I. INTRODUCTION
The Office of the Comptroller of the Currency (OCC) has stressed the importance of banks subject to its supervision to effectively manage the operational risks associated with their activities. Debt collection and the sale of charged-off debt raises operational and reputational risks that the agency expects institutions to manage effectively and in a manner that ensures customers are treated fairly. Set forth below is a brief description of the scope of debt collection and debt sales activity within the federal banking system, a description of ongoing OCC supervisory concerns and actions, and a discussion of policy implications.
II. SCOPE OF DEBT COLLECTION AND DEBT SALES ACTIVITY WITHIN THE FEDERAL BANKING SYSTEM
As providers of consumer credit, banks are in the business of lending money to be repaid with interest. They underwrite the loans and price them according to the risk associated with that lending and the customers’ creditworthiness. A certain percentage of the loans that banks make go unpaid. Under the Interagency Uniform Retail Classification and Account Management Policy guidelines, banks must charge off open-ended retail credit loans, such as credit cards, once they have become 180 days past due. When a bank charges off a debt, it realizes a loss, but the borrower generally continues to have an obligation to repay the loan. At that point, the bank faces a business decision on how to recover that loss or not to pursue collection of the debt. Debt collection may take several forms, including continued efforts by the bank to collect it on its own, the hiring of a third party to collect the debt on its behalf, or the sale of the debt to an unaffiliated third party, which generates a partial recovery. While banks are expressly authorized to conduct debt collection activities, that decision must involve a consideration of all of the legal, reputational, and operational risks associated with the debt and the collection activity.
III. ONGOING SUPERVISORY CONCERNS AND ACTIONS
The OCC expects all national banks and federal savings associations to have policies and procedures in place to manage their debt collection activities effectively. This includes managing the operational and reputational risks, and complying with all relevant consumer protection laws. When banks sell debt, the agency expects them to have policies, procedures, and practices that result in the third party treating customers fairly and consistently with the expectations of the banks and regulators. Even though a bank may have sold a consumer’s debt to a third party, consumers often continue to view themselves as the bank’s customers and may have other relationships with that bank. As a result, the debt collector’s behavior affects the bank’s reputation. Failure to implement proper controls and governance that effectively manage these activities represents safety and soundness and compliance concerns for the OCC. The Comptroller’s Handbook on “Other Consumer Protection Laws and Regulations” describes a bank’s obligations under the Fair Debt Collection Act when conducting debt collection activities. The OCC has also published guidance to banks that provides principles for effectively managing risks associated with vendors and third-party service providers, which also applies to third-party vendors collecting debt on behalf of the banks (debt placement relationships) and is also relevant to their relationships with buyers of their debt (debt sales relationships). See OCC 2001-47, “Risk Management of Third Party Relationships.”
Through its more recent work on debt sales, the OCC identified a number of best practices that OCC large bank examiners are incorporating into their supervision of debt sales activities. A copy of these best practices can be found by searching for “Appendix 1 - Debt Sales/Best Practices” on the OCC’s website. The OCC uses such best practices and insights gained from its on-site supervisory activities to inform the development of policy rules and guidance that may be more applicable to a broader range of financial institutions.
The best practices document provides a practical description of effective risk management practices examiners should expect to see in large banks with debt sales activities. Such practices should include the establishment of detailed policies and procedures to govern debt sales practices consistently across the organization. Those policies and procedures should:
Due diligence reviews and ongoing monitoring of potential debt buyers are particularly important in managing the reputational risk associated with debt sales activities. Appropriate due diligence reviews should occur before the sale. The reviews should answer questions such as whether debt buyers have appropriate licenses; whether there are existing regulatory and legal actions against the debt buyer or its owners; and whether they are in good standing. In addition to these general governance activities characteristic of sound risk management, the document also includes a variety of specific actions that reflect best practices seen by examiners across large banks:
Consistent with the OCC’s heightened expectations for large banks overall, the agency is raising its expectations with regard to the banks’ oversight and management of their debt sales activities. For example, while banks continue to work through integration issues, the OCC has emphasized the need for rigorous quality control processes and strong audit programs. Where examiners find unsafe and unsound practices, practices that fail to comply with applicable laws or regulations, or practices that fail to meet our heightened expectations; the OCC will take appropriate supervisory action, including enforcement actions when warranted. Where the agency becomes aware of concerns with nonbank, third party debt collectors, it will refer those issues to the CFPB, which has jurisdiction over those types of entities.
IV. POLICY IMPLICATIONS
While supervisory action continues, the OCC recognizes the need for clear, actionable, and effective policy regarding debt sales among all national banks and federal savings associations that engage in this activity. The OCC is in the process of developing supervisory guidance that outlines safe and sound banking principles that should be followed in connection with sales of charged-off consumer debt. The guidance will outline risk management expectations for banks so they can appropriately assess and prudently manage the operational, compliance, and reputational risks associated with this activity and implement appropriate practices to address and mitigate those risks.
The OCC expects a bank’s sale of charged-off consumer debt to be structured and operated in a prudent and safe and sound manner that continues to ensure fair treatment of the affected customers. The OCC’s guidance will detail the principles that OCC-supervised institutions will be expected to apply in their risk management processes, policies, and procedures regarding disposing of charged-off consumer debts. The principles articulated in the guidance will provide banks with appropriate flexibility in their business decisions regarding non-performing consumer debts, while ensuring that their practices do not enable third party debt buyers to create unnecessary hardships for consumers through their actions after the acquisition of these charged-off debts.
V. CONCLUSION
Debt collection is a fundamental part of the business of lending. While banks must carefully underwrite the loans they make by considering the ability and willingness of the borrower to repay that debt, lending retains the inherent risk of borrowers failing to repay their debt. When that occurs, banks have the responsibility to attempt to collect that debt and to recover losses associated with that bad debt. They must do this in a manner that is not only safe and sound, but fair to their customers and in compliance with applicable laws and regulations.
In seeking to recover their losses, banks should exercise particular care when they choose to sell that debt to third party debt collectors. Selling debt to third party debt collectors carries particular compliance, reputational, and operational risks. The OCC has highlighted these risks on a number of occasions and while the industry continues to heal from the credit and capital market challenges of the financial crisis, it is evident that these risks are gaining increasing prominence. For this reason, the OCC has raised its expectations for banks to provide effective risk management over all facets of their operations and activities. Meeting those expectations will require additional effort and investment on the part of the banks.