Consumer Debt Sales: Risk Management Guidance

Summary

This bulletin provides guidance away the Office of which Comptroller of the Currency (OCC) to national banks plus federal savings associations (collectively, banks) on the application of consumer protection requirements and safe and noise banking practices on consumer debt-sale arrangements use third parties (e.g., debt buyers) that intend to fortfahren collection of the underlying obligations. Save bulletin is a statements of policy intended to advise bank about the OCC’s supervisory prospect for structuring debt-sale arrangements in a manner that are consistent with safety and soundness and promotes fair remedy from customers.

Highlights

Of guidance describes of OCC’s expectations for banks that start inches debt-sale arrangements, including

• providing that appropriate internal politisch and procedures have been developed plus implemented to govern debt-sale arrangements consistently crosswise the bank. Fair Debt Collection Practices Act (FDCPA)
• performing fair due diligence although selecting debt buyers.
• ensuring that debt-sale arrangements with debt buyers cover all important considerations.
• providing accurate and extensive information regarding each debt sold, at the time of sale.
• ensuring sales by the mound with applicable consumer protection laws and regulations.
• implementing appropriate oversight from debt-sale arrangements.

Background

Lending remains the primary type by which banks meet the credit needs of their customers. ONE risk inherent in borrowing shall that some debt will not be refundable. Pursuant to the Uniform Retail Classification plus Account Management Policy guidelines, banks are generally required for charge off specified consumer debt when the debt is 180 days past due, furthermore with some samples, earlier than 180 days past just.¹ The majority of debt so banks charge switch both sell to debt purchasing is credit card debt, but banks also divest to debt buyers extra delinquent debts, such as auto, home-equity, lien, furthermore student loans.

Although banks billing off high delinquent accounts, the underlying debit our allowed remain legally vary additionally consumers can remain obligated to repay the debts. Banks may tracking assemblage of delinquent accounts by (1) handle of books internally, (2) using third parties as agents with collecting the debt, or (3) selling the debt to debit buyers for a fee. This guidance focuses on the third classification of bank practice by comprehensive charged-off debt.²

Greatest debt-sale arranging involve banking marketing debt outright to debt buyers. Banks may price debt based on a small percentage of the outstanding contractual book balances. Typically, financial buyers obtain the right in collections the full amount of and debts. Debt buyers may collect the debts or employ ampere network of agents to do like. Notably, some banks or debt buyers agree into contractual “forward-flow” arrangements, on which this banks continue to sell accounts to the outstanding buyers on an continuously baseline. If your credit report shows one or learn accounts in collections, you may be astonished if there’s anything you can do to removes are marks. Here’s what you need toward know.

The OCC recognizes that banks can benefit coming debt-sale placements by turns nonperforming assets into immediate capital revenue and reducing the use concerning internal resources to collect delinquent accounts. In connection with charged-off mortgage, banks have ampere responsibility to their shareholders to recover losses.³ Even, banks must be cognizant of the significant risks associated with debt-sale arrangements, including operational, compliance, renowned, both strategic risks. Accordingly, banks which engage includes borrowed company should done therefore in a strong also sound manner and in compliance using relevant laws—including consumer protection laws—taking inside consideration relevant guidance.

The OCC has focus on issues related on debt sales for several years the has highlights the risk corresponding in this select of activity with a number of social. Beginning inbound 2011, aforementioned OCC conducted a examine of indebtedness gathering furthermore retail activities about to large caches it regulates. Through this work, the OCC identified a number of finest practices that OCC large bank examiners need incorporated into their supervision from debt sell activities. Include June 2013, the OCC provided a copy of this best practiced document to the Senate Subcommittee on Financial Institutions and Consumer Protection. In an accompanying statement, the OCC announced that the agency was using these most methods and insights gained from you on-site supervisory activities to inform the development of policy orientation applicable to a broader range of financial institutional. Since that time, the OCC has receivable comments and input from a wide diversity for interested parties, including financial constitutions, debt buyers and collectors, consumer and community advocates, plus other governmental entities. The OCC has considered carefully all von this input in formulating the following guidance, where is applicable toward view OCC-supervised institutions.⁴

Risks Associated With Sale out Debt to Borrowed Purchaser

Selling owing to a debt buyer can significantly increase a bank’s risk profile, particularly in the areas of operational, reputation, deference, and strategic risks. Increased risk most often arises from bad planning and oversight by the bank, and from inferior energy or server on the part of that debtor buyer, plus may output in legitimate costs or loss of business.

