Millions of debt collection cases could be fatally flawed -- even when a judge has already banged down the gavel and allowed a debt buyer to seize a debtor's assets.
Call it Robo-signing II -- a sequel to the scandal over slipshod paperwork used in home foreclosures. As with foreclosures, the rubber-stamping of debt buyers' collection paperwork is coming under fire. In a three-pronged challenge, federal regulators, state officials and courts are laying separate roadblocks to once-easy judgments against debtors.
"The system has to depend on the accuracy of the information that the debt buyer is bringing to court," said Charles Delbaum, a staff attorney at the National Consumer Law Center. "When you can't rely on it because it's robo-signed ... it corrupts the whole system."
Lawsuits filed to collect old debts usually rely on sworn statements called affidavits. Debt buyers draw up these statements to stand in for account records -- contracts and account statements -- as proof of the debt. Signers of the affidavits swear that they have reviewed account data to ensure that the claim is accurate. But a number of court cases found that major debt buyers churned out the affidavits without checking records. In a landmark class-action suit against debt buyer Midland Funding, for example, employees of the debt buyer admitted to signing affidavits at rates of 200 to 400 a day.
Mass-produced verdicts have caused some consumers to be sued more than once for the same debt, or for debts that were the result of identity theft. Affidavits swearing that consumers were notified of the court action against them have also been exposed as false.
"On hundreds of occasions the defendant process servers purported to serve process at two or more locations at the same time," U.S. District Judge Denny Chin wrote in a ruling against Mel Harris and Associates in September 2012. The ruling granted class-action status to a claim that more than 100,000 default judgments were obtained through fraud.
Debt collection a 'broken system'
Consumer advocates have long howled about errors and abuse that result when debt buyers obtain old accounts from creditors -- mostly credit card accounts -- and use the courts to collect. Those concerns have been growing since the Federal Trade Commission issued a 2009 report titled, "Repairing a Broken System," that concluded "consumers are not adequately protected in either debt collection litigation or arbitration."
The debt buyers' industry group says the problems are only procedural, and the debts being collected are real. "I think [the debt buyers' association] is in full support of reasonable consumer protection law that ... at the same time allows for the collection of legitimate debt," said Jan Stieger, executive director of DBA International.
But recently, consumers have won significant victories:
- Courts are challenging affidavits that underpin collection cases. In February 2013, the 6th U.S. Circuit Court of Appeals rejected a settlement that would have shielded more than 1 million lawsuits nationally from being challenged on the basis of false affidavits. In March, three national consumer groups stepped in to support a case in Illinois that is challenging the use of an affidavit as proof of ownership of a debt.
- States are increasingly calling for higher standards of proof in collection cases. Minnesota, for example, is considering legislation on debt buyers following a regulatory crackdown by the state attorney general against robo-signed affidavits.
- Federal regulators are focusing on documents used in debt collection. The U.S. Consumer Financial Protection Bureau launched an examination program in 2013 that includes debt buyers, and the manual for examiners calls for scrutiny of records used to back up debts and amounts. In January, the Federal Trade Commission released a report listing concerns about account records used to collect purchased debt.
Consumer advocates say that court and legislative changes could force a widespread rollback of the affidavit system, and that in turn would force big changes in a collection mechanism that has grown into a behemoth. Since fewer than half of defendants show up in court -- and those who do rarely have a lawyer -- collectors usually win cases easily without having to produce hard proof that a debt even exists. Higher standards of evidence could result in a sharp drop in these one-sided judgments against consumers.
"I think it would dramatically impact how easily and successfully they can collect these debts," Delbaum said.
The scope of debt buyer lawsuits is large. The Midland Funding lawsuit involves 1.4 million cases filed since 2005. In New York City alone, there were 457,322 consumer collection lawsuits brought by large debt buyers during a 30-month period ending July 2008, collecting $1.1 billion in judgments and settlements, according to the study "Debt Deception" by a coalition of consumer advocate groups. Because collection cases are scattered through county and municipal courts, national figures on the caseload are unavailable.
