Notice from the Feds: Banks Will Be Held Responsible for Third-Party Collection Service Providers Used

At the end of 2013, the Federal Reserve Board released a reminder for all banks and banking institutions that they are held responsible for the actions of all third-party providers and collections agencies they hire, including ARM companies.  The statement advised all banks to take risk management measures seriously when considering the use of third-party collections, as a failure to collect according to increasing Federal regulatory procedures could hurt the reputation and financial well-being of larger companies. 

Also included in the issued guidelines were definitions of what the Federal Reserve Board considers to be a “service provider.”  In its definition, the FRB lists a service provider as any entity that enters into a contract with the financial institution in order to provide business functions or services for that financial institution.  With this definition, ARM firms would be clear-cut service providers, as would collection attorneys or collection agencies hired by larger banking institutions.  Other service providers might be firms offering accounting, loan review, compliance services, auditing and risk management assessments.

By holding financial institutions accountable for the actions of third-party ARM companies and collection attorneys, the Federal Reserve Board has taken an unprecedented move to encourage ARM businesses, collection agencies and collection attorneys to follow all compliance guidelines related to debt collection and legal action.  The loss of reputation and potential fines incurred by a larger financial institution means that they will be seeking only the most informed, professional ARM companies to provide third-party debt collections services.  It just makes better financial and business sense to play by the rules, particularly in the process of collecting on consumer debt. 

This guidance applies to all member banks of the Federal Reserve System, including savings and loan companies and nonbank subsidiaries.  Encouraging banks to closely monitor their ARM vendors keeps debt collection practices in line with new tighter Federal guidelines for collecting.