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The agreement on debt collection that JPMorgan Chase (JPM) signed with federal regulators Thursday appears likely to become part of the blueprint for reform of an often-criticized industry.
The 58-page consent order, hailed by consumer advocates, lays out a detailed series of requirements that JPMorgan Chase must follow when it works with collection agencies and outside law firms to recoup delinquent accounts. It also imposes new rules on any sale of debt to outside companies. For example, it states that the bank must notify its customers when it sells their debt.
Right now, there is no way for consumers to know whether a third-party debt collector who approaches them actually has the right to collect that debt, says Robert Hobbs, deputy director of the National Consumer Law Center.
"So this is a fundamental change for consumers," he adds. "I would say this will become the model for the rest of the banking and debt-collection industries."
The consent order between JPMorgan Chase and the Office of the Comptroller of the Currency does not cover the bank's mortgage operations. But the credit card business, auto lending business, and student loan business, which the bank recently said it was exiting, were all implicated.
The debt collection practices within JPMorgan Chase's credit-card operations have been the focus of particular scrutiny, centering on allegations of faulty records and shoddy procedures.
"Chase has been the poster child for collection abuse and faulty documentation," says Peter Holland, a University of Maryland law professor.
While the bank neither admitted nor denied wrongdoing in Thursday's order, the company did express contrition in a press release.
"Although these issues affected less than 1% of Chase customers, any mistake is regrettable and does not reflect the high standards we set for ourselves," Bill Wallace, its head of operations for consumer and community banking, said. "We are committed to fixing this."
JPMorgan Chase said Thursday that it has taken numerous steps to address the issues, citing its decision in 2011 to stop filing lawsuits aimed at collecting delinquent credit card debt. Those suits have not resumed, the company stated. American Banker reported in July that the bank has also stopped most of its sales of charged-off credit card debt.
Thursday's agreement with regulators requires JPMorgan Chase to compensate certain consumers who were affected by its debt-collection practices, and a company official said that most of those people have already received compensation.
Regarding the extensive changes JPMorgan Chase is required to make to its debt-collection operations, the official said: "I think it's fair to say that some of the controls have been implemented and some of them are in the process of taking place."
At numerous big banks, major changes in the methods used both to collect unpaid debt and to sell such debt to other firms are under way, says Christopher Willis, a banking lawyer at Ballard Spahr.
"These issues have been the subject of very intense work by some of the large banks for well over a year, probably close to two years," Willis said. "I think they've made a lot of progress."
The Consumer Financial Protection Bureau, which has the authority to write industrywide rules regarding debt collection, was not a part of Thursday's settlement between the OCC and JPMorgan Chase.
A CFPB official said the agency "commends the OCC for its action today to clean up credit card debt collection practices. The official added: "we continue to look into these issues more broadly."
Consumer advocates argue that the entire system of collecting debts is broken, relying largely on an assembly line of lawsuits that are backed by shoddy documentation and are built on the assumption that few consumers will actually show up in court. Consumer groups would like to see the CFPB follow up the OCC's action with broader rules.
"This is an important first step. It's an enforcement action, though," says Ira Rheingold, executive director of the National Association of Consumer Advocates. "Hopefully this is a predicate for some serious rule-making."
Despite Thursday's agreement, JPMorgan Chase is not yet out of legal peril with respect to its debt collection operations. A lawsuit filed in May by the California Attorney General's Office is still pending.
In what may be a sign of JPMorgan Chase's internal focus on debt collection issues, the company recently hired John Tonetti, who until early this month was working as the CFPB's program manager for debt collection.
A spokesman said Thursday that Tonetti is working in risk management but would not say whether he is focusing on debt collection issues. Tonetti, who has 30 years of experience in the debt collection industry, was not made available for an interview.
In June, while Tonetti was still working at the CFPB, he gave banks a public warning about the consequences of faulty information.
"There's billions of dollars in billions of accounts flowing through the ecosystem," Tonetti said at a hearing hosted by the CFPB and the Federal Trade Commission. "Even a relatively small error rate can lead to a large number of consumers harmed."