When Covid-19 hit the economy, most debt collectors gave borrowers a break, cutting back on lawsuits amid lockdowns, closed courts and loan-forbearance initiatives.
One of the biggest and least-known companies in the industry did the opposite.
Sherman Financial Group filed more lawsuits to squeeze cash from people behind on their credit-card bills. A Wall Street Journal analysis, based on the five state-court districts with searchable online records, showed Sherman had the largest year-over-year increase of any firm identified between last March 15 and Dec. 31 -- up 52% from the year-earlier period, compared with a 24% decline in those districts for the industry as a whole.
Sherman, a privately held enterprise, through its subsidiaries filed 15,420 more debt-collection lawsuits in those districts than during the year-earlier period. Those courts serve 13% of the U.S. population.
In doing so, Sherman has cemented its reputation as a maverick in the industry. Since founding the company two decades ago, Sherman Chief Executive Ben Navarro has helped transform the once small and fragmented business of collecting old credit-card debt into a multibillion-dollar industry dominated by huge firms.
And while many of his competitors have retrenched during economic downturns, Mr. Navarro has capitalized on them, expanding in the wake of the 2008 financial crisis and bucking industry trends during Covid.
During the pandemic, most of Sherman's largest rivals filed fewer new lawsuits, citing borrower hardship. Two publicly traded competitors, PRA Group and Encore Capital Group, both sued fewer people in 2020 than in 2019, and they limited new collection efforts. California-based Oportun Financial Corp. suspended new lawsuit filings, dismissed pending cases and capped the interest rate on its loans.
A spokesman for Sherman and Mr. Navarro, its majority owner, said that while the company has filed more lawsuits during the pandemic than a year earlier, it also owned more debt during that period. In the last nine months of 2020, the spokesman said, Sherman's debt-collection arm, Resurgent, sued a smaller percentage of its debtors than in prior years. The company declined to disclose specifics about the amount of additional debt it holds or the percentage of borrowers it sued.
The Sherman spokesman, David Wells, said the company's pandemic response shouldn't be measured by the number of lawsuits if filed. "In addition to drastically reducing its suit filing rate, Resurgent implemented many consumer-friendly policies during the pandemic."
Suing people who were struggling even before the pandemic may turn out to be a canny move. Government stimulus, breaks on rent and lockdown-driven spending cuts mean many people without much savings now have some cash in the bank. Courts can order banks to take such savings from debtors' accounts and give the money to creditors. Because Sherman discloses little about its financial results or operations, it couldn't be determined how profitable its approach has been.
Sherman, based in Charleston, S.C., got its start buying distressed debts from other firms. Initially, its competitors were small and unable to handle large volumes, while Sherman, backed by big investors, bought large portfolios, using computer systems that made analyzing old loans and collecting on them more efficient and profitable. Over the years, Sherman diversified. It bought a bank that issues high-interest credit cards, often to consumers with weak credit. If customers default, other Sherman entities try to collect.
Mr. Navarro, Sherman's 58-year-old founder, has made a fortune in the business. He and his partners have created a global investment firm whose holdings have included an office park in Ireland, a big chunk of the South Amboy, N.J., waterfront, a window-shade maker and fintech companies that lend money at high interest rates. Many of those holdings are controlled by shell companies.
In 2018, Mr. Navarro made an unsuccessful bid to buy the Carolina Panthers football team, which sold for $2.275 billion. More recently, Mr. Navarro's family office invested $250 million in a private-equity fund focused on oil and gas.
Mr. Navarro, who declined to comment for this article, rarely speaks publicly about the collections business. "I've spent a career trying to be low key and trying to have our company be as low key as possible," he told a group of students three years ago at his alma mater, the University of Rhode Island, according to a video recorded by one attendee.
When consumers stop paying off their cards, the banks that issue them usually send letters and make phone calls attempting to collect. They often give up after 180 days, booking the bad debt as a loss. Then they sell it, often for just a few cents per dollar of debt, leaving the new owner to try to collect.
Unlike with mortgages or car loans, there often is no collateral to seize with a credit-card loan. Collectors call and send letters, hoping borrowers agree to pay a portion of their debt. Lawsuits are the last and most expensive resort.