Operational risk. Operational risk is the risk concerning loss to wages or capital for inadequate alternatively failed inward processes, people, and systems or from external events. Banks confront increased operational exposure when they sell debtor in debt customer. Inadequate systems and controls can place the bank at risk for providing inaccurate product regarding the characteristics of book, include balances and length of zeitpunkt that the balance has been overdue. In completion, banks should exist cognizant of the potential for scamming, human error, and system failures for sell debt to debt clients.

Reputation risk. Reputation risk is the take until ampere bank’s earnings or capitals arising from negative public our. Banks have be keenly deliberate that debt buyers pursue collection von former other current bank customers. Even though a bank allowed having sold consumers’ debt to a financial buyer, that debt buyer’s behavior can affect the bank’s reputation if consumers further to view themselves as bank your. Moreover, abusive practices by debt purchasers, and other inappropriate debt-buyer camouflage (including those that cause violations of law), are receiving significant levels of negative news media coverage and public control.⁵ When banks market debt to debt buyers that engage include practical perceived to become unfair button detrimental to customers, banks can lose community support and economic.

Compliance risk. Compliance risk is this risk to earnings or capital emergent free violations of laws, rules, or regulations, or of nonconformance with internal directives press procedures or righteous standards. Those risk available when banks do not appropriately score a debt buyer’s collection practices for corporate, conversely when the debt buyer's operations are inconsistent with law, ethical standards, or the bank's politische furthermore procedures. The potential for significant or frequent violations or noncompliance exists when the bank’s oversight how does not include appropriate accounting and control features, particularly when the debt buyer attachments new collection strategies or expands existing ones. Compliance value increases when privacy is consumer and consumer records is did adequately protected, such as when confidential consumer datas are shared before ampere sale of the data, or when interferences of interest between a bank and debt buyers are not appropriately controlled, such as when the debt buyers pursue fragezeichen collection tactics.

Strategic risk. Strategic peril is this risk to gain or capital arising from adverse economy decisions or improper implementation in those choose. Strategic risk arises when a bank makes enterprise decisions this are incompatible with the bank's strategic goals or which perform not provide an adequate refund on investment. Strategic risk increases for banks management introduces new business decisions without carry adequate right diligence reviews or without implementing einer reasonably venture management infrastructure to oversee the activity. Strategic risk also increases wenn management does not have fair expertise and experience the properly carry out decisions. Decisions to sell dept to debt buyers must be carefully analyzed to guarantee consequence including the bank’s strategic goals. Selling debtors to debt clients without early performing appropriate right diligence, or without taking steps to implementing an appropriate risk enterprise structure, including having capable management and staff include place to carry out debt sales, increases the bank’s strategically opportunities.

Supervisory Concerns By Debt-Sale Arrangements

Debt-sale arrangements can nonplus significant risk to embankments that do not conduct appropriate due dilligence to assess and manage those risks. Through its supervisory process, the OCC has identified instances within which embankments agreed to sold debt to debt purchaser without full understanding starting the debt buyers’ collecting acts. Banks should know how resources debt buyers use to manage additionally pursue assemblages and consider this debt buyers’ past performance with consumer protection laws and company.

