In August 2014, the Office of the Comptroller of the Currency (“OCC”) issued a Risk Management Guidance to national banks and federal savings associations on debt-sale arrangements (“Guidance”). All OCC-supervised banks need to take note of these new requirements and formulate appropriate policies and procedures to address debt-sales. This guidance from the OCC complements the Consumer Financial Protection Bureau’s (“CFPB”) emphasis on debt collection issues.
Pursuant to the Uniform Retail Classification and Account Management Policy guidelines, “banks are generally required to charge off certain consumer debt when the debt is 180 days past due, and in some instances, earlier than 180 days past due,” as explained in the Guidance. The majority of debt that is charged off and sold is credit card debt, but banks also sell other delinquent debts, such as auto, home-equity, mortgage, and student loans. While the OCC recognizes that banks have a responsibility to their shareholders to recover losses, the Guidance also states that “banks must be cognizant of the significant risks associated with debt-sale arrangements, including operational, compliance, reputation, and strategic risks.”
The OCC has focused on debt sales issues for several years, most recently issuing “best practices” that it provided to the Senate Subcommittee on Financial Institutions and Consumer Protection in July 2013. Since that time, the OCC received comments and input from numerous parties, including financial institutions, debt buyers and collectors, consumer and community advocates, and other governmental entities. The introductory comments to the Guidance state that all of this commentary has been taken into account in developing the document.
Regarding the supervisory concerns of the OCC with respect to debt sales, the Guidance explains that risk to institutions is the primary concern. The Guidance states that “[b]anks should know what resources debt buyers use to manage and pursue collections and consider the debt buyers’ past performance with consumer protection laws and regulations.” Additionally, the OCC states it has become aware of situations where “banks inappropriately transferred customer information to debt buyers [and] gave debt buyers access to customer files so they could assess credit quality before the debt sale, without the banks first making proper customer disclosures, which was inconsistent with the banks’ internal privacy policies and applicable laws and regulations.” The Guidance points out concerns with transferring incomplete customer files, including basic details like account numbers and payment histories.
The Guidance explains supervisory expectations of debt sales that are specific and detailed. First, with respect to ensuring appropriate internal policies and procedures for debt-sale arrangements, the OCC lists more than a dozen unique requirements, including that “customers receive timely notification from the bank that the debt has been sold, the dollar amount of the debt transferred, and the name and address of the debt buyer.” Additionally, other requirements involve ensuring that credit bureau information is updated to reflect the sale or transfer of the debt to the debt buyer, as well as that internal review standards are revised to ensure that debt sales comply with the bank’s own policies and procedures.
With respect to due diligence when selecting the debt buyer, the Guidance requires banks to “assess the potential debt buyers’ background, experience, and past performance, including consumer complaints about the debt buyers, and assess steps taken by debt buyers to investigate and resolve the complaints.” The due diligence requirement reaching down to the customer complaint level will require banks to work with debt buyers to obtain the needed information and details to comply with the Guidance. The due diligence obligation is ongoing, with required periodic updates when forward-flow contractual arrangements are in place.
Contracts pertaining to debt-sale arrangements with debt buyers should cover all the “important considerations” that the OCC enumerates in the Guidance. Such concerns include downstream sales to other debt buyers, as well as steps associated with terminating a collection contract, i.e., return or destruction of all customer information. The contracts between debt buyers and banks should address the “reasons why the debt buyer can litigate.”
At the time of sale, banks must provide eight discrete pieces of information to the debt buyer, including:
- the signed contract evidencing the relevant consumer’s liability for the debt in question,
- the last 12 account statements,
- all account numbers used by the bank,
- an itemized account of amounts claimed to be owed,
- the name of the issuing bank,
- details of the last payment and date(s) of the default,
- information about unresolved disputes and fraud claims made by the debtor,
- and the debtor’s name, address, and Social Security number.
The OCC Guidance states that certain types of debt are not appropriate for sale, including “[d]ebt that has been otherwise settled or is in process of settlement, [d]ebt of deceased account holders, [d]ebt of borrowers that have sought or are seeking bankruptcy protection, [d]ebt of account holders currently in litigation with the institution, [d]ebt incurred as a result of fraudulent activity, and [a]ccounts lacking clear evidence of ownership.” Further, banks should refrain from the sale of certain additional types of debt, including accounts eligible for Servicemembers Civil Relief Act protections, as well as accounts of minors, individuals in disaster areas, and close to the statute of limitations.
Finally, the Guidance explains the need for banks to implement appropriate oversight of the debt-sale arrangement and to comply with applicable laws and regulations in that process. These obligations go hand-in-hand, but the Guidance’s discussion on compliance with applicable laws and regulations identifies specific criteria under each law and regulation that must be addressed. The oversight responsibilities will vary depending on the structure of the arrangement between the bank and the debt buyer, but regardless, appropriate oversight is important to minimize the bank’s “exposure to potential reputation damage and supervisory action.”
The CFPB has publicly stated as a priority regulating the debt collection industry and institutions engaged in collecting their own debts. Regulation F was open for comment earlier this year, and forthcoming additional regulation is certain.
For banks supervised by the OCC, it is crucial to review the Guidance and identify appropriate updates to your compliance documents and personnel. The “best practices” have been fleshed out, and incorporating other areas of emphasis should be a priority.
Please contact Spilman with any questions.