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.
CHARLESTON — Attorney General Patrick Morrisey today announced nearly $20 million in debt cancellation for West Virginia consumers as part of a settlement with a debt collector, known as Cavalry Investments and Cavalry Portfolio Services among other names.
The settlement requires Cavalry to forever cease efforts to collect $19.7 million in debt for 2,847 consumers, in addition to paying $350,000 to the State of West Virginia.
“This settlement provides significant relief directly to the affected consumers,” Attorney General Morrisey said. “Companies operating in our state must respect our laws.”
The settlement stems from an investigation into complaints alleging Cavalry engaged in debt collection practices without a West Virginia license and surety bond. Both are required by the state’s Collection Agency Act.
The investigation also revealed practices inconsistent with the state’s Consumer Credit and Protection Act. Those allegations included telephone abuse and harassment, along with a failure to identify the account owner in collection letters and in reporting alleged debts to consumer reporting agencies.
Cavalry agreed to delete all account information from the affected consumers’ credit records and release all liens filed against the consumers’ property. The company denied any allegation of wrongdoing as part of the settlement.
The Attorney General’s Office filed a lawsuit after issuing an investigative subpoena requesting Cavalry suspend all collection activities. Among those named defendants were Cavalry Portfolio Services LLC, Cavalry Investments, SPV I and SPV II, all headquartered in New York.
Unifund CCR Partners, a debt buyer, was in the business of purchasing large portfolios of charged-off debts from original debt holders in the hope of eventually collecting from the original debtors. Unifund asserted the right to judgment against defendant David Zimmer for charged-off debt in the amount of $2453.22, plus costs and statutory pre-judgment interest of 12% under 12 V.S.A. 2903, for a credit card account opened in defendant’s name with Citibank. Unifund also alleged that defendant was unjustly enriched in that amount “by virtue of non-payment on an account.” At trial, Unifund asserted that it was authorized to collect the debt by a series of limited assignments, from Citibank to Pilot Receivables Management, LLC (Pilot) on June 18, 2012, and from Pilot to Unifund CCR LLC (UCL) and UCL to Unifund, both on June 1, 2013. To establish standing to enforce the underlying debt, Unifund offered testimony of Brian Billings, who spoke in support of the assignment from Citibank to Pilot, and Elizabeth Andres, who spoke in support of the assignments from Pilot to UCL and UCL to Unifund. The trial court found these documents to be inadmissible as hearsay because Unifund had failed to establish the necessary foundation for their admission. The trial court also found that, even if the assignments were admissible as a business record under Rule 803(6), Unifund had failed to establish standing. Unifund raised four arguments on appeal: (1) that documents proffered to establish the assignment of defendant’s debt were not admissible as business records; (2) that the assignment of the right to collect is itself sufficient for standing; (3) that Unifund sufficiently established the terms of the contract between defendant and Citibank, including the contractual interest rate; and (4) that Unifund demonstrated a basis to recover for unjust enrichment. Finding no reversible error in the trial court’s analysis and judgment, the Supreme Court affirmed.
WASHINGTON, D.C. – The Consumer Financial Protection Bureau today against Citibank, N.A., two of its affiliates – Department Stores National Bank and CitiFinancial Servicing, LLC – and two debt collection law firms for altering affidavits filed in debt collection lawsuits. Citibank retained Faloni & Associates, LLC, of Fairfield, N.J., and Solomon & Solomon, P.C., of Albany, N.Y. to collect credit card debt on its behalf in New Jersey state courts.
Citibank filed sworn statements attesting to the accuracy of the debt allegedly owed. Citibank then provided the affidavits to their attorneys to file with New Jersey courts. The two firms retained by Citibank altered the dates of the affidavits, the amount of the debt allegedly owed, or both, after the affidavits were executed. This violated the Fair Debt Collection Practices Act.