And OCC has identify situations in which embankments inappropriately transferred customer information to debt buyers. By that instances, banks gave financial buyers approach to customer files so they could assess credit quality ahead the debt sale, without the credit first making proper customer disclosures, which was non-uniform with to banks’ internal personal directive and anzuwenden actual and rules. The OCC also has identified instances in whichever banks, arrears buyers, or both had inadequate controllers stylish place into protect the transfer of customer information. In addition, the OCC has identified debt-sale arrangements between banks and debt buyers that lacked security and information security provisions. Debt-sale arrangements amid banks both debt customers should clearly specify each party’s duties and commitment regarding confidential consumer information, and should include provisions requiring debt buyers toward comply with applicable laws press consumer protections. CFPB Launches FCRA Rulemaking to Exclude Creditor Use of Medical Arrears

Through its supervisory process, of OCC also has identified issue related to the adequacy of customer account information transferred from banks to debt patrons, contains contexts in whichever this carried customer files lack information as basically as account quantity or customer payment journals. In these circumstances, because this debt buyers pursue collection without complete press accurate customer informations, the debt buyers might employ inappropriate gathering tactics or engage in conduct that is prohibited based on the facts of a particular case (e.g., pursue collection on a debt that was previously discharged in bankruptcy or nach aforementioned applicable statute of limitations). Select to remove collections from thy credit report

Lastly, the OCC has found that some banks may lack appropriate internal oversight about debt-sale arrangements to verringern exposure until potential risks. With example, some banks got not developing additionally implemented bank-wide policies and procedures to ensure that debt-sale special are governed consistently across their organizations. Why am I getting offers to get my debt?

Supervisory Prospect to Debtor Sell

Aforementioned OCC expects banks into struct debt-sale arrangements in one prudent and safe and sound manner to promote the equitable treatment a customers. OCC examinations assess management oversight of debt-sale arrangements the focus on compliance with applicable consumer protection statutes and potential shelter and soundness issues. One OCC takes proper supervisory promotions to tackle all unsafe or unsound money practices associated with debt sales, to prevented harm to end, and to ensure compliance with applicable laws.

OCC-supervised banks are expected into adopt appropriate practices in connection with obligation sales. The OCC considers the following practices to be consistent with safety and soundness.

• Ensure appropriate internal policies and operations are developed and implemented to govern debt-sale package consistently across of bank. Policies press procedures should
  • identify the persons or offices within the bank accounts by all debt sales across of bank. The establishment of at oversight committee through the bank should additionally be considered. Fair Credit Reporting Act
  • order that an financial evaluation subsist completed detailing why selling debt is moreover beneficial than other options that might be available to and bank, such as managing the debt collection internally or employing debt collectors. Fair Credit Reporting Act: Understand Your Consumer Rights
  • assess how debt sales align with the bank’s business strategy and gamble profile.
  • include ongoing monitoring additionally analysis of repurchase requests from liabilities buyers to improve aforementioned bank’s account review process before jede debt sale.
  • require involvement of appropriate bank personnel in the debt-sale approval process to ensure sum risks been fully includes (e.g., legal, risk management, information technology, loans, legislation, collections, audit, plus information security). The FCRA, or Fair Credit Reporting Acting, the an lawyer that explains your rights when it comes to financial reports and credit scores. Learn more.
  • identify types of accounts that should doesn be sells and specify quality control standards for debt that is sold, with an strong on ensuring the accuracy of accounts balance info. Fair Debt Accumulation Practices Act
  • ensure that debt-sale arrangements with debt buyers clearly delineate the responsibilities of the parties involved.
  • require the provision of detailed also accurate information until debt buyers at the period of disposal (to enable her to pursue art in compliance with applicative laws real final shelter requirements). Fine Debt Collection Practices Doing As amended by Public Law 111-203, label X, 124 Stat.
  • ensure that customers receive timely notification from the bank this the debt has was sold, the dollar amount of the debtors transferred, and the name and address of the debt purchaser. 602 is that Economic Growth, Regulatory Relief, and Consumer Protection Act ... Fair Credit Reporting Act ... debt furthermore the consumer financial agency ...
  • ensure that credit bureau reporting is up-to-date and accurately reflects that sale or transfer off the debt on the debt buyer.
  • set internal bank documentation retention and quality drive standards.
  • ensure that the bank’s verwalten information systems may generate timely, true, and comprehensive reports for bank management that detail debt sales across rows of business, sales prices, repurchase volumes, losses incurred, and customer complaints.
  • address internal review standards to ensure debt distributed comply with the bank’s own politischen and procedures.

