The good, The bad, The Ugly
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 strongest point of the paper is the push for banks to perform extensive due diligence of 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 as well as 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, but large originating banks have a tendency to have poor documentation standards and practices for charged-off debt.
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 the services they provide 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. Certainly, information security and legal compliance by debt buyers 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 for an understanding that borrowers also have serious obligations which they need to fulfill.
What the guidance does not address well in the realm of documentation are how many contracts are “signed” online as well as 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 as determined to set parameters of what establishes debt as well. With so many debts originated without a physical signature on a piece of paper, failure to address modern practices is only going to further limit 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 litigate a specific debt. Certainly, there continue to be issues 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.
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 interesting 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 type 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.
The OCC report, while there are some legitimate issues at hand, also represents an intrusion by the government between a bank and a debt buyer on a legitimate 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.
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