JPMorgan Chase (JPM), which is bracing for a crackdown over its credit card debt collections practices, is trying to give regulators less ammunition.
The nation's largest bank has halted most sales to third-party collectors of debts it has already charged off its own books. Bank executives have cited concerns that such sales could cause further damage to its reputation, according to sources familiar with its actions. Court records show that third-party collectors' lawsuits over Chase debts have dropped off precipitously since the beginning of the year.
The exact timing and extent of the pullback is unclear. Collections industry observers say they became aware early this year that Chase had stopped the regular sales of most credit card debts. Collections firms' court filings, seeking repayment of debts acquired from JPMorgan Chase, have plummeted in several formerly-busy jurisdictions, according to a search of state court records. Sources disagree about whether sales have stopped entirely or simply been heavily restricted.
JPMorgan Chase spokesman Steve O'Halloran declined to discuss its handling of defaulted consumer debts.
JPMorgan Chase and other credit card issuers historically have filed lawsuits to compel consumers to repay defaulted loans. Such suits typically involve only a few thousand dollars each, but en masse add up; Chase recovered $1.4 billion from defaulted credit card accounts 2011, according to its financial filings with the Securities and Exchange Commission. (Not all of that necessarily came from judgments.) In addition to their own collections efforts, banks typically sell some debt they've charged off their own books to third parties. Those buyers tend to pay pennies on the dollar and then file their own lawsuits seeking repayment.
JPMorgan Chase's pullback from selling bad loans to outside collections agencies comes as it faces mounting pressure over how it pursues payments from credit card customers who fall behind on their debts. The bank's latest move follows a decision two years ago to stop filing its own credit card collection lawsuits amid rising scrutiny of those practices.
California Attorney General Kamala Harris said in a lawsuit filed against JPMorgan in May that the bank had consistently taken procedural shortcuts and used illegal "robo-signing" techniques to sue thousands of borrowers, despite persistent shortfalls in the documentation it uses to support its collections activities.
The Office of the Comptroller of the Currency also has been probing the bank's collections procedures and practices since 2011; JPMorgan said last month that it expects a formal enforcement action related to "certain non-mortgage consumer collections practices."
Combined with the cessation in the filing of its own collections lawsuits, JPMorgan Chase's sharp drop in sales of bad loans to outside collectors severely limits the legal avenues through which it might seek repayment of newly-defaulted consumer debts.
The timing of Chase's pullback roughly coincides with a move by the OCC, its primary regulator, to increase scrutiny on how banks handle card debt. In a recent memo to examiners, the OCC's head of large bank supervision outlined a series of "best practices" for selling accounts. The document does not constitute formal OCC policy but does reflect its expectation that banks will take greater precautions than in the past to prevent collections errors and abuses.
Mark Schiffman, a spokesman at ACA International, a trade association for collections agents, says that many credit card lenders and debt collectors are rethinking common practices now that regulators are taking a closer look at the industry.
"There certainly is a much higher level of scrutiny over the bundling and selling of debts and what sort of documentation accompanies them," Schiffman says. "Everything's on the table, because it's getting such a close look at the federal state and local level from policymakers."
The Consumer Financial Protection Bureau now has oversight of large debt collectors, and launched systemic examinations of them at the beginning of the year. It has also begun scrutinizing banks' own collections practices. The agency warned lenders in early June that they will have to produce better documentation to back up their sales of debts to third-party collectors.
Peter Holland, who runs the University of Maryland School of Law's consumer debt defense clinic, says that an important first step would be for banks to post online their contracts with debt buyers, in which they agree to sell a specific number of delinquent accounts in the future. Posting these so-called forward-flow agreements would address some paperwork defects in the lawsuits that debt collectors file against borrowers.
"I'm hoping that banks will stop selling the highly toxic assets, and short of that I'm hoping that either voluntarily or by regulators or by court order, those forward flows will be put up on the Internet and required to be made public," he says.
JPMorgan's current pullback in debt sales has had a perceptible effort on lawsuits filed by collectors in at least some parts of the country. For example, in 2012, debt buyers filed 567 cases in Miami Dade County's civil court seeking to collect on defaulted Chase accounts. In the first half of 2013, however, the number of filings fell to 21. Almost all of those cases list another debt buyer as an involved party, suggesting that the debts involve older accounts purchased from a third party.
Courts in Missouri and Oklahoma show similar drop-offs in debt collectors' Chase-related filings.
Holland says that, as of a few months ago, Chase was "actively supporting" debt-collection litigation in Maryland by supplying affidavits to attorneys who sued borrowers. But there is often a lag between when a debt is sold and when the buyer brings a lawsuit against the borrower.
He is cautiously optimistic about the implications for consumers of JPMorgan Chase's decision to pull back on debt sales.
"They shouldn't sell that stuff," he says. "So if Chase stopped selling that, that's a good thing, and other banks should follow suit."