CL&P Blog

Jimenez Paper: Illegality in Consumer Debt Contracts and What to Do About it

Dalie Jimenez of Connecticut has written Illegality in Consumer Debt Contracts and What to Do About it.  Here's the abstract:

Many of the contracts for the sale of consumer debts that are publically available contain “quitclaim” language disclaiming all warranties about the underlying debts sold or the information transferred, generally referring to the debts as being sold “as is” and “with all faults.” Some of the contracts contain even more specific language, disclaiming any representations as to the “validity, enforceability, or collectability” of the debts sold as well as “the accuracy or completeness of any information provided by the seller to the buyer, including ... current balance or accrued interest.”   

This paper argues that the collection of a consumer debt that was sold or assigned through a contract containing this quitclaim language is a per se violation of the Fair Debt Collection Practices Act's prohibition against using false, deceptive, or misleading representations in connection with the collection of a debt. The paper argues that collectors make a misleading representation when they seek to collect from a consumer when they state that the consumer owes a particular dollar amount on the debt or a particular amount in interest. The paper also argues  that where the underlying debt was sold subject to quitclaim language, collectors who seek to collect by bringing a lawsuit are not only violating the FDCPA, they are also materially misrepresenting facts to the court and potentially violating state analogs to Fed. R. Civ. P. 11.

Given the high likelihood that any given attempt at collection by a debt buyer to collect a consumer debt is based on a contract that contains quitclaim language, the Article proposes steps that could be taken by various actors in the collection system to ameliorate this issue. The first solution focuses on federal or state regulators using their enforcement and supervisory powers to stop the collection of debts based on underlying contracts with this language. The second focuses on courts, state legislators, and the consumer attorney bar, and urges them to require or request the production of the underlying contracts. The third recommendation is a novel proposal for a national debt registry system that I argue would go a long way towards solving this (and other problems) going forward.

American Banker: How CFPB Exams Will Change the Debt Collection Industry

by Jeff Sovern

Here (behind a paywall, unfortunately). The article implies that the Bureau will listen to collector phone calls (at least, that's how I interpret the statement that the Bureau will audit the "handling of phone calls").  That contrasts with what Fred Williams reported in his book Fight Back Against Unfair Debt Collection Practices (which I blogged about here), when he wrote that collectors were told when the firm's compliance department was listening to their calls, in response to which the collectors would tone down their behavior.

CPFB Issues Annual Report on FDCPA Activity

The CFPB has released its annual report on activities under the Fair Debt Collection Practices Act. You can read it here. The report summarizes consumer complaint data, the Bureau's new supervision program, amicus briefs, and enforcement actions (not much to report in that category), and significant enforcement and other actions taken by the FTC, among other things.  Some snippets from Rich Cordray's introduction:

• "As we continue to emerge from the devastating fiscal crisis of 2007-2008, we find that debt collection constitutes one of today’s most important consumer financial concerns. Currently, about 30 million consumers, nearly one out of every ten Americans, are subject to debt collection activities, for amounts that average about $1,500 apiece."

• "Under the larger participant rule recently adopted by the CFPB, any firm with more than $10 million in annual receipts from consumer debt collection activities is now subject to our supervisory authority. This authority extends to about 175 debt collectors, which accounts for over 60% of the industry’s annual receipts in the consumer debt collection market."

Will the CFPB Hold Banks Responsible for Their Contracting Parties?

by Jeff Sovern

The American Banker has an interesting article titled CFPB Focuses on Consumer Choice - or Lack Thereof which discusses the speech Director Cordray gave to the Consumer Advisory Board last month (Allison blogged about it here). Excerpt from the article follow:

[Cordray said] added, "When people cannot vote with their feet, their clout is limited, even though these products and services can have a profound influence on their lives."

"Without consumer choice, a key element of market discipline is lacking," Cordray said in the Feb. 20 speech. "The result is to permit or even facilitate a distinct indifference to the interests of individual consumers."

And what does the Bureau do with that fact?  Here's more:

Cordray's speech last month to the bureau's Consumer Advisory Board goes farther than earlier regulatory edicts. The remarks suggest that the relationship between a bank and a debt collector may be fundamentally unfair to the consumer, no matter how much due diligence the bank does on the debt collection firm.

"When a consumer does not pay back a debt, the creditor may decide to sell it to or contract with a debt collector to secure payment of what is still owed," Cordray noted.

"Once this occurs, the paying business relationship has shifted; it now lies between the debt collector and the creditor, not the consumer and the creditor. This can lead to mistreatment of the consumer, who becomes, in effect, a kind of 'bystander' to the new business relationship. In this situation, creditors may have little reason to ensure that debt collectors treat consumers fairly and appropriately or that they maintain and use accurate information."

Cordray also listed mortgage servicing, student loan servicing, and credit reporting as examples of industries where the interests of consumers can become largely incidental.

"From the perspective of the credit reporting firm and its clients," he said, "inaccurate reports may be no more than a statistic or an error rate. But for individual consumers whose reports are incorrect, the damage done to their lives can be severe and lasting."

So, to repeat, where does the Bureau go with this?  Toward increased regulation of the entites that don't contract with consumers?  In that case, why mention the banks?  Or to holding banks responsible?  We will see.

Loyola Consumer Law Review Symposium on Debt Collection in the Modern Economy

The Symposium is in Chicago on Friday, April 5, 2013.  Looks to be very interesting.  More information here.

Reuters: States probing top U.S. banks over debt collection

by Jeff Sovern

Here.  An excerpt:

As with the mortgage cases, the investigation focuses on the banks' poor paperwork and their weak tracking of the debts.

When they sold delinquent credit card debt to the buyers, often at only a few cents on the dollar, they allegedly failed to provide them with the evidence that the borrowers owed the money. It is unclear, however, if the incomplete information was used to pursue borrowers who were not delinquent.

* * *

Investigators are finding that the banks often did not provide buyers of the debt with evidence that individual credit card accounts were delinquent. Instead the banks only provided basic information about how much money they thought was owed and who the borrower was, without providing original contracts, past statements, or other additional documentation.

I would be curious to know the cause of action  My guess would be a UDAP violation.  The FTC and CFPB are also looking into the matter; perhaps the CFPB could use its power to curtail abusive practices.  One interesting feature about this is that consumers are not parties to the sales of the debts, yet they are the ones who are injured.  The probe raises a host of questions: for example, if creditors are obliged to furnish the underlying information when selling the debts, presumably their costs will increase.  Will they respond by raising prices to debt buyers?  And will those higher prices make the purchase uneconomic for the debt buyers?  If debt buyers have the paperwork, will they use it to prove their claims, thus depriving the rare consumers who are represented by counsel or otherwise well-advised of a successful defense that the debt buyer can't prove the claim?  Will debt buyer claims end up being for lower amounts because the paperwork doesn't substantiate the amounts they have been claiming?  Or will the only change be better-substantiated default judgments?

Debt Collection Study of Offer of Representation and Counseling

Dalie Jimenez of Connecticut, James Greiner of Harvard, Lois R. Lupica of Maine, & Rebecca L. Sandefur of the American Bar Foundationand Illinois have written Using a Randomized Control Trial to Accomplish Multiple Goals: An RCT Evaluating What Works for Individuals in Financial Distress, Investigating the Debt Collection System, Exploring Ways to Increase Access to Justice, and Bridging Clinical and Doctrinal Instruction, forthcoming in the Georgetown Journal on Poverty Law Policy.  Here's the abstract:

This article describes a proposed randomized control trial (RCT) involving individuals in financial distress, specifically, individuals sued on a credit card debt collection case by a debt buyer or creditor. The aim of the RCT is to evaluate the effectiveness of two interventions often proposed to help individuals in financial distress improve their financial health. We intend to test, inter alia, whether (1) an offer of legal representation in the debt collection case, (2) an incentive to undergo the same financial counseling required in bankruptcy, or (3) a combination of both treatments have an effect on the financial health of financially distressed consumers. Our primary outcome measure will be credit scores and reports, although we also aim to survey study participants about other outcomes such as changes in health, assets, and general well-being.

We describe in detail not just the methodology of the study, but also the mechanics of how we have gone about executing this complex field experiment so far. The objective in doing so is to demystify the process for scholars, legal aid lawyers, and clinical professors who have not had direct experience with empirical methods, and to encourage them to think about conducting RCT evaluations of their own programs. The article also describes three other goals we seek to advance through the project. The first is a deeper understanding of debt collection in the courts. Allegations of abuse abound about the industry generally and legal collections specifically, but to date, the evidence is largely anecdotal. We will be uniquely positioned to learn about whether the allegations are more than anecdotes. The second is increasing access to justice for unrepresented defendants in collection cases. Along with a team of dedicated law students, the study team is developing an attorney litigation manual and pro se materials, including court forms and scripts, for debt collection litigation. Before making the pro se materials available, they will be field tested with individuals in similar situations to those facing study participants. The third goal is developing an innovative pedagogical approach to legal instruction that combines doctrine and practice. A majority of the law students participating in the project are doing so in the context of a seminar which incorporates both doctrinal instruction about the consumer credit system and clinical experience.

We hope that this article provides our readers both with ideas for future research projects and with ideas about how to incorporate diverse goals in a single study design.  

 

A Journalist Writes About His Experiences as a Debt Collector

by Jeff Sovern

Back in 2008, Fred Williams, a reporter for the Buffalo News who had written stories about debt collectors, worked as a debt collector for an upstate New York debt collection firm.  Williams was not exactly undercover--he disclosed that he had written the stories--but it sounds as if he was treated as any other employee: he went through training and later had to prove himself to advance to a permanent position.  In 2011, Williams published a book about the experience.  Though the title of the book makes it sound like a primer for consumers being pursued by debt collectors--Fight Back Against Unfair Debt Collection Practices--and the book does include advice for consumers, what makes the book special is Williams's account of his experiences. I read the book to learn more about the industry for the debt collection materials to appear in the next edition of our casebook, and I thought I would say a bit about it here as well.

