issuers receive when they sell credit card debt has
declined in recent years, at least one issuer told us it had reduced its sale
of such debtit sold 659,000 accounts with a face value of $3.6 billion in
2008, as compared with 750,000 accounts with a face value of $5.4 billion
in 2006. Another issuer told us that in 2009 it sold approximately 6.6
percent of the inventory of charged-off debt it had accrued since 2001,
which had been the year of its most recent prior sale of debt. In addition,
one issuer told us that it had sold a small percentage of its charged-off
debts from 2007 to 2009. Two other issuers declined to provide us with
data on their sale of credit card debt because they considered this
information proprietary.
Some debt-buying companies may purchase portfolios of debt that they
collect on themselves, while other debt buyers may outsource all of their
collections to third-party collection agencies or law firms. According to
the trade association DBA International, debt buyers that do not collect on
their own debt (sometimes called passive debt buyers) are generally not
subject to FDCPA since they take no action to collect on the debt and do
not communicate with the consumer. Portfolios of credit card accounts
can be sold through public or Web-based auctions or through direct
placements arranged by buyers and sellers. A portfolio of debts can be
sold in bulk for an agreed-upon price or in a forward flow arrangement
in which sellers agree to sell a steady volume of accounts for a specified
period of time. Forward flow contracts provide sellers with a predictable
stream of revenue for their charged-off accounts.
In addition, sales of credit card debt can be made through debt brokers
firms that facilitate the transaction between buyer and seller but never

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themselves attempt to collect on the debt. These firms charge a fee that
may range from 6 to 8 percent of the portfolios purchase price. One
industry publication reported that in 2007 the top three debt brokers
National Loan Exchange, Garnet Capital Advisors, and LoanTradehad
managed a total of $17 billion in credit card sales. 45 We spoke with an
official at one of these three debt brokers, who explained its process for
brokering the sale of a portfolio of credit card debt: A financial institution
contacts the broker with information on the debt portfolio it wishes to sell
and the broker analyzes the portfolio and studies market conditions to
determine an appropriate price for the portfolio. The broker then
describes the portfolio in a detailed memo that is marketed to perhaps 200
potential buyers. A smaller number of interested buyers will receive
further information and conduct their own analysis of the portfolio. On
behalf of the seller, the broker will then offer the debt portfolio either
through a sealed bidding process or an online auction.
Sellers and buyers conduct due diligence before making a bid or
completing a transaction, which can include a review of the other partys
policy and procedures regarding collection operations, compliance with
applicable state and federal laws, and professional references. Some credit
card issuers told us they sell accounts only to debt buyers with which they
are familiar because of concerns about reputation risk; one of these
issuers requires buyers to be certified annually to be eligible to purchase
its accounts. Similarly, on the debt buyer side, some buyers require the
seller to complete a survey to provide them with more information about
the accounts being sold.
According to several industry stakeholders we spoke with, when preparing
a portfolio for sale, a debt seller generally scrubs the accounts to remove
those in which the debtor has died, filed for bankruptcy, settled the debt,
or alleged fraud or identity theft. Prior to bidding on a credit card
portfolio, debt buyers typically do their own reviews and scrubs of the
accounts, according to DBA International. They may also review the
portfolios contents to determine the potential return on investment and if
the strategies required to collect on the accounts would be consistent with
the buyers operations. According to ACA Internationals industry
guidance, once a bid has been accepted and a transaction completed,
certain documents, such as a bill of sale and a list of the accounts sold,
may be used to legally document transfer of ownership.

45

The Nilson Report, Issue 901, April 2008.

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According to several industry stakeholders, as well as industry guidance

published by ACA International, contracts for sales of debt portfolios can
typically include provisions that specify the nature and extent of the
account data that will be provided to the buyer, as well as the buyers
access to account mediafor example, credit card applications and billing
statementsor other documentation. Some contracts can include buyback and put-back rights, which allow buyers and sellers to remove and
receive remuneration for certain accounts, such as those involving
evidence of fraud or deceased debtors. The contracts also may include
indemnification provisionsfor example, holding the first buyer
responsible for any liability incurred as a result of the actions of a
subsequent buyer. Some contracts also may limit the terms under which
the buyer can resell the accounts. For example, one issuer with which we
spoke prohibits its debt buyers from reselling the accounts for 1 year after
purchase. Another issuer requires the debt buyer to receive its approval to
resell the accounts, noting that the criteria for selecting the secondary
buyer must be similar to that used by the issuer.
The price of a credit card portfolio is largely driven by certain key
characteristicsmost notably, the age of the debt and the number of times
it has previously been placed for collection with a third-party agency. For
example, accounts that are 91 days to 6 months past due and never
previously placed for collection generally receive the highest prices, while
older accounts and those previously placed for collection typically receive
far lower prices. Some stakeholders told us that the geographic location of
accounts can also affect pricing since state laws on debt collection,
statutes of limitation, and other issues can affect the ability to recover on
the accounts. For example, one debt broker told us that prices may be
lower in states that prohibit the garnishment of wages in debt collection
judgments. The debt broker added that the issuers underwriting criteria,
the average account balance, and the amount of documentation available
all can affect the price of a portfolio.
Limited publicly available data exist on the exact prices of credit card
portfolios. As shown in table 2, Kaulkin Ginsberg estimated that in January
2009, accounts that were up to 6 months delinquent and had not been
placed with a collection agency typically sold for an estimated 5-7
cents for each dollar of face value. Older debt typically sold for much
lessfor example, accounts that were more than 2 years delinquent or had
been previously placed with two collection agencies sold for an estimated
1-2 cents for each dollar of face value. Prices for all types of delinquent
credit card debt have declined significantly in recent years, which Kaulkin
Ginsberg attributes largely to a weakening economic environment that has

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reduced consumers ability to repay debts and reduced buyers willingness

to pay as much for underperforming assets.
Table 2: Estimated Price Ranges for Credit Card Debt, Per Dollar of Account Face
Value, March 2007 and January 2009
Type of debt

March 2007

January 2009

Fresh:
91 days to 6 months past due and never placed
with a collection agency

$0.12 - $0.17

$0.055 - $0.075

Primary:
6 to 12 months past due and never placed with a
collection agency

$0.08 - $0.12

$0.035 - $0.05

Secondary:
12 to 24 months past due and/or previously
placed with 1 collection agency

$0.055 - $0.09

$0.02 - $0.03

Tertiary:
More than 2 years past due and/or previously
placed with 2 collection agencies

$0.03 - $0.05

$0.01 - $0.02

Quad:
More than 3 years past due and/or previously
placed with 3 collection agencies

$0.01 - $0.025

$0.004 - $0.01

Source: Kaulkin Ginsberg, InsideARM.

Note: The definitions in this table for fresh, primary, secondary, tertiary, and quad debt are those used
by Kaulkin Ginsberg, but these definitions can vary across the debt collection industry.

After a debt buyer purchases a portfolio of accounts it has similar options

as an issuer in choosing how to collect on the accounts. It can choose to
collect or litigate using internal resources, contract the collection of the
account to a third-party agency or law firm, or resell the accounts, or a
portion of them, to a secondary buyer. The resale of debt has increased in
recent years, according to Kaulkin Ginsberg, and debt can be resold
multiple times. One debt buyer estimated that almost half of all credit card
accounts purchased directly from original creditors eventually are resold.
As with the original sale of a debt portfolio, resale can occur through a
public auction, directly between debt buyers, or through a debt broker
serving as intermediary. The extent to which debt buyers resell their debt
depends to some extent on their business model. Passive debt buyers do
not attempt to collect debts directly, but rather resell or outsource
everything they purchase to collection agencies or law firms. Other debt
buyers purchase portfolios, attempt collection for a certain period, and
then resell accounts for which collection was not successful. Several
industry stakeholders with whom we spoke noted that a debt buyers due
diligence becomes especially important for portfolios that have been sold

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multiple times because fraud or inaccurate account data can be more

prevalent in these accounts.