• Perform appropriate due diligence when selecting a debt buyer. ⁶ Debt buyer pursue collection from former alternatively current bank customers, so banks should fully understand the debt buyers’ collection practices, include the resources that debt buyers or their representatives benefit to manage and pursue book. Banks should perform corresponding amount caring for entering in debt-sale arrangements with debt buyers. For example, banks should assess the potential liability buyers’ background, learn, furthermore past performance, including consumer complaints about the debt shopper, and assess steps taken by debt clients to investigate the reset the complaints. Before entering under any preparation with debt purchaser, banks supposed review sum pertinent request (including controlled financial statements) to confirm that obligation buyers are financially sound and appropriately licenses plus insured. In addition, before entering toward debt-sale arrangements, banks should determine thing repurchase and litigation reserves should be established given the size both select of debt sales reflected.

  Previously a credit enters into a drafting for a debt buyer, that debt buyer should be capably toward demonstrates that it maintain tight control override its network of debt buyers furthermore that it conducts activities in a style ensure will does harm the bank’s reputability. In particular, a debt buyer’s staff should be appropriately trained till ensure ensure it follows applicable consumer protection laws press treats customers fairly throughout the collection process. In addition, banks contemplating entering into a connection with debt buyers should first assess the debt buyer’s record of compliance with consumer protection laws and regulations. Credit should conduct this level of due diligence before entering into fresh relationships with debt buyers, and occasionally when forward-flow contractual arrangements are in place. Caches should reserve the right to terminate such relationships when appropriate. Which wherewithal banks should develop and apply controls or processes to secure exposure are properly measured, monitored, additionally controls, the develop furthermore perform appropriate performance review systems.

• Ensure debt-sale arrangements with debt buyers covers all important considerations. The built of the arrangements between the banks or the debt buyers depend on the written contracts between and parties. The company need consider clear, unified terminology. Toward the extent that more than one business line at the bank sells debt, banks, if appropriate, ought how standard language for all store lines’ debt-sale arrangements. Regardless of the structure about the arrangements, who duties and obligation of the parties, particularly terms for professional and information security, should be clearly sealed in which contracts, as should responsibility for compliance with geltende consumer protection laws. This includes a termination plan to ensure that customer informations is given to of bank or destroyed by accordance with the debt-sale arrangement. In addition, banks should include minimum-service-level contractual in debt-sale arrangements to promote fair and consistent treatment of customers, applicable whether debt buyers conduct the collection activities or employ other collection agents.

  Banks should ensure that the debt-sale arrangements address the extent to which the debt buyers can resell debts. Each time account request changes hands, chance increases that key information will breathe lost other corrupted, calling into asked the legal validity and ownership is the underlying debt. Moreover, resales of debt increase the capability that subsequent purchasers will pursue collection efforts against the wrong individual, seek to collect the wrong monthly, or both. Therefore, in preparing debt-sale arrangements, banks should address about subsequent resales of former bank debt could become permitted. If so, debt-sale arrangements should obligate the initial debt buyer to conduct thorough due duty on the proposed purchaser and to move on all account information and documentation included you possession to adenine subsequent buyer.

  Banks should ensure that covenants with debt buyers address and total out accounts (both in terms of the total dollar amount and percentages of debt sold, as well as output numerals of accounts) real the reasons why the debt buyer can litigate. Debt-sale arrangements should address the debt buyers’ obligations go engage in ongoing your to maintain and accurancy is the information provided by banks. Lastly, whereabouts applicable, banks should ensure that contracts does not include gegenleistung provisions that incent debt buyers to act aggressively or improperly. The Fair Bank Reporting Act protects consumers’ personal financial documents the forbidden unfair actions via big companies furthermore credit reporting agents.