In May 2011, Citibank learned that one of its law firms had altered affidavits and stopped referring new credit card accounts to it. At Citibank’s request, a New Jersey court dismissed actions pending as of Sept. 12, 2011 that Citibank identified as involving altered affidavits or incorrect information.
The CFPB’s order requires Citibank to comply with the New Jersey state court order, in which Citibank had to refund $11 million collected from consumers and stop collection of an additional $34 million in debts, both of which Citibank has done. Solomon & Solomon, P.C., must pay a $65,000 penalty to the Bureau’s Civil Penalty Fund. Faloni & Associates, LLC, must pay $15,000. Consistent with the Bureau’s Responsible Business Conduct bulletin, the CFPB did not impose civil money penalties on Citibank for this violation, especially in light of its efforts to recompense harmed consumers.
WASHINGTON, D.C. – The Consumer Financial Protection Bureau today took two separate actions against Citibank for illegal debt sales and debt collection practices. In the first action, the CFPB ordered Citibank to provide nearly $5 million in consumer relief and pay a $3 million penalty for selling credit card debt with inflated interest rates and for failing to forward consumer payments promptly to debt buyers. The second action is against both Citibank and two debt collection law firms it used that falsified court documents filed in debt collection cases in New Jersey state courts. The CFPB ordered Citibank and the law firms to comply with a court order that Citibank refund $11 million to consumers and forgo collecting about $34 million from nearly 7,000 consumers.
“Citibank sent inaccurate information to buyers when it sold off credit card debt and it also used law firms that altered court documents,” said CFPB Director Richard Cordray. “Today’s action provides redress to consumers who were victimized by slipshod practices as part of our ongoing work to fight abuses in the debt collection market.”
Citibank, N.A., is a national bank with headquarters in New York, N.Y., that issues consumer credit cards. From 2010 to 2013, Citibank sold portfolios of charged-off credit card accounts. It typically provided debt buyers with information about the consumer and the debt, including the supposed annual percentage rate (APR). A “charged-off” account is one the bank deems unlikely to be repaid, but may sell to a debt buyer, usually for a fraction of face value. The debt buyer then can try to collect on those accounts.
Citibank broke the law when, from February 2010 until June 2013, it provided inaccurate and inflated APR information for almost 130,000 credit card accounts it sold to debt buyers. These buyers then used the exaggerated APR in debt collection attempts. Citibank also failed to promptly forward to debt buyers approximately 14,000 customer payments totaling almost $1 million. The CFPB found that Citibank violated the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act. Specifically, Citibank:
Under the Dodd-Frank Act, the CFPB has the authority to take action against institutions or individuals engaged in unfair, deceptive, or abusive acts or practices. Under the CFPB’s order addressing illegal debt sales practices, Citibank must:
WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) filed a consent order in federal court that resolves a lawsuit against Frederick J. Hanna & Associates, a Georgia-based law firm, and its three principal partners, for operating an illegal debt collection lawsuit mill. The CFPB lawsuit had alleged that the defendants rely on deceptive court filings and faulty evidence to churn out lawsuits. The order bars the firm and its principal partners from illegal debt-collection practices, including filing lawsuits without being able to verify the consumers’ debt is owed, and intimidating consumers with deceptive court filings. The order also requires the firm and its principals to pay $3.1 million to the Bureau’s Civil Penalty Fund.
“The Hanna firm relied on deception and faulty evidence to coerce consumers into paying debts that often could not be verified or may not be owed,” said CFPB Director Richard Cordray. “Debt collectors that use the court system for purposes of intimidation should reconsider how their practices are harming consumers.”
The Hanna law firm focuses exclusively on debt collection litigation, and its three principal partners, Frederick J. Hanna, Joseph Cooling, and Robert Winter, play an active role in the company’s business strategies and practices. The firm performs debt collection activities on behalf of clients that include banks, credit card issuers, and companies that purchase and sell consumer debt. The Hanna law firm typically files lawsuits if its efforts do not lead to collections.
