Major banks face a wave of state investigations into sales of defaulted credit card debt. Now the banks may be facing an even more pressing challenge from their primary federal regulator, the Office of the Comptroller of Currency.
Earlier this year, the OCC began issuing its bank examiners a four-page set of "best practices" to be used in evaluating banks' sales of delinquent consumer debts to third parties.
Written by Morris Morgan, the OCC's deputy comptroller for large bank supervision, the document is yet to be adopted as formal agency policy. However, it reflects the OCC's view that slipshod debt sales are a safety and soundness issue for banks that must be corrected.
"Bank by bank, they understand it's going to be a higher bar," says Kathy Gouldie, OCC lead retail credit expert.
The OCC's issuance of best practice guidelines follows two years when big banks have faced a flurry of criticism from consumer advocates and state attorneys general over their handling of credit card debt.
They also come on the heels of the OCC's own 2011 investigation into whether bank officials employed shoddy record-keeping and "robo-signing" of affidavits and other documents in their own internal collections efforts. That scrutiny prompted JPMorgan Chase (JPM) to shut down a multi-billion dollar in-house litigation operation later the same year. Ultimately it also cut back sales to third parties of accounts it had already charged off its own books. Other banks are believed to have employed similar collections practices. Collections can be a significant money maker for banks, enabling major card issuers to to recoup hundreds of millions of dollars a year. JPMorgan Chase's recoveries peaked at $1.4 billion in 2010.
Banks maintain an internal staff that pressures consumers to repay delinquent debt. When such efforts fail, banks send defaulted accounts to outside attorneys or sell them to third parties. Debt buyers can sometimes extract value even from consumers who have no assets by obtaining judgments and garnishing future wages. It's a business involving high volumes and deep discounts: Encore Financial, one of the largest credit card debt buyers, paid $562 million for $18.5 billion of debt last year, or three cents per dollar of face value, according to its Securities and Exchange Commission filings.
In issuing its best practice guidelines, the OCC appears to be aiming to address general concerns about big banks' debt collection and sales practices, with a particular focus on the "robo-signing" of documents and use of incomplete records in selling bad loans to third-party collectors.
Some debt buyers have relied on records later proven to be faulty or nonexistent to harass and repeatedly sue borrowers who had already repaid their obligations. Now the OCC is recommending that banks "detail documentation requirements to ensure accurate and reliable information is provided to the debt buyer at time of purchase."
The OCC's recommendations include urging banks to:
- Vouch for the accuracy and completeness of all debt records they sell.
- Monitor how debt buyers collect on accounts and limit their reliance on litigation.
- Restrict debt buyers from re-selling defaulted consumer accounts.
- Establish a central debt sale oversight committee.
- Produce written justifications for selling debts instead of collecting on them internally.
- Provide debt buyers with key account information at the time of sale and make full records available at little or no charge.
- Segregate accounts that are "near the statute of limitations" or belong to sensitive customers, such as those in bankruptcy or active-duty military service.
Some credit card lenders are already in compliance with all of these guidelines, but most institutions need to make improvements, says the OCC's Morgan.
"We are now emphasizing that there needs to be a rigorous quality control function up front," he says. "Many of these institutions have acquired other institutions. There have a number of systems that don't communicate with each other, and they have data compiled through different processes."
The OCC's supervisory staff has already discussed its best practices with executives at major banks, and there are indications that banks are already making changes to incorporate the best practices. These include the moves by JPMorgan Chase to rein in its debt-collection operations.
Other regulators, including the Federal Trade Commission and the Consumer Financial Protection Bureau, have indicated their desire to see banks move in the same direction. The OCC's best practices will likely further the efforts of those agencies and state attorneys general to press reforms by undercutting banks' claims that new restrictions are unreasonable, consumer advocates say.
"The OCC understands that consumer protection plays a very important role in a bank's safety and soundness," says Ira Rheingold, head of the National Association of Consumer Advocates and a recent presenter at a joint FTC/CFPB debt collection hearing. "This [debt sales to collections agencies] is an area where there is enormous heat coming."
Asked about the OCC's guidance, JPMorgan Chase, Wells Fargo (WFC), Citigroup (NYSE:C), and Bank of America (BAC) all either declined to comment or did not respond before deadline. But debt market participants say that the lenders are displaying increasing caution.
Aaron Hadam, executive vice president of National Loan Exchange Inc., a delinquent-debt broker, says he has seen several big banks rethink their debt sales policies in recent months. He attributed the change to the OCC's best practices and to the increased industry attention from the Consumer Financial Protection Bureau.
"We see a lot of activity in issuers in redefining their on-boarding practice" with third-party debt buyers and collectors, Hadam says. "We're seeing certain issuers changing resale policy, adding criteria about outsourcing" and otherwise making sure that they meet regulators' expectations.
Sources contacted by American Banker unanimously held the view that such tightening will continue. However, some collections industry representatives expressed surprise at the specificity of the OCC's guidance.
"What they've laid out as best practices aren't necessarily considered best practices yet by the industry or those who are making rules or laws," says Mark Schiffman, head of public affairs for ACA International, a collections industry trade association that has advocated the creation of industrywide debt-collection standards. "We'd suggest care to ensure that what OCC is suggesting is consistent with where the FTC, CFPB and others are heading in terms of policymaking on this topic… this reads less like best practices and more like 'This is what we want banks to do.' "
Implementing the OCC's best practices could be costly, adds Christopher Willis, a Ballard Spahr attorney who advises banks on regulatory compliance. Traditionally, lenders have provided debt buyers with only basic information about the debts that customers owe and provided more complete files only when requested. If more information is mandated at the time of sale, "that requires an investment by the seller to spit it out and by the buyer to assimilate it," he says.
The OCC's recommendation that banks extensively monitor how debt buyers pursue defaulted accounts could also complicate sales, Willis says.
"The whole idea of treating the debt buyer as someone you need to police puts in an oversight component, and may reduce the pool of available buyers."
Even so, card lenders will ultimately be better off incorporating the OCC's best practices, Gouldie says. When examiners began looking closely, they found that many banks lacked central oversight over credit card debt sales.
"There are many cases that, had the right people in the organization known what other people were doing, [those things] would not have occurred," she says.