Judgment surfaces years later
Brian Pindell of Queens, N.Y., found out first-hand what can happen when courts issue judgments based on thin documentation. After Superstorm Sandy, the Web design worker was surprised to be turned down for a federal recovery loan because of unpaid judgments on his credit report. The judgments were news to him. "I was being sued by a company that I didn't know I had any affiliation with," he said. "I was never served any sort of paperwork."
With the help of legal aid attorney Nasoan Sheftel-Gomes, Pindell uncovered records showing that one judgment had been paid through deductions from his paychecks back in 2009. The debt buyer, Midland Funding, gave him a letter of satisfaction to help clear up his credit report. But Pindell is still trying to find out how duplicate judgments against him were entered for the same $1,000 Citi card balance without his knowing about it. (Child support and student loan payments were also deducted from his pay, so the additional wage garnishment escaped his notice, he explained.) The bigger question: How he was ordered to repay a credit card that he never had in the first place. "We are trying to get that money back and make him whole," Sheftel-Gomes said.
Another question with affidavits centers on the authority to collect the debt. Accounts may be sold two or more times in the debt market. Debt buyers often use affidavits to establish their right to collect debts, instead of the series of contracts proving ownership -- a practice that is being challenged by the lawsuit in Illinois. In Unifund v. Shah, a state court found that Unifund's sworn affidavit was not sufficient proof that it owned the right to collect on a Citi card account, which had changed hands three times. At the appeal level, AARP, the National Consumer Law Center and National Association of Consumer Advocates filed a brief in March supporting the decision, calling debt buyer affidavits "inherently unreliable."
Industry raises an objection
Debt buyers and industry representatives say the ill effects of robo-signing have been overblown. Problems with paperwork have been corrected since revelations about mass-produced affidavits surfaced back in 2009, they say. More importantly, the high-speed signing was only a procedural problem, and does not mean that the amounts claimed in court filings are necessarily wrong.
"It's important to note that throughout this process, the validity of the underlying debt and the consumer's financial obligation to repay it have never been called into question," Greg Call, senior vice president and general counsel of Encore Capital, the owner of Midland Funding, said in a statement issued in response to the 6th Circuit's February ruling.
Also in February, the debt buyer's group adopted a certification program that sets standards for account records. Debts should come with nine data points to identify the person and the amount owed, the standards say. Copies of the actual account documents such as statements and contracts are not required.
"We work with legislators and regulators to make sure we're drafting rules that make sure the right information is provided, but do not go overboard and not allow the industry to function," said Stieger. Members of the association will be required to meet the certification standards, but those who aren't members may continue to buy and sell debt in the market.
Standards in flux
What the courts and regulators will accept as proof of a debt could depart from the industry's proposals. Debt buyers exchange debt records electronically through spreadsheets, but some authorities are pushing for more account documents as proof that the debt is accurate, and that the debtor's identity is correct.
A bill introduced in January in Minnesota, for example, calls for debt buyers to show account contracts as proof of a debt before obtaining a "default" judgment, when a consumer does not appear in court. Peter Holland, a law professor at the University of Maryland who has studied debt collection robo-signing, said several states are considering similar moves through court rules or legislation.
In Pennsylvania, a trial court mocked the efforts of debt buyer Commonwealth Financial Systems Inc. to substantiate its computerized records of Citi card debts with the testimony of vice president Daniel Venditti, saying "the limits of Mr. Venditti's knowledge were vast." The 2009 judgment, upheld on appeal in 2011, found that the debt buyer had no way to know whether records it obtained from the lender were correct.
The FTC, in its January report based on looking at 90 million accounts, said that sold debts usually carry a disclaimer about the accuracy of the account information provided to the buyer. The lack of warranty does not mean records are necessarily inaccurate, but makes it difficult for debt buyers to verify records that are challenged or questionable.
"Although buyers received the data file and some other information about the debts ... they obtained very few documents related to the purchased debts at the time of sale or after purchase," according to the report, "The Structure and Practices of the Debt Buying Industry."
