Wells Fargo Halts Card Debt Sales as Scrutiny Mounts
The CFPB is taking aggressive action against the debt collection industry, emphasizing it plans to hold banks responsible for third-party actions.July 12
The Office of the Comptroller of Currency has begun issuing its examiners "best practice" guidelines to end big banks' use of faulty records in the sale of defaulted consumer debt. The move could threaten billions of dollars of sales to collections agencies.July 2
Wells Fargo (WFC) has halted sales of its customers' unpaid consumer loans to outside debt collection agencies, according to several sources familiar with the bank's operations.
The San Francisco bank's decision mirrors a more drastic pullback at JPMorgan Chase (JPM), which has frozen most of its credit card debt-sales activities. It also comes at a time when regulators are ratcheting up scrutiny of banks' collections operations.
Wells Fargo is facing less direct pressure from regulators than is JPMorgan Chase over its credit card collections practices. However, people familiar with the bank's decision say it appears to be reviewing its operations to ensure they comply with regulators' increasingly tight standards for: the process through which banks sell defaulted credit card loans; whom they sell collections rights to; and what information they provide to third-party debt collectors.
Wells Fargo spokeswoman Natalie Brown declined to discuss the bank's debt sales strategy but said in an email that the bank works closely with regulators "to adjust practices as the regulatory environment evolves."
The bank's debt-sales moratorium comes at a time when Chief Executive John Stumpf has said that he wants to expand the bank's relatively small credit card operations. As it bulks up, Wells Fargo will face heightened pressure to avoid the sorts of troubles that have beset its larger competitors' collections operations.
JPMorgan Chase faces a pending federal enforcement action and a lawsuit from California's attorney general over its credit card collections practices. The New York bank has seen the money it makes from those operations fall by 41%, or almost $600 million, since 2010.
Banks have historically sought to collect a portion of delinquent consumer debt by filing lawsuits aimed at compelling borrowers to make repayments. In other cases, they have sold rights to the debts for pennies on the dollar to outside collections agencies, which file their own lawsuits against debtors.
Consumer advocates have long expressed concerns that banks "robo-sign" collections documents, lack complete records or fail to provide them to outside debt buyers.
A number of regulatory agencies have recently begun tightening the screws on big banks and the outside vendors who handle some of their soured customer loans. Among those taking action are the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Trade Commission and several state attorneys general.
CFPB Director Richard Cordray this month vowed to take enforcement action against the debt-collection industry and said his agency will hold banks accountable for lapses by third-party debt buyers. The OCC has compiled a list of best practices for banks that sell third parties rights to collect credit card debts the banks have already charged off their own books. The agency said this month that it is developing more binding supervisory guidance for the industry.
New York State Superintendent of Financial Services Benjamin Lawsky also on Thursday proposed a series of reforms that would require debt collectors to improve recordkeeping and the disclosures they make to borrowers.
"It's a whole new ball game," says Mark Schiffman, a spokesman for ACA International, a trade association for collections agents.
Court records in once-busy state courts in Florida and Missouri show a noticeable drop-off this year in the lawsuits filed by outside agencies trying to collect banks' credit card debt from consumers. The slowdown in lawsuits and debt sales appears to have been triggered by both heightened regulatory scrutiny and the fact that banks have less bad debt to sell; credit card loss rates have fallen steadily since peaking in 2009.
Banks are taking what is "probably a healthy breather, to say, 'Are we doing this the right way and how should we do this going forward? Is it worth the return on investment that we receive?'" Schiffman says.
Wells Fargo quietly stopped renewing its contracts with existing debt buyers in mid-2012. The stoppage is temporary and is likely to be lifted by year's end, according to Michael Flock, who works directly with debt buyers. His firm, Flock Advisors, provides financing to buyers and also advises on collections industry M&A.
Wells Fargo spokeswoman Brown said the bank does "not expect the OCC's best practices document to impact our sales strategy." She credited "the improving economy and related improvements in consumer credit quality" for the recent decline in the volume of lawsuits filed by third-party agencies seeking repayment of debts incurred by Wells Fargo customers.
Other big banks, including Citigroup (NYSE:C), have also slowed sales of charged-off consumer loans to third-party buyers over the past year and a half, industry sources say.
"We continue to adhere to regulatory guidance and to review the effectiveness of our policies and controls for credit card collections," Citigroup spokeswoman Emily Collins said in an email. "We have not materially changed our debt sales strategy." She declined further comment.
The debt-sales stoppage at Wells Fargo and the pullbacks at other big banks appear to be different in kind from JPMorgan Chase's, collections industry sources say.
Rather than fearing a specific regulatory backlash, banks "began to re-examine their buyer groups and plot adjustments to their debt-sales practices because they felt it was inevitable that the CFPB and other regulators would scrutinize their practices," says Sean McVity, a managing partner at Garnet Capital Advisors LLC, which brokers sales of bad debt.
Flock also characterizes Wells Fargo's recent move as "more a period of retrenchment, reassessment and redesign of their policies than a wholesale policy to stop selling debt altogether."
"They're going to have a list of debt buyers that is very, very small for the foreseeable future," he says. "When they start up at the end of the year, the list of approved debt buyers will be very limited."
Consumer advocates say they expect to see other big banks rethink their practices as well, with a particular focus on the level of documentation they retain and provide to third parties.
"I just don't think this [previous industry practice] can continue, and I think anyone who's stopping it [debt sales] realizes that after the mortgage robo-signing fiasco, there's potential reputational damage from continuing," says Ira Rheingold, head of the National Association of Consumer Advocates. "The writing is on the wall."