OCC Formalizes Rules for Selling Consumer Debt

The Office of the Comptroller of the Currency has issued new guidelines on the sale of consumer debt, a move that could help reform a practice that consumer groups say is plagued by errors and abuses.

The OCC's debt-sales guidance, released Monday, outlines the steps banks must take before selling charged-off consumer debt. It expands on and formalizes the best-practices guidance on debt sales that the OCC released last July.

While the best practices were recommendations tailored for large banks, the new guidance applies to all institutions regulated by the OCC, regardless of size. The OCC expects banks to analyze the risks of consumer debt sales and provide accurate information to debt buyers. The guidelines also cover what types of consumer debt can be sold and specify the account information that banks must include when selling debt, among other requirements.

Notably, the OCC plans to make banks responsible for performing due diligence on debt buyers before a sale. States and regulators have increasingly been targeting debt buyers that violate consumer protection laws, but banks have generally not been held responsible for these firms' conduct.

"Before a bank enters into a contract with a debt buyer, the debt buyer should be able to demonstrate that it maintains tight control over its network of debt buyers and that it conducts activities in a manner that will not harm the bank's reputation," the guidelines say. "In addition, banks contemplating entering into a relationship with debt buyers should first assess the debt buyer's record of compliance with consumer protection laws and regulations."

The guidelines are a result of the OCC's three-year review of large banks' debt collections and sales, which state attorneys general and whistleblowers have claimed are riddled with problems. JPMorgan Chase, for instance, entered into a consent order last year for allegedly selling accounts that were incorrect or missing crucial information and accounts that had been paid or discharged in bankruptcy, as well as floating laws designed to protect military servicemembers. JPM neither confirmed nor denied these claims.

The OCC's investigation largely confirmed that there are serious problems with banks' internal controls over their consumer-debt sales. The OCC identified instances when banks "transferred customer files [that] lack information as basic as account numbers or customer payment histories" and when "banks gave debt buyers access to customer files so they could assess credit quality before the debt sale," in violation of privacy laws. It also found that banks sell debt without first investigating the buyers.

In response to these problems, the OCC guidelines require that banks provide debt buyers with signed customer contracts, as well as account numbers, copies of the last 12 account statements and the date, source and amount of the last payment. It also forbids banks from selling certain categories of debt that "fail to meet the basic requirements to be an ongoing legal debt" and to refrain from selling debt that poses compliance and legal risk, such as debt covered by the Servicemembers Civil Relief Act.