Mike Ginsberg

Mike Ginsberg

News articles surfaced recently regarding the regulatory climate for large banks’ sale of defaulted credit card debt.

The biggest attention grabber over recent weeks comes from the pressure that major banks are feeling from the Office of the Controller of the Currency (OCC), the primary federal regulator for very large banks. Coupled with the scrutiny that large banks and large participants in the ARM industry have been feeling from the CFPB for nearly two years, the regulators continue to profoundly impact that segment of the ARM industry.

Let’s take a look at what has already developed as a result of the OCC and the impact it is having on one major card issuer.

Earlier this year, the OCC began issuing its bank examiners a four-page set of “best practices” to follow when evaluating banks’ sales of delinquent consumer debts to third parties, according to American Banker. This comes after two years of sharp criticism from consumer advocacy groups and state attorneys general over large banks’ managing of credit card debt and the OCC’s own 2011 investigation into “robo-signing” of affidavits and less than adequate record keeping.

The OCC’s so-called “best practices” document has yet to be adopted as formal policy but reflects the view that debt sales practices are an issue for banks that must be corrected. The OCC is already recommending that banks “detail documentation requirements to ensure accurate and reliable information is provided to the debt buyer at time of purchase”. Increased scrutiny prompted JP Morgan Chase earlier to stop most of its debt sales in an effort to get ahead of regulators.

Nearly two years ago, the bank stopped placing accounts with collection law firms for suit amid rising scrutiny of those practices and robo-signing techniques. The focus on Chase’s collection and debt sales activities is solely because they are recognized as the nation’s largest bank and accounted for a significant portion of the accounts purchased by debt buyers over the past decade. Chase alone recovered $1.4 billion from defaulted credit card accounts in 2011, according to its financial filings with the Securities and Exchange Commission.

Debt buyers, collection agencies, and collection law firms focused on this asset class already braced themselves for the expected shortfall from this and other issuers. Their current pullback in debt sales has had a noticeable effect on lawsuits filed by collectors in at least some parts of the country. For example, in 2012, debt buyers filed 567 cases in Miami Dade County’s civil court seeking to collect on defaulted Chase accounts. In the first half of 2013, however, the number of filings fell to 21, according to American Banker. Almost all of those cases list another debt buyer as an involved party, suggesting that the debts involve older accounts purchased from a third party. Courts in Missouri and Oklahoma show similar drop-offs in debt collectors’ Chase-related filings.

Banks and debt buyers also continue to feel pressure from consumer advocacy groups, with most pushing for more open disclosure and increased requirements to file suit.

Are Chase’s actions an isolated response by one large credit card issuer or is it an indication of things to come for those who sell, purchase, and service charged-off debt?

If the recent FTC/CFPB roundtable is any indication, there may soon be universal standards for data exchange in the ARM process, including the placement and sale of accounts. Much of the discussion centered around such standards.

In addition to the OCC and FTC, the Consumer Financial Protection Bureau (CFPB) — which has oversight of large banks, debt buyers, and debt collectors — started its own examinations of ARM companies at the beginning of the year. It also began scrutinizing banks’ own collections practices. The agency warned banks last week that they will have to produce better documentation to back up their sales of debts to third-party collectors, further indication that regulatory changes will have a profound impact on this asset class for years to come.


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