The largest U.S. banks face a multi-state investigation into whether they helped debt collectors pursue faulty judgments against credit card customers, according to people familiar with the matter.
At issue is whether weak record-keeping by banks or a failure to pass accurate information to collection agencies harmed consumers.
The allegations against the banks echo those central to last year's $25 billion federal-state mortgage settlement to resolve charges that the banks "robo-signed" documents and pursued foreclosures with faulty information.
This latest probe targets the same banks, including Bank of America , JPMorgan Chase , Citigroup and Wells Fargo , said the sources who spoke on condition of anonymity because the investigations are continuing.
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.
Representatives of JPMorgan, Bank of America, Citigroup and Wells Fargo declined to comment for this story. The American Bankers Association also declined to comment.
Mark Schiffman, vice president for public affairs at ACA International, an organization that represents debt collectors, said the industry agrees it needs proper information to pursue debts owed, but said policymakers could better define which documentation is necessary.
While states are still considering their options in how to proceed against the banks, the issue is "moving up in importance" and action could come soon, one state official said.
The probe against the banks marks an expansion of the scrutiny that to date has largely focused on the debt collectors.
Along with state attorneys general, federal agencies including the Federal Trade Commission and the Consumer Financial Protection Bureau (CFPB) have been investigating the firms who buy the delinquent debt and then seek to collect on it.
In one of the more notable cases, the FTC last year accused debt buyer Asset Acceptance of misrepresenting that consumers owed a debt when it could not substantiate its representations. The FTC also charged that the firm failed to disclose debts that were too old to be legally collected and repeatedly called third parties who did not owe a debt.
Asset Acceptance neither admitted nor denied the findings, but agreed to pay $2.5 million to settle the charges.
The FTC does not have jurisdiction over the banks who sold the credit card debt, but two sources familiar with the matter said the CFPB could join in the larger action being coordinated by the states.
FOLLOWING THE PAPERWORK
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.
In a speech last week, CFPB Director Richard Cordray told state attorneys general he wanted to work with them in addressing key priorities, including problems in debt collection.
A CFPB spokeswoman said the agency "coordinates closely with the prudential and state regulators to oversee consumer financial markets, with the goal of effectively using the combined federal-state resources to effectively oversee the markets."
The multi-state inquiry into the banks is led by Iowa, people familiar with the matter said, the state that also led state involvement in the mortgage deal.
"Our office is leading a multistate working group that is looking into debt buying and debt collection practices, and how these practices impact consumers," Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, said. "Because this is an open case, we can't discuss specifics."
Schiffman, the spokesman for the organization representing debt collectors, said the industry is limited by what information debt sellers, including banks, provide them with.
"The challenge for our industry is that, we're not in control of the documentation that's available," he said. "It comes from the creditor."
Banks could argue that they were not the ones who directly pursued the judgments, and were simply selling off bad debt for pennies on the dollar.
FLOODING THE COURTS
Despite a lack of documentation, consumer advocates and people familiar with the investigations say debt buyers still pursued court rulings that allowed them to potentially garnish wages and debit bank accounts.
Consumers usually fail to contest the court proceedings, these people said, because they often don't receive the notices, don't know how to respond, or cannot take the day off work, and courts enter default judgments against them.
"A lot of these debt buyers are flooding state courts attempting to collect debts that they've bought for pennies on the dollar," said Ira Rheingold, executive director of the National Association of Consumer Advocates. "They're filing these affidavits about how much is owed, and who owes it, but the reality is, they have no information."
While the banks are not themselves pursuing the questionable judgments on credit card debt, they could be liable for aiding and abetting the practice by providing information they cannot confirm as accurate, people familiar with the states' legal theories said.
Experts could not predict what kind of liability banks could face in related actions, but a recent FTC study hints at the potential billions at stake.
The agency examined $143 billion in debt, most of it from credit cards, sold to debt buyers in the past three years. It found that customers disputed some 3.2 percent of the debts, or about $4.6 billion of the debt studied.
The FTC said it receives more complaints from consumers about debt collectors, including debt buyers, than about any other industry.
(Reporting By Aruna Viswanatha in Washington, D.C., and Rick Rothacker in Charlotte, N.C.; Additional reporting by Emily Stephenson and Diane Bartz; Editing by Karey Van Hall and Tim Dobbyn)