The recent release of the OCC Risk Management Guidelines is another attempt by government agencies to press originators and debt buyers to conform to national standards of debt sales. Below is a review of the best, the worst, and what some of it means to the accounts receivables industry.
The Good:
The most vital point of the paper is the push for banks to perform extensive due diligence on debt buyers. A significant problem as of late has been a minority of debt buyers and collectors performing as bad actors in the marketplace, which has significantly affected small debt buyers, in particular, to purchase what was once commonly available paper. Large institutions have tended toward closed-door, direct deals with large debt buyers to protect their interests and prevent the flow of paper downmarket to smaller buyers.
Another good push is for banks to provide more documentation to debt purchasers. Too often, even at the point of sale, a limited amount of documentation is available, not just to the debt buyer. Still, large originating banks tend to have poor documentation standards and practices for charged-off debt.
The Bad:
The OCC somewhat mischaracterizes risks associated with reputation. In many peoples' experiences, the business made with large banks is only done out of necessity, not out of reputation. Large banks' competitive advantage is not through customer service but in their services at a lower cost than smaller banks. Large national banks lose little in reputation by selling off their debt. However, reputation for smaller entities could be a genuine issue, and it prevents many local banks and credit unions from even experimenting with debt sales.
The OCC also has too high an opinion of non-paying consumers. Indeed, debt buyers' information security and legal compliance are necessary, but non-paying debtors also cause harm to the bank and its business. Too great a swing has been made in recent years toward consumer protection without pushing to understand that borrowers also have serious obligations that they need to fulfill.
The guidance does not address well in the realm of documentation is how many contracts are "signed" online and working more toward establishing the use of debt (such as using the credit card at the point of sale) as affirming a contract. Few, if any, government agencies have made any recommendations as to what constitutes a valid contract. If they are so determined to enact guidelines, they should also be committed to set parameters of what establishes debt. With so many obligations originated without a physical signature on a piece of paper, failure to address modern practices will limit further how debts may be collected.
Probably the most egregious point of guidance is the line "Banks should ensure that contracts with debt buyers address the volume of accounts (both in terms of the total dollar amount and percentage of debt sold, as well as aggregate numbers of accounts) and the reasons why the debt buyer can litigate." The OCC nor banks should limit the ability of a debt buyer to prosecute a specific debt. Certainly, there continue to be issued with certain debt purchasers improperly notifying debtors with "subway service," and suing on improper balances, but by no means should the bank limit the business for a debt buyer in litigation.
The Ugly:
From the standpoint of the debt buyer, the OCC appears to be attempting to discourage loan sales to a certain degree by making the process more difficult. An exciting aspect of this, however, is that it could be easier for a smaller bank (such as a state or regional level bank) rather than the large national banks, with multiple divisions which handle the same type of loans but are geographically separated and may naturally follow different procedures for what amounts to the same kind of debt.
Some have postulated that the guidelines may open up the debt marketplace to more debt sales. I doubt they would be widely available and more along the lines of any current deals – large institutions dealing with each other, with little for small debt buyers to purchase.
While there are some legitimate issues at hand, the OCC report also represents an intrusion by the government between a bank and a debt buyer on a fair contract. Proper due diligence by the bank is necessary and always has been on potential purchasers. However, the problems should not require an executive government agency interfering in the relationship.
In conclusion: The release of the OCC Risk Management Guidelines is another attempt by government agencies to press originators and debt buyers to conform to national standards of debt sales. Below is a review of the best, the worst, and what some it means for account receivables professionals. The Good: The strongest point in this article is that banks should perform extensive due diligence on potential debt purchasers before entering into contracts with them; as we’ve seen recently, there are many bad actors out there who need to be rooted out from our industry. One significant problem has been small-time collectors performing poorly (or not at all), which can have devastating consequences especially if they're targeting smaller customers.