Client Alerts
November 12, 2015

Note Sale Expansion: Its Source and Implications (Part Three)

Stites & Harbison, PLLC, Client Alert, November 12, 2015

by Elizabeth Lee Thompson and Alyson M. Cox, Summer Associate

In this series, Stites & Harbison is examining the expansion of notes sales in recent years. The first part of this series discussed the reasons behind this expansion, including the surplus of under-performing notes post-2007, lenders’ preference for note sales over expensive foreclosure proceedings, and the government’s current focus on note sales’ potential rejuvenating effect on struggling communities. The second part delineated the note transfer process and pointed out potential pitfalls in note sale transactions. Here, the third part of the series will evaluate the OCC bulletin addressing note sales and providing guidelines for selling lenders.

In August 2014, the Office of the Comptroller of the Currency (“OCC”) released a bulletin providing guidance to banks “on the application of consumer protection requirements and safe and sound banking practices to consumer debt-sale arrangements with third parties (e.g., debt buyers) that intend to pursue collection of the underlying obligations.”1 Specifically, the OCC intended the policy statement to advise banks of the OCC’s “expectations for structuring debt-sale arrangements in a manner that is consistent with safety and soundness and promotes fair treatment of customers.”

I. Risks Associated With Note Sales

Banks should be aware of certain dangers associated with note sales, such as operational, reputation, compliance, and strategic risks. The OCC notes that these risks often arise due to “poor planning and oversight by the bank, and from inferior performance or service on the part of the debt buyer.” It warns that the foregoing risks could “result in legal costs or loss of business.” Thus, the OCC outlined specific risks within each of the foregoing categories and compiled a list of “best practices” incorporated by large banks into their supervision of note sales.

II. Supervisory Concerns Associated With Note Sales

The OCC lists various supervisory concerns with debt-sale arrangements of which sellers should remain aware. For instance, the OCC warns against banks granting note buyers access to debtor files in order to assess credit quality without first making proper customer disclosures. The guidance contains the following supervisory expectations of banks that engage in note sales:

  • ensuring that appropriate internal policies and procedures have been developed and implemented to govern debt-sale arrangements consistently across the bank.
  • performing appropriate due diligence when selecting debt buyers.
  • ensuring that debt-sale arrangements with debt buyers cover all important considerations.
  • providing accurate and comprehensive information regarding each debt sold, at the time of sale.
  • ensuring compliance by the bank with applicable consumer protection laws and regulations.
  • implementing appropriate oversight of debt-sale arrangements.

III. Consequences of Noncompliance

The OCC “recognizes that banks can benefit from debt-sale arrangements by turning nonperforming assets into immediate cash proceeds and reducing the use of internal resources to collect delinquent accounts.” It advises, however, that banks be cognizant of certain risks associated with debt-sale arrangements and incorporate the OCC’s relevant guidance.

This OCC bulletin is currently in effect, and lenders should aim to fully comply with the guidance when formulating note sale programs.2 The OCC examiners will “determine whether bank management has established controls and implemented a rigorous analytical process to identify, measure, monitor, and manage the risks associated with debt sales.”3 If the OCC finds that a bank’s practices fail to comply with the directive, the OCC will “take appropriate supervisory action” and may bring enforcement actions.

Consequently, note sellers must consider the OCC’s guidance in order to avoid repercussions. Banks considering the possibility of engaging in note sales—or those that already sell notes but have concerns regarding their current policies’ compliance—should seek legal counsel in order to ensure full conformity with the OCC bulletin.


In this series, Stites & Harbison provides readers with a general overview of issues related to the recent note sale expansion. Here, Part III specifically outlines the OCC bulletin released in 2014 and identified various risks threatening note sellers. In order to comply with the OCC’s guidance and avoid enforcement actions or supervisory consequences, banks should: ensure that appropriate internal policies are in place, perform due diligence in the selection of note buyers, ensure that purchase arrangements are thorough and complete, provide buyers with comprehensive and accurate information during the transaction, comply with relevant consumer protection laws, and implement necessary supervision arrangements. If sellers fully comply with these recommendations, they may avoid operational, reputation, compliance, and strategic risks inherent to the note sale process.

Banks and other lenders interested in the prospect of note sales should contact legal counsel in order to fully evaluate the pros and cons of note transactions, the complexities of the transfer process, and the OCC’s expectations in this context.

1 Office of the Comptroller of the Currency, U.S. Dep’t of the Treasury, OCC Bull. 2014-37, Risk Management Guidance 1 (2014) [hereinafter OCC Bull.].

2See Jonathan L. Pompan, New OCC Guidance on Debt Sales, Ass’n of Corp. Counsel (Aug. 4, 2014), (issuing similar advice to banks on the OCC bulletin).

3 OCC Bull., supra note 1, at 26.

Related Capabilities
Secured & SBA Lending