The Office of the Comptroller of Currency has issued guidance to banks it supervises that will be used to supervise the bad debt and debt collection practices of banks. The new guidance is not a rule yet but it is the OCC document on what is “best practices.”
The focus of the rule is bad debt that is sold and what happens to it, not debt owed to original creditors. The bad debt marketplace has been effectively out of control for a number of years with bad debt being sold and resold without proper documentation, robo-signing, and debt buyers suing consumers over debt which the debt buyers can’t prove they even own. It’s been a hot mess.
Chase Bank is the first major bank to put a hold on their debt sales practices and embrace the guidelines. Others are following.
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.
- 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.
- Limit litigation strategy and evaluate if debt buyers provide consumers with any ability to pay based on their ability or are fast to litigate most accounts.
These rules can have a big impact for both consumers and the debt relief industry. With less aggressive pressure from debt buyers there may be less stimulus for consumers to take action and call on a third party debt relief company for help and assistance.
This has the potential of impacting those debt relief companies who try and sell debt verification or invalidation services since new rules will clearly define the data associated with an account and how far the debt can be sold from the original creditor so it will retain more accuracy.
It will be interesting to see how these rules impact banks who may elect to attempt to collect debt internally either more aggressively or keep bad debt in house after charge off and work it for a longer period of time.
Both bad debt buyers and originating banks would most likely need to be more focused on the quality of their operations and accuracy of their data and that’s not really a bad thing.
The OCC guidelines provide further guidance about the type of problematic accounts that should not be sold to debt buyers. These include:
- debt owed by military members covered by the Servicemembers Civil Relief Act
- deceased with no remaining responsible party
- accounts in disaster areas
- pending bankruptcy
- accounts close to statute of limitations
- accounts lacking clear title
- accounts lacking proof of right-to-cure or notice of intent-to-sell letters
- balances comprised largely of interest and fees
- cease and desist accounts
- debts where payments were recently received
- accounts in ongoing loss mitigation programs (short sales, deed in lieu; etc.). – Source
But for accounts the bank decides it can sell, they are directed to take much greater care in who they sell debts to. The OCC guidance provides the following direction.
“Strong debt sale oversight includes an established initial and ongoing due diligence process of third party debt buyers to help control and limit legal and reputation risk. Management should establish minimum criteria for approving debt buyers and should consider the following:
- Do debt buyers have appropriate licenses to operate across various state jurisdictions?
- Is the debt buyer an established business? What is the length of time the debt buyer is required to be in business by bank standards?
- Does the debt buying entity have audited financial statements? Are they financially sound and not under undue financial distress?
- Any regulatory or legal actions currently taken against the debt buyer or its owners / principals raising concerns or issues? Are the debt buyers and owners/principals in good standing (e.g., National Association of Retail Collection Attorneys (NARCA)?
- Are collection activities primarily performed in-house or are they outsourced? What activities can be outsourced—bankruptcy filing, repossessions, litigation activities, skip tracing, etc? Does the company off-shore collection processes?
- Determination of how often legal actions are performed by the debt buyer in an effort to collect debt (consider placing litigation limits within the contract)?
- For forward flow agreements can the debt buyer demonstrate the needed liquidity to purchase future debt sales?
- Does the debt buyer carry sufficient insurance (i.e. commercial liability and errors and omissions policy)?
- Are debt buyers prohibited from reselling accounts? If they are not prohibited what additional controls are required within the original purchase and sales agreement?
- Management should maintain a file on approved debt buyer with supporting documentation to meet OCC vendor management expectations. See OCC Bulletin 2001-47 Third Party Relationships: Risk Management Principles for additional information.
Management should consider the following items when performing an onsite inspection of the debt buying entity:
- Business culture;
- Management and business structure;
- Regulatory and compliance—FDCPA, SCRA, FCRA, Telephone Consumer Protection Act, BK, Fraud, and Deceased;
- Quality of internal quality control function;
- Qualified legal staff;
- How consumer complaints are handled and tracked;
- Collection training—handbooks, procedures, and job aids;
- Information, data, and physical security;
- Regulatory communication;
- Communications are state compliant (i.e., letters, phone calls); and,
- Call or collection attempt frequency.
Ongoing due diligence should consider:
- Reviewing annual financial statements of the buying entity to ensure ongoing financial strength.
- The buying entity and its principal/owners remain in good standing.
- If there are any significant changes in processes, operations, or personnel.
- The volume and type of consumer complaints, as well as applicable remediation.
- The volume and reason of repurchases.”