Certain Issues Exist

about Some Debt
Collection Practices
and FDCPA Does Not
Address Some
Changes That Have
Occurred in
Technology and the
Marketplace

State and federal enforcement actions, anecdotal evidence, and the

volume of consumer complaints to federal agenciesabout such things as
excessive telephone calls or the addition of unauthorized feessuggest
that problems exist with some processes and practices involved in the
collection of credit card debt, although the prevalence of such problems is
not known. FDCPA, which was enacted in 1977, does not reflect certain
changes that have occurred since that time with regard to modern
technology and the debt collection marketplace.

Issuers In-house
Collection Operations
Have Been the Source of
Complaints, but Regulators
Have Identified Relatively
Few Serious Problems

The federal depository regulatorsFDIC, Federal Reserve, OCC, and

OTSand FTC track consumer complaints related to issuers in-house
debt collection practices. 46

Complaints about Issuers

As shown in table 3, during 2004-2008, the depository regulators received

an average of about 2,000 complaints per year about the credit card debt
collection practices of the institutions they supervise. These complaints
constituted, on average, about 12 percent of all complaints that the
depository regulators received about credit cards and 4 percent of
complaints received about any topic during that time frame. FTC does not
track whether complaints are related specifically to credit card debt, but
during the same 5-year period it received about 22,400 complaints annually
about original creditors overall debt collection practices. Our review of
FTC complaint data indicates that roughly 25 percent of the complaints

46

We did not include the NCUA in the scope of our review of consumer complaints because
officials told us that credit unions represent a very small share of the credit card market.

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FTC received about debt collection were complaints about original

creditors (as opposed to third-party collectors). However, data were not
available on the extent to which the consumer complaints were against
larger versus smaller creditors.
Table 3: Number of Consumer Complaints Received by Federal Depository
Regulators and FTC, 2004-2008
Federal Depository Institution Regulators

Year

Total number Total number

of consumer of credit card
complaints
complaints
received
received

FTC

Total
number of
credit card
FDCPA
complaints
received

Total number of
debt collection
complaints about
original creditors

2004

44,328

15,229

2,257

20,588

2005

47,714

16,579

1,954

23,637

2006

43,319

13,502

1,625

21,465

2007

49,727

17,064

1,641

20,095

2008

63,024

19,023

2,434

26,615

Source: GAO analysis of FDIC, Federal Reserve, FTC, OCC, and OTS data.

FDIC and OTS complaint data showed that common allegations in

complaints received about issuers included attempts to collect debt not
owed and inappropriate practices such as excessive telephone calls or
harassment. Among the most common complaints that FTC received about
creditor debt collection were excessive telephone calls, creditors
misrepresenting the amount or legal status of a debt, the addition of
unauthorized fees and interest to accounts, and telephone calls from
creditors looking for other individuals. However, consumer complaints
may not be a reliable indicator of the extent of problems that may be
occurring, for several reasons. Many consumers who experience problems
with debt collection likely do not complain to any government agencyin
many cases because they may not know to which agency to complain or
because they do not know that their rights have been violated.
Additionally, FTC has noted that a complaint does not necessarily indicate
that a violation of law has occurredeither because the complaint is
inaccurate or, if accurate, does not represent an actual violation.

Enforcement Actions against

Issuers

As discussed earlier, federal depository regulators conduct examinations

of the entities they supervise and may take formal or informal
enforcement actions when they find noncompliance with applicable laws
and regulations. From 1999 to 2008, OCC, OTS, and Federal Reserve did

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not find any problems in their bank examinations related to credit card
debt collection that resulted in a formal enforcement action. FDIC took
formal enforcement action during that time frame against three issuers
related, among other things, to their oversight of CompuCredit
Corporation, a third-party vendor used to market, service, and collect debt
on some of the issuers credit card accounts. 47 The issuers themselves
were not alleged to have engaged in improper debt collection, but they
were each found to have had inadequate compliance systems to conduct
proper oversight of CompuCredit, which was accused of engaging in
deceptive collection practices. 48 The issuers entered into a consent
agreement, in which they agreed to a cease and desist order and to pay
restitution and civil money penalties, without admitting or denying the
alleged violations. 49
Depository regulators also can take informal enforcement actionssuch
as commitment letters, memorandums of understanding, and board
resolutionswhen they find weaknesses that are more technical in nature,
but for which corrective action still is needed. From 1999 through 2008,
OCC told us it took one informal enforcement action against an issuer that
related to credit card debt collection, and the Federal Reserve, FDIC, and
OTS told us they did not take any.
In addition to the enforcement actions taken by the federal depository
regulators, in the late 1990s FTC reached settlements with four
department stores related to the collection practices of their private-label

47

FDIC issued cease and desist orders in the following cases: In the Matter of Columbus
Bank and Trust Company, Columbus, Georgia, FDIC Nos. 08-033b and 08-034k (June 9,
2008); In the Matter of First Bank & Trust, Brookings, South Dakota, FDIC Nos. 07-228b
and 07-260k (Mar. 26, 2009); and In the Matter of First Bank of Delaware, Wilmington,
Delaware, FDIC Nos. 07-256b and 07-257k (Oct. 9, 2008).
48

In the Matter of CompuCredit Corporation Atlanta, Georgia, FDIC Nos. 08-139b and 08140k (Dec. 19, 2008). FDIC issued a cease and desist order in the case.

49

Columbus Bank and Trust Company agreed to pay a total of $9.9 million in civil penalties
and restitution; First Bank & Trust agreed to pay a total of $285,000 in civil penalties and
restitution; First Bank of Delaware agreed to pay $1.04 million; and CompuCredit
Corporation agreed to pay civil penalty of $2.4 million and restitution of not less than $100
million.

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credit cards. 50 FTC alleged that the stores had induced cardholders who
filed for bankruptcy protection to reaffirm their credit card accounts and
falsely represented that these reaffirmation agreements would be filed
with the bankruptcy courts. 51 The resulting consent agreements with the
four department stores ensured that at least $183 million would be
returned to consumers whose debts had been collected illegally.
The Department of Justices U.S. Trustee Program has taken one
enforcement action against an issuer related to credit card debt collection.
In November 2008, the program settled with Capital One for allegedly
collecting on credit card debts that had been discharged in bankruptcy,
which is a violation of the U.S. Bankruptcy Code. 52 According to the
Trustee Program, Capitol One did not have effective procedures for
identifying customers who had filed for bankruptcy. As a result, the issuer
had improperly filed proof of claims in approximately 5,600 cases when it
knew or should have known that the debt had been discharged, and the
issuer improperly collected approximately $340,000 from debtors Chapter
13 bankruptcy estates nationwide in violation of federal bankruptcy law.

50

In the Matter of Sears, Roebuck and Co., FTC No. C-3786 (Feb. 20, 1998) (relevant
consent agreement reserved a right for FTC to file another action if the settlement in a
separate class action suit totaled less than $100 million); In the Matter of Montgomery
Ward Credit Corporation, and General Electric Capital Corp., FTC No. C-3839 (Dec. 11,
1998) (relevant consent agreement reserved a right for FTC to intervene in related lawsuits
if aggregate settlement amounts therein were less than $60 million); In the Matter of The
May Department Stores Company, FTC No. C-3848 (Jan. 20, 1999) (relevant consent
agreement required the company to refund at least $15 million to consumers who, having
had their credit card account debts discharged in bankruptcy proceedings, continued to
make payments or faced illegal collection efforts); and In the Matter of Federated
Department Stores, Inc., FTC No. C-3893 (Aug. 20, 1999) (relevant consent agreement
ensured that the company made full refunds totaling up to $8 million to consumers who,
having had their account debts discharged in bankruptcy proceedings, continued to make
payments or faced illegal collection efforts). The issuance of private-label cards by retail
stores has declined in popularity in the current credit card market. It is more common
today for such stores to have an agreement with a large bank to issue cards in their name.

51

Bankruptcy filers may voluntarily reaffirmthat is, agree to paycertain debts with
creditor firms in an effort to retain assets. However, the U.S. Bankruptcy Code requires
that such agreements be filed with the bankruptcy courts, and in the case of debtors not
represented by legal counsel, reaffirmation agreements must be approved by the court. 11
U.S.C. 524(c). FTC alleged that these stores did not file the agreements or the bankruptcy
courts did not approve them and, therefore, the agreements were unenforceable and the
stores unfairly collected many of these debts.

