A recent report from researchers at the Federal Reserve Bank of Philadelphia posits that creditors’ concerns about their reputations incentivize the outsourcing of debt collection to third-party debt collection agencies. In the report titled “The Economics of Debt Collection: Enforcement of Consumer Credit Contracts,” authors Viktor Fedaseyeu and Robert Hunt developed a research model for evaluating creditor and third-party debt collection practices and their impact on consumers repaying debts.
In deciding whether to outsource debt collection efforts, creditors often take into account the relative efficiency of in-house versus third-party collections. Delegating debt collection to a third party can be costly for creditors, as creditors have to share any recoveries with the third party. At the same time, however, outsourcing saves labor and other costs that would otherwise be devoted to collections in-house. In-house collections may also be more advantageous because creditors generally have more consumer information in their databases that can help with the collection effort, and the Fair Debt Collection Practices Act excludes original creditors from its definition of debt collectors. The authors found, however, that “relative efficiency does not always determine whether collections are conducted in-house or through third parties.”
Rather, “harsher” collection efforts by third parties and reputational concerns of creditors may drive a creditor’s decision to outsource. By comparing statistics on consumer complaints filed with the FTC, Fedaseyeu and Hunt found that “[r]oughly speaking, there are 10 times more complaints per collector in the third-party collections industry than for the economy as a whole.” Thus, by outsourcing collection efforts to third parties, creditors may rely on that party’s assertive tactics to recoup more money from consumers while preserving their own reputation.
“Given the regulators’ increased focus on debt collection and the potentially large impact that it may have on borrowers, it is important to understand the economic forces that affect the decision to outsource debt collection to third-party firms and the implications of this decision for consumer welfare,” stated Fedaseyeu and Hunt.