Consumer Law & Policy Blog

Guest Post From Peter Holland: Forced Arbitration is the Silver Bullet to Kill Consumer Lawsuits, Says Prominent Corporate Attorney

by Peter Holland

In anticipation of the CFPB’s forthcoming study on forced arbitration in consumer contracts, we can expect lots of rhetoric from industry about how arbitration is more consumer friendly than litigation, and that it results in better outcomes (i.e. more money) for consumers.  (If this were really so, then how could a company justify these added losses to their shareholders)?

 It is not often that the general public gets a peek behind industry messaging, so this article and related podcast (especially starting at 8:44) are a particular treat.  Although industry may describe forced arbitration as a consumer protection measure, when talking amongst themselves, they describe it as “silver bullet” which can magically kill consumer claims.  Judge for yourself:

 “What if there existed a single argument that could be made in many consumer cases that would successfully remove the matter from Court and likely end the case in its entirety? 

Surprisingly, such an argument exists, though it is often overlooked in the defense of debt collectors and debt buyers.” 

The answer, according to the author, is to force the case out of court and into arbitration, where the claims will never be pursued because of the cost.  The lawyer in the podcast says that once a court orders arbitration, it is “very rare” a case actually goes to arbitration, and he can only think of 2 cases over the past several years that went to arbitration after the case was stayed or dismissed in court.  One of the reasons he offers is that plaintiff’s attorneys don’t want to spend their own money on arbitration.

So, in the words of one prominent lawyer, industry has a “silver bullet” which kills almost all disputes because of economic barriers and an inability to find lawyers.  Nice system. 

Public Justice on Zombie Debt

Here (HT: Peter Holland).

Jake Halpern's "Bad Paper"

by Jeff Sovern

We've mentioned Jake Halpern's terrific book Bad Paper about the debt collection industry before (see here and here). I finally got around to listening to the audio version. If you teach debt collection law, it's a must-read to help you learn about the industry.  If you practice in the area, you may already know much of what he says (I don't know enough about what practitioners in the field know to say), but it's certainly a very informative book. It's also engagingly written, so if you do already know about the industry, you will at least enjoy hearing it again.  The book describes how Wall Street finances debt collection shops, many of which (at least the ones he describes) seem to be filled with convicted felons.  Some interesting points:

We've heard a lot from critics about how much the CFPB spends. But here's Halpern's take on its funding:

The CFPB's entire budget for 2014 is roughly 10 percent of the Food and Drug Administration's or 6 percent of the Environmental Protection Agency's . . . the CFPB's budget is equivalent to just 2 percent of what JPMorgan Chase set aside in reserves for its litigation expenses in 2013.

Halpern also complains that the CFPB is supervising only about the 175 largest debt collectors, but that there are 9,599 debt collection outfits throughout the country, and much of the misconduct occurs in the smaller shops: "the CFPB's toe in the water remained at quite some distance from the industry's self-proclaimed bottom-feeders . . . ."

As co-author of a consumer law casebook, I always look for things that might be worth adding to the casebook.  Here's one such takeaway, on one attorney's attempt to meet the requirement imposed by courts under the FDCPA that before an attorney's name is signed to a debt collection document sent to the consumer, the attorney must be "meaningfully involved" in the process:

[Dennis] was to review and sign every single lawsuit that the firm filed. He claims that he worked twelve-to-fourteen-hour shifts and signed roughly five hundred lawsuits a day. In theory, he was providing his lawyer's eye and making sure that everything was exactly as it should be. But it proved impossible. "There's no way that you could effectively double-check all that stuff," he told me.  "No possible way."  . . . . in the end, Dennis was fired from the firm . . . .When I asked Dennis about the size of the profits that his old firm made, he offered only one word: astronomical.

An interesting interpretation of the FDCPA rules governing communicating with third parties:

According to the Brandon Wilson school of skip tracing, you started by identifying and then calling the neighbor.  [Under the FDCPA], a collector is allowed to call a neighbor only to verify a debtor's contact information. . . ."But if the neighbor volunteers to pass along a nessage, you can say: 'Gee, do you think you can leave my name and number on the mailbox?" insisted Brandon. . . .The trick was simply prompting the neighbor to help out. "I will say things like : 'They don't have my number--and I am calling all the way from Bangor, Maine--I don't know what I am going to do.'  When the debtor gets the message, nine times out of ten they will call us. . . . And that's what we want. We want that chance to get them on the phone . . . .

NY Adopts New Debt Collection Rules

by Jeff Sovern

The press release is here.  The rules themselves are here.  Law360's Evan Weinberger reports here on whether they might become a model for the CFPB or other states.  I am very curious to see how effective the new rules will be. They will surely help some consumers.  Because the rules require disclosures, and evidence is increasingly calling into question how much consumers take advantage of disclosures, some--perhaps many--consumers who could benefit from the new rules may not avail themselves of the protections they provide.  I hope a way is found to monitor the rules' effectiveness to see if more needs to be done.

David Lazarus in the Los Angeles Times on Debt Collectors Renting Out Prosecutor Letterhead

by Deepak Gupta

In today's Los Angeles Times, consumer columnist David Lazarus takes a look at the practice of for-profit debt collectors renting out the seal and letterhead of local California prosecutors -- the target of a new class-action lawsuit that our firm filed yesterday in federal court in San Francisco. The practice was condemned in a scathing ethics opinion released by the American Bar Association a few weeks ago -- an opinion we blogged about here.