In July 2014, the CFPB filed suit against the firm and its principal partners in federal court in the Northern District of Georgia. The consent order resolves the case. In its complaint, the CFPB charged the law firm with violating the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition on deceptive practices as well as the Fair Debt Collection Practices Act by:
Under the Dodd-Frank Act, the CFPB has the authority to take action against institutions or individuals engaging in unfair, deceptive, or abusive acts or practices, or that otherwise violate federal consumer financial laws. The CFPB’s proposed order, if approved by the court, would:
This action is part of the Bureau’s work to address illegal debt collection practices across the consumer financial marketplace, including companies who sell, buy, and collect debt.
Stipulated Final Judgment and Order
The consent order follows an earlier court order issued in July 2015 that rejected the defendants’ motion to dismiss the case. Among other things, that court ruling held that attorneys have an obligation to meaningfully review the facts of a lawsuit before filing it and that the CFPB has the authority to take action against attorneys engaged in illegal consumer debt-collection practices.
WASHINGTON, D.C. – Today the Consumer Financial Protection Bureau (CFPB) took action against the nation’s two largest debt buyers and collectors for using deceptive tactics to collect bad debts. The Bureau found that Encore Capital Group and Portfolio Recovery Associates bought debts that were potentially inaccurate, lacking documentation, or unenforceable. Without verifying the debt, the companies collected payments by pressuring consumers with false statements and churning out lawsuits using robo-signed court documents. The CFPB has ordered the companies to overhaul their debt collection and litigation practices and to stop reselling debts to third parties. Encore must pay up to $42 million in consumer refunds and a $10 million penalty, and stop collection on over $125 million worth of debts. Portfolio Recovery Associates must pay $19 million in consumer refunds and an $8 million penalty, and stop collecting on over $3 million worth of debts.
“Encore and Portfolio Recovery Associates threatened and deceived consumers to collect on debts they should have known were inaccurate or had other problems,” said CFPB Director Richard Cordray. “Now, the two biggest debt buyers in the market must refund millions and overhaul their practices. We will continue to take action to protect consumers from illegal and obnoxious debt collection practices.”
Encore Capital Group, Inc. is headquartered in San Diego, Calif. Its subsidiaries also named in today’s action are Midland Funding LLC, Midland Credit Management, and Asset Acceptance Capital Corp. Together, they form the nation’s largest debt buyer and collector. Portfolio Recovery Associates is the nation’s second largest debt buyer and collector. Portfolio Recovery Associates is a Delaware for-profit corporation headquartered in Norfolk, Va. and is a wholly-owned subsidiary of PRA Group, Inc.
As debt buyers, Encore and Portfolio Recovery Associates purchase delinquent or charged-off accounts for a fraction of the value of the debt. Although they pay only pennies on the dollar for the debt, they may attempt to collect the full amount claimed by the original lender. Together, these two companies have purchased the rights to collect over $200 billion in defaulted consumer debts on credit cards, phone bills, and other accounts.
The CFPB found that Encore and Portfolio Recovery Associates attempted to collect debts that they knew, or should have known, were inaccurate or could not legally be enforced based on contractual disclaimers, past practices of debt sellers, or consumer disputes. The companies also filed lawsuits against consumers without having the intent to prove many of the debts, winning the vast majority of the lawsuits by default when consumers failed to defend themselves. These practices violated the Fair Debt Collection Practices Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Encore and Portfolio Recovery Associates illegally attempted to collect debt that they knew, or should have known, may have been inaccurate or unenforceable. Specifically, the CFPB found that the companies:
Encore and Portfolio Recovery Associates collected debts through lawsuits and threats of legal action in unlawful ways. Specifically, the companies:
Pursuant to the Dodd-Frank Act, the CFPB has the authority to take action against institutions or individuals engaging in unfair, deceptive, or abusive acts or practices or that otherwise violate federal consumer financial laws. Under the terms of the CFPB orders released today, Encore and Portfolio Recovery Associates are required to:
NEW YORK – Attorney General Eric T. Schneiderman today announced that his office has obtained a settlement from Encore Capital Group, Inc. (“Encore”), a major debt buyer, for bringing improper debt collection actions against thousands of New York consumers. For years, Encore sued New York consumers and obtained uncontested default judgments against consumers who failed to respond to the lawsuits, even though the underlying claims were untimely under New York law. Under the settlement, Encore will seek to vacate more than 4,500 improperly obtained judgments totaling nearly $18 million. Encore will also reform its debt collection practices and pay civil penalties and costs in the amount of $675,000.
