Consumer Law & Policy Blog

Debt Collectors and Pseudonyms

by Jeff Sovern

Brian posted earlier a link to the Times article about debt collectors.  The article notes in a photo caption that debt collectors use pseudonyms, apparently because they fear retribution from consumers from whom they are attempting to collect debts.  But doesn't that violate 15 U.S.C. section 1692e, which prohibits "false, deceptive, or misleading representation[s] or means in connection with the collection of any debt"?  The use of pseudonyms need not always be innocent; a debt collector who has violated the Fair Debt Collection Practices Act can use a pseudonym to conceal his or her identity to escape liability.  Thus, in testimony before Congress in 1992, Richard Bell, a former debt collector, stated that collection agencies report that a collector about whom they receive a complaint has been fired or left the company; in fact, according to Bell, the collector simply changes his alias.

Delaware Courts to Collectors: Prove It

The Delaware courts have posted an administrative directive setting higher standards for consumer debt collectors to plead and document their collection actions.  Among other things the directive calls for debt buyers to identify the original creditor and all assignments of the debt and to attach a copy of the original contract.  The latter requirement will be challenging for credit card debts, because the written credit card account agreement is a thing of the past; most credit card contracts are now formed (according to the card issuers anyway) when a consumer clicks an "I agree" button, and the contract terms are somewhere in the cloud.  You can read and respond to comments on the directive here. 

Important New Treasury Rule Protects Social Security, Other Federal Benefits in Bank Accounts

by Jon Sheldon

An extremely important federal rule issued today (76 Fed. Reg. 9939) strengthens protections for Social Security and other federal benefits deposited in consumers' bank accounts. The “interim final” rule, which will take effect on May 1 but is still open for public comment, will limit creditors’ ability to freeze and take funds from accounts that contain Social Security, Supplemental Security Income (SSI), VA and other federal benefits.

Federal law makes these funds immune from seizure by creditors. But in practice creditors frequently obtain court garnishment orders and banks then freeze bank accounts containing protected funds. A beneficiary may be unable to access urgently needed funds for weeks or months. Often, the paperwork and procedures needed to end an illegal freeze prove too daunting for a recipient, so that a bank turns over supposedly “untouchable” funds to a creditor. The new rule requires all banks to determine whether an account contains protected funds. If so, the bank is required to protect two months of benefit payments from garnishment or even from a temporary freeze.

Comments on the new rule may be filed by May 24, 2011, by going to www.regulations.gov and entering “3206-AM17” in the keyword field. The NCLC contact on this rule is Margot Saunders, (202) 452 6252 x 104; (304) 553 1123 (cell phone); msaunders@nclc.org.

Debt Buyer Dismissed

A Pennsylvania appeals court has affirmed the dismissal of a debt buyer lawsuit on an old credit card account, because the debt buyer could not prove the debt. The credit card agreement and account history could not be admitted under the business records exception to the hearsay rule.  The debt buyer could not testify that the credit card account records were made contemporaneously and in the regular course of the issuing bank's business. 

More importantly, the contract itself was not proven.  The debt buyer offered a standard form cardholder agreement dated seven years after the consumer's account was allegedly opened.  In addition, the interest rate charged by the debt buyer was higher than the "agreement" called for, and the "agreement" did not provide for the attorney's fees being sought. 

As many consumer attorneys know, the lack of evidence is endemic to the debt buying industry.  Pools of delinquent accounts are often sold with "media not readily available", i.e. with no account histories or signed contracts.  Given that signed cardholder agreements no longer exist, collection attorneys are often hard-pressed to produce anything that could be called a contract to support their claim.  The Federal Trade Commission issued a report on related debt buyer practices last July, but offered only recommendations directed to state courts to discourage these practices.  It remains to be seen whether the CFPB will take regulatory and enforcement action under the Fair Debt Collection Practices Act, which after all, prohibits false representations of the validity or amount of a debt, including false statements that are reckless or negligent, i.e. debt buyers alleging amounts owed based on little more than a spreadsheet they purchased for 0.6 cents on the dollar.

The Court's citation of Judge Boyko's decision dismissing foreclosure cases for similar want of proof illustrates the continuing erosion of the credibility and deference the banking industry once enjoyed with state courts.

HT to Cary Flitter.

Indiana closes debtors' prison

A while back I reported on the revival of debtor's prison in a southern Indiana county court.  The Indiana Court of Appeals has now struck down the local county court rule that imposed contempt sanctions, including imprisonment, for debtors who failed to pay small claims judgments on ordinary civil debts.  The county court rule provided for a "personal order of garnishment,"  which, unlike ordinary garnishment orders directed at third parties like banks and employers, would order the debtor herself to turn over any non-exempt funds in the debtor's possession, regardless of whether such funds actually existed.  The disabled and indigent defendant in the case at issue was found in contempt and ordered to serve 30 days in jail for failing to pay $10 monthly on a $445 judgment, despite not having any non-exempt assets or income.

The Court of Appeals cited the Indiana Constitution's provision that "there shall be no imprisonment for debt, except in case of fraud, " and voided the local court procedures.  Congratulations to John Brengle and Katherine Rybak of Indiana Legal Services on achieving simple justice in this case.