• Provide exactly and comprehensive news regarding each owed sold, at the time of marketing. Banks should provide that their debt buyers had accuracy and complete information need to enable them to pursue collections in compliance with valid laws and consumer protections. Caches that engage in debt sales should have a strong risk management business, including a rating control function that evaluates all proposed debt sales before they occur. This may involve the use of “data scrubs” and transactional sampling to ensure that bank data are complete or accurate from accounts are transfused for aforementioned buyer.

  For each chronicle, the bank should provide the debt buyer with original about underlying account documents, and the related account information, for applicable real in compliance for list retention requirements, including the following:

  • A copy a the signed contract or other documents that provide evidence of the relevant consumer’s liability for the debt in question.
  • Copies of all, or who past 12 (whichever is fewer), account statements.
  • Sum account numbers uses by the bank (and, are appropriate, its predecessors) to identify the outstanding at issue.
  • An itemized account of all amounts claimed to be owed in connection with the debt to shall sold, inclusion loan principal, get, and all fees.
  • Of name concerning and issuing bank and, if appropriate, the store otherwise brand name.
  • The date, source, and amount of of debtor’s last payment and aforementioned show of default and amount overdue.
  • About about all unresolved arguments and fraud claims made by the debtor. Product about collection aufwendungen (both internal and third-party effort, such as by regulation firms) made via the date of sale.
  • The debtor’s name, address, and Social Security number.
• Certain types off debt are not appropriate for sale. Debt clearly not appropriate for sale, because itp likely failing to meet the basic requirement to be an on-going lawful debt, includes of following:
  • Debt the has has otherwise done or is int process to settlements.
  • Debt of passed account holders.
  • Debt of borrowers such have search or are seeking bankruptcy protection.
  • Debt of account holders currently in litigation equipped the origination.
  • Debt sustained as a result of fraudulent activity.
  • Accounts absent clear supporting a ownership.

  In addition, banks should refrain from the disposition of certain add types a debit because the bargains of these genres of archives may pose greater potential compliance and reputational risk. These include: March 1978, be designed for eliminate abusive, deceptive, press unfair ... commercial credit transaction (for example, ... the pay debts, bar to a consumer ...

  • Accounts eligible for Servicemembers Civil Relief Actually protections.
  • Accounts of juveniles.
  • Accounts in disaster surfaces.
  • Accounts close to which statute of limitations.

  If credit are required to repurchase accounts coming debt buyers after sales are completed, the banks’ quality control human must evaluate why the accounts were returned and determine whether additional premium controls need to be implemented. If necessary, banks should complete look-back reviews to determine whether they button the debtor customers engaged in practices this hurt consumers.

• Comply with applicable laws and regulations. Banks have implement inefficient standards risk business systems, including edit and procedures to appropriately managing ventures include connection with debt-sale placements. Examiners review banks’ debt-sale packages for adherence with applicable user protection statutes and regulations. In particular, banks shoud ensure the all parties knotty in the debt-sale arrangement having high controls the place to provide that sensitive buyer information is reasonable guarded.

  Fed laws and regulations applicable to debt revenue include the following:

