Federal regulators are cracking down on questionable debt collection practices by some of the nation’s biggest lenders.
The push comes after revelations that some of the same practices that have haunted the foreclosures of homes â€" like robo-signing and faulty documentation â€" have cropped up in efforts to recoup delinquent credit card debt.
The debt collection practices of banks and lenders have long existed in a kind of regulatory gulf. The primary federal law that governs how companies pursue consumers behind on their bills does not apply to firms that are trying to recoup money that they lent directly to a consumer.
As a result, the lenders â€" from national banks like Capital One to big department stores like Macy’s â€" can hound consumers behind on their bills with repeated calls, even though the practice is restricted by the Fair Debt Collection Practices Act.
But on Wednesday, the Consumer Financial Protection Bureau plans to assert at a hearing that it has the authority to regulate banks’ debt collection practices under the Dodd-Frank financial overhaul law. The act bars the firms from employing “unfair, deceptive or abusive acts.“
“It doesn’t matter who is collecting the debt â€" unfair, deceptive or abusive practices are illegal,†Richard Cordray, the agency’s director, said in a statement early Wednesday.
Another agency, the Federal Trade Commission, on Tuesday won a $3.2 million penalty against Expert Global Solutions, the world’s largest debt collection operation, over accusations that the firm harassed consumers.
Adding to the scrutiny, the Office of the Comptroller of the Currency, a chief bank regulator, is investigating how banks like JPMorgan Chase collect credit card debt, according to several people close to the matter.
The regulator spotted errors in roughly 9 percent of monetary judgments â€" the dollar amount the bank sought from consumers â€" won through collection lawsuits filed from 2009 to 2011, these people close to the matter said. JPMorgan declined to comment, but the bank has been cooperating with regulators to fix problems in its collection lawsuits, according to people briefed on the situation. And in roughly 90 percent of the flawed judgments, the consumers did not pay the full amount, the people said.
JPMorgan also stopped filing new credit card lawsuits in 2011, these people said, because of concerns that some of the underlying documentation was flawed. In courts across the nation, according to judges, JPMorgan has also been dropping pending lawsuits.
As they work through a glut of soured debts, from credit card balances to overdue auto loans, some of the big lenders are going to court to get what they are owed, according to interviews with judges, lawyers for consumers and federal regulators.
While fewer customers are falling behind on their bills as the nation moves farther away from the financial crisis, lenders are still working to reduce the amount of bad loans on their books.
In most instances, consumer advocates say, customers acknowledge that they owe some money. The problems arise, though, when the credit card companies and third-party debt collectors run roughshod over legal procedures that govern how the firms can collect money, according to consumer lawyers.
“It’s a huge problem where creditors and debt buyers are mass producing fraudulent documents,†said Susan Shin, a lawyer at the New Economy Project, which works with community groups in New York.
Some lawsuits, the judges and lawyers say, hinge on erroneous documents, quickly thrown together to make up for critical paperwork that is missing, like payment histories or the original contracts.
For some consumers, the problems begin long before they set foot in a courtroom. Rogerio Normanilson, 56, said that the calls he received from collectors for Macy’s â€" sometimes four times a day â€" caused him crippling stress and aggravated his health issues, including H.I.V. Mr. Normanilson, who fell behind on his payments in January and is currently living in a New York City shelter, said that the calls continued even after he begged for them to cease.
Macy’s would not comment on the individual case, citing its confidentiality policy. Jim Sluzewski, a spokesman for Macy’s, said the company abided “by regulations governing credit and collection activities.â€
Since such collection efforts fall into the regulatory void, consumer lawyers say, consumers have little recourse. “These creditors are essentially given free rein,†said Carolyn E. Coffey, a lawyer at MFY Legal Services.
Lenders have been buffeted by these kind of problems before, particularly over the way they pursued struggling homeowners. Last year, five of the nation’s largest banks reached a $26 billion deal with 49 state attorneys general over claims the lenders wrongfully seized homes.
Now regulatory scrutiny is shifting from mortgages to credit cards. The problems in credit card lawsuits often proliferate in the shadows, because unlike in foreclosure cases, borrowers sued over credit card debt rarely show up to defend themselves. As a result, more than 95 percent of lawsuits result in a default judgment, an automatic win for the lender.
The default judgments can be devastating, entitling the lenders to garnish a consumer’s wages or freeze bank accounts. In New York, for example, the judgments are good for 20 years and accrue annual interest of 9 percent.
Sometimes borrowers do not even realize that they have been sued until a lender wins a default judgment, consumer lawyers say. The situation often arises when lenders claim to serve borrowers with notice of a lawsuit, as they are required to do under the law, but do not actually do so.
Dianne Carr, 68, who lives in New York, said she had no idea that Capital One was suing her over stale credit card debt until last year, when she went to a credit counselor and learned of the black mark. By then, it was too late to fight back, she said.
“It feels so bad,†said Ms. Carr.
Capital One declined to comment on the case.
In the Federal Trade Commission’s fine against companies owned by Expert Global Solutions, based in Plano, Tex., the agency secured a $3.2 million civil penalty against the firm for using unfair and deceptive practices and illegal debt-collection techniques.
The F.T.C. said that it was the largest civil penalty ever obtained by the agency against a third-party debt collector.
The companies were accused of violating the F.T.C. Act and the Fair Debt Collection Practices Act by calling consumers several times a day, even after being asked to stop; calling early in the day or late at night; calling consumers’ workplaces; and leaving phone messages that disclosed the debtor’s name and existence of the debt to third parties. In a proposed consent decree filed in United States District Court for the northern district of Texas, the companies agreed, in addition to paying the fine, to investigate claims that the debt information was wrong, to not communicate with third parties about a consumer’s debt and to not otherwise harass consumers while trying to collect debts.
Expert Global Solutions and its subsidiaries, with 32,000 employees, recorded more than $1.2 billion in revenue in 2011, the F.T.C. said. The firm declined to comment on the case. But the agency fine was a tiny fraction of that amount â€" one-quarter of 1 percent of annual revenue.
Like its federal peers, the Federal Trade Commission has been increasing its oversight of debt collection agencies since the financial crisis and recession, said Christopher Koegel, an assistant director for financial practices in the agency’s bureau of consumer protection. The bureau has filed three debt collection cases so far in 2013, after bringing six in 2012, five in 2011 and one in 2010. During that time, the F.T.C. has assessed $56 million in judgments, and the largest civil penalty collected by the agency has grown to $3.2 million in the case on Tuesday, from $2.5 million.
