More than a year after regulators cracked down on Wall Street’s flawed home foreclosure procedures, authorities are stepping up pressure on debt collectors over a flood of lawsuits rife with unsupported allegations against delinquent credit card holders.
State and federal regulators are increasingly alarmed that banks and debt collectors appear to be using faulty records in litigation against borrowers having trouble paying what they owe on their credit cards.
In some cases, authorities said, the paperwork and the procedures have been so
defective that borrowers weren’t even given notice of lawsuits against them until judges rendered default judgments for their failure to appear in court to defend themselves.
Those judgments opened the doors to wage garnishments, asset seizures and other actions lenders and collectors could take.
The concerns of authorities echo the questionable records and so-called robo-signing in the nationwide foreclosure litigation, which led to last year’s $25-billion settlement with five of the nation’s biggest banks.
A broad investigation of the debt-collection industry by the California attorney general’s office is focused partly on companies that buy delinquent credit card accounts from lenders at a discount, then sue to get borrowers to pay up, said a person familiar with the matter who was not authorized to speak publicly and did not want to be identified.
That investigation, which is ongoing, already led to the state’s civil lawsuit last month against JPMorgan Chase & Co., the nation’s biggest banking firm.
Atty. Gen. Kamala D. Harris accused the company and its Chase Bank of running a “massive debt collection mill” that flooded California’s courts with more than 100,000 lawsuits based on shoddy documents, including those signed by low-level employees posing as assistant treasurers and bank officers.
Meanwhile, attorneys general from more than a dozen other states have launched a joint investigation into similar issues in the debt-collection industry.
“We’re concerned about the debt buying that’s occurring, concerned about the quality of the information that’s turned over to the purchaser, concerned that there’s not a lot of due diligence on the names and the amounts,” said Iowa Atty. Gen. Tom Miller, whose office is leading the inquiry.
“Some of the names are incorrect. Some of the amounts are incorrect. And sometimes the debts aren’t valid and are still turned over and sold,” said Miller, who led the coalition of state attorneys general in the foreclosure cases.
At least three federal agencies also are looking into the practices of debt collectors.
“We are on the verge of a sea change,” said Suzanne Martindale, a staff attorney in San Francisco for consumer advocacy group Consumers Union. “The writing is on the wall.... Consumers are being wrongfully pursued.”
William Black, a former top banking regulator, said the debt-collection industry is “massively screwed up.” Debt collectors, he said, “buy stuff on the basis of shockingly bad due diligence.”
Tommie Sexton, a 43-year-old waiter from Oakland, knows firsthand how screwed up the system is.
During the Great Recession, Sexton fell behind on payments for his Chase credit cards. Last year Chase sold the accounts to Midland Funding in San Diego, one of the nation’s largest buyers of debt, and Midland quickly sued Sexton for $7,000 in unpaid bills, including interest and other charges.
As evidence of its right to collect, Midland filed copies of Sexton’s credit card statements and an affidavit from Chase that it had sold the account to Midland. Sexton, with help from the East Bay Community Law Center in Berkeley, argued that the documents were not enough to prove Midland owned the debt, especially the Chase affidavit, which was created after he was sued.
Typically, such documents are inadmissible, but debt collectors commonly rely on them and other incomplete information, said Meg Ryan, supervising attorney of the law center.
“The big problem in these third-party cases is that the plaintiff never brings a Chase witness to testify,” she said. “Companies like Midland are winning by relying on bad affidavits from Chase, and the defendant has no opportunity to cross-examine a Chase witness at trial.”
Sexton and Midland eventually settled.
Midland remains confident that its documents “clearly established” that the company owned the account, said Greg Call, Midland’s general counsel.
Even so, shoddy documents such as those alleged in Harris’ suit against JPMorgan are “ubiquitous” in the debt-collection industry, said Peter Holland, an assistant professor at the University of Maryland law school. “And if the big banks are not engaged directly in what [Harris] is alleging, they are certainly selling off junk debt that falls into the hands of predatory debt buyers,” he said.
JPMorgan, for one, has feet on both sides of the fence. Besides Chase Bank, it has an investment unit that owns NCO Group, a major player in the debt-collection industry.
NCO has been the target of federal and private legal actions, including a federal class-action suit alleging that NCO attorneys sue consumers for debts they don’t owe. NCO spokesman Tom Hoy said that the suit, filed in December, lacks merit and that the company would vigorously defend itself. The case is pending.
Separately, JPMorgan signaled in a regulatory filing last month that it expects regulators to smack it with an enforcement action over its debt-collection practices. The Office of the Comptroller of the Currency started examining the bank’s practices two years ago, said a congressional aide who was briefed on the matter but not authorized to speak publicly.
After broadening its inquiry to other banks, the OCC also may force banks to ensure accuracy of account records that they sell to debt firms and use in lawsuits, the aide said. An OCC spokesman declined to comment.
Some debt collectors conceded that the industry has problems but said that many deals aren’t tainted by questionable practices.
Michael Brkich, a former accountant who heads the 704 Group in Orange County, said the Chase debt his small firm has purchased came with “impeccable” records.
The bank bundles credit card statements and a chain of titles so debt firms can prove they have the legal right to sue debtors, he said. “Chase is actually really good about it,” Brkich said. “A lot of other institutions, they sell it and forget about it.”
After the Federal Trade Commission in 2010 cited problems with collections litigation, some state and county governments around the country have tightened rules to block faulty lawsuits from clogging courts.
This year the Consumer Financial Protection Bureau started to examine debt collectors on a regular basis.
Christopher Koegel, assistant director of the FTC’s division of financial practices, said regulators have had “limited success” in solving the problem. The debt-collection industry continues to be the subject of more complaints to the agency than any other industry.
“It’s very much still a work in progress,” Koegel said. “I can’t say that it’s been fixed. We’re still in the infancy of the efforts to fix it.”
Times researcher Scott Wilson in Los Angeles contributed to this report.