Good News About Credit Card Debt Sales

American Banker reporters Maria Aspan and Jeff Horwitz have been sharing cutting edge news about the debt collection and debt buyer world for some time. The news they share this week is good news indeed. They report that JPMorgan Chase is pulling back even more in its credit card collections-related activities, by stopping most bad loan sales to outside debt buyers. Chase had been receiving criticism for the way in which it pursued defaulting customers, which included many procedural shortcuts, mass robo-signing, and so on. As a result, Chase stopped suing its own customers and began selling off even recent bad debts to third parties. Now, just in time to avert new OCC suggested best practices for selling bad debts, Chase says it will no longer sell the bad debt either.  This leaves me scratching my head over here. Exactly what will happen to the bad debts now? 

As another article explains, The OCC’s best practices are not binding on lenders but may nevertheless change how banks handle their debt sales to third-party collectors.   This article cites Professor Peter Holland, whose article we blogged about here. The OCC best practices recommend/request that lenders:

• Vouch for the accuracy and completeness of all debt records they sell;
• Monitor how debt buyers collect on accounts and limit their reliance on litigation;
• Restrict debt buyers from re-selling defaulted consumer accounts;
• Establish a central debt sale oversight committee;
• Produce written justifications for selling debts instead of collecting on them internally;
• Provide debt buyers with key account information at the time of sale and make full records available at little or no charge; and
• Segregate accounts that are "near the statute of limitations" or belong to sensitive customers, such as those in bankruptcy or active-duty military service.

This article also suggests that this new scrutiny might reduce the demand for these bad debts. As they say, from your lips to G-d’s ears. Debt buying is currently big business. Encore Financial, one of the largest credit card debt buyers, paid $562 million for $18.5 billion of debt last year, or three cents per dollar of face value, according to its Securities and Exchange Commission filings.

Given that many third-party debt collectors have virtually no proof of the debt they seek to collect and sometimes even sue and harass the wrong person, these recommendations could be very useful to consumers. The OCC did its own investigation in 2011 and found (not surprisingly) that banks have people on staff whose main job is to pressures consumers to repay delinquent debt, and that if this fails, they sell the debt to third parties who sometimes extract payments from consumers who have no assets by obtaining judgments and garnishing future wages.

This semester in clinic we are seeing debt collection cases in which the collectors do not care if the debtor is judgment proof or not. We’ve even seen a case or two in which collectors are suing on time-barred debts. This is of course a bad idea, given that doing so is a violation of the Fair Debt Collection Practices Act as well and many states’ UPA statutes. In any case, we may see a sea change in the number of debt collection actions following these developments, which would certainly be nice.  

 

 

 

Comments

[STEVEN J. FROMM, ATTORNEY, LL.M. (TAXATION)]

There is some big irony in that these lenders stuff mailboxes with offers and blank checks and basically flood consumers with this crap. Then when they get bad credit risk people to bite they then end up with not getting paid and passing the problem to someone else who can make a profit. What a racket. There is something fundamentally with this picture and these practices.

[Raymond]

I have an idea. First don't return or sign the offer. The second is to repay what you borrow.

[SYSM]

Raymond, would that credit cards were only suing for "repay what you borrow." The fees and "penalty interest rates" that they lard onto the account as soon as it becomes clear that the accountholder is struggling to repay usually equal or exceed the amount borrowed, in my experience representing cardholders being sued by credit cards. Frequently the amount sued for is more than 2x the balance of the last statement on which the cardholder actually swiped the card/made a purchase.

[mt]

Federal regulation requires banks to write off all cc accounts that have gone. Then they can choose to keep collecting themselves or by hiring collectors as agents, or they can sell the paper. The market price of freshly written off paper is usually between 5 & 10 cents on the dollar and older paper of course goes for less. Thus, banks have no incentive to do any of the things that this post recommends, because the costs approximate the value at risk. If they are imposed, this will likely result in less unsecured credit access to avoid the poor cost benefit tradeoff.

One may prefer that to the present situation, or not, but one should be intellectually honest about it, and if that is the preferred result, why not puruse it directly & just limit credit card issuance directly.

Some of the recommendations are really stupid. Provide written justification for selling instead of collecting internally (whatever that means - can't they hire outside counsel?). Hello? Business school 101 - make or buy; hold or sell - which projects to have a better return? Do you seriously need a piece of paper to say that about every debt sale? Or is the idea that economics aren't an adequate "justification"?

And how are consumers helped by a regulation ensuring a debt buyer gets proper documentation? That is how most collection efforts are defeated!

[mt]

first sentence should have ended "gone past six months in default".