“New York has laws in place to ensure no one can prey on consumers, and debt collectors are required to follow those rules,” said Attorney General Schneiderman. “Today’s settlement ensures that thousands of New Yorkers will see millions in relief from debts that were not enforceable in the first place. We will continue to take action against any company that abuses the power of the court system at the expense of hardworking families.”
Encore is a debt buyer that purchases unpaid consumer debts such as credit card debts from the original creditor or from other debt buyers at deeply discounted prices. Encore’s subsidiaries, which include Midland Credit Management, then attempt to collect on the debt. Through its subsidiaries, Encore is one of the most active debt collection plaintiffs in New York State, filing tens of thousands of debt collection actions each year.
It is unlawful for a debt collector to bring suit against a consumer when the claims are outside of the applicable statute of limitations. Under New York law, in order for an action to be timely filed, it must be commenced not only within New York’s statute of limitations, but also within the statute of limitations of the state where the cause of action accrued, if other than New York. In debt collection actions, a cause of action accrues where the original creditor of the debt resides. For example, while New York’s statute of limitations to collect on a debt is generally six years, if the original creditor on the debt was located in Delaware, which has a three-year statute of limitations, the shorter statute of limitations would govern the action.
The Attorney General’s investigation found that, despite the clear requirements of New York law, Encore brought debt collection claims that were untimely under the statutes of limitations where the causes of action accrued. Because most consumers fail to respond when they are sued by a debt collector, Encore obtained default judgments in its favor based on these time-barred claims.
In addition to seeking to vacate more than 4,500 improperly obtained judgments and paying $675,000 in civil penalties and costs, Encore has agreed to several important reforms of its current practices in New York. These include:
In addition to filing time-barred debt collection actions, Encore was also engaged in a practice that is often referred to as “robosigning”: Encore employees signed hundreds of affidavits submitted in support of debt collection actions each day without reviewing the affidavits and without possessing personal knowledge, as alleged in the affidavits, about the claimed debts and the amounts owed. The settlement requires Encore to institute reforms to ensure that “robosigning” does not occur and to ensure that all sworn statements filed in debt collection actions are reviewed prior to execution.
This settlement is a part of the Attorney General’s continuing efforts to combat unlawful and abusive debt collection activity. In May 2014, Attorney General Schneiderman obtained settlements from two major debt buyers, Portfolio Recovery Associates and Sherman Financial Group, who filed time-barred debt collection cases. Those settlements resulted in the vacature of more than 3,000 improperly obtained judgments.
In addition, in September 2014, New York’s Court System adopted a comprehensive set of reforms related to consumer debt collection actions that incorporate many of the recommendations of the Attorney General’s Office. More information on those reforms is available here.
Consumers facing default judgments arising from debt collection actions brought by Encore or its subsidiaries (including Midland Credit Management) who believe that the default judgment was improperly obtained because the claim was time-barred should contact the Attorney General’s Office within ninety days. Such judgments may be eligible for vacature pursuant to the settlement.
This case was handled by Special Counsel Carolyn Fast, Special Assistant Attorney General Stephen Mindell, and Bureau Chief Jane Azia, all of the Consumer Frauds and Protection Bureau, and Executive Deputy Attorney General for Economic Justice Karla Sanchez.