While inaccurate account information is not necessarily endemic, consumer complaints indicate that they're not minor, either, the FTC report found. Of the 1 million debts that consumers disputed a year, debt buyers said they verified about half, indicating that 500,000 disputed debts a year could not be verified.
"What they (debt buyers) are buying is a spreadsheet, literally," said Holland of the University of Maryland law school, who runs the school's legal aid clinic. "They're trying to turn straw into gold."
Questions about account accuracy have also been raised by individual incidents. Linda Almonte, a whistleblower at Chase Bank, told The New York Times in 2010 that her group found incorrect balances or addresses in 5,000 accounts being prepared for sale, out of a portfolio of 23,000. She was fired after disobeying her manager's prodding to complete the $26 million deal, the Times' Oct. 31, 2010 article reported.
Where consumers stand to benefit
So if vast swaths of collection judgments were flawed, how can individual consumers get justice?
"The reality is, a lot of people won't go in and try to get their judgment vacated," said Delbaum, who worked on the case involving Midland accounts. Overturning a robo-signed verdict still means hiring a lawyer and bringing a lawsuit against the debt buyer -- which could backfire if the debt buyer can "prove up" their case with sufficient account records to verify the claim.
Class-action lawsuits of the sort aimed at Midland represent an alternative that hold out the hope of benefits for consumers on the receiving end of robo-signed verdicts. The initial revelations about Midland robo-signing launched a number of similar claims against debt buyers in other regions. The Sixth Circuit appeals court rejected the proposed Midland settlement because it would have paid only about $17 per consumer for giving up their right to challenge a judgment against them. So another attempt to settle that case may sweeten the sum, and set a benchmark for other cases.
Consumers might also benefit from a broader regulatory settlement such as the one that resulted from the mortgage robo-signing scandal. In 2012, a $25 billion multi-state settlement with mortgage servicers provided financial aid to people who lost their homes. In the debt-buyer arena, some states have launched investigations resulting in piecemeal settlements with individual debt buyers including NCO Financial Systems, National Credit Adjusters and Midland Funding. Reports of a broader, industry-wide investigation by a multi-state group have surfaced, but are unconfirmed.
The stakes in credit card verdicts are not as large as home foreclosures, but some consumer advocates say that the debt-buying scandal could turn out to be more widespread, given the large numbers of credit card debts that have soured in recent years and the multi-billion dollar scale of the debt-buying industry. Lax paperwork in debt-buyer judgments can more easily result in erroneous or inflated amounts collected from consumers, advocates say, because of the lower standards for proof, and the fact that judgments are usually generated without the supposed debtor showing up in court.
"Oftentimes, the creditors are padding the amount they're suing on," said Carolyn Coffey, supervising attorney at MFY Legal Services in New York City. "If they have a contract that says they can do that, that's fine, but often they don't have a contract that says that." When no one objects, however, debt buyers can add fees and interest to the underlying debt and make it part of the court's judgment, she said. The NCO Financial Systems settlement with 19 state attorneys general, for example, includes awards for debtors who were charged interest above what was specified in their account agreements.
Another result of the overhaul could be the changes to the collection system that will determine how current and future collection cases are handled. For now, however, state governments and individual court cases are lurching unevenly toward new standards.
"There's not a clear federal mandate of how they (debt buyers) are supposed to do it," said Michael Lamm, a director at Kaulkin Ginsberg Co., an adviser to the debt collection and debt buying industries.
While indications are growing that new standards are coming, they are not in place yet, consumer advocates say, and reform of the current collection mechanism remains to be seen. In 2012, courts in New York City issued default judgments in 60% of the 96,460 consumer debt cases heard, according to court administrative figures obtained by the Urban Justice Center.
"They still bring cases where ... it's just the lawyer trying to hand in paperwork, and too many judges allow it to happen," Holland said of debt buyers. "My sense is, until the courts enforce the old laws or the new laws, it just doesn't matter."