This post originally appeared February 9, 2017 on CreditCards.com as “‘Pay-for-delete’ debt settlement comes out of the shadows”
By Barry Paperno
Heard of Encore Capital Group? Or maybe, like millions of consumers, you’ve seen the names of its subsidiaries, Midland Credit Management or Asset Management? They’re big players in the world of debt-buying, where some very big credit reporting and scoring changes affecting millions of consumers are in the works.Encore Capital Group, the huge (more than $1 billion in revenue annually) debt-buyer known to millions of debtors by its subsidiaries – Midland Credit Management, Midland Funding, Asset Management and Atlantic Credit & Finance – announced in January 2017 it has imposed a new credit reporting policy that has already affected more than 1 million of their debt-holders:
- If more than two years have passed since the debt became delinquent, a collection account will be removed entirely from a consumer’s credit report once paid in full or settled for less than the total due.
- For newer debts not yet appearing on credit reports, the debt will be kept off the credit report if payments begin within three months of the initial collection notice mailing, or as long as payments are made each calendar month until the account is paid in full or settled.
What makes this credit reporting policy change important is the potential for a major impact on the way some of the most damaging information to credit scores – collection debt – appears on the credit reports of more than 70 million consumers. To appreciate the importance of collection debt on credit reporting and scoring, consider that adding a collection of any amount to an otherwise clean credit report can lower a credit score by more than 100 points and seriously hinder the ability of a consumer to obtain affordable credit for years to come.
Debt buyers and collectors
Encore Capital and PRA Group (Portfolio Recovery Associates) are America’s “big two” debt buying companies. They purchase credit card, medical and other debts, usually from the original creditors after many months – often years – of unsuccessful collection attempts by the original lenders. Considering the low likelihood that such bad debt will ever be repaid, debt buyers make their money by taking over these obligations for a fraction of their face value and aggressively going after consumers for payment using letters, calls and lawsuits.
A big challenge for the debt collection business has always been finding incentives for the debtor to pay. After all, consumers with collection or other bad debt have already seen their credit scores tumble as soon the debt first went bad. And from experience, they have also learned their scores aren’t likely to improve when collections are paid and that such debts will remain on their credit reports and impact their scores for seven years. They no longer feel they have a reason to pay.
For many years, “pay-for-delete” has been one of the best poorly kept secrets available to consumers and collectors looking for a good reason to pay a debt gone bad. The typical pay-for-delete arrangement begins as a letter from the debtor to the collector seeking an agreement where the debtor pays, either in full or a settled-upon amount for less than the total due, in exchange for the collector removing the account from the consumer’s credit reports or preventing its appearance if not yet reported.Pay-for-delete, however, has a problem: It violates credit bureau reporting rules that ensure the accuracy and completeness of credit reports. According to the bureaus – Equifax, Experian and TransUnion – the proper way to report a resolved collection debt is that, when paid, the account is updated to reflect a “paid collection” that remains on the credit report for the remainder of its seven-year life.
Encore Capital is likely to face scrutiny with its new reporting policy. In effect, consumers can buy their way out of negative, but accurate items on their credit reports.
The significance of Encore Capital’s recent move is that this is the first time since credit reporting left the pre-Fair Credit Reporting Act Dark Ages of almost 50 years ago, that credit reporting incentives similar to pay-for-delete are being brought out from the shadows, into daylight, and made available to millions of qualifying debt-holders burdened with Midland, Asset Management and other Encore Capital-owned debts on their credit reports.
What’s the big deal?
If Encore Capital is successful with this new practice, credit reports and scores will be looking better for millions of Encore Capital debtors once they either pay in full or settle the debt. Where things could get even more interesting is if this policy were to catch on with other debt buyers and collection agencies.
If, as is likely, the incentives offered by this new policy lead to increased collection revenue and cost savings from handling fewer consumer disputes and complaints, expect other companies to jump on the bandwagon. In that case, while secretly wishing to put this genie back in the bottle, the bureaus might just find themselves with no other option but to adapt some of their reporting requirements to accommodate some of these new consumer- and collector-friendly reporting changes.
Not unexpectedly, consumer advocates have been enthusiastic about Encore Capital’s latest move.
“One of the biggest frustrations for many consumers is the fact that resolving a collection account generally doesn’t improve their credit scores,” says Gerri Detweiler, head of market education for the business credit company Nav and longtime consumer credit writer and educator. “If you ask most consumers, they think it will, and should. This change will be enormously beneficial, especially if it is adopted industrywide. It gives consumers the opportunity to get back on their feet credit-wise, pretty quickly, instead of being stuck in credit purgatory for seven years.”
Michael Bovee, founder of Consumer Recovery Network, who has worked with consumers for years to resolve these kinds collection debts, also sees the change as welcome relief for consumers.
“These are people who have worked their way through financial challenges, and are looking to do the right thing, and who want to make progress on their futures,” he says. “The credit reporting policy that Midland Funding has implemented may be mistakenly seen by some as insignificant, but that is shortsighted. This will help people buy homes, and lead to stronger family formation in our country. It is something that I hope to see the rest of the collection industry adopt going forward.”
Though, as a group, consumer advocates have not held back their support for Encore Capital’s radical move, to date the credit bureaus, lenders, credit score developers and other credit industry players have been more or less silent. And for good reason, given the potential conflict with established bureau reporting rules.
FICO 9 and National Consumer Assistance Plan
Yet, while perhaps not even realizing it, the credit bureaus and FICO, creator of the credit scores used in 90 percent of lending decisions, have already demonstrated some flexibility through a couple of actions over the past few years involving credit reporting and scoring changes affecting millions of consumers:
- FICO 9 – the latest FICO credit scoring formula that FICO claims is its most predictive model to date.
- National Consumer Assistance Plan – a credit reporting agreement reached between 31 state attorneys general and the big three national credit bureaus.
Over the decades, a source of much debt collection frustration on all sides has been over FICO credit scores treating paid collections no differently than when unpaid – and, as discussed, leaving little incentive for indebted consumers to pay.
In 2014, FICO introduced its latest scoring formula, FICO 9, that for the first time excludes paid collections entirely from scoring calculations and reduces score damage from unpaid medical collections. These changes mean that FICO no longer considers paid collections to be a necessary credit scoring component and that unpaid medical collections are not as valuable to the score as in the past.
With this step in the right direction for consumers, the ongoing challenge now is getting FICO 9 adopted by the lending world; no small feat considering that new scoring model adoption has traditionally moved at molasses-like speed.
The other lead-up to Encore Capital’s new reporting policy is a 2015 agreement between 31 state attorneys general and the three credit bureaus establishing that, when fully implemented later this year:
- Medical bills will not appear on credit reports until 180 days old, giving consumers and insurance companies time to resolve the debt before it impacts a credit report and score.
- Debts not arising from a contract or agreement to pay – traffic tickets and government fines, for example – will no longer be allowed on credit reports, whether paid or unpaid.
Change is in the air
Taken together, FICO 9, the National Consumer Assistance Plan and now Encore Capital’s new reporting rules point to the trend toward increasing relief for consumers who many feel have already paid for their financial misfortune through low credit scores, high interest rates and credit denials.
In the end, the credit bureaus are most likely to be the ones in the driver’s seat deciding whether Encore Capital and ultimately any other debt buyer, collection agency or creditor can offer to delete seriously negative information in exchange for payment.
In the meantime, and for as long as it lasts, consumers can chalk this one up as a win.