Here's Lazarus's take:

These programs are hinky from the get-go. Prosecutors are allowing private debt collectors to misrepresent themselves as official entities, and consumers are unfairly being threatened with bogus charges.

If these programs focused solely on making the legal system more efficient, fine. But they seem to exist primarily to do the dirty work for merchants who believe they're owed some cash.

These companies should do their own debt collecting. Prosecutors should concentrate on enforcing the law.

And if prosecutors can't tell the difference, they should, as the American Bar Assn. suggested, sign up for some remedial ethics training.

I admit, I had to look up the word "hinky" in the dictionary. But it seems quite apt.

ABA Issues Formal Ethics Opinion on Prosecutors Who Rent Out their Letterhead to Debt Collectors

by Deepak Gupta

Since its inception, this blog has covered the pernicious practice of prosecutors who rent out their name and authority to private for-profit debt collectors. As readers may recall, these debt collectors use official-looking letterhead to threaten consumers who have accidentally bounced checks for household purchases  -- consumers are told they'll face criminal prosection and even jail unless they pay exorbitant collection fees.  Our law firm recently filed a class-action lawsuit aimed at one such debt collector, known as Bounceback, Inc., under the Fair Debt Collection Practices Act and Washington state law.

Yesterday, the American Bar Association stepped into the fray. It's about time.

The association's Standing Committee on Ethics and Professional Responsibility issued ABA Formal Ethics Opinion 469, which concludes in no uncertain terms that the so-called "check diversion" programs violate basic standards of professional conduct.

In particular, the opinion shines a spotlight on the misuse of the lawyer's name and authority in facilitating these arrangements. The demand letters are effective at scaring consumers because they are sent on prosecutor letterhead and contain threats of criminal prosecution -- threats that no other debt collector could make.

But those threats are false. "Typically," the ABA's opinion explains, "no lawyer in the prosecutor's office reviews the case file to determine whether a crime has been committed and prosecution is warranted or reviews the letter to ensure it complies with the Rules of Professional Conduct prior to the mailing."

The opinion also rightly emphasizes that the demand letters at issue are especially deceptive "because they misuse the criminal justice system by deploying the apparent authority of a prosecutor to intimidate an individual." And, in addition to making misrepresentations, the letters involve prosecutors in aiding and abetting the unauthorized practice of law by private, for-profit collection collectors.

The prosecutor-debt collector arrangements are also "abusive" because they convey "the impression that the machinery of the criminal justice system has been mobilized" against the consumer, who is led to believe that he or she may face jail time unless the collector gets paid.

Sunday Times Magazine Story: Paper Boys: Inside the Dark, Labyrinthine and Extremely Lucrative World of Consumer Debt Collection

Here.

One-Third of Americans Had Debts in Collection Last Year

Here.

Bounceback, Inc. Sued for Using Seal and Letterhead of Prosecutors to Collect Debts

by Deepak Gupta

When Roz Terrill wrote a $41 check at the local Goodwill store to buy clothes for her two special-needs children, she had no idea it would lead to threats of criminal prosecution against her. Because of a banking mix-up, Roz’s check did not clear. Months later, she received a letter that looked like it had been sent by the Kitsap County Prosecuting Attorney. Bearing a prosecutor’s seal at the top, it said that Roz had been accused of a crime and, in large type, that, “to avoid the possibility of criminal charges being filed,” she had to pay the amount of the check plus $185 in fees.

What Roz didn’t realize was that the letter was really sent by Bounceback, Inc., a for-profit Missouri-based debt collection company that had paid the real prosecutor’s office for permission to threaten consumers. The real prosecutor had never reviewed any evidence about Roz’s check and was never going to prosecute her. Nor was there any legal basis for the fees. But Roz ultimately ended up paying the check plus $220 in fees because that was the only way that she could stop the threats and gain peace of mind. Wodena Cavner and Linda Parks, a wheelchair-bound retiree, went through similar experiences.

The three consumers have filed a class action lawsuit against Bounceback, Inc. in federal court in Spokane, Washington. My law firm, Gupta Beck PLLC, along with the Seattle firm of Terrell Marshall Daudt & Willie, represents the plaintiffs. You can read reports about the suit at Courthouse News and InsideARM. For an in-depth look at this practice, read Jessica Silver-Greenberg's article from a couple years back in the New York Times. Here's a clip from a local TV news story on our case:

Videos Educate Consumers Being Sued for Debt Collection

by Jeff Sovern

Here.  The New Media Advocacy Project (N-Map) and Fordham Law School’s Feerick Center for Social Justice in conjunction with MFY Legal Services, Inc., and Pro Bono Net, along with other organizations, have created a series of short, animated videos to help consumers being sued in debt collection cases.  I watched a couple of them and they are quite well done.  Consumers go to the web site and answer a series of questions (called a survey on the web site) about whether they have heard from a debt collector, are being sued, have had a judgment entered against them, etc. On the basis of their answers, the web site then identifies which videos to show them.  It is easy to imagine that consumers who don't know what to do when they are being sued by debt collectors will find these useful.  It will be interesting to see the extent to which consumers use them. While the videos are directed to New York consumers, they would probably be valuable to non-New York consumers and in any event seem worth emulating elsewhere.  (HT: Carolyn E. Coffey)