The Federal Trade Commission has long accused banks of contributing to shortcomings in the documents that debt collectors use to back up demands that consumers repay delinquent credit card debts. But the commissions' lack of jurisdiction over banks meant its concerns carried limited weight.
The FTC's partnership with the Consumer Financial Protection Bureau — which is empowered to regulate banks under the Fair Debt Collection Practices Act — has changed that. Under a memorandum of understanding signed early this year, the bureau and the FTC agreed to share data and coordinate enforcement actions in the debt collections industry.
The teamwork is a key piece of a broader push by state attorneys general and federal officials to take a hard look at how banks and collections agencies document, sell and recoup consumer debt. The partnership is yet to produce formal policy proposals or objections to specific industry practices, but industry observers see signs that it's already shaping CFPB procedures and consent decrees.
"You can guess where they're going," says Christopher Willis, a Ballard Spahr attorney who has advised debt collection companies on preparing for CFPB examinations.
In a confluence of regulatory events, the CFPB is launching its first inspections of large consumer debt buyers just as the FTC is set to release of "the first comprehensive study of the debt buying industry," according to Tom Pahl, the FTC's director for financial practices. That work will include an analysis of what information debt buyers receive from original creditors.
CFPB officials have spoken freely of their interest in consumer debt collection practices and published a 29-page summary of the procedures the bureau is following during the exams of big debt collectors that it began this month. Examiners are supposed to address topics such as the nature of the information collectors obtain from the original creditors, which are often banks.
When looking at debt-collectors' records, CFPB examiners should consider "the nature of the account-level information that is provided by the seller," the procedures state, and "any representations or disclaimers made relating to the accuracy of the account-level information that is provided by the seller."
Ultimately, examiners are supposed to determine whether "the information received is sufficient to substantiate representations made to consumers regarding the debt and the consumer's liability for the debt."
The exams are just beginning, but there are already signs that the bureau will find some industry practices objectionable. In a March 2012 report on its Fair Debt Collection Act work, the bureau noted that it is "conducting nonpublic investigations of debt collection practices to determine whether they violate the FDCPA or the Dodd-Frank Act."
The bureau is yet to lay out precise standards for what documentation it believes is appropriate. That has frustrated industry attorneys such as Willis.
"When it comes to litigation and collection documentation, there's precious little in that exam manual," Willis says, noting that state courts around the country have adopted very different standards for how much evidence is required for a case to pass muster.
For those seeking clues to where CFPB policy is headed, the best place to look may be a consent decree signed in October between Amex, the CFPB and Federal Deposit Insurance Corp. American Express agreed to pay $112.5 million in refunds and fines to settle allegations of misdeeds involving marketing, payment processing, deceptive debt collection and age discrimination.
Record-keeping failures were not among the violations that regulators cited in the wide-ranging order. But among the remedies American Express agreed to is a little-noticed stipulation raising the bar for the evidence required for the company to make consumer collections demands.
Broadly, the provision requires Amex to maintain "accurate and complete information" on debts that it attempts to collect. "Such information shall include, at a minimum (a) consumer agreements and any subsequent amendments and (b) documentation evidencing the debt and each transaction or activity on the debt," the consent decree states. "The Bank … must immediately cease such collection efforts if the consumer disputes the debt and the Bank is unable to provide the documentation."
Amex spokeswoman Marina Norville declined to say how far back the company keeps account agreements, but said it would not be a problem to produce them.
"We do keep extensive multi-year records to comply with regulations," Norville said. "There was never a finding or allegation [by regulators] that there was a lack of documentation regarding our debt collection."
Amex does not sell defaulted debts. But many banks that do will be forced to alter their debt collection and sales operations if the Amex consent decree reflects how regulators want to mold broader industry practices. The array of records that Amex has agreed to produce in contested debt cases significantly exceeds what banks and debt buyers regularly provide in state court collection cases.
A review of dozens of the company's collections cases in Duval County, Florida and Alameda County, California shows that Amex almost always filed some form of account agreement and one or more account statements in each jurisdiction. Account statements going back to the alleged debt's creation were not included, however.
