July 10, 2013

Big lenders face scrutiny on collections

Regulators say debtors are being abused

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 — like robo-signing and faulty documentation — 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 — from national banks like Capital One to big department stores like Macy’s — can hound consumers behind on their bills with repeated calls, even though the practice is restricted by the Fair Debt Collection Practices Act.

But 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 — unfair, deceptive, or abusive practices are illegal,” Richard Cordray, the agency’s director, said in a statement.

Another agency, the Federal Trade Commission, meanwhile, 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 people close to the matter.

The regulator spotted errors in roughly 9 percent of monetary judgments won through collection lawsuits filed from 2009 to 2011, these people 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, 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, lenders are still working to reduce the amount of bad loans on their books.

In the vast majority of instances, consumer advocates say, customers acknowledge that they owe money. The problems arise when the credit card companies and third-party debt collectors run roughshod over legal procedures that govern how the firms can collect, according to consumer lawyers.

Some lawsuits, the judges and lawyers say, hinge on erroneous documents, thrown together to make up for critical paperwork that is missing.

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.

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.