52

Galley v. Capital One Bank (USA), N.A., No. 06-12142-JNF (Bankr. E.D. Mass. 2008).

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The scope of this report is largely on the debt collection practices of the
very largest credit card issuersall of which are federally supervised
banksbut it should be noted that concern about debt collection
practices has often focused on the smaller, subprime credit card issuers.
Representatives of the National Consumer Law Center told us that
subprime issuers, which are often small, local banks, have been very
aggressive in their debt collection efforts, and a report by the center
alleged that some high-fee subprime card issuers frequently employ
abusive debt collection practices. 53 FDIC staff told us that to the extent
that debt collection abuses occur, they may be more common among
smaller issuers, particularly subprime issuers, since large issuers tend to
have more compliance resources and may be more mindful of the
collection practices they use since they are sensitive to preserving their
reputations in a mature credit card marketplace. Data on the proportion of
consumer complaints on debt collection practices that were made against
larger versus smaller issuers are not readily available.
Some consumer group representatives have raised concerns about some
issuersincluding large issuersdebt collection practices, such as the
use of arbitration in resolving debt collection matters. Cardmember
agreements sometimes require that disputes about a cardholders account
be handled through arbitration, a form of alternative dispute resolution in
which disputes are resolved by an independent arbitrator, rather than by a
judge in a formal court. Some consumer advocates expressed concern that
requiring arbitration is unfair because they believe the arbitration system
can be biased against consumers. A September 2007 report by Public
Citizen that reviewed arbitration cases in California found that business
entities prevailed in about 94 percent of debt collection cases. 54 In July
2009, the Minnesota Attorney General announced that it had reached a
settlement with the National Arbitration Forumthe countrys largest
administrator of credit card and consumer collections arbitrationsin
which the company agreed to permanently stop administering arbitrations
involving consumer debt. The representatives of the large issuers with
whom we spoke said that they rarely or never engage in arbitration
involving delinquent or charged-off accounts.

53

National Consumer Law Center, Fee Harvesters: Low-Credit, High-Cost Cards Bleed
Consumers (Boston, Mass., November 2007).

54

Public Citizen, How Credit Card Companies Ensnare Consumers (Washington, D.C.,
September 2007). Public Citizen examined 33,948 National Arbitration Forum arbitration
filings in California, nearly all of which related to collection matters.

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Some Debt Collection

Industry Practices Have
Been the Source of Much
Concern, but the Extent of
Problems Is Unknown

No comprehensive data exist on the extent to which abusive practices may

be occurring among third-party debt collectors and debt buyers.
Nevertheless, FTC, state agencies, and consumer groups have expressed
concerns in recent years that abusive practices are occurring. Although
the extent of problems is not known, several indicatorsprimarily
complaint data, government enforcement actions, private lawsuits, and
anecdotal evidencesuggest they may not be uncommon.

Complaints about Third-party

Collectors

FTC receives more complaints about the debt collection industry than it
does any other specific industry. In 2008, the agency received about 79,000
complaints on third-party debt collectors, which represented almost 19
percent of all consumer complaints it received on any topic. These figures
are for complaints related to the collection of any debtnot just credit
card debtbecause FTC does not track complaints by type of debt.
Complaints about debt collection have increased in recent years and grew
34 percent from 2004 through 2008. Our analysis of FTC complaint data
found that the most common complaints from 2004 through 2008 related
to debt collectors were, in order of prevalence, (1) misrepresentation of
the amount or legal status of a debt; (2) excessive telephone calls; (3)
telephone calls from collectors looking for other individuals; (4) use of
obscene, profane, or abusive language; and (5) threatening to sue if
payment was not made.
The Better Business Bureau, which also collects consumer complaints,
reported receiving about 16,000 complaints about debt collection
companies in 2008. These companies represented the sixth most common
source of complaints received during 2005-2008. Some state agencies also
collect consumer complaints about debt collection practices. The National
Association of Attorneys General found that debt collection complaints
were the number one topic of complaints received by state Attorneys
General in 2008. Representatives from three state agencies also told us
that they receive more complaints about the debt collection industry than
any other topic.
As noted earlier, complaint data may not be an accurate gauge of the
extent of problems. One debt collection industry representative noted that
because of the nature of their work, it is unsurprising that large numbers
of people have grievances with them. Moreover, consumers complaints
are not always valid. Industry representatives also point out that the
number of complaints against the debt collection industry represents a
very small fraction of the more than 1 billion consumer contacts the
industry makes each year. Furthermore, increases in consumer complaints
may result, in part, from the ease with which technologies such as the

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Internet allow consumers to file a complaint. These effects would tend to

overstate the number of actual problems; on the other hand, consumer
complaints are self-reported and there are likely to be a number of
complaints that are unreported.
Since FDCPA was enacted in 1977, FTC has taken at least 60 enforcement
actions alleging violations related to debt collection. 55 We analyzed the 24
actions initiated in 1998-2008 against collection companies and found that
13 of them involved or may have involved the collection of credit card debt
(as opposed to other forms of debt). 56 In these actions, FTC alleged
violations of FDCPA and/or the FTC Act, which included, among other
activities, harassing and abusing consumers, communicating with the
consumers employers and co-workers about their debts, threatening to
initiate lawsuits or criminal actions against consumers if they failed to pay,
and failing to notify consumers of their right to dispute and obtain
verification of their debts. FTC reached a settlement agreement with the
defendant in all 13 cases, and penalties included requiring collectors and
debt buyers to pay civil monetary penalties and return wrongfully
collected funds to consumers. In some cases, FTC also required debt
collection agencies to develop procedures to address the alleged abusive
practices. For example, one collection agency had to develop a
comprehensive consumer complaint and resolution program and
implement a training program that had to be approved by FTC.

Enforcement Actions against

Third-party Collectors

Examples of FTCs actions against third-party debt collection companies

include the following:

In March 2004, FTC alleged that Capital Acquisitions & Managementa

debt buyer that purchases credit card debtviolated FDCPA by
threatening and harassing numerous consumers to get them to pay debts
they did not owe or that were beyond the statute of limitations. 57
According to FTC, the firm bought lists of debts that were outdated and
frequently contained no documentation about the original debt and in

55

The number of FTC enforcement actions should not be seen as a proxy for the extent of
problems or violations in the law in any given industry.

56

Three of these 24 enforcement actions specified credit card debt, 10 did not specify the
type of debt collected, and 11 clearly involved debt other than credit card debt, such as
mortgage and payday loans.

57

United States v. Capital Acquisitions & Management Corp., No. 04 C 50147 (N.D. Ill.
filed Mar. 24, 2004).

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many cases inadequate information about the original debtor. In its press
release, FTC alleged that the firm made efforts to find people with the
same name in the same geographic area and tried to collect the debts from
them, whether or not they were the actual debtor. The firm would tell
these consumers that they were legally obligated to pay the debt and, if
they failed to, could be arrested, jailed, or have their property seized, FTC
alleged. Capital Acquisitions & Management settled with FTC in March
2004, without admitting liability for any matter alleged in the complaint,
and paid a civil penalty of $300,000. In the 8 months following the
settlement, FTC reported receiving more than 2,000 consumer complaints
against the firm and filed another complaint about the firms practices. A
second enforcement action against this company and other named
defendants resulted in a $1 million judgment as equitable monetary relief
and permanently barred the corporate defendants and some of the
companys management from engaging in debt collection activities. 58

In June 2008, FTC alleged that Jefferson Capital Systems, LLC, a debt
collection company, and CompuCredit Corporation violated the FTC Act
and Jefferson Capital Systems, LLC also violated FDCPA by engaging in
deceptive marketing and abusive collection practices. 59 According to FTC,
the firms marketed a preapproved credit card to consumers with chargedoff debt, telling them that their old debt balance immediately would be
transferred to the new credit card and reported as paid in full to consumer
reporting agencies. However, consumers who accepted the offer
immediately were enrolled in a debt repayment plan and did not receive a
credit card until they paid 25 to 50 percent of their charged-off debt.
Additionally, FTC alleged that Jefferson Capital used obscene or profane
language in debt collection and caused telephones to ring or engaged
persons in telephone conversation repeatedly with the intent to annoy,
abuse, or harass. The settlement prohibited Jefferson Capital from
engaging in the alleged conduct and required it to comply with FDCPA.