The number of debt-collection lawsuits filed across the country doubled between 1993 and 2013, according to the Pew Charitable Trusts, and debt claims are now the most common type of civil case in nine of 12 states examined by Pew. The cases frequently end in default judgments letting debt collectors garnish wages or bank accounts to satisfy the debt, plus interest and fees.
Among the people Sherman sued during the pandemic was Shalinda McGregor, 30 years old, who owes $1,372.51 in credit-card debt. She said she had been unable to pay the debt since she quit nursing school and moved to rural Wolcott, N.Y., to care for her father after he had a heart attack.
For the past few years, she worked in an apple-processing plant six nights a week. In the summer when the plant slows, she collects unemployment. She said she defaulted because she could never make enough money to pay off her debts.
Sherman sues only a small percentage of customers who don't resolve their debts during collections efforts, the spokesman said, and offers payment plans or partial debt forgiveness before suing.
Ms. McGregor said she got letters seeking repayment for years before she was sued, which she ignored, assuming they were from scammers. She hasn't responded to Sherman's lawsuit and said she has been out of work since catching Covid in January and intends to file for bankruptcy because of the credit-card debt.
Sherman's lawsuit against Ms. McGregor, filed on Sept. 3, was one of the roughly one million debt-collection lawsuits in 2019 and 2020 in the five jurisdictions analyzed by the Journal -- New York, Wisconsin, Maryland, Missouri and Harris County, Texas, which includes Houston.
Of the top 10 filers of debt-collection lawsuits in those jurisdictions in 2020, eight, including well-known lenders such as Bank of America Corp. and Capital One Financial Corp., filed the same amount or fewer lawsuits during the pandemic than a year earlier. Citigroup Inc. notched an increase.
"The modest, single-digit year-over-year percentage increase in collections litigation nationally is largely the result of cases that predate the pandemic by months," a Citigroup spokeswoman said.
In 2020, Sherman-owned companies filed 12% of the debt lawsuits in those jurisdictions, up from 6% a year earlier.
Sherman's spokesman said the company bought 60% more debt in 2019 than in the prior year, so that when the pandemic hit, it held more debts over which to potentially sue people. Nationally, he said, Sherman spent millions of dollars less on lawsuit fees during 2020 than its two largest publicly traded competitors, which he said indicated Sherman filed fewer lawsuits than those rivals countrywide. None of the companies disclose how many suits they file.
Sherman has previously succeeded amid times of economic hardship by harnessing technology and data in its collection efforts. In 2009, Sherman's revenue hit $1.2 billion, allowing Mr. Navarro and his partners to buy out the company's long-time investors, two insurance companies that needed to boost capital, and take the company private.
"We not just survived, but thrived," Mr. Navarro later said to the Rhode Island college students. He played a clip from the film "It's A Wonderful Life" in which the customers of George Bailey's building-and-loan company demand to withdraw their money amid a bank run as banker Henry Potter tries to drive it out of business.
"The only bad news," Mr. Navarro told the students, "is that I was Potter. I'm not sure what that says about me, but anyway we were able to make the most of the financial crisis."
The Sherman spokesman said Mr. Navarro's whole speech was intended to show students how they could succeed "by focusing on humility, kindness and preparation."
Mr. Navarro told the students he started Sherman, which he named after his dog, in 1998 in a one-bedroom apartment with a fax machine and newborn baby. He had been co-head of mortgage sales and trading at Citigroup when he decided that no one had brought basic technology to the business of collecting bad consumer loans.
"Collections were done on pencil and paper and note cards, and physical note card files in much of the industry," said Tim Grant, an early employee who would become a senior executive before leaving Sherman a few years ago. Big credit-card issuers sold old debts for pennies on the dollar into an informal marketplace full of brokers -- a business that has been plagued by consumer complaints and regulatory scrutiny.
"Sherman was most definitely trying very, very hard to be a white knight in what had been a somewhat dirty business," Mr. Grant said.
Mr. Navarro wanted to use computer programs to estimate the profitability of debt portfolios. He assembled a 100-person information-technology staff, hired people with front-office experience and integrated the company's various business units so they could handle bigger volumes and different types of debt, according to a 2006 report to investors.
