May 10, 2014
Taking on the country’s biggest debt buyer, Midland Funding
Leoncio Paz took on one of the country’s biggest debt collectors — and won.
The case was pretty cut and dry: Midland Funding sued Paz for $5,216 on an old credit card debt. Paz, 48, said the amount was more than he owed. But rather than accept the charges, as so many others do, the maintenance man from Alexandria, Va., contacted a legal aid attorney.
That attorney figured out that the amount Midland sought in its sworn affidavit included all sorts of fees that the company lacked the documentation to collect. And when Paz challenged the case on those grounds, Midland dropped the suit.
“It’s highly likely that a lot of people are being sued for a lot more than they probably owe,” said attorney Simon Sandoval-Moshenberg, who represented Paz.
Midland has sued thousands of people just like Paz in hopes of a quick payday. The company has a reputation of buying soured credit card debt and heading straight to court to collect, a tactic that consumer lawyers say scares people into settling.
The strategy has been so effective that in Northern Virginia alone Midland has recovered more than $27 million since 2003 — a year the firm filed a few dozen cases at most. But in the past four years, it has flooded courts from Loudoun County to Prince William County with nearly 11,000 lawsuits as companies overwhelmed by delinquent accounts have sold them for pennies on the dollar.
And it’s not just Northern Virginia. State attorneys general, judges and consumer lawyers nationwide are complaining of a broken debt collection system that allows companies such as Midland to file tens of thousands of cases built on flimsy documentation.
The information Midland relies on is the same as is “used when credit card users call or get their balance online,” said Greg Call, general counsel of Encore, Midland’s parent company. “We have over 180 million pages of documentation from issuers supporting the debts that we collect, with access to even more.”
Paz was surprised when Midland came knocking. He did not, after all, take out a credit card with the firm. It bought his debt from the lender who issued the card. Midland is a unit of Encore Capital Group, a San Diego-based corporation that buys portfolios of charged-off debt — delinquent accounts that lenders give up on.
These “debt buyers” often purchase no more than an electronic file of names, addresses and amounts owed on accounts that are more than 180 days past due. More detailed information is usually available, but it would cost more and therefore would cut into their profits.
“Debt buyers play an important role in the economy in that they recover rightfully owed consumer debt,” said Mark Schiffman, a spokesman for the Association of Credit and Collection Professionals, a trade group. “Companies and government rely on the repayment of credit, fees, services to keep their business functioning.”
He said debt buyers help companies offset some of the unpaid accounts they incur. Selling accounts to debt buyers also helps banks reduce losses from lending money, which maintains the flow of credit at low rates.
Still, the collection system is riddled with problems. Government agencies receive hundreds of thousands of consumer complaints about harassing phone calls, lack of verification of debt and people discovering a collection attempt only through their dinged credit report.
The Consumer Financial Protection Bureau plans to issue rules to fix these problems this year, but it is unclear whether those rules will radically alter the business model of debt buyers and reduce the number of cases clogging court calendars.
In the meantime, debt buyers are taking advantage of a patchwork of state and federal laws with varying degrees of consumer protection.
The federal Fair Debt Collection Practices Act says consumers have the right to request information that verifies what they owe, but regulators say debt buyers do not always comply. That may be a consequence of the way charged-off debts are sold.
A recent report by the Center for Responsible Lending said portfolios of debt often contain inaccurate, outdated or missing account information, especially if the debt is resold multiple times.
The debt-buying business was born out of the savings and loan crisis, when the government auctioned the assets of failed thrifts through the Resolution Trust Corp. Once those sales died down in the mid-1990s, debt buyers turned their attention to consumer debt.
“We see more debt buyers now than we do original creditors,” said Lisa Mayne, a presiding judge in Fairfax County. “Back in the day, you had local banks coming in with their attorneys. Now, the majority of cases we see are from companies that have bought the debt.”
Credit card debt is the most common type of defaulted debt they buy, but they also snap up portfolios of student loans, medical debt, utility bills, tax liens, car loans and mortgages, according to the Center for Responsible Lending.
The three largest publicly traded debt buyers — Encore, Asta Funding and Portfolio Recovery Associates — spent more than $1.2 billion last year to buy portfolios of debt worth more than $85 billion, according to regulatory filings.
Encore, which owns the debt of one in five Americans, accounted for most of that spending. The company said it files lawsuits in fewer than 5 percent of the open accounts in its total portfolio, but it would not break out how many of those cases derive from the Midland unit.
“We only turn to legal action when a consumer does not respond to multiple efforts to reach him or her by mail and telephone,” said Sheryl Wright, Encore’s senior vice president of corporate and government affairs. “As a matter of practice, we work toward finding a mutually acceptable payment plan with consumers, often at a significant discount.”
Encore’s entire portfolio of debt is rather large considering that the company is made up of several subsidiaries and recently acquired Asset Acceptance Capital — one of the largest debt buyers in the country.
“The cost to collect through the legal channel is nearly five times higher than our cost to collect through other channels,” Wright said. “There is very little incentive to litigate, unless we truly feel it is the only option left.”
