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.
More aggressive defenses in court and more rigorous rules regarding unscrupulous practices in the second-hand debt market could also complicate and raise the cost of banks' own debt-collection efforts. Another risk is that highly publicized cases of poor documentation and plaintiffs' victories in court could encourage other borrowers to pose legal challenges or simply stop paying.
Missing Records, Unprovable Cases
Willis emphasizes that for banks reviewing documentation practices is purely a prudent risk-management measure; there is no reason to believe the courts will find that substantive documentation failings are widespread, he says.
Consumer advocates argue otherwise, at least for outside debt collection agencies. When banks sell delinquent loans to such firms, its transfer is accompanied by proof of how the debt was created, critics say.
"Banks actually keep pretty crummy records," says Peter Holland, a University of Maryland law school professor who focuses on consumer debt.
No less than the Association of Credit and Collection Officials, an industry trade group, has admitted as much. "[D]ocumentation is often unattainable for a variety of reasons, the most important of which is the creditor no longer has the information or did not have it when selling an account," the association wrote in a 2011 letter to the rules committee of Maryland's Court of Appeals. "Greater discussion is needed to identify the type of proof sufficient to seek a judgment."