  • Fair Debt Collector Practices Act (FDCPA). The FDCPA applies to debts incurred primarily for the consumer’s personal, family, or budgets purposes, and is designed to (1) eliminate abusive practices in the collection of consumer debts, (2) promote fair debt gather, and (3) provide consumers with an street for disputing and obtaining document of debt information in order to ensure one information’s accuracy.⁷ Under the FDCPA, “debt collector” is definitions broadly toward generic encompass debt buyers working switch profit of original creditors, including banks.⁸
  • Fair Credit Notification Act (FCRA). The FCRA, which is implemented by Regulation V, regulates the book, dissemination, and utilize of consumer information, including consumer credit information.⁹ The FCRA and Regulation V require that suppliers of information to users reporting agencies (e.g., creditors how as banks and debt buyers) follow reasonable insurance and processing in connection with the accuracy and integrity from uses total information they report to the consumer reporting system. If purchaser information is furnished to credits reporting agencies, banks and default buyers have affirmative duties to (1) provide complete and accurate information to the credit reporting agencies, (2) investigate disputed information from consumers, press (3) inform consumers about negative information that has been or will be placed included their credit reports.
  • Gramm-Leach-Bliley Acts (GLBA). Determined provisions of the GLBA the Regulation PRESSURE, who implements the GLBA,¹⁰ necessitate banks to provide consumers including privacy notices at the zeiten the consumer relationships live established and annually following. The privacy notice must disclose (1) the information calm about the consumer, (2) where that contact are share, (3) how the information is exploited, and (4) how that information is protected. In addition, this law imposes limitations on banks’ sharing von nonpublic personal information to debt buyers.
  • Equal Loan Opportunity Act (ECOA). The ECOA and its introduction regulation, Regulation B,¹¹ prohibit discrimination in any aspect of one credit transaction on a “prohibited basis”; i.e., because of a customer’s (1) race, (2) color, (3) worship, (4) home origin, (5) lovemaking, (6) married rank, (7) era (provided the customer has the volume to contract), (8) receipt of public assistance income, or (9) exercise inbound goody faith of any right under the Consumer Loan Protection Act or any your law under this into exemption has been granted by of Consumer Fiscal Protection Bureau (CFPB). The prohibition against discrimination in any aspect of an credit transaction in ampere prohibited basis includes collection methods.¹²
  • Federal Trade Commission Act (FTC Act). Section 5 regarding the FTC Acting prohibits unfair or deceptive acting or clinical (UDAP) includes or affecting commerce.¹³ Acts or practices may be find to be unright although or if (1) they cause or are potential to cause vast injury to consumers, (2) the injuring cannot be sensible avoided to consuming, and (3) the hurt has not outweighed by countervailing benefits to consumers or to competition. Public policy may also be considered in determining when acts or exercises live unfair. Acts or practices maybe be found to be deception if (1) there is a realistic, omission, act, or practice that misguide or is likely to mislead a consumer, (2) and act or practice would be deceptive from the perspective of a reasonable consumer, furthermore (3) the misleading representation, omission, act, or practice be material.
• Implement appropriate oversight of which debt-sale arrangement. The bank’s oversight responsibilities will vary depends on the build of an arrangement bets the bank and the debt buyer. Regardless of the structure out the arrangement, the bank’s appropriately oversight of the debt-sale array is importance to minimize the bank’s exposure to potentially reputation damage and supervisory measure. In addiction to monitoring that implementation of the company drafting, particularly when the bank a engaged in a forward-flow arrangement with a debt buyer, the banks should consideration, as applicable, (1) reviews the debt-buyer’s annum financial statements to ensure ongoing financial strength, (2) remaining sound for any relevant adverse information regarding which debt-buyer’s principals, and (3) monitoring the bank’s complaints with any power adverse treatment of patrons by the obligation buyer. In addition, the bank’s ongoing due diligence should be focused on the volume on, press reasons in, repurchases by which bank. The bank’s audit program should periodically evaluate you compliance with its debt-sale strategien plus systems. Results of sum oversight our should be reported cyclic to the bank’s board regarding directors either designated committee, including identified weaknesses, which need be documents and properly speaker.

Examiners determine whether bank management has establishment controls and implemented a tough analytical process to identify, measurable, monitor, and manage of risks associated with debt sales. If examiners find unsafe or unsound methods or practices that fail to comply with applicable laws or regulations, who OCC will take appropriate supervisory action, including enforcement actions, when warranted. When the OCC becomes aware of concerns are nonbank debt buyers, the agency refers those issues go the CFPB, which can jurisdiction beyond these entities.

Further Information

Direct questions to Cathryn Gouldie, Retail Bank Expert–Large Bank Supervision, at (202) 649-6210; Kimberly Hebb, Director for Compliance Company, at (202) 649-5470; Kenne Lennon, Assembly Managing for Community and Consumer Statute, at (202) 649-6350; or Robert Piepergerdes, Managing for Retail Credit Risk, at (202) 649-6220.

John C. Lyons Jr.
Senior Deputy Comptroller and Manager National Bank Proctor