Will New Federal Standards Destroy Debt Buying Industry?

John Rossman

Wells Fargo has temporarily suspended sales of defaulted credit card accounts, according to press reports this week.  This latest move to strangle the debt industry comes after JPMorgan Chase reportedly also suspended sales of most of its defaulted accounts.

These media revelations about two major banks left many debt buyers puzzled and questioning the future of the industry. However, a recent Federal regulator’s statement of stringent “best practices” for all debt sales by banks is the likely cause for the purported pullback by Wells Fargo and JPMorgan Chase. Further, these new best practices for debt sales promise to radically redefine debt buying forever.

At Least 82% of All Accounts Sold are Affected by OCC Statement

On July 17, 2013, Office of the Comptroller of the Currency (OCC) issued a statement to a Senate committee regarding debt sales by nationally chartered banks. The full statement by the OCC may be accessed here.

In this statement, the OCC noted that the 19 largest banking organizations – each of which is regulated by the OCC – account for approximately 82% of all debt sales in the United States.

Best Practices Include Limiting Lawsuits on Purchased Accounts and Placing Restrictions on the Resale of Accounts.

The OCC statement outlines “best practices” all regulated banks should follow in debt sales.  This statement by the OCC provides a glimpse into the future of debt buying, including the following:

1.      The OCC contends that the failure of a bank to properly regulate debt sales can result in “safety and soundness” concerns for the bank.  In essence, the OCC believes that improper debt sales practices by banks can substantially jeopardize a bank’s ability to operate.

2.      Banks must have effective policies and procedures for debt sales, which would include [not an exhaustive list from the OCC statement]:

a.      A financial analysis of why selling a debt is better than collecting it internally.

b.      Detail document requirements to insure the debt buyer receives accurate and reliable information.

c.      Address third party due diligence requirements and ongoing due diligence requirements.

d.      Outline accounts that cannot be sold, including accounts that are close to the statute of limitations.

3.      For initial and ongoing due diligence regarding the sale of accounts, the banks must consider the following [not an exhaustive list from the OCC statement]:

a.      Does the debt buyer have all appropriate licenses.

b.      How long has the debt buyer been in business.

c.      Does the debt buyer have audited financials and is it financially sound.

d.      Are there any regulatory or legal actions pending against the debt buyer.

e.      How often does the debt buyer pursue legal action on accounts and consider placing litigation limits on purchased accounts.

f.       Are debt buyers prohibited from reselling accounts.

The OCC is in the process of formulating supervisory guidance that outlines safe and sound banking principles to be followed by banks when selling charged-off consumer debt.

These Best Practices May Benefit the Industry, But at What Cost?

Many of these best practices – such as licensing standards for debt buyers and documentation/accuracy requirements for sold accounts – will undoubtedly benefit the debt industry.  However, the restrictions on reselling accounts will severely constrict the ability for smaller debt buyers to acquire portfolios in at least 82% of the market (from the 19 largest banking organizations regulated by the OCC).  Further, the restrictions on pursuing collection litigation on accounts will limit collection options for all purchasers.

These types of restrictions can only result in an overall increase in the cost of credit for all consumers.  All debt buyers are encouraged to closely examine the OCC statement to assess its impact on your organization.

This publication is provided only as a general discussion of legal principles and ideas. Every situation is unique and must be reviewed by a licensed attorney to determine the appropriate application of the law to any particular fact scenario. If you have a legal question, consult with an attorney. The reader of this publication will not rely upon anything herein as legal advice and will not substitute anything contained herein for obtaining legal advice from an attorney. No attorney-client relationship is formed by the publication or reading of this document. Moss & Barnett, A Professional Association, assumes no liability for typographical or other errors contained herein or for changes in the law affecting anything discussed herein.