Consumer Financial Protection Bureau – A Critique of the OCC “Best Practices” Statement.
The recent Office of the Comptroller of the Currency (OCC) report “Shining a Light on the Consumer Debt Industry” is an attempt by the federal government to outline its opinion of what it considers the “best practices” for banks to follow.
As covered in a recent InsideARM.com article, such “best practices” will likely be a further burden placed on the small and mid-sized businesses of the debt sales industry, and likely benefit the larger publicly-traded corporations and solidify the big business relationships between the banks and large debt buyers and collection agencies.
Below is a critique of some of those “best practices” and how they would adversely affect the debt sales industry.
As a general critique of the initial summary part of the report, the OCC should have little to do with the decisions banks make on how and where to sell their debt. Unless fraud and systemic abuse exist, the government should play little, if any, role in how banks determine their own reputation and business practices. Unfortunately, with banking interests tied far too closely to governmental and Federal Reserve policies – which back banking risks with taxpayer funds – and an overzealous governmental oversight into business regulation in general to protect a “common good,” such “best practices” are likely to carry the weight of law in some circumstances as banks would feel pressured to adhere to governmental “suggestions.”
The list of “best practices:”
- require financial analysis of why selling the debt is a better option than collecting debt internally
Bank managers are often not attuned to costs associated with internal collections, nor are they often aware of the actual value of a debt. Bankers and accountants may have a hard time understanding that a large balance is practically worthless in some circumstances. Government bureaucrats could likely be worse at determining such value. Many buyers who have attempted to purchase debt from directly from banks who have not sold before could probably share an anecdote or two about how an accountant or executive at a bank simply did not understand how a large, six-figure account could be worthless. Government employees with minimal banking experience will likely present a worse barrier.
- identify types of accounts that should not be sold and specify quality standards and quality control for debt that is sold, emphasizing the accuracy of the account balances
On the surface, a worthy goal. However, many debt sales for years have had similar requirements in sales contracts...without government intrusion. It is probably a greater problem on the resale market than directly from originating banks but is often solved when sellers create good contracts and abide by them.
- ensure the purchase and sale agreements clearly delineate roles and responsibilities of all parties for fair debt collection.
A nice platitude that means...what exactly?
- require detailed documentation to ensure accurate and reliable information is provided to the debt buyer at the time of purchase
Probably the best suggestion. Acquiring proper documentation has been a problem since debt has been bought and sold. Banking computer systems and record keeping are like many doctor's offices – woefully out of date, with upgrading a minor priority.
- specify internal bank documentation retention practices
The operative word here is “practices.” What banks do, what they should do, and what they say they do can be three different things. It is probably better for the market to enforce, which has been a general problem at times, as some buyers have been willing to purchase paper with poor documentation at high prices even from banks.
- address due diligence requirements of third parties to ensure compliance with the bank’s own policies and procedures.
This item was footnoted with an acknowledgment that third parties do not fall under the OCC jurisdiction...as much as they would probably prefer otherwise. Unfortunately, asking banks to “address” such requirements is too short a step to actually laying such requirements out in regulation or law.
Later in the statement, a further list is placed for specific actions.
- Establish oversight committee — an oversight body to monitor third party debt buyers and provide a corresponding single, consistent control structure for overall consumer debt sales within an institution
For the large banking institutions, an oversight committee could be harder than it looks. Several large banks sell debt out of different departments, from different areas of the country. Again, it is also a suggestion that looks suspiciously like a government directive.
- Use debt buyer scorecards - enhanced controls to assess legal and reputation risk of the debt buyer that takes into consideration consumer complaints, repurchases, legal actions filed against the company, and other regulatory compliance issues.
- Maintain account accuracy and documentation
- Confirm the accuracy of account balances, confirm marketable title that is free and clear of all liens, and confirms the completeness and accuracy of account documentation prior to debt sales.
- Use clear, consistent contract terminology
- Use boilerplate contract language across lines of businesses when appropriate.
- Provide sufficient documentation sufficient documentation will allow fair and informed collection of debts including relevant customer account codes and explanation of codes that should alert a debt buyer to special handling of certain accounts (e.g., attorney handling, etc.).
The scorecard suggestion is almost patronizing in its tone, like telling a high school student to keep notes on an index card. The list is nice government bureaucratic suggestions from individuals with minimal private sector experience.
- Limit the resale of debt—contractually limiting the ability of the third party to resell the debt to another entity allows the bank to control who ultimately will pursue collection from“their” customers and helps prevent legal validity and ownership questions later
Even with the patronizing above, limiting the resale of debt and limiting litigation are the worst two items on the list. Some banks already limit resale for consumer relations reasons; but, again, it is a private business decision which should be made as a matter of bank business.
- Limit the litigation strategy - banks should evaluate the litigation strategies of debt buyers, consider selecting debt buyers who limit their use of litigation, or use contractual provisions or other means to limit the use of litigation by buyers of their debt.
A relatively new suggestion, which has seen little practice even from banks which limit resale. Limitation of litigation would particularly hurt the small-scale debt buyers, who must use multiple strategies to be profitable. Allowing litigation also protects the very idea that contracts need to be honored. If consumers know that the power to sue on a legitimate debt is removed from anyone who collects, then delinquencies will become an even greater problem.
- Maintain quality Management Information Systems establish appropriate management reporting that tracks debt sales, sales price, and repurchase causes and volume.
- Conduct periodic reviews depending on past practices and controls, a look-back review may be required to determine if prior practices resulted in consumer harm.
And we finish with more governmental bureaucratic patronizing.
“Shining a Light on the Consumer Debt Industry” is less about finding reasonable solutions to allowing debt buyers to operate in a fair and just marketplace than about “protecting” consumers from poor financial decisions and further attempting to regulate businesses by a governmental entity. The statement is often patronizing in tone and provides little respect as to how the industry already operates, and does not acknowledge the struggles that small debt buyers already undergo in wading through extensive government regulations to collect a legitimate debt.