'Robo' Credit Card Suits Menace Banks

Last year JPMorgan Chase & Co took New York resident Shady Gergis to court over a few thousand dollars in allegedly unpaid credit card debt.

The facts of the suit were banal, but Chase's case landed in the courtroom of Noach Dear, a Brooklyn, New York civil court judge with a reputation for being tough on collections efforts. Taking no chances, Chase hired pricey white-shoe law firm Alston & Bird to face off against the self-represented Gergis.

In June, Judge Dear threw Chase's suit out. The judge described as "robo testimony" the statements of the bank's document custodian — a 17-year Chase veteran — and made it clear that he believed Chase had failed to present evidence to support the accuracy of its own records.

The case received little attention and ultimately could prove to be merely a populist fluke. Of course, that's what many observers first said when judges began dismissing home foreclosure suits over problems with affidavits and recordkeeping — a trend that eventually mushroomed into the nationwide robo-signing mortgage scandal.

Now, a growing number of judges, state attorneys general, federal agencies, consumer attorneys and academics are concluding that banks may be susceptible to similar claims in other areas of consumer lending, including the credit card market. If banks prove unsuccessful in defending themselves from claims that their records are shoddy, they run the risk of inviting a new regulatory crackdown and legal battles over the validity of claims involving tens of billions of dollars in unsecured debt.

Under normal circumstances, the handling of delinquent consumer loans is fairly straightforward. When consumers fail to pay off such debts, banks write down the balance and try to recoup whatever they can by bringing collections suits against debtors themselves or by selling rights to the debt to specialized collection agencies. The individual debts amount to only a few thousand dollars per consumer on average, but the total sums at issue are large; last year, market leaders Bank of America and Chase each charged off $7 billion in credit card debt.

One silver lining for banks is that they have not been the main focus of documentation dispute so far. Instead, consumer advocates and courts have directed their harshest barbs at the third parties who acquire rights to delinquent credit card accounts and then seek to turn a profit collecting from consumers.

The risks that brand-name banks will themselves get caught up in the dispute appear to be rising, however. As American Banker reported earlier this month, JPMorgan Chase stopped filing collection suits last April amid growing evidence of internal documentation problems. With the template for challenging collection procedures already established in the mortgage market, a broad attack on banks' debt collection practices in other areas of consumer lending could expand rapidly.

"If I were a collector of consumer debt, I'd look at my entire process from start to finish for whether there's an argument to be made that the process is not verifiable," says Christopher Willis, an Atlanta attorney for Ballard Spahr LLP, which specializes in defending banks in consumer lending cases. "I think there is substantial danger."

For banks, the documentation issues pose threats on several fronts. If consumer advocates manage to hobble the ability of collections agencies to win cout judgments against consumers, it would likely reduce what they're willing to pay banks for defaulted receivables. Such bum debt typically sells for only pennies on the dollar, but those pennies add up to billions of dollars.