In November 2008, FTC settled with the debt collection agency Academy
Collection Service, Inc. and its owner for $2.25 million, which FTC said
was the largest civil penalty FTC assessed in a debt collection action. 60

58

FTC v. Capital Acquisitions & Management Corp., No. 04 C 7781 (N.D. Ill. filed Apr. 11,
2005).

59

FTC v. CompuCredit Corp., No. 1:08-CV-1976 (N.D. Ga. Dec. 19, 2008) (stipulated order
without the defendants admitting liability for any violation alleged in the complaint).

60

United States v. Academy Collection Service, Inc., No. 2:08-cv-01576-KJD-GWF (D Nev.

Nov. 19, 2008). Defendants did not admit to the matters alleged in the complaint.

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Academys collectors allegedly engaged in false threats of wage

garnishment, arrest, and legal action; communicated with third parties
about consumers debts; and called consumers at their workplace when
employers prohibited such calls. Other practices included unauthorized
withdrawals from consumers bank accounts and the early deposit of
consumers postdated payment checks. According to its press release, FTC
also alleged that Academy dismissed consumers complaints without
sufficient investigation or did not properly discipline collectors who were
found to have violated FDCPA. In addition to the civil money penalty, FTC
also required Academy to make certain disclosures, such as consumers
right to have the company stop contacting them about their debt.
FTC also has taken enforcement actions against debt collection companies
for allegedly violating FCRA by reporting inaccurate information to
consumer reporting agencies. In 2000, FTC alleged that Performance
Capital Management maintained old, inaccurate information and failed to
report disputes to consumer reporting agencies. The consent decree
settling this action imposed a civil penalty of $2 million, which was waived
because of the companys poor financial condition. 61 In 2004, FTC alleged
that NCO Group reported accounts using incorrect delinquency dates,
which can cause negative information to remain on a consumers credit
report beyond the 7-year reporting period permitted under FCRA. NCO
Group paid a $1.5 million civil penalty to settle FTCs charges. 62

State Enforcement Actions and

Private Lawsuits

While comprehensive data on state actions are not available, our analysis
of information provided by the National Association of Attorneys General
found at least 60 enforcement actions were taken by state attorneys
general against debt collection companies from January 2006 through May
2009, of which 28 involved or may have involved the collection of credit
card debt. These actions alleged a variety of illegal debt collection
practices, such as deducting money from consumers bank accounts
without authorization, operating in states without proper licenses, and
refusing or failing to provide consumers with proof of their debts.
Generally, state attorneys general either negotiated a settlement with the
debt collection company or brought a court action against the company.
Settlements included penalties such as refunds to consumers, cancellation

61

United States v. Performance Capital Management, Inc., No. 2-01-cv-01047TJH-E (C.D.

Cal. 2001) (consent agreement without adjudication of any issue of fact or law and without
defendants admitting liability or fault).

62

United States v. NCO Group, Inc., No 04-2041 (E.D. Pa. 2004) (consent decree without
adjudication of any issue of fact or law and without defendants admitting liability).

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of consumers debts, civil penalties, and injunctive relief aimed at

preventing future collection violations.
Among these state enforcement actions were the following:

In 2006, the Massachusetts Office of the Attorney General settled with a

debt collection law firm for allegations of unfair debt collection practices
that violated state and federal debt collection laws. According to the
states office, representatives of the firm, among other violations, used
obscene language, harassed and embarrassed consumers, exceeded the
number of permissible calls, placed calls to consumers at improper hours,
disclosed debts to persons other than the consumer, and failed to provide
proof of the validity of debts. Under the settlement, the firm is required to
pay a total of $75,000, including $20,000 in consumer restitution, and
agreed to implement new policies and procedures.

In 2007, the Office of the Illinois Attorney General sued a debt buyer for
violations of the Illinois Consumer Fraud and Deceptive Business
Practices Act. According to the Illinois office, the company used abusive
practices to attempt to collect on time-barred debts more than 10 years
old, debts that had been discharged in bankruptcy, and debts that had
been settled. Additionally, the company allegedly refused or failed to
provide proof of debts, illegally contacted consumers family members and
workplaces, and withdrew money without authorization from consumers
bank accounts. Under the stipulated final judgment, the company paid
$100,000 to the state.
As noted earlier, FDCPA provides consumers with a private right of action,
allowing them to bring civil actions against debt collectors that violate its
provisions and be awarded monetary damages. The Senate report that
accompanied FDCPA indicates that Congress intended these private
lawsuits to provide an important incentive to debt collection companies to
comply with the act. While the exact number of private lawsuits for
violations of FDCPA is not known, representatives of the debt collection
industry told us that such suits were relatively common. The FDCPA Case
Listing Service, LLCa private firm that tracks such litigationreported
that 5,383 cases were filed against collection agencies, collection law
firms, and debt buyers in U.S. District Court in 2008 for alleged violations
of FDCPA. A representative of the firm noted that this figure does not
include FDCPA lawsuits filed in state courts, of which there are also
believed to be a substantial number.

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While consumers private right of action can provide an incentive for debt
collectors to comply with FDCPA, representatives of the debt collection
industry told us that many of the FDCPA lawsuits filed are for what they
consider to be technical violations of the statute that have caused no
actual harm to the debtor. For example, the National Association of Retail
Collection Attorneys believes that a significant burden has been placed
upon debt collectors that have been forced to defend FDCPA suits that
claim that the collectors validation notice is somehow confusing or
misleading. Industry officials told us they believe that some consumer
attorneys file FDCPA lawsuits largely for their own personal gain, taking
advantage of the attorneys fees awarded under FDCPA for attorneys who
prevail against collection agencies. Representatives of several debt
collection companies told us that in many instances they choose to settle
FDCPA cases even when they believe they have done no wrong to avoid
the expense of bringing the cases to trial.
FDCPA provides that collectors that violate the law are liable to an
individual consumer for any actual damages suffered by the consumer,
plus any additional damages allowed by the court, not to exceed $1,000
per violation. The court also may award reasonable attorneys fees to a
consumer who prevails in the action. Damages for class actions are set at
the lesser of $500,000 or 1 percent of the debt collectors net worth. In its
2009 workshop report, FTC proposed that Congress, at a minimum, update
these damages to reflect inflation since 1977. 63 Some consumer attorneys
with whom we spoke said the amounts were too low to serve as a
meaningful deterrent for collection companies. In contrast, one industry
representative expressed the view that the amounts paid for attorney fees
often far exceed the damage award to the consumer, particularly for
technical violations of FDCPA that, in their view, caused no actual
consumer harm.

Debt Collection Litigation

FTCs workshop report noted that lawsuits seeking to collect on credit

card debt are usually filed in state court and, depending on the amount of
the debt, may be filed either in small claims court or civil court of general
jurisdiction. Courts typically apply state contract law to decide collection
cases and use state rules of civil procedure and local court rules, the
report noted, and state rules of civil procedure require that after filing the
debt collector serve the debtor with notice of the action, which can

63

FTC, Collecting Consumer Debts: The Challenges of Change: A Workshop Report

(Washington, D.C., February 2009).

