WASHINGTON Senate lawmakers added to the growing scrutiny of consumer debt collectors Wednesday, urging federal regulators to clamp down on an industry criticized for poor documentation practices and, in some instances, conflicts of interest.
The hearing before the Senate Banking Committee subcommittee on financial institutions was another sign that stricter rules for debt collectors, which have been accused of improperly harassing consumers and maintaining poor documentation in connection to delinquent borrowers, could be in the offing.
"Just as we saw in the mortgage market, banks and other lenders are keeping shoddy records and giving them a seal of approval," said Sen. Sherrod Brown, D-Ohio, who chairs the subcommittee. "Former bank employees have reported that they were instructed to '[g]o ahead and sign' affidavits verifying consumer debts, even when they didn't have documentation to back up their claims."
The panel questioned two witnesses, one from the Federal Trade Commission and another from the Consumer Financial Protection Bureau. Brown asked each whether regulators should take stronger steps to keep tabs on collection practices, including more rigorous standards for financial institutions to provide paperwork before selling delinquent debt and restricting ties between large banks and debt collectors.
He specifically questioned Reilly Dolan, the FTC's acting associate director for the division of financial practices, about the propriety of Expert Global Solutions, the world's largest debt collector that was formerly called NCO, being owned by a subsidiary of JPMorgan Chase. The debt collector was fined $3.2 million by the FTC last week for allegedly harassing customers. (Last month, JPMorgan said it would spin off the unit that owns it.)
"Obviously, we need to make sure that we deal with a conflict of interest," Dolan said.
He added, however, that some ties between banks and debt collectors do have their benefits.
"In some ways, that" connection with a bank "can make life easier because" the debt collector has "potentially greater access to the documentation that the original creditor has," he said.
Still, both the CFPB and the Office of the Comptroller of the Currency have repeatedly issued strong cautions to financial institutions about their relationships to debt collectors, whether through partial ownership, a bulk loan sale or some type of third-party contract.
In addition to conflicts, regulators have also warned banks about potential reputational risks associated with ties to debt collectors.
"When banks sell debt," the OCC "expects them to have policies, procedures, and practices that result in the third party treating customers fairly and consistently with the expectations of the banks and regulators," the OCC said in a written statement submitted for the hearing. (The agency did not have a witness appearing in person.)
"Even though a bank may have sold a consumer's debt to a third party, consumers often continue to view themselves as the bank's customers and may have other relationships with that bank," the OCC added. "As a result, the debt collector's behavior affects the bank's reputation. Failure to implement proper controls and governance that effectively manage these activities represent safety and soundness and compliance concerns for the OCC."
During the hearing, CFPB official Corey Stone strongly agreed that debt collectors should verify documentation related to a delinquency before going after a consumer, and especially before bringing litigation against a borrower. But enforcing such a requirement by regulation is not an easy undertaking, he said.
"When it comes to standards for the fundamental task of maintaining records and disclosing information, the devil is in the details," said Stone, who is assistant director in the CFPB's office of deposits, cash, collections and reporting markets. "It means answering the question: which specific pieces of information about a debt need to be maintained, by whom, and disclosed when? If we get this right, the result will be a more trustworthy collections system that is more likely to treat consumers with dignity and respect, while better meeting the needs of creditors."
While the FTC also supports having verified documentation, Dolan said he was concerned about going so far as to prohibit companies from selling debt if documents had not been verified.
"We have concerns about the unintended consequences when you have a small debt buyer having a lot of information and would therefore need to make sure they have these security procedures in place," said Dolan, when asked by Brown if such a rule is feasible. "The last thing we'd want is to find that consumer files have been in the dumpster. So we have to think of all the unintended consequences before we go down that road."
Dolan also noted some limitations in federal law to ensuring proper documentation. For example, he said, current law allows sellers to put their own provisions in a debt sale agreement that restrict a debt collector from going back to the seller to request more documentation.
"That is definitely one of the concerns the commission has raised and we want to continue to look at that and we want to work with the CFPB as they are addressing some of these issues," Dolan said.
Because of the overall difficulty in gathering and sharing accurate data within the debt collection industry, Stone said the CFPB is currently talking with companies about creating a debt registry for the entire industry. The CFPB would provide standards for how companies submit data for the registry once a debt goes into collection. The data would then be housed in one secure portal and available to banks, collectors and consumers.