Consumer Law & Policy Blog

New Study Finds Serious Shortcomings in New York Debt Collection Cases

The report, by the New Economy Project, is titled The Debt Collection Racket in New York: How the Industry Violates Due Process and Perpetuates Economic Inequality.  Some excerpts:

Over the past decade, the number of debt collection lawsuits filed in New York’s courts has exploded, with upwards of 200,000 cases filed in 2011 alone. Creditors and debt buyers engage in an array of fraudulent and deceptive debt collection practices that siphon billions of dollars from New York’s low-income neighborhoods and communities of color. Abusive debt collection falls along a continuum of discriminatory financial practices that pervade low-income neighborhoods and communities of color, long targeted by high-cost and predatory financial services providers.

The creditors and debt buyers that bring these lawsuits routinely engage in "sewer service" — falsely claiming to the courts that they have served people with court papers. They also engage in rampant "robo-signing" — mass-producing fraudulent documents that they then submit to the courts. Debt buyers — companies that buy old, charged-off debts for pennies on the dollar — file more than half of all debt collection lawsuits in New York, and systematically lie to the courts about key information that they do not in fact have.

Creditors and debt buyers engage in this fraud to obtain automatic, or "default," court judgments, which they then use to freeze people’s bank accounts or garnish their wages. The judgments also appear on people’s credit reports, blocking them from housing, employment, and credit access. Consequences have been especially dire for low-wage workers, elderly and disabled New Yorkers on fixed incomes, single mothers, and domestic violence survivors — and now also New Yorkers affected by last year’s hurricane.

Debt collection abuses stem largely from structural problems related to the buying and selling of old, charged-off debts. When selling the debts, creditors, including the country’s largest banks, disclaim virtually all liability for inaccuracies in the scant information they provide. When purchasing debts, debt buyers obtain only extremely limited information and cannot substantiate the debts in court.

The courts have long been on notice that debt buyers routinely fail to submit the legally-required documentation, and bear significant responsibility for allowing debt buyers to get away with fraud. Although New York City courts recently have taken some corrective measures, the courts continue to grant debt buyers hundreds of thousands of default judgments in violation of New York law.

And here are some claims from the report that are particularly interesting:

 

Debt buyers virtually never prevailed in contested cases, but relied on winning cases by default or by intimidating unrepresented people into making settlement agreements.  

In 9 out of 10 cases, an employee of the debt buyer — who had no connection to the original creditor — fraudulently testified to facts that only the original creditor could possibly know.

[N]o application by a debt buyer for a default judgment complied with New York law. The court nevertheless improperly granted default judgments on 97% of the applications.

[W]e observed significant differences in outcomes between lawsuits filed against New York City residents and those filed against New Yorkers outside New York City. New York City courts had a lower default judgment and higher answer rate than non- NYC courts. This difference is likely attributable to two key factors: First, people sued in New York City are more likely to receive notice due to an additional notice requirement that the New York City Civil Court adopted in 2008. Second, New York City residents benefit from a range of free programs — some offered by the court itself and some by the private bar or legal services offices — designed to assist unrepresented litigants sued by debt collectors. Unfortunately, few similar programs exist outside New York City.

This last finding suggests that consumer benefit from the consumer protection laws referred to in the paragraph.

Reports on FTC-CFPB Debt Collection Roundtable

On Thursday, the FTC and CFPB held a joint roundtable titled Life of a Debt: Data Integrity in Debt Collection.  Journalist Fred Williams has a report at the Taking Charge blog. An except:

At Thursday's  meeting, [debt buyer and industry association president Richard] Munroe and other debt buyers didn't repeat the argument the collection  industry has advanced in the past: That regulation will block collection of  legitimate debt and injure the credit system. Instead, industry representatives  pleaded that the new rules, whatever shape they eventually take, be consistent  and nationwide.

And Trevor Salter at Ballard Spahr's CFPB Monitor also had posts here and here.

WaPo: Regulators Probing Banks’ Debt Collection Practices

by Jeff Sovern

Here. One surprise is that the regulator in question is the Office of the Comptroller of the Currency, which is showing still more evidence that it has escaped the clutches of the financial industry, which had captured the OCC in the past.  An excerpt:

The OCC’s investigation reflects the agency’s increasing focus on fair lending and consumer protection coming out of the financial crisis. The agency, for example, teamed with the Consumer Financial Protection Bureau in July to bring a $210 million action against Capital One for deceiving millions of customers into buying costly and unneeded credit card services.

“The OCC’s interest in [consumer protection issues is] a part of that overall focus in Washington,” said Christopher J. Willis, a partner at the law firm Ballard Spahr.

 

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.