The records the bank's outside attorneys present sometimes come with disclaimers. In an Alameda County Amex collections suit, the bank's outside attorney declared that an alleged debtor had "entered into a written contract" and should be held to its terms. But Amex had lost the document at some point during the collections process.
"It has been passed through many hands," the attorney wrote in a successful petition for a default judgment.
Sometimes the Amex records introduced do not appear to match descriptions made by its attorneys. One attorney, for example, submitted a "photographic copy of the original agreement" that she claimed had been provided to the borrower in 2000. The document is dated 2008.
The discrepancy does not appear to have been questioned. Amex won a $15,824.33 judgment in an Alameda County, California civil court after defendant Maurice Harris failed to file a response.
Missing from the Harris case, and dozens more reviewed by American Banker, is any documentation showing that the borrower opened the account at issue. That's because Amex does not possess it, according to court declarations by a company employee.
"I have become thoroughly familiar with the manner in which American Express maintains its business books and records," reads a filing stamped with the name of Iching Chao, a New York custodian of records for the bank. "After the conclusion of 25 months, it is standard business practice [of American Express] to destroy applications."
"There's no reason why they should be destroying the account records," says Aurora Harris, a California attorney who has challenged Amex debt claims over allegedly insufficient documentation. "To me, it's a sign of a lack of accountability."
Amex spokeswoman Norville noted that the FDIC-CFPB consent order references boilerplate cardholder agreements, not signed credit card applications. The agreement in place at the time an account holder's defaults is the pertinent one, rendering previous versions irrelevant to a borrower's obligations, she says,
Ballard Spahr's Willis, who does not represent Amex, also disputes the notion that credit card collection claims should be required to supply exhaustive account documentation. State judges have not shown any desire to see such materials.
"It's one of those things where industry practices have been influenced by the legal system, and the legal system hasn't demanded these things in the past," he says.
Given the changing regulatory climate, however, Willis says he's advising clients to be cautious about discarding account records.
"You can't read the Amex consent order and come to any different conclusion than that … the safest and most conservative practice is to retain everything as long as the account is alive," he says.
It remains an open question whether banks and the companies that buy debt from them could live up to the documentation standards imposed on American Express. Past debt sales contracts prepared by JPMorgan Chase and Bank of America raise the possibility that complying would be a stretch. A B of A agreement with SquareTwo's CACH subsidiary states that "documentation may not exist with respect to the loans purchased." A JPMorgan Chase sale agreement from 2008 states that documentation is available "for no less than 50% of the charged-off accounts" sold. Both banks declined to comment on record-keeping and debt sale practices.
Some industry observers say they believe the two banks and debt buyers would do well to tread carefully with debt sales that don't include extensive documentation.
"When institutions are collecting on their own accounts, I don't think there's a dramatic problem," says Timothy McTaggart, an attorney for Pepper Hamilton and Delaware's former banking commissioner. "Where it gets messy is in transferring [debts] to third parties. For an 'as is' transaction, it's a question of whether the reps and warranties and stipulations are going to meet changing regulatory conditions."
Bankers, of course, abhor the uncertainty of changing regulatory expectations. Plenty of state and federal officials have shown displeasure with industry documentation and collection practices. But other than in the case of the Amex consent decree, none has proposed changes to how banks collect on or sell rights to delinquent accounts.
The absence of such proposals reflects the distance government officials still have to go, says Ira Rheingold, executive director of the National Association of Consumer Advocates. If state or federal authorities want to demand significant reforms, they'll need the leverage of substantial investigations, he says.
"There are a lot of parties active in this," Rheingold says. "The question is whether they are ready to bring a court case if the national banks and debt buyers are unwilling to take remedial action."
Ballard Spahr's Willis agrees. Consumer advocates view alleged problems with consumer debt collections as analogous to the foreclosure documentation controversy that produced the national mortgage servicing settlement, he notes. Willis is unsure, however, that defaulted credit card debts will produce the same "hydraulic" pressure for action that, in the case of foreclosures, resulted in a $25 billion national settlement.
"Credit card debt doesn't get nearly the same press and airplay as foreclosures," he says. "That may have a bearing on the political motivation to go forward with this kind of litigation."