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include the date and time the debtor must appear in court. If the debtor
does not appear in court to respond to the lawsuit, the judge can generally
enter a default judgment in favor of the creditor. Once the owner of a debt
receives a favorable judgment, the owner can generally collect on that
judgment or award, and in some states can seek to put a lien on the
debtors property or garnish the debtors wages or bank accounts.
While no national figures are readily available on the number of debt
collection lawsuits filed in the United Statesinvolving credit card or any
other form of debtthe numbers are widely recognized to be very large.
FTCs 2009 workshop report noted that the majority of cases on many
state court dockets on any given day are debt collection cases. A report by
the Urban Justice Center estimated that in 2006, 320,000 debt collection
cases were filed just in New York Citys Civil Court. 64 In Chicagos Cook
County Circuit Court, more than 119,000 civil debt collection lawsuits
were pending as of June 2008, according to a review by the Chicago
Tribune. State officials in Ohio told us that municipal court judges there
handle as many as 1,000 debt collection cases per week. A review by the
Boston Globe found that at least 60 percent of small claims cases filed in
Massachusetts in 2005 were filed by debt collectors. Consumer groups,
attorneys, and FTC all acknowledge that the number of these state court
cases has increased in recent years and is putting a strain on the state
court systems. Kaulkin Ginsberg and the National Association of Retail
Collection Attorneys have noted that the growth of the debt-buying
industry has resulted in increases in collection lawsuits because entities
that purchase delinquent debt often use collection law firms as their
primary tool for recovery.
FTCs workshop report highlighted concerns related to the prevalence of
default judgments in debt collection litigation. For example, in Cook
County, Illinois, it is estimated that debt collectors obtained a default
judgment in more than 45 percent of debt collection lawsuits filed in 2007.
The Urban Justice Center estimated that 80 percent of the debt collection
cases it reviewed for 2006 in New York City resulted in default judgments.
When a consumer does not show up in court to respond to the suit, a
default judgment generally may be entered against them. Consumer
advocates and consumer attorneys have raised concerns that debt
collectors often file suits with weak evidence supporting the alleged debt,

64

Urban Justice Center, Debt Weight: The Consumer Credit Crisis in New York City and
Its Impact on the Working Poor (New York, N.Y., October 2007).

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knowing that most likely the consumer will not appear in court and they
will receive a default judgment. Moreover, advocates say consumers often
do not appear to contest a debt collection lawsuit because they have not
been properly served with notice of the lawsuit. 65 In response to concerns
about the number of default judgments, representatives of the debt
collection industry say that in many debt collection cases, defendants may
legitimately owe the debt but do not appear in court because they want to
avoid the associated costs of offering a defense that they know will be
unsuccessful.
Representatives of the National Consumer Law Center, the National
Association of Consumer Advocates, Consumer Union, and attorneys at
legal aid clinics have stated that they have observed a number of other
debt collection practices that raise concern. Because there is limited
information about the extent to which these practices occur, most of the
evidence remains anecdotal.

Other Concerns

Collection of debt discharged in bankruptcy. Under the federal

Bankruptcy Code, creditors are prohibited from taking any form of
collection action on debts discharged in bankruptcy, including legal action
and communications with the debtor, such as telephone calls and letters. 66
As noted earlier, federal agencies have reached settlement with companies
alleged to have engaged in collection activities on discharged debt. In
addition, at least one debt buyer we identified purchases discharged
bankruptcy debt. There may be instances in which debts that have been
initially designated as discharged can later become collectablesuch as
cases where the courts discover additional assets that can be divided
among creditors or where debtors may choose to repay discharged debts
out of a sense of moral duty. However, some consumer representatives
have expressed concerns that the purchase and sale of discharged debt
may foster improper collection practices.

65

A party in a civil action is generally served (delivered) legal papers in lawsuits, either by
mail or by a professional process server or a government official, such as a deputy sheriff,
marshal, or constable. According to a press release, in April 2009, the New York State
Attorney General filed criminal charges and a civil suit against a legal process server and its
chief executive officer and president for allegedly failing to provide proper legal
notification to thousands of New York residents facing debt-related lawsuits. See Office of
the New York State Attorney General, Attorney General Cuomo Announces Arrest of Long
Island Business Owner for Denying Thousands of New Yorkers Their Day in Court,
http://www.oag.state.ny.us/media_center/2009/apr/apr14a_09.html (accessed July 1, 2009).
66

11 U.S.C. 524.

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Collection of time-barred debt. As noted earlier, while it is generally illegal

to sue or threaten to sue to recover debt that is beyond the statute of
limitations (time-barred debt), FDCPA does not prohibit other attempts to
collect on such debt, such as through telephone calls or letters. Some
consumer advocates have reported to FTC that some collectors still make
false threats of suit or actually sue on time-barred debtsand in some
cases obtain a default judgment on time-barred debts from consumers who
may be unaware that a collector may not lawfully sue on debt over a
certain age. FTC addressed this issue in a recent roundtable it held in
August 2009 on debt collection litigation and arbitration issues. FTC plans
to hold two other roundtables on these issues later this year.

Revival of time-barred debt. Some consumer attorneys have also reported

that some debt collectors have used unlawful tactics in an attempt to
revive a time-barred debtthat is, to extend the time available to sue a
debtor if the statute of limitations has past or is approaching. Consumer
representatives have alleged that some companies have unjustly sought to
extend the limitations period by altering a debts recorded delinquency
date or by persuading consumers to make a very small payment or making
unauthorized payments in the debtors name.

Debts May Not Always Be

Adequately Verified

Having adequate information is a key element in ensuring a fair and

efficient system for collecting debt. According to FTC and other
stakeholders, collection agencies and debt buyers sometimes may not
have adequate information about their accounts and may not always have
access to documentation needed to verify the debt.

Amount of Information
Transferred to Collection
Companies Varies

The flow of information plays an important role in the process of debt

collection. Credit card issuers provide their third-party collection agencies
with information about the debtorincluding name, address, telephone
number, date of birth, Social Security number, and employerand about
the debt itself, including account number, balance, date of first
delinquency, and date of charge off. Additional information that may be
provided by issuers includes the last date of payment; a breakout of the
principal, interest, and fees that compose the amount due; monthly
payment date; minimum payment amount; and any notes describing the
issuers internal collection efforts on the account. Some issuers allow
third-party agencies to access account information through the issuers
own data system during the collection process.
FTC, state agencies, consumer advocates, and others have expressed
concerns that debt collection companies sometimes have inadequate
information about the accounts for which they are collectingincreasing

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the likelihood that the collector reaches the wrong consumer or tries to
collect the wrong amount. Consumer groups and others note that this
problem appears to be most acute when debt is sold and the transfer of
information between seller and buyer may not be complete. It is common
for a debt buyer to receive only a computerized summary of the issuers
business records, and the specific account data transferred to a debt buyer
varies with each sale. Problems with the sufficiency of data that are
transferred can be exacerbated when accounts are sold multiple times,
and there are numerous areas in which account integrity could be
compromised, according to industry data specialists with whom we spoke.
For example, important account informationsuch as results of disputed
account investigations, consumer complaints about billing errors, and
information on settlement agreements and identity theftmay not always
be transferred to debt buyers.
To help improve information flows, FTCs 2009 workshop report proposed
that Congress modify FDCPA to require that the initial validation notices
provided to consumers include three additional pieces of information.
First, the agency recommended that validation notices notify consumers of
two significant rights they have under FDCPA: the right to have collection
efforts suspended prior to debt verification and the right to require
collectors to cease contact upon written request. 67 Second, FTC
recommended that validation notices include the name of the original
creditor. FTC and consumer groups have noted that this would benefit
consumers as well as collectors by making it easier for consumers to
recognize their debts when they have been sold to a debt buyer under a
different name than that of the original creditor. Third, FTC recommended
that validation notices include not just the total amount of the debt, but
also an itemization of principal, interest, and fees, which it said would
allow consumers to determine if any charges being demanded by a debt
collector were erroneous or subject to dispute.
A related area of concern has been the availability of account mediathat
is, billing statements, credit card agreements, card applications, or other

67

Specifically, FTCs workshop report recommended that validation notices be required to

inform consumers of their rights under (1) section 809(b) of FDCPA, which provides that if
a consumer disputes a debt or requests verification of the debt in writing within 30 days of
receiving the validation notice, the debt collector must suspend collection efforts until it
obtains verification of the debt and mails it to the consumer; and (2) section 805(c) of
FDCPA, which requires debt collectors to cease contacting a consumer about a debt if the
consumer requests it in writing. 15 U.S.C. 1692c(c) and 1692g(b).

