Federal Regulator OCC Issues Guidance on Debt Portfolio Sales

In a bulletin issued Monday, the Office of the Comptroller of the Currency (OCC) provided new guidance to banks intended to advise debt portfolio sellers about the OCC’s supervisory expectations for structuring debt-sales arrangements with debt buyers.

The guidance, which is applicable to all OCC-supervised banks, specifically concerns the “application of consumer protection requirements and safe and sound banking practices to consumer debt-sale arrangements with third parties (e.g., debt buyers) that intend to pursue collection of the underlying obligations.”

The new bulletin is, in effect, a clarification of previous guidance on best practices in debt sales issued in July 2013.

DBA International, the leading trade group for debt buyers, noted that an important clarification in the new guidance is the explicit support for the responsible sale and resale of debt portfolios by banks and debt buyers. The group said that it had the opportunity to work with the OCC on new guidance after the 2013 document was published.

DBA also noted that any of its members engaged in its Certified Debt Buyers program already meet the standards.

The OCC’s guidance speaks directly to banks, however, even carrying warnings about the risks associated with dealing with debt buyers, particularly in the areas of operational, reputation, compliance, and strategic risks. It encourages sellers to perform careful due diligence on debt-sales partners.

As for the structure of the agreements, OCC said it expects to “structure debt-sale arrangements in a prudent and safe and sound manner to promote the fair treatment of customers.” It enumerated practices it feels are consistent with that expectation:

Ensuring appropriate internal procedures concerning debt sales – The OCC wants banks to have consistency across the organization on debt sales. This includes identifying specific individuals responsible for debt sales, assess how debt sales align with company strategy, proper notification to customers that the debt has been sold, and formulating processes for identifying accounts that should not be sold.

Debt-sale arrangements should cover all important considerations – The contracts should reflect clear, consistent terminology and clearly delineate the duties and obligations of the parties, particularly provisions for confidentiality, information security, and compliance with consumer protection laws. Interestingly, the OCC noted that “Banks should ensure that the debt-sale arrangements address the extent to which the debt buyers can resell debt” and contain provisions on when the debt buyer can litigate.

Debt portfolio transactions should provide accurate and comprehensive information about the debt at the time of sale – For each account, the bank should provide the debt buyer with copies of underlying account documents, and the related account information, as applicable and in compliance with record retention requirements, including the following:

A copy of the signed contract or other documents that provide evidence of the relevant consumer’s liability for the debt in question.
Copies of all, or the last 12 (whichever is fewer), account statements.
All account numbers used by the bank (and, if appropriate, its predecessors) to identify the debt at issue.
An itemized account of all amounts claimed to be owed in connection with the debt to be sold, including loan principal, interest, and all fees.
The name of the issuing bank and, if appropriate, the store or brand name.
The date, source, and amount of the debtor’s last payment and the dates of default and amount owed.
Information about all unresolved disputes and fraud claims made by the debtor. Information about collection efforts (both internal and third-party efforts, such as by law firms) made through the date of sale.
The debtor’s name, address, and Social Security number.

The OCC also explicitly laid out accounts it feels are not eligible for sale due to the unlikelihood of the accounts being an “ongoing legal debt”:

Debt that has been otherwise settled or is in process of settlement.
Debt of deceased account holders.
Debt of borrowers that have sought or are seeking bankruptcy protection.
Debt of account holders currently in litigation with the institution.
Debt incurred as a result of fraudulent activity.
Accounts lacking clear evidence of ownership.

In addition, banks should refrain from the sale of certain additional types of debt because the sales of these types of accounts may pose greater potential compliance and reputational risk. These include: