Consumer Law & Policy Blog

Confessions of Former Debt Collectors

The CNNMoney website has a fascinating collection of accounts by former debt collectors, describing what they thought of the job (most but not all of them hated it) and why they left it.  Here are a few excerpts:

• I was absolutely ruthless when I first started out as a debt collector. I had a black heart. If someone told me they only had $150 to their name this month and needed to feed their entire family of five, I would say, "I don't care, this is your fault and you owe the money. Pay it." I would even use blind threats like, "I know where you work" to intimidate them.

• Collectors I knew regularly held contests to see who could make the most people cry in one day.  A co-worker at my office overheard another collecting agent telling a debtor in Spanish that she was going to send someone over to his house to beat him with a tire iron, because she didn't think anyone in the office would understand her. You'd be surprised what goes on behind closed doors. Every day, you were asked to break the law. If you didn't break the law, you were asked what was wrong with you.

• One of the guys in a nearby cubicle called up debtors and posed as a legal counsel. He would tell them to raise their right hand and promise to tell the truth, and then he would drill them with personal questions and badger them, saying throughout the conversation, "Do you still have your right hand raised? You do realize you're under oath, right?" He could get away with things like this because most consumers just don't know their rights.

• Unlike some of the other collectors I knew, I didn't try to scare people or take advantage of peoples' ignorance by threatening things like eviction even though we weren't allowed to evict someone. But it was still tough to deal with people who are struggling so much, and it was even harder knowing that a lot of people aren't telling you the truth.

• When I started my own collection agency and we had our first big customer, I needed to hire 30 collectors. I posted one job opening and had 400 to 500 people apply. As soon as I told them we did drug screening and background checks, the pool went to less than a hundred people. This just shows how much the industry needs to change.

Three Interesting Articles on the OCC, Debt Collection, and the Military Lending Act

by Jeff Sovern

Yesterday the Times published speculations about who will replace John Dugan as head of the Office of the Comptroller of the Currency in its Reuters BreakingViews column.  The OCC will continue to matter even after the CFPB becomes a reality because of its power to declare state laws preempted as to federal institutions. An excerpt:

If President Obama is looking for a candidate already intimately involved in the transformation of the nation’s regulatory architecture, he could go with Daniel K. Tarullo, a Fed governor and an expert on bank regulation. But why would he want the job? Although the Office of the Comptroller of the Currency will pick up the powers of the thrift regulator, oversight of the biggest bank holding companies will be the purview of the Fed. In that respect, the O.C.C. could be a step down for Mr. Tarullo.

That paves the way for more of an up-and-comer, like Richard H. Neiman, New York’s top state bank regulator. Mr. Neiman knows Washington, too. He worked at the O.C.C. earlier in his career and serves on the Congressional oversight panel for the bank bailout. Even better, Mr. Neiman has private sector experience as head of TD Bank USA.

Following up on Deepak's post yesterday on the FTC debt collection report, today's Times included Automated Debt-Collection Lawsuits Engulf Courts about a law firm, Cohen & Slamowitz, of Woodbury, N.Y, that files more than 5,700 lawsuits per lawyer a year.  The article strongly implies that those are collection cases.  What makes it possible is software that merges court documents with information received from debt buyer-clients.  I wonder how that squares with the "meaningful review" requirement courts impose on lawyers under the Fair Debt Collection Practices Act.

Finally, Parade Magazine had a depressing piece this weekend about soldiers who have been scammed, titled  Red, White, and Scammed, which reported on how some lenders have gotten around the Military Lending Act's interest rate limits:

Some lenders abide by the cap but drown their products in fees—in one reported case, $452 of charges were piled on a $1000 loan. Others base their businesses offshore and call their offerings “revolving lines of credit”—both so they can skirt U.S. laws and charge 500% interest. In her Arlington, Va., office, Petraeus typed “ military loans” into Google. “I got about 2.5 million results from that,” she says. “A lot of them are predatory or just outright scams.”

FTC Issues Major Report on Debt Collection and Forced Arbitration: System is "Broken"

by Deepak Gupta

The Federal Trade Commission today issued a major report on debt collection and the forced arbitration of consumer collection disputes. Concluding that "the system for resolving consumer debt collection disputes is broken," the FTC recommends a series of sweeping reforms. The new report, Repairing A Broken System: Protecting Consumers in Debt Collection Litigation and Arbitration, reflects information gathered at roundtable discussions following a February 2009 report on the same subjects. The vote to issue today's report was 5-0.

Given the heated debate in Congress and the courts over forced arbitration, the arbitration-related material in today's report is likely to receive the most attention. The report addresses concerns about requiring consumers to resolve debt collection disputes through binding arbitration without meaningful choice, bias or the appearance of bias in arbitration proceedings, and procedural unfairness in arbitration proceedings. The FTC's principal recommendations are:

• Consumers should have a meaningful choice about arbitrating debt collection disputes.
• Arbitration forums and arbitrators should eliminate bias and the appearance of bias.
• Arbitration forums should conduct proceedings in a manner that makes it more likely that consumers will participate.
• Arbitration forums should require that awards contain more information about how the case was decided and how the award amount was calculated.
• Arbitration forums should make their process and results more transparent.

Citing the scandal over the National Arbitration Forum, Commissioner Julie Brill issued a separate concurring statement in which she urged Congress to enact a temporary ban on the mandatory arbitration of consumer debt collection disputes:

Such a ban should remain in place until the arbitration process can be shown to be fair, transparent, and as affordable as traditional litigation, and until consumers have a meaningful opportunity to opt out of pre-dispute arbitration without losing access to the credit services they seek. Once these conditions have been met, Congress could lift the ban itself, or it could delegate that authority to the Federal Trade Commission or another appropriate consumer financial protection agency or bureau established in the future.

Today's report also recommended a number of sweeping reforms to consumer collection litigation:

• States should consider adopting measures to make it more likely that consumers will defend themselves in litigation, decreasing the prevalence of default judgments.
• States should require collectors to include more information about the alleged debt in their complaints.
• States should take steps to make it less likely that collectors will sue on debt on which the statute of limitations has run.
• Federal and state laws should be changed to prevent the freezing of a specified amount in a bank account including funds exempt from garnishment.

Another Supreme Court Victory for Consumers: Ignorance of the Law Doesn't Excuse Collection Abuses

by Deepak Gupta

 In an opinion by Justice Sotomayor, the U.S. Supreme Court this morning handed consumers an important victory in the battle against abusive and deceptive debt-collection practices.  The Court ruled 7-2 that debt collectors who violate the Fair Debt Collection Practices Act can't evade liability for those violations by claiming ignorance or mistake of law. Resolving a circuit split, the Court rejected the collection industry's argument that the Act's defense for "bona fide errors," which excuses clerical or factual errors made despite adequate preventive procedures, also extends to errors of law.

I filed a brief in the case, which you can read here, on behalf of five national consumer groups (Public Citizen, AARP, the National Association of Consumer Advocates, the National Consumer Law Center, and U.S. PIRG: The Federation of State PIRGs). We argued that a mistake-of-law defense would deter enforcement, inhibit the development of precedent, and create a "race to the bottom," encouraging the very abuses that Congress sought to prevent when it passed the FDCPA.  Justice Sotomayor's majority opinion cites and quotes our brief, explaining that "the dissent's reading would give a competitive advantage to debt collectors who press the boundaries of lawful conduct."  The opinion also twice cites the NCLC's manual on the statute.

Justice Breyer wrote a brief concurrence to stress that the dilemma lawyer-debt collectors may face--between zealous representation of their clients and fear of personal liability--can be cured by the FTC advisory opinion process.  He notes that the FTC hasn't issued many such opinions, but says that he "would expect" the FTC to issue more opinions if the dilemma proves serious, and joins the majority opinion "[o]n this understanding." Justice Scalia writes separately to say that the Court could have rested on textual analysis alone.

Justice Kennedy, joined by Justice Alito, dissents. Speaking for myself, I'm mildly surprised that there's a dissent in this case.  Justice Kennedy's opinion displays some worrying hostility to plaintiffs' lawyers, consumer litigation, class actions, and the statute itself.  Thankfully, it's just a dissent.

Class Action Brought in Debt Collection Sewer Service Scandal

Last summer we blogged about the New York State Attorney General's suit to vacate 100,000 debt collection cases in which the defendants had allegedly never been served because of fraud by process servers.  The Times now reports that a class action has been brought on behalf of the defendants who were never served.  An excerpt about the defendants:

The class-action lawsuit filed on Monday goes after an entire debt collection chain, starting with the debt-buying companies, the law firm they hired to collect the debt, and the process-serving firm used to notify debtors. The suit names five debt-buyer firms with variations of the names L-Credit and LR Credit. All are subsidiaries of Leucadia National, a $6 billion publicly traded holding company engaged in various businesses, including timber and manufacturing. The company, which is also named as a defendant, declined comment on the suit.

Alaska Supreme Court Rejects Debt Collectors' First Amendment Defense

by Deepak Gupta

With increasing frequency, debt collectors accused of engaging in abusive tactics in the context of consumer collection litigation have been raising a novel defense based on the Petition Clause of the First Amendment, which guarantees a right of access to the courts. They argue that their conduct constitutes protected petitioning activity and is thus completely immune from liability under the Petition Clause, and the Noerr-Pennington doctrine that developed out of it. In the last few weeks, I've seen new notices of constitutional challenges raised along those lines in several federal district courts.

In May, I flew out to Anchorage to argue the issue in the Alaska Supreme Court, on appeal from a lower-court decision dismissing a consumer's case on petition-clause grounds. (You can find our briefs here and here.)

I'm pleased to report that, on Friday, the Alaska Supreme Court ruled that debt collectors who employ unfair or deceptive tactics during collection lawsuits are not shielded by the First Amendment. The decision is the first appellate ruling on the issue by any court nationwide.  As I say in the Public Citizen press release about the case, "the Alaska Supreme Court’s ruling sends the message that debt collection companies can’t get away with abusive tactics simply by hiring lawyers. The court rejected a dangerous new immunity defense that would have created a gaping hole in consumer protection law."

Our case arose out of an attempt by an Anchorage collection agency to sue Robin Pepper, a mentally disabled woman, without providing her with proper notice. The agency sent papers to a nonexistent address, misrepresented to the court that Pepper was competent, and tried to get a default judgment against her. Pepper, represented by Alaska Legal Services, then brought a separate lawsuit, alleging that the collection agency’s practices violated the state Unfair Trade Practices Act. The collection agency asked the court to dismiss Pepper’s case on the theory that its litigation conduct was protected by the First Amendment, and the lower court agreed. Alaska Legal Services asked Public Citizen to handle the case on appeal.

The Alaska Supreme Court broadly rejected the debt collector’s immunity defense, ruling that the First Amendment’s petition clause does not extend to conduct that was unfair, deceptive, and in violation of the Unfair Trade Practices Act. Quoting our brief, the court ruled that debt collectors have “no legitimate interest in pursuing collection litigation without notifying debtors, or in seeking to default incompetent debtors without notice to their lawyers or guardians.”

Debtor's Prison in Indiana

Apparently in the southern counties of Indiana, judges are not in sympathy with our state constitution's ban on imprisonment for debt, which dates back to 1851.  Judgment debtors whose sole income is exempt Social Security, and whose assets fall below the state property exemptions, are summoned to court on show cause orders, and threatened with contempt if they refuse to make payment arrangements.  The Indiana Court of Appeals recently reversed one trial court's judgment ordering an indigent debtor to pay $25 monthly on an ordinary contract debt, or face prison.  HT to student Laura Harris who researched this practice while working at Indiana Legal Services.  Below the break I have reproduced the exchange between the trial judge and the consumer.

NY Attorney General Cuomo Sues to Vacate 100,000 Debt Collection Judgments

The AG claims that the defendants were never served, and so defaulted, whereupon money was seized from bank accounts and wages garnished.  The Times report is here.  The complaint lists  35 lawyers and law firms as defendants. The amount collected is said to exceed $500 million.

AOL Posts "Debt Collection Horror Stories"

AOL has posted a collection of what they call "Debt Collection Horror Stories" which they describe as true stories involving AOL users.  (Hat tip: Arlene Levitin). 

Does Federal Law Bar Collecting Debts From the Dead?

by Jeff Sovern

Last week, on March 3, the Times ran a front page article, You’re Dead? That Won’t Stop the Debt Collector, about collecting debts from the families of the deceased.  Here's a particularly memorable quote:

“In times of illness and death, the hierarchy of debts is adjusted,” said Michael Ginsberg of Kaulkin Ginsberg, a consulting company to the debt collection industry. “We do our best to make sure our doctor is paid, because we might need him again. And we want the dead to rest easy, knowing their obligations are taken care of.”

Parts of the story are quite poignant.  For example:

The people on the other end of the line often have no legal obligation to assume the debt of a spouse, sibling or parent. But they take responsibility for it anyway.

“I am out of work now, to be honest with you, and money is very tight for us,” one man declared on a recent phone call after he was apprised of his late mother-in-law’s $280 credit card bill. He promised to pay $15 a month.

* * *

But sentiment also plays a large role, the agencies say. Some relatives are loyal to the credit card or bank in question. Some feel a strong sense of morality, that all debts should be paid. Most of all, people feel they are honoring the wishes of their loved ones.

But what do the recipients of these calls understand about their legal obligations?  Another quote:

Scott Weltman of Weltman, Weinberg & Reis, a Cleveland law firm that performs deceased collections, says that if family members ask, “we definitely tell them” they have no legal obligation to pay. “But is it disclosed upfront — ‘Mr. Smith, you definitely don’t owe the money’? It’s not that blunt.”

Sarah Waldeck of the Concurring Opinions blog commented that in fact it should be that blunt.  She's right.  But even thought the Fair Debt Collection Practices Act does not explicitly require such a disclosure, there's a pretty good argument the absence of such a disclosure violates the FDCPA.  Section 807 of the FDCPA prohibits "false, deceptive, or misleading representations in connection with the collection of any debt."  That includes the false representation of "the character . . . or legal status of any debt."  When a debt collector calls you up to ask for payment of your deceased relative's debt, isn't there an implied representation that you owe the debt?  The standard for deception under the FDCPA in many circuits is the "least sophisticated consumer" standard.  Wouldn't such a call deceive the least sophisticated consumer into thinking that he owes the debt, unless the caller says to the contrary?

And that's not the only problem under the FDCPA.  Section 808 bars debt collectors from using "unfair or unconscionable means . . . ."  I'd love to hear someone explain why taking advantage of grieving families in such circumstances is not unfair or unconscionable when no one has told them they don't have to pay.  Especially if the debt collector starts explaining how paying the debt would help the deceased rest easy.

The consumers have still another argument, though it's a bit strange.  Section 805(b) of the FDCPA bars collectors from communicating "in connection with the collection of any debt, with any person other than the consumer  . . . "  Well, the consumer's dead, so maybe the collector ought to be able to communicate with his family--except that that's not what the statute says.  Section 803(3) defines "consumer" as "any natural person obligated or allegedly obligated to pay any debt."  But the people receiving the calls apparently are not obligated to pay the debts; that's what the article's about.  Maybe you could argue that the point of this provision is to prevent debtors from embarrassment, and someone who's dead is beyond that, but I don't find that persuasive; certainly people have an interest in how they will be perceived after their death.  Maybe a better argument is that the family lacks standing to assert this claim (though the debtor's estate should be able to), but it certainly raises an interesting puzzle.  Anyway, I wonder if we're going to see some law suits arising out of this practice. 

ADDENDUM: As a commenter pointed out, section 805(d) has a special definition for "consumer" which may include some of those who have heard from the debt collectors, and to that extent would save debt collectors from violating section 805.