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items that help substantiate the validity of the debt. Contracts between
issuers and debt buyers usually specify the terms of the account media
provided to the buyer. For example, in our discussions with issuers and
debt buyers and our review of sample contracts, we found that oftentimes,
buyers will have the right to request media either for a certain period of
time subsequent to the purchase of a portfolio or for a certain number of
accounts in the portfolio. Debt buyers may use such media to support a
lawsuit or to address a consumer dispute. Some contracts between
primary debt buyers and secondary debt buyers provide that if the
secondary debt buyers request account media, the primary debt buyers
will attempt to obtain them from the original creditor. Similarly, contracts
between secondary debt buyers and tertiary debt buyers provide that the
tertiary buyer can request media from the secondary buyerwhich then
requests them from the primary buyer, which requests them from the
issuer (see fig. 3).
Figure 3: How Account Information Is Passed among Debt Buyers

Current owner of debt submits request for account media

(such as billing statements, cardmember agreements, card
applications) to the previous owner. The request is passed along until it
reaches the issuer.
Media
st
reque

Third
buyer

Second
buyer

First
buyer

Credit
card
issuer

Media

B
Upon request, issuer provides account
media to the initial debt buyer, who passes
it on to subsequent buyers until it reaches
the current owner.
Source: GAO.

This process can be problematic because if any company in the chain fails
to respond (or goes out of business), it can be difficult to obtain the media
needed to document and verify an account. The credit and collection
industry trade association ACA International has suggested that Congress
require by statute that creditors and debt buyers maintain specific account

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GAO-09-748 Credit Card Debt Collection

documentation until the time they sell, forward, or assign a debt to

another entity, at which time the documentation would be required to be
made available to that entity.
Some industry representatives have noted that improving information
flows in the debt collection process would have costs as well as benefits.
For example, they note that requirements for maintaining and transferring
media (such as credit card agreements) for all accounts would impose
financial costs to creditors and collectors. Moreover, industry
representatives say that the need for account media is relatively rarefor
example, one collection attorney estimated that such media from issuers
or previous debt buyers would be relevant to fewer than 1 percent of his
firms collection disputes. In addition, representatives of the credit card
industry have said that the transfer of more account information can raise
privacy and data security concernsfor example, by allowing more
parties to hold sensitive account information there may be an increased
risk for data breaches and identity theft. While these issues would need to
be considered, FTC and consumer advocates maintain that it remains
important nonetheless to find ways to better ensure that debt collectors
have adequate information about the accounts for which they are
collecting.

Adequacy of Verification Has

Been a Concern

FDCPA requires that, if a consumer disputes the validity of a debt in

writing, the debt collection agency must provide the consumer with
documented verification of the debt. 68 However, the statute does not
precisely set out what constitutes verification of the debt. Collection
companies policies for responding to requests for verification vary. In
many cases, contracts between issuers and collection agencies stipulate
how the agency responds to requests for verification. FTC, consumer
advocates, and state agencies have said that, in practice, many debt
collectors and debt buyers do very little to verify debts that consumers
dispute. In particular, they say that the verification provided by debt
buyers sometimes consists of little more than a written statement that the
amount being demanded is what the creditor claims is owed. Collection
agencies ability to provide adequate documentation to verify a debt may
be limited if they do not have access to account media, as is sometimes the
case.

68

DBA International stated that, in practice, many debt buyers provide verification to
consumers who dispute a debt even when the dispute is oral or is not received within the
30-day period required under FDCPA.

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Debt collection industry representatives claim that considerable confusion

exists about what constitutes adequate verification under FDCPA, and
collectors largely have had to rely on case law. In one key case, the Fourth
Circuit of the U.S. Court of Appeals found in 1999 that while the debt
collector must obtain verification from the creditor for the amount
demanded, the collector is not required to keep detailed files of the alleged
debt. 69 To clarify and improve the debt verification process, FTCs 2009
workshop report proposed that FDCPA be amended to require debt
collection agencies to conduct reasonable investigations that are
responsive to the specific disputes consumers have raised. FTC points out
that such a requirement would be comparable to the reasonable
investigation standards for addressing consumer disputes that are
imposed by FCRA and Regulation Z, which implements the Fair Credit
Billing Act. 70 FTC officials told us that what constitutes a reasonable
investigation would depend on the specific facts of the dispute, including
the type of debt and the cost of obtaining information. Some debt
collection industry participants say that because the circumstances of a
dispute can vary, any new statute or implementing regulations should
avoid requiring a specific checklist of items required for verifying a debt.
However, in general, FTC, consumer representatives, and industry
participants agree that clarification is needed on what constitutes
adequate verification of a debt under FDCPA.

Most Stakeholders Believe

That FDCPA Needs
Updating

FDCPA was enacted in 1977. While some sections have been amended, it
has not been substantially revised to reflect changes that have occurred in
technology and in the debt collection marketplace. Most stakeholders
involved in the process of debt collection with whom we spoke
representing consumers, state and federal agencies, credit card issuers,
debt collectors, and debt buyershave expressed support for updating
FDCPA.

FDCPA Does Not Address

Some Key Modern
Technologies

Communication technologies that are ubiquitous todaymobile

telephones, e-mail, caller identification, answering machines, and fax
machineswere not prevalent when FDCPA was enacted in 1977.
Collection companies sometimes have faced difficulties in trying to use
these technologies while remaining in compliance with the act:

69

Chaudhry v. Gallerizzo, 174 F.3d 394, 406 (4th Cir. 1999).

70

15 U.S.C. 1681s-2, 1666: Regulation Z, 12 C.F.R. 226.13(f) (2009).

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Answering machines and voice mail. FDCPA requires that a collection

agency identify itself as such to a debtor and also not state that a debtor
owes any debt to any other party who might answer the telephone. 71 A
debt collector may violate FDCPA if the collector leaves a message on a
consumers answering machine or voice mail that fails to disclose that the
collector is calling in an attempt to collect a debt. However, the debt
collector may also violate FDCPA if someone other than the debtor
overhears a telephone recording revealing the debt collection effort. One
court acknowledged the difficulty a debt collector has in complying with
all of the provisions of FDCPA at the same time when leaving voice mail,
and inferred that debt collectors may need to reach debtors by postal mail,
in-person contact, or by speaking directly to them via telephone instead of
using voice mail. 72

Mobile telephones. FDCPA restricts the hours in which debt collectors can
call consumers and prohibits collectors from imposing additional
telephone charges on consumers. However, because mobile telephone
users may not be, at a given time, in the geographic location indicated by
the telephones area code, debt collectors calling a mobile telephone
cannot be certain they are calling within the permitted hours.
Furthermore, unlike users of land lines, mobile telephone users often
incur charges of some sort whenever they receive a call.

Caller identification. When debt collectors call consumers who have

caller identification on their telephones, the collectors may be disclosing
their names and telephone numbers, which could be construed as a
violation of FDCPA if a third party sees that a debt collector is calling.
However, some stakeholders have questioned if conveying false or
blocked information through caller identification would be a violation of
FDCPAs and the FTC Acts prohibitions on making a false or misleading
representation, as well as FDCPAs prohibition of making telephone calls
without meaningful disclosure of the callers identity.

E-mail and faxes. Debt collection agencies have been reluctant to use email and faxes to communicate with debtors because of the risk that
someone other than the debtor may read the transmission, which could
violate FDCPAs prohibition on disclosure to third parties.

71

15 U.S.C. 1692c(b), 1692e(11).

72

Berg v. Merchants Assn Collection Div., Inc., 586 F. Supp. 2d 1336, 1344 (S.D. Fla. 2008).

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Predictive dialers. Predictive dialerswhich are used heavily in the debt

collection industry to efficiently manage high call volumessometimes
can result in inadvertent hang-ups or dead air, which could be a violation
of FDCPAs prohibition on causing a telephone to ring repeatedly with
intent to annoy, abuse, or harass a consumer. 73
Because FDCPA does not address these technologies, collectors often
have had to rely on case law to determine their appropriate use, and this
has created challenges for debt collection industry participants wanting to
comply with the law. In a comment letter to FTC, ACA International stated
that [c]onflicting court decisions make it challenging to comply with all
applicable laws and that without guidance on the application of FDCPA
to these new methods of communication, debt collectors are without a
reference point to assess the legality of using these technologies to
communicate with consumers. Similarly, the National Association of Retail
Collection Attorneys noted in a comment letter that conflicting court
decisions have made regulatory compliance a guessing game, rather than a
predictable endeavor.