To get Sherman off the ground, Mr. Navarro sold 91% of the firm for $40 million to two insurance firms. "They had phenomenal analytics," said Daniel Gross, the former CEO of one of the firms, Enhance Financial Services Inc.
Sherman grew quickly as wages for many working and middle-class consumers stagnated and they turned to more widely available credit. Between 2001 and 2020, consumer credit-card debt grew by 37% to $819 billion, according to New York Fed data, and credit-card debt sold by banks increased by 87%, Federal Reserve data show.
In some cases, Sherman admitted to suing the wrong people. Other times, it attempted to collect debts so old they were no longer legally collectible, court records show.
The company said identity theft can lead to suing the wrong people, and Resurgent takes steps to detect and remedy cases of mistaken identity, the spokesman said.
Between Sherman's inception and September 2006, its companies recovered more than $3.8 billion in old debts, it said in a 2006 presentation. Between 2005 and 2009, before the company was taken private and data became unavailable, Sherman was the nation's biggest buyer of defaulted credit-card debt, according to the Nilson Report, a credit-industry analysis firm.
In 2005, Sherman bought a small bank, rebranded it Credit One, and increased the business from $647 million in outstanding credit-card receivables in 2006 to $6.81 billion in 2020, the most recent reported figure, according to Nilson Report. Credit One was the seventh-largest credit-card provider in 2020, ranked by active accounts.
Between 2011 and 2020, the bank was the subject of 13,500 consumer complaints filed to the federal Consumer Financial Protection Bureau over late fees and delays in processing payments that generate late fees, according to a Journal analysis of federal records made public via a public-records request.
Credit One received the most complaints of any firm with less than $10 billion in assets supervised by the Office of the Comptroller of the Currency, a federal banking regulator, and the ninth-most complaints about financial products of the largest credit-card issuers ranked by outstanding loans.
"The level of complaints is representative of an institution of our size, " Sherman's spokesman said. "We work hard to address all customer complaints, and our goal is to have as few as possible."
Since Mr. Navarro's group took full control of the company, there has been little publicly available information about Sherman's activities. Court records, some of the only public documents, show that Sherman filed thousands of lawsuits against borrowers, leading to some problems with authorities.
In 2011, Maryland sued Sherman's primary debt-collection subsidiaries, alleging they flooded courts with cases but were unlicensed to collect there. Sherman suits "contained false, deceptive, or deficient complaints and supporting affidavits," state regulators wrote. In a 2012 settlement, without admitting wrongdoing, Sherman paid a $1 million penalty and gave credits worth about $3.8 million to Maryland consumers.
In 2014, the New York attorney general later said, Sherman collected from at least 400 borrowers whose debts weren't legally collectible. Sherman paid a $175,000 fine for those violations. In September, the New Mexico attorney general sued Sherman, alleging it undertook illegal collections practices. The Sherman spokesman declined to comment because the lawsuit is pending.
The spokesman said the CFPB has never taken an enforcement action relating to debt collection against Sherman's debt-collection companies, and in 2020 those companies underwent 54 regularly scheduled regulatory examinations and a COVID-specific assessment with zero violations.
Laws regulating collection efforts vary. Some states, including Kentucky, allow debt collectors to seize nearly everything a debtor owns. Last year, Carol Bradley, 78-year-old retiree who lives on the outskirts of Louisville, filed for bankruptcy after a Sherman subsidiary emptied her bank account to collect on a 15-year-old debt.
Sherman had acquired a $12,008 debt that Ms. Bradley had defaulted on in 2006. Sherman later sued Ms. Bradley, and a judge in 2011 awarded Sherman a default judgment, allowing it to force her bank to pull money from her account.
Sherman didn't act on that judgment until last year, the Sherman spokesman said, when the company's computer models determined Ms. Bradley had money to pay. In May, Sherman used a garnishment order to compel her bank to transfer her balance of $6,770.78 to Sherman.
Ms. Bradley, who declined to comment, lives on a fixed income, court records show. Bankruptcy laws enable debtors to seek the return of garnishments filed immediately before a bankruptcy. Ms. Bradley did so, and Sherman settled the matter by returning the money.