While some have portrayed debt collectors who cross legal lines as sadists who enjoy abusing others (see, e.g., the testimony of Richard Bell in the third edition of our casebook), Williams offers a different take.  Williams reports that he met few collectors who enjoyed threatening consumers but nevertheless describes numerous interactions in which collectors approached or stepped over the line demarcating improper behavior.  According to Williams, debt collectors face incentives to employ inappropriate tactics because of the need to collect enough debts to retain their jobs and earn the approval of other debt collectors. Williams argued that collectors employed illegal tactics because they work.  He also claimes that collectors are hardened by frequent interactions with dishonest consumers who leave the collectors jaded and cynical.

As for the rules imposed on collectors by the federal Fair Debt Collection Practices Act, Williams's experiences are not always consistent.  The agency where he worked seemingly followed some of the FDCPA's strictures faithfully; for example, collectors were not permitted to call consumers more than once a day. But other rules seemed to go by the wayside.  Collectors largely omit the so-called "Miranda warning of FDCPA § 1692e(11). Alternatively, he reports that some collectors leaving messages for consumers hang up in the middle of the Miranda warning: “I am legally required to inform you that this is an attempt [click]” and then claim that the call was cut off. Some collectors claim that they are calling from the fraud department, a false statement which violates § 1692e.  Still another collector creates the impression that a collection matter will end up in litigation by asking for the consumer's lawyer's phone number. If the consumer denies having a lawyer, the collector replies "Don't you think you're going to need one.?" Though the agency had a compliance department, Williams reports that collectors are told when Compliance is monitoring their calls so they know when to avoid violating the FDCPA.  The result, according to Williams, was that the compliance department was a sham.  So why are some rules followed slavishly and others ignored?  My speculation is that excessive calling can be proved by obtaining phone records while the proving the contents of unrecorded phone conversations devolves into a credibility contest.

Williams's book reads fast and is entertaining.  For those who want a better understanding of the debt collection industry, it is a must-read. 

 

Debt Buyer's Guide: Small Claims Court is "the Vehicle That Flushes Out Payment"

Not that I want to generate sales of the book, but here is an ad for a guide for debt buyers that contains the statement above  (HT: Gina Calabrese).  

Debt Collection Litigation Tidbits

by Jeff Sovern

I've been pulling together some materials for a section in the next edition of our casebook on debt collection litigation.  Here is some of what I've found:

1. From FTC, Reparing a Broken System: Protecting Consumers in Debt Collection Litigation and Arbitration i (2010): “The system for resolving disputes about consumer debts is broken.” 

2. From Centurion Capital Corp. v Guarino, 35 Misc.3d 1219(A), 951 N.Y.S.2d 85 (N.Y.City Civ.Ct. 2012):

[D]ue process requires that this judgment should be vacated and the case dismissed. The plaintiff filed more than 13,700 cases in New York City Civil Court and in all of them, as this one, lacked the legal capacity to bring and maintain any of those actions. The fact that the plaintiff corporation is neither an authorized domestic corporation nor an authorized foreign corporation makes this underlying action defective. * * *

Added to this is the problem that there is no copy of the actual assignment submitted, and no proof that the defendant's account was included in the assignment of debts if it was a bulk assignment.

* * *

The complaint fails to set forth what state law governed the underlying credit card agreement. There is no statement as to what is the applicable statute of limitations and whether this action was timely commenced. There is no indication as to when the agreement was entered into, when the credit card issued or the date of the last payment. There is no indication as to how that amount due was calculated. There is no indication that Wolpoff & Abramson was licensed as a debt collector as required by the New York City Administrative Code § 20–490.

In the interests of brevity, I have left out other problems reported in the opinion.

3. In LVNV Funding Llc v. Guest, 35 Misc.3d 1232(A), 2012 WL 1957715 (N.Y.City Ct. 2012), the court imposed a $10,000 sanction on attorneys for a bringing debt collection case without sufficient proof and considered, but ultimately decided against, holding them in contempt.  The court wrote: ‘The Court trusts that plaintiff's counsel shall commence actions on behalf of assignee creditors in the future only after having received sufficient documentary or verifiable proof of the alleged claim and that they will adhere to future directives issued by any court before which they appear. Any future failure by plaintiff's counsel to comply with an order of this Court will not be tolerated.” 

4. One debt collector, perhaps dissatisfied with judicial reactions (like those above) to his cases, created a fake courtroom in which he issued illegal judgments against debtors.  See Ed Palattella, Erie Judge Bans Ex-Unicredit Chief From Debt Collection, Erie Times-News (July 12, 2012).  The collector later defaulted in a suit brought against him by the Pennsylvania Attorney General, was barred from collecting debts in Pennsylvania, and filed for bankruptcy.