In Northern Virginia, Encore’s Midland unit has filed 16,878 lawsuits from 2003 to March of this year in the district courts of five counties. The company won nearly two-thirds of those cases through judgments against consumers who either failed to appear in court or simply agreed to pay the amount.
Almost 20 percent of those people wound up having their wages garnished, according to a review conducted by The Washington Post. Debts range from as little as $53 to as much as $23,786.
Judges have dismissed 15 percent of Midland’s cases, while the company has abandoned an additional 9 percent, such as the Paz case. Only two people have ever won a case against Midland outright.
Sandoval-Moshenberg said the company abandons cases when consumers fight back because it knows the cases could not withstand closer examination in court.
His client Paz did owe at least a few thousand dollars on his JCPenney credit card. Paz made his last payment in March 2011, two years before the debt landed him in court.
“I paid as much as I could for years, but it got tough and I didn’t have the ability to pay,” the father of three said.
Paz was willing to work out a payment plan with Midland, but Sandoval-
Moshenberg said he suggested that they review the case first. The attorney got the case dropped, and then in turn he filed suit against Midland for allegedly submitting a “false, deceptive or misleading” affidavit in violation of federal law.
“There’s a certain extent to which Mr. Paz is sort of getting away with something,” Sandoval-Moshenberg said. “He did owe something. Now he’s not going to have to pay it. It just shows how messed up the system is.”
He added: “What we want ultimately is a situation when only the right people are being sued, for only the right amount by only a party that legitimately bought the debt, and only having the evidence to prove the debt. In terms of an efficient functioning of capitalism, that is the system that we would want.”
Consumer lawyers have raised doubts about whether Midland employees review account data before affirming its accuracy in sworn affidavits submitted to the court.
One Midland employee, Ivan Jimenez, testified in a 2009 civil lawsuit against the firm that he signed 200 to 400 affidavits a day. He said that “very few” documents were checked for accuracy, a claim that mirrors accusations of mortgage servicers “robo-signing” foreclosure documents.
Midland tried to settle the lawsuit, which eventually won class-action status, for $5.2 million, but an appeals court rejected the deal last year because of the paltry sum each borrower would have received: $17.38. In the wake of the Ohio case, Midland says it is more judicious about the affidavit process.
“The Ohio litigation centered around processes that were in place in 2008, which were substantially restructured after the court expressed concern,” Wright said. “We believe our current processes are best in class, and that is the result of a constant focus on training, quality and improvement.”
Not everyone agrees. Thirty-two state attorneys general filed a joint objection in the Ohio settlement saying they are still seeing evidence of Midland robo-signing now.
“The exact wording in the affidavits have been changed, but they still falsely imply that Midland had access to all of the records of the underlying account,” said Thomas Domonoske, a lawyer at Legal Aid Justice Center in Charlottesville, Va. “Midland still doesn’t buy all of the records.”
Judges across the country have tossed out thin-file lawsuits by the hundreds or imposed limitations on how many cases can be filed in a day.
After being inundated with debt actions with scant documentation, a group of Fairfax County judges banded together in 2008 to institute minimum standards for collectors.
The best practices call for, among other things, a statement from the original creditor showing the balance and the terms of the account agreement. About a dozen courts throughout Virginia have adopted the guidelines, but there is no uniformity across the state, said lawyer R. Peyton Whitely of Legal Services of Northern Virginia.
“Short of these best practices or a judge-initiated procedure, Virginia statutory law does not require debt buyers and other creditors to submit very much in support of default judgement applications,” he said. “So we’re way behind Maryland and other jurisdictions that have formally enacted such requirements.”
The collection trade group supports the CFPB’s effort to update the system but cautions against rules that prohibit creditors or collection agencies from lawfully recovering debt.
“There is no one-size-fits-all solution for such a complex industry,” Schiffman said. Yet, “One of the biggest problems facing the collection of consumer debt is the lack of national standards for documentation. This has created confusion and frustration for all involved — including consumers, collectors, creditors and judges.”
In November, the bureau issued a notice of proposed rulemaking to modernize the legal framework governing debt collection. It is seeking public comment before formally proposing anything, asking people whether they have received threatening calls at all hours of the night or been dragged into court based on inaccurate information.
If the CFPB establishes federal standards for lawsuits, the bureau could face a fight from states that don’t want national laws to supersede their statutes. Thomas Pahl, counsel in the office of regulations of the CFPB, said the bureau is trying to work with states on the issue, and in the meantime, working to support efforts to strengthen local laws.
Encore’s Wright said it is in the company’s interest to have a uniform standard for the documents needed to collect. She noted that the company has told the CFPB as much in a recent comment letter.
“We feel strongly that creating best practices and standardizations will provide all consumers a more informed methodology when working to resolve outstanding debts,” she said.
It would also level the playing field for debt collectors that play by the rules, said Legal Aid’s Domonoske.
“These debt buyers file false affidavits, get judgements that wind up in garnishment, robbing other collectors that follow the law from getting any of the money they’re owed,” he said. “They’re really cheating the entire system.”