FTC Lacks Rulemaking

Authority for FDCPA

FDCPA requires FTC to provide Congress with an annual report

describing its FDCPA enforcement efforts and provide any
recommendations for statutory changes. However, FDCPA does not
authorize FTC or any other agency to issue rules to implement the act. 74
The legislative history of the act indicates that rulemaking authority was
not provided to any agency because the relevant committee regarded the
legislation as comprehensive and believed it would fully address all
collection abuses. 75 However, because no administrative agency can
promulgate rules for FDCPA, limited means exist for clarifying ambiguities
or filling gaps in the statute and addressing issues that arise as technology
and the marketplace evolve. As we have seen, the advent of the debtbuying industry has created new challenges with regard to information
flows that were not envisioned when FDCPA was drafted. FTC officials
noted that if FDCPA were amended to require collectors to respond to
consumer disputes with reasonable verification measures, a rulemaking
would be the appropriate method for determining what constitutes a

73

15 U.S.C. 1962d(5).

74

15 U.S.C. 1692l(d) specifically prohibits FTC and other agencies from promulgating
rules concerning the collection of debts by debt collectors.
75

S. Rep. No. 95-382, at 6 (1977).

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reasonable verification process. Similarly, FTC and some industry

representatives note that rulemaking authority would allow the agency to
address current and future technologies in the marketplace.
Representatives of some consumer groups and state agencies told us that
they support providing FTC with rulemaking authority for FDCPA. Among
debt collection trade associations, the National Association of Retail
Collection Attorneys has supported giving FTC rulemaking authority,
which it says would help resolve potentially conflicting court
interpretations and help ensure industry compliance. ACA International
has not explicitly called for amending FDCPA to give FTC rulemaking
authority, but has recommended that FTC make regulatory changes as it
deems necessary. Officials from DBA International, a trade association for
debt buyers, told us it had not taken a position on FTC rulemaking
authority. FTC already has rulemaking authority to implement other
consumer protection statutesfor example, the agency issued the
Telemarketing Sales Rule in 1995, revised in 2003, to respond to changes in
telephone technologies and the marketplace. FTC has issued four FDCPA
advisory opinions, which protect debt collectors from liability for
actions taken in good faith reliance on the opinions. 76 In addition, FTC
staff have issued a commentary on FDCPA and also have issued a number
of staff opinions, but the commentary and these opinions are not legally
binding and have not always carried much weight in the courts, according
to FTC staff. As a result, debt collectors have often had to rely on case
lawwhich they note has sometimes been ambiguous or contradictory
in interpreting how to comply with FDCPA, and there has been no
regulatory process to help address the changing marketplace for debt
collection.

Conclusions

The rise in credit card delinquencies and charge offs that has accompanied
the current economic recession has focused new attention on the
practices of creditors and third-party companies in collecting on
delinquent credit card debt. FDCPA, enacted in 1977, has been an
important tool in addressing unfair third-party debt collection practices,
but it has not kept up with the evolving marketplace or with changes in
technology, and FTC has previously recommended that Congress make
certain changes to the statute. We believe that in at least three areas,

76

15 U.S.C. 1692k(e).

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FDCPA would benefit from modification to provide needed clarity for

industry and to enhance consumer protections.
First, FDCPA is limited in addressing problems associated with
information flows. With the advent of debt buying has come the repeated
resale of accountsmaking it more difficult to verify debts and obtain
appropriate documentation as credit card accounts get further from their
original owner. FDCPA does not, for example, address the account
information that should be provided when a debt is sold nor does it
address the procedures and information that constitute verification of
the debt. Statutory changes to better address these issues could help
ensure that participants in the debt collection industry have clear
guidelines on what information they must provide to each other and to
consumers, and could help reduce instances where collectors seek
payment from an incorrect party or for an incorrect amount.
Second, because FDCPA was enacted prior to the advent of technologies
such as mobile telephones, e-mail, and voice mail, its provisions on
communicating with consumers are outdated. This has resulted in
considerable ambiguity and confusion on using these technologies in
compliance with the law, and collection companies have been reluctant to
use some modern technologies. Statutory changes to ensure technology
issues are addressed could benefit both industry and consumers, allowing
the industry to more efficiently conduct its operations and consumers to
receive information expeditiously and with appropriate protections.
Finally, because FTC does not have rulemaking authority under FDCPA,
there is no regulatory process to keep up with an evolving marketplace
and changes in technology. With rulemaking authority, FTC could better
regulate the practices of debt collectors and ensure that consumers are
protected from unfair and abusive practices.

To help ensure that the debt collection system better protects consumers
without unduly burdening the legitimate process of collection, Congress
should consider modifying the Fair Debt Collection Practices Act to
account for changes in the marketplace that have occurred in recent years.
Among such modifications, Congress should consider, in particular,
options for modifying FDCPA to

Matter for
Congressional
Consideration

help ensure that debt collectors and debt buyers have adequate
information about the debts transferred and adequate documentation to
verify the debts they seek to collect from consumers,

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Agency Comments

reflect technologies that were not prevalent when the act was originally
enacted, and

provide FTC with the authority to issue rules to implement the act.
We provided a draft of this report to FDIC, Federal Reserve, FTC, OCC,
and OTS for comment. FDIC, Federal Reserve, FTC, and OTS provided
technical comments that we incorporated as appropriate. In addition,
FDIC and FTC provided written responses, which are reprinted in
appendixes II and III, respectively. In its response, FDIC noted that it
takes seriously its responsibilities to enforce consumer protection laws
and regulations related to debt collection and that it has taken formal
enforcement actions and assessed civil money penalties against financial
institutions to address noncompliance with these laws and regulations. In
FTCs response, it noted that its February 2009 workshop report,
Collecting Consumer Debts: The Challenge of Change, concurred with our
view that Congress should consider amending FDCPA to give FTC the
authority to issue implementing rules.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from the
report date. At that time, we will provide copies to other interested
congressional committees, as well as the Chairman of the Board of
Governors of the Federal Reserve System, the Chairman of the Federal
Deposit Insurance Corporation, the Chairman of the Federal Trade
Commission, the Comptroller of the Currency, and the Acting Director of
the Office of Thrift Supervision. In addition, the report will be available at
no charge on GAOs Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me
at (202) 512-8678 or cackleya@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made key contributions to this report are
listed in appendix IV.

Alicia Puente Cackley

Director, Financial Markets and
Community Investment

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Appendix I: Objectives, Scope, and

Methodology

Appendix I: Objectives, Scope, and

Methodology
Our report objectives were to examine (1) the protections provided
consumers under federal and state laws related to credit card debt
collection, and the roles and responsibilities of federal and state agencies
in enforcing these laws; (2) the processes and practices involved in
collecting and selling delinquent credit card debt; and (3) any issues that
may exist related to some of these processes and practices. The focus of
our report was on the collection of consumer credit card debt as opposed
to other forms of debt. However, because collection agencies may collect
on multiple kinds of debt, it was not always possible to isolate debt
collection processes related specifically to credit card debt. We indicate in
the report whether data that we present are specific to credit card debt or
may include other types of debt. Our report also focuses on the largest
credit card issuers and debt collection companies that ranged in size from
medium to very large; therefore, the collection processes and practices
described in this report may not be representative of smaller credit card
issuers or debt collection companies.
To address our first objective, we reviewed and analyzed relevant federal
laws, rules, and guidance and we interviewed officials from the Federal
Trade Commission (FTC) and the federal depository institution
regulatorsBoard of Governors of the Federal Reserve System (Federal
Reserve), Federal Deposit Insurance Corporation (FDIC), Office of the
Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS),
and the National Credit Union Administration. We reviewed the
procedures the federal regulators use in their bank examinations to review
issuers debt collection policies and practices. We also reviewed two
compendiums that summarized state laws applicable to debt collection
the National Consumer Law Centers Fair Debt Collection and Collection
Actions legal practice guides and ACA Internationals Guide to State
Collection Laws and Practice. We did not conduct our own review of all
state fair debt collection statutes, but we did review the statutes of
selected statesCalifornia, Colorado, Massachusetts, and Texaswhich
we selected because they included provisions that differed in some ways
from the Fair Debt Collection Practices Act. We interviewed staff with the
office of the attorney general in these four states and relied upon them for
the analysis of and information about the meaning and scope of their state
debt collection laws. In addition, we conducted a group interview,
coordinated by the National Association of Attorneys General, with staff
from the office of the attorney general of 15 additional states who chose to
participate. We also met with staff from state and local agencies
responsible for regulating the collection industry in a group meeting that
was coordinated by the North American Collection Agency Regulatory
Association to learn about state and local agencies activities, roles, and

