OCC's Collections Scrutiny Squeezes JPMorgan

Regulators have yet to finish cracking down on JPMorgan Chase's (JPM) credit card collection operations, but the bank already appears to be paying a hefty price.

The bank's recoveries of previously charged off credit card debts have fallen by 41%, or almost $600 million, over the past two years. While likely due in part to a broader industry slowdown in card losses, JPMorgan's slump far outpaces declines in recoveries at other big credit card issuers.

It also coincides with regulators' mounting scrutinyof the bank's methods for pursuing borrowers who fall behind on their card debts.

The drop in recoveries, coming after JPMorgan stopped or slowed many collections activities, could serve as a warning to other banks. Lower recoveries may be an inevitable cost of retooling banks' credit card debt collection operations to comply with regulators' increasingly high expectations.

Big banks try to offset their losses from bad consumer loans by suing the delinquent borrowers or by selling the debts to outside collection agencies for pennies on the dollar. Recoveries of those losses can make significant silver linings for banks' credit card write-offs; JPMorgan Chase reported $1.37 billion in so-called "recoveries" for 2010.

Two years later, that figure shrank to $811 million. The drop-off in JPMorgan's recoveries coincides with an investigation the Office of the Comptroller of the Currency began in 2011 into the bank's credit card collections practices, amid broader scrutiny of the industry's practices.

While the bank has said it expects an OCC enforcement action, it has also reined in its own efforts to recover money from delinquent borrowers. In the past two years, JPMorgan has stopped filing its own credit card collections lawsuits against borrowers, and in recent months it has stopped most sales of charged-off consumer debt to outside agencies. Both decisions appear to have taken a toll on recoveries.

A JPMorgan Chase spokesman declined to comment.

Regulatory scrutiny of banks' debt collections and debt sales practices is mounting across the industry in general and at JPMorgan in particular. In June, California Attorney General Kamala Harris filed a lawsuit against JPMorgan, claiming that it had consistently taken procedural shortcuts and used illegal "robo-signing" techniques to sue thousands of borrowers with inadequate documentation of the debts.

Banks are collecting less money from recoveries in part because there is less debt to recover; credit card loss rates have fallen steadily after peaking in 2009, meaning that banks now have fewer delinquent customers to sue and fewer bad debts to sell off.

Most other big banks have recorded smaller declines in their credit card recoveries over the past two years. Bank of America (BAC), Capitol One (COF), American Express (AXP) and Wells Fargo (WFC) have all seen their recoveries fall 8% to 16% from 2010 to 2012. (Discover's (DFS) recoveries rose and Citigroup (NYSE:C) does not break out its credit card recoveries from other consumer loans.

But industry members say that the outsize recovery slump at JPMorgan could be a warning to other banks of things to come.

"The fundamentals of the debt collection business have been moving towards lower levels of recoveries for a whole slate of reasons," says Isaac Boltansky, a policy analyst at Compass Point Research & Trading

He points to the increased attention that the Consumer Financial Protection Bureau and other regulators are paying to debt collection. Earlier this year, the OCC began issuing its bank examiners a four-page set of "best practices" to be used in evaluating banks' sales of delinquent consumer debts to third parties.

"We have seen the CFPB prioritize its focus on industries by the total number of consumers those industries touch. … Debt collection is primed to be one of the next areas of focus for that exact reason," Boltansky says. "It cuts throughout almost all consumer financial products and it's an area that's ripe for new rules."

Credit card recoveries tend to lag the business cycle, with banks stockpiling charged-off accounts during bad times and collecting on them as time and economic circumstance allow. Lenders keep the written-off accounts for months or even years, hiring outside collections firms and attorneys to pursue recoveries. Those efforts generally recoup most of the value from the bad debt, leaving remnants that banks typically sell for a few pennies on the dollar.

Much of banks' current collection activity focuses on the backlog of bad debt from the recession. Even as charge-off rates fell sharply over the last three years, banks' recoveries from debt collection and sales stayed fairly stable.

JPMorgan could eventually rebound from its recovery slump, if it reaches a point where it returns to selling off or filing lawsuits on the bad debts it currently holds. But delays often worsen collectors' chances to recover money from delinquent consumers, meaning that banks will have an uphill battle to improve their recovery rates in the immediate future.