This article examines current trends in debt buyer litigation, including a review of recent regulatory actions and the impact of debt buyer lawsuits on individual consumers and on small claims courts. The article calls for a ban on the sale of consumer junk debt by banks, and for a requirement to make public the terms, conditions and disclaimers from sales contracts between banks and junk debt buyers.
This bulletin provides guidance from the Office of the Comptroller of the Currency (OCC) to national banks and federal savings associations (collectively, banks) on the application of consumer protection requirements and safe and sound banking practices to consumer debt-sale arrangements with third parties (e.g., debt buyers) that intend to pursue collection of the underlying obligations. This bulletin is a statement of policy intended to advise banks about the OCC’s supervisory expectations for structuring debt-sale arrangements in a manner that is consistent with safety and soundness and promotes fair treatment of customers.
Debt buyers have flooded courts nationwide with collection lawsuits against consumers. This article reports the findings from the broadest in-depth study of debt buyer litigation outcomes yet undertaken. The study demonstrates that in debt buyer cases, (1) the vast majority of consumers lose the vast majority of cases by default the vast majority of the time; (2) consumers had no lawyer in ninety-eight percent of the cases; and (3) those who filed a notice that they intended to defend themselves without an attorney fared poorly, both in court and in out of court settlements.
This study challenges the notion that there is an “adversary system” within the context of debt buyer lawsuits. The findings suggest that no such adversary system exists for most defendants in consumer debt cases. Instead, these cases exist in a “shadow system” with little judicial oversight, which results in mass produced default judgments.
The procedural and substantive due process problems which are endemic in debt buyer cases call for heightened awareness and remedial action by the bench, the bar, and the academy. As lawyers who are “public citizens, with a special responsibility for the quality of justice,” the profession can do better. This article proposes suggestions for further study, and several common sense reforms.
Advocates for lower-income families need to be aware that many debt buyers are suing the wrong people, and for the wrong amounts.
“The views expressed are not necessarily those of the Federal Reserve Bank of Boston or the Federal Reserve System. Information about organizations and upcoming events is strictly informational and not an endorsement.”
This Article uses a unique collection of contracts for the sale of consumer debts — e.g., delinquent credit card accounts — to examine the sale transaction. It finds that in many contracts, sellers disclaim all warranties about the underlying debts sold or the information transferred, sometimes as far as specifically refusing to stand by “the accuracy or completeness of any information provided.” The Article argues that the collection of consumer debts sold through these transactions is in violation of the Fair Debt Collection Practices Act’s prohibition against using deceptive or misleading representations in connection with the collection of a debt. After considering some potential explanations for why this illegal collection has gone on for so long, the Article proposes a regulatory and a market solution to the problem.
(This article was previously titled: Illegality in the Sale and Collection of Consumer Debts).
Colorado Attorney General John Suthers announced that the Consumer Credit Unit of his office filed a civil lawsuit against United Credit Recovery (UCR), its principal and director, Leonard Potillo (D.O.B. 06/26/65), as well as against GTF Services and Standley & Associates, alleging that they sought to pass off fraudulent bank documents in their attempt to collect on outstanding debts and engaged in deceptive trade practices that harmed consumers.
“UCR faked bank officer signatures on documents to orchestrate a debt-for-sale scheme from which they handsomely profited,” explained Suthers. “The scheme involved thousands of individual accounts totaling tens of millions of dollars,” Suthers continued.
According to the complaint, UCR purchased consumer debt from Wells Fargo and US Bank and then used account information provided by the banks to create hundreds of thousands of fake affidavits purporting to describe and to verify debt owed by consumers. UCR profited by using the fake affidavits in collecting on the debt and in reselling debt to third-party debt collectors.
In addition to using the affidavits for its’ own collection purposes, UCR sold accounts of Colorado consumers to other agencies and distributed the falsely-created affidavits to those agencies. GTF, one such agency, is alleged to have used the affidavits through the debt-collection law firm Standley & Associates, who filed the affidavits in more than 300 debt collection lawsuits against consumers in Colorado.
The fabricated affidavits have assisted in the collection of money from Colorado consumers by being filed in court as evidence of the amount owed and by being presented as validation of the debt directly to Colorado consumers.
The complaint was filed pursuant to the Colorado Consumer Protection Act and the Colorado Fair Debt Collection Practices Act with the Denver County District Court.
Colorado’s complaint asks the courts to completely compensate or restore to their original position, all consumer injured by the defendants.
The Federal Trade Commission today announced the results of the first empirical study of debt buyers – companies that are in the business of buying consumer debts and trying to collect on them.
As the Commission has found in its prior work, debt collectors who have insufficient information may approach the wrong consumers, try to collect the wrong amount, or both. The report, titled The Structure and Practices of the Debt Buying Industry, found there is room for improvement in the information debt buyers have when they contact consumers and try to collect.
The study analyzed more than 5,000 portfolios of consumer debt containing nearly 90 million consumer accounts with a face value of $143 billion. By dollar amount, most of the debt studied (71 percent) was credit card debt, but the study also included mortgage, medical, utility, telecommunications, and other consumer debt. The study evaluated the types of information debt buyers received from creditors both at and after the time of purchase, as well as the contracts governing the relationship between debt buyers and creditors.
The report notes that debt buying plays an important role in consumer credit. Debt buyers paid pennies on the dollar (an average of about 4 cents, with older debt selling for less than newer debt) for the billions of dollars in debts they bought from creditors. The proceeds from these sales have helped to reduce creditors’ losses from lending money, allowing them to provide more credit at lower prices.
But, as the report points out, debt buying also raises significant consumer protection concerns: Consumers each year disputed an estimated one million or more debts that debt buyers attempted to collect. Prior FTC experience has found that consumers often dispute the amount of the debt or that they owe the debt at all. Debt buyers verified only about half of the disputed debts, which means that buyers either could not verify or did not attempt to verify about 500,000 debts each year.
The report also found that at the time of purchase, creditors provided debt buyers with some important information concerning debts, including the name, address, and telephone number, and social security number of the debtor; the creditor’s account number; the outstanding balance on the account; and the dates of account opening and last payment. Buyers, however, did not receive some key information about debts purchased, such as whether consumers previously disputed the debts or whether collectors previously verified the debts. Creditors also imposed limitations on the ability of debt buyers to obtain information and documents about accounts after sale. Most contracts between creditors and debt buyers stated that the creditors did not warrant that the information they provided to buyers about debts was accurate.
The report cites a need for further research. The study focused on nine of the nation’s largest debt buyers, which comprised more than 75 percent of the industry, and did not include data from any smaller debt buyers. The study also did not consider the practices debt buyers used when taking legal action against consumers, or the accuracy of the information debt buyers received and used to collect debts. Further research on these and other debt buyer topics would be beneficial to policymakers.
The Commission vote to issue the report was 4-0-1, with Commissioner Joshua D. Wright not participating.