First of two parts
State attorneys general and the Federal Trade Commission have regularly skirmished with the debt collection industry over what they regard as the use of aggressive legal tactics supported by scanty records. Now the banks that originally created the debts are at risk of being drawn into the fray.
Many of the authorities' concerns about collection practices bear a resemblance to the mortgage market's so-called robo-signing scandal, which ultimately cost banks $25 billion to settle. Alleged problems in both markets include the use of mass-produced affidavits, piecemeal or nonexistent account records and haphazard quality controls.
Among the government officials probing banks' consumer debt collection practices is Iowa Attorney General Tom Miller, according to people who were contacted by his office. Miller, a Democrat and former president of the National Association of Attorneys General, played a lead role in the national mortgage settlement brokered jointly by the federal government and state attorneys general.
Iowa's review is still in its early stages, sources say, but Miller and a group of like-minded AGs are approaching debt collection as a potential follow-on to the mortgage servicing agreement. The concern is that sloppy business practices may mislead judges and produce erroneous claims against consumers.
"There are egregious examples of abuse of the judicial system," says a source familiar with the activities of the government officials. The states are "looking at the banks themselves, not just third party debt buyers," the source adds.
The scrutiny involves delinquent consumer debt. Typically, when such obligations become more than 180 days past due, banks write down the balance and try to recoup whatever they can, either by themselves bringing collections suits against debtors or by selling rights to do so to outside collection agencies. Individual debts amount to only a few thousand dollars per consumer on average, but the total sums at issue amount to billions of dollars a year for each of the country's largest banks. Chargeoffs and delinquencies have fallen sharply since the end of the recession (see page 4), but collection efforts involving the millions of accounts already written off will continue for years and new ones are constantly cropping up.
In addition to Iowa's AG, a slew of other government authorities are taking a similar look at banks' sale of defaulted accounts into the secondary market. Mississippi Attorney General Jim Hood and a separate group of AGs have been investigating JPMorgan Chase's handling of credit card debt since last spring, and the Consumer Financial Protection Bureau, a federal agency created under the Dodd-Frank Act with authority over banks and nonbanks alike, launched systematic examinations of major debt collectors at the beginning of 2013.
The FTC, which has jurisdiction over debt collectors but not banks, has been gathering data on the industry for several years. It is now on the verge of releasing a report that will detail the records debt collectors possess when making repayment demands and their relationships with banks.
"The main purpose of the FTC's study is to provide insights to assist federal and state policymakers and law enforcers in their decision-making," says Thomas Pahl, assistant director of the commission's financial practices division.
Key regulators appear to have a strong sense already that current industry practices are insufficiently rigorous. The clearest sign came last October when American Express signed a consent order with the Federal Deposit Insurance Corp. and the CFPB. The agreement requires Amex to provide credit card borrowers with "documentation evidencing the debt and each transaction" on all contested debts.
Although the records required by regulators significantly exceed what it has previously filed in state court collection cases, Amex says it will not have problems complying with the mandate. Lack of documentation has not been an issue for American Express," says spokeswoman Marina Norville. "We do our own record keeping, and look through our records to ensure we have what we need."
Other banks and debt collectors may prove unable to produce such materials consistently, or do so at a reasonable cost, both collections industry participants and consumer advocates say.
"For millions of Americans, you'd wipe clean what they owe because there might not be 10 points of documentation. Maybe there're only four of 10," says Mark Schiffman, vice president of ACA International, a trade association for collections agents. Banks have not typically furnished full account records to debt collectors, and abruptly requiring exhaustive documentation "would be game over" for many in the industry, he adds.
For banks, consumer credit defaults are the downside of a cyclical business. Peaking at $83 billion in 2009, credit card chargeoffs have since fallen by more than half, dropping to $34 billion in the four quarters through last September. In both good times and bad, however, collections are an important source of revenue for banks.