While we have previously made note of increasing CFPB
scrutiny in the debt collection sphere, its also worth discussing increasing
agency oversight of the ways that financial institutions fully charge-off and
sell debt to third party collection agencies. Just this week, the Office of the
Comptroller of the Currency (OCC), the prudential regulator for nationally
chartered banks, issued
a formal guidance for these debt sales. This guidance document outlines steps
and best practices for banks to take before, during, and after consumer debt
sales. To be clear, the OCC has no jurisdiction over credit unions, but this
guidance may serve as a blueprint for anything that NCUA comes up with.
The OCC has been studying this issue for three years prior
to releasing its guidance, since many consumer groups, state attorney’s
general, and whistle-blowers have been revealing chronic errors in the debt
collection market, such as missing account information and customer payment
histories. The new guidance therefore requires banks to provide their debt
buyers with signed customer contracts, account numbers, and other information.
It also asks banks to refrain from selling debt that poses potential legal/compliance
risk, especially under the Fair Debt Collection Practices Act (FDCPA) and
Servicemembers Civil Relief Act.
While financial institutions can benefit from debt-sale
arrangements that turn nonperforming loans into immediate cash proceeds and can
minimize resources devoted to collections, these charge-offs are not without
risk. The guidance breaks down this risk into operational, compliance,
reputation, and strategic risk. That said, the overriding message of this
guidance is that the OCC now expects banks to perform due diligence on their counterparties
before a debt sale occurs, especially for consumer protection laws. In the
past, banks were generally not held responsible for abusive or illegal
collection practices of their debt buyers. This guidance suggest that this
status quo is changing.
While we know that credit unions are not-for-profit
organizations that exist to solely to serve their members, , it’s important to
keep in mind that this may not necessarily be the case with the debt buying
organization that you do business with. For credit unions to maintain our
hard-earned reputation, its important for us to carefully choose a debt
buyer/collection agency that understands and shares the values of the credit
union movement. This is especially important given the history and notoriety of
debt collection practices, which are now
under the close eye of CFPB.