New Yorker Article on Debt Collector

The October 11 issue of the New Yorker has a piece titled Letter from Buffalo: Pay Up by Jake Halpern that presents an interesting profile of a Buffalo debt collector.  The debt collector is struggling to make enough money to keep his business afloat and care for his family, and the article describes how he resists the temptation to engage in illegal debt collection activities even though eschewing them may cost him his business.  A link is not available to the article, but if you are interested in debt collection, it would be worth it to pick the piece up.  (Hat tip to Dee Pridgen).

Times Article: Robo-Signing Nothing New in Debt Collection

Here.  A memorable quote:

Analysts say that affidavit-signers at debt-buying companies appear to have little choice but to take at face value the few facts typically provided to them — often little more than basic account information on a computer screen.

That was made vividly clear during the deposition last year of Jay Mills, an employee of a subsidiary of SquareTwo Financial (then known as Collect America), a debt-buying company in Denver.

“So,” asked Dale Irwin, the plaintiff’s lawyer, using shorthand for Collect America, “if you see on the screen that the moon is made of green cheese, you trust that CACH has investigated that and has determined that in fact, the moon is made of green cheese?”

“Yes,” Mr. Mills replied.

Given the volume of affidavits, even perfunctory research seems impossible. Cherie Thomas, who works for Asta Funding, a debt buyer in Englewood Cliffs, N.J., said in a 2007 deposition that she had signed 2,000 affidavits a day. With a half-hour for lunch and two brief breaks, that’s roughly one affidavit every 13 seconds.

Three thoughts on the foreclosure documentation scandal

by Christopher Peterson

On monday the American Banker ran a well written story by Jeff Horwitz on the document problems slowing down foreclosures. It focuses on whether document custodians actually have the possession of key documents, including especially promissory notes. The article (subscription requried; 2010 WLNR 21191843) quotes document custodians insisting that they have all the documents they need, but it also includes some scepticism from Diane Thompson, April Charney, and Max Gardner. It is good to see financial journalists paying more carefull attention to consumer rights advocates.

This being said, I think the story is still missing some important points. Because I have a million other things to do today, I’ll limit myself to three thoughts that jump to mind. First, one reason some originators may have been lax in sending proper documentation on to the depositor (and in turn the document custodian or trustee) is a false belief that designating MERS as the mortgagee or deed of trust beneficiary would facilitate quick foreclosures without all the proper documentation. MERS is an important partial driver of the affidavit problems. Some financial institutions convinced themselves that MERS would  be a cradle-to-grave proxy eliminating the need for them to keep the collateral jackets with blue ink documents that old-fashion lenders once maintained. Why keep track of paperwork if MERS is just going to do your foreclosures for you? This is an easy thing to believe when (1) they really wanted to believe it and (2) the motto of company is “process loans, not paperwork.” Should we be surprised that the paper might not have actually changed hands?

Second, the representations the document custodians are making in Mr. Horowitz’s article are inconsistent with what some mortgage bankers themselves have admitted. A brief (Download Here)the Florida Bankers Association submitted to the Florida Supreme Court takes the totally opposite view on whether the promissory notes are lost. It states, “The reason ‘many firms file lost note counts as a standard alternative pleading in the complaint’ is because the physical document was deliberately eliminated to avoid confusion immediately upon its conversion to an electronic file.” Yikes! Memo to all bankers: destroying promissory notes is a bad idea. But don’t trust me. Instead very carefully read this next sentence recently written by two Judges on the American Bankruptcy Institute’s Uniform Commercial Code Committee: “for the note to be enforced, the person who asserts the status of the holder must be in possession of the instrument.”

But wait, there's more...

What Happens When You Tell Consumers You're Trying to Collect a Time-Barred Debt?

Nathalie Martin of New Mexico and Timothy E. Goldsmith of New Mexico's Psychology Department report the answer in Testing Materiality Under the Unfair Practices Acts: What Information Matters When Collecting Time-Barred Debts? Forthcoming in the Consumer Finance Law Quarterly Report.  Here's the abstract:

Should creditors and debt collectors be required to disclose the fact that a debt is time-barred when attempting to collect from a consumer? This article describes an empirical study that compares how consumers react to two different collection letters, one in which the recipients are told explicitly that the debt being collected is time-barred, and one in which they are not given this information. The study measures whether consumers are equally willing to pay the debt, when they are told that the debt is time-barred. Appended to the article are the survey questions asked of the study participants.

Spoiler alert: telling them the debt is time-barred makes a difference to their willingness to pay it.

GMAC Mortgage Halts Tainted Foreclosures

Bloomberg has a report today that GMAC Mortgage is halting foreclosures in 23 states due to unspecified defects.  Apparently this action results from depositions of an employee who admits to signing tens of thousands of summary judgment affidavits and lost note affidavits with no knowledge of whether any of the facts being affirmed are true.  This is another illustration of the need for stronger enforcement of laws and rules governing mortgage servicer conduct, at a point when the stress of foreclosure volumes inevitably leads to shortcuts and worse by mortgage collectors.

Update:  Ally Financial, parent company of GMAC Mortgage, has issued a statement clarifying that it has only stopped some sales of foreclosed homes and evictions, not all foreclosures.  The release is otherwise uninformative.