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Appendix I: Objectives, Scope, and

Methodology

responsibilities. Seventeen of the groups 24 U.S. members elected to

participate in this meeting.
To address our second objective, we interviewed representatives of the six
largest credit card issuers as measured by total outstanding credit card
loans, as of December 31, 2007, in the Card Industry Directory. 1 These
issuers, which represented about 83 percent of total outstanding U.S.
credit card debt, were American Express, Bank of America, Capital One
Financial Corp., Citigroup Inc., Discover Financial Services Inc., and
JPMorgan Chase & Co. We reviewed the internal collection department
policies of one issuer and the internal collection training materials used by
three issuers, as well as several sample contracts between issuers and debt
collection agencies and between issuers and debt buyers. We also
reviewed the Securities and Exchange Commission filings of selected
issuers and publicly held debt collection companies. In addition, we met
with six third-party debt collection agencies, six companies that purchase
credit card debt, one law firm that specializes in debt collection, and one
collection attorney. We chose these entities because some or a significant
portion of their business included the collection or purchase of credit card
debt and because they ranged in size from medium to very large. These
companies included some of the largest industry players, although data are
not available on the share of the respective markets that they represent.
We made several attempts to meet with at least one small debt collection
agencyfewer than 20 employeesbut were unsuccessful in gaining the
cooperation of any such companies that we contacted. Additionally, we
met with trade associations that included ACA International (which
represents creditors, third-party collection agencies, collection attorneys,
and debt buyers), DBA International (which represents debt buyers), the
National Association of Retail Collection Attorneys, the American Bankers
Association, and the Consumer Data Industry Association (which
represents consumer reporting agencies). We also reviewed the guidance
and other information that ACA International provides to its members.
Finally, we toured the collection facilities of one card issuer and one large
debt collection agency and listened in on a number of calls to consumers
made by collections staff.
To address our third objective, we reviewed FTCs annual reports to
Congress on the Fair Debt Collection Practices Act from 1998 to 2009, as

Card Industry Directory: The Blue Book of the Credit and Debit Card Industry in North
America, 20th ed. (Chicago, Ill., 2008).

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Appendix I: Objectives, Scope, and

Methodology

well as its consumer education materials and other relevant documents.

We also reviewed the transcript, report, and public comments resulting
from the workshop on debt collection that FTC hosted in October 2007. 2
We obtained and analyzed consumer complaint data from 2004 to 2008
that FTC maintains in its Consumer Sentinel database. Additionally, we
reviewed all of the enforcement actions that FTC filed against debt
collection agencies from 1998 to 2008 and examined their associated
complaints, press releases, consent orders and agreements, and
permanent injunctions. We did not include cases that clearly did not
involve debt specific to credit cards. However, sometimes the type of debt
involved could not be determined from the documents, and in those cases
we included the case but specified that it was not known if credit card
debt was involved. We also received information from the Department of
Justices U.S. Trustee Program on its role in taking enforcement action
related to the collection of credit card debt in cases involving bankruptcy
filings. In addition, we collected and analyzed data from FDIC, Federal
Reserve, OCC, and OTS on consumer complaints submitted in 2004-2008
related to credit card issuers debt collection activities. We also gathered
information from these agencies on the informal and formal enforcement
actions, if any, they had taken against issuers for violations identified
during bank examinations in 1999-2008. We reviewed bank examination
reports and relevant documents associated with enforcement actions,
such as orders to cease and desist. We did not gather complaint data or
information on enforcement actions from the National Credit Union
Administration because officials told us credit unions represent a very
small share of the credit card market. To assess the reliability of FTCs
Consumer Sentinel database as well as the consumer complaint data
provided by the four federal depository regulators, we reviewed these data
for obvious errors in consistency and completeness and we interviewed
agency staff responsible for maintaining the data. We determined that the
data were sufficiently reliable for the purposes of this report. However,
complaint data may both over- and underestimate the number of actual
problems in the industry because complaints may not be accurate or they
may not represent a law violation. Consumer complaints are also selfreported and there are likely to be a number of complaints that are
unreported.

Federal Trade Commission, Collecting Consumer Debts: The Challenges of Change: A

Workshop Report (Washington, D.C., February 2009).

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Appendix I: Objectives, Scope, and

Methodology

We identified enforcement actions related to debt collection at the state

level by reviewing the National Association of Attorneys Generals
biweekly Consumer Protection Reports from January 2006 through May
2009, which compile information on state and federal enforcement of
consumer protection laws, legislative initiatives, and consumer education
efforts. These reports may not be representative of all state attorney
general enforcement actions because they are a compilation of press
releases from their offices Web sites, not all of which may publish such
press releases. To the extent feasible, we identified those enforcement
actions related to credit card debt and, as available, reviewed related press
releases and other documents. We also reviewed and analyzed consumer
complaint data related to debt collection agencies that had been collected
by the national Better Business Bureau and the National Association of
Attorneys General. We reported these data because they provided
information relevant to our review, but we did not test the reliability of
these data because they appeared to corroborate FTCs consumer
complaint data. We also reviewed studies and reports by consumer
organizations, such as the Urban Justice Center and Public Citizen, related
to debt collection. In addition, we met with attorneys who represent
consumers in debt collection cases and with representatives of consumer
organizations, including the National Consumer Law Center, Consumers
Union, and the National Association of Consumer Advocates.
Because the debt collection industry is mostly composed of privately held
companies, the amount of publicly available data about the industry is
limited. To identify information on the industry, we conducted a literature
search and we talked with a researcher from the Federal Reserve Bank of
Philadelphia and officials from ACA International and DBA International,
as well as other industry participants. We reviewed two industry surveys
commissioned by ACA International, as well as reports published by
Kaulkin Ginsberg and the Nilson Report. To determine the reliability of
industry data in the Kaulkin Ginsberg reports, we interviewed company
representatives about their methodology. They told us their estimates are
developed from discussions with industry participants, financial
statements, and other data obtained in the firms capacity as an industry
advisor. We could not assess the reliability of the firms data, but our
review of its methodology indicates that their data may not be
representative of the entire debt collection industry. Officials from the
Nilson Report declined our request to discuss the methodology used in
their reports. We reviewed the descriptions of the survey methodologies
contained in the ACA reports and determined that while their
methodology was generally sound, because of the low response rate and
the absence of nonresponse bias analysis, and the wide confidence

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Appendix I: Objectives, Scope, and

Methodology

intervals around key estimates due to the small number of responses, the
resulting survey data may not be reliable for making precise quantitative
estimates. However, we report some of the results from these reports
because limited other publicly available sources of such data exist. During
the course of our review, we also found several companies on the Internet
that said they provided debt collection industry research and statistics for
a fee, but we did not pursue these because their methodology suggested
they faced potentially severe risks to reliability.
We conducted this performance audit from July 2008 to September 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.

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Appendix II: Comments from the Federal

Deposit Insurance Corporation

Appendix II: Comments from the Federal

Deposit Insurance Corporation

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Appendix III: Comments from the Federal

Trade Commission

Appendix III: Comments from the Federal

Trade Commission

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Appendix III: Comments from the Federal

Trade Commission

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Appendix IV: GAO Contact and Staff

Acknowledgments

Appendix IV: GAO Contact and Staff

Acknowledgments
GAO Contact

Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov

Staff
Acknowledgments

In addition to the contact named above, Jason Bromberg (Assistant

Director), Anthony Bova, Christine Houle, Tiffani Humble, Marc Molino,
Carl Ramirez, Linda Rego, and Barbara Roesmann made key contributions
to this report.

(250403)

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