JPMorgan Chase (JPM) pressured customers to repay debts they did not owe, sold collections agencies rights to credit card accounts that had been extinguished in bankruptcy and tolerated frequent errors by its third-party collections attorneys, according to a lawsuit filed by Mississippi Attorney General Jim Hood on Tuesday.
The state's complaint is, despite significant redactions, the most detailed and potentially damning attack so far on JPMorgan Chase's credit card debt collections operation, which the bank has shut down.
JPMorgan Chase declined to comment on the Mississippi complaint through a spokesman.
The bank ceased filing suits to collect consumer debt in the spring of 2011, following a probe by the U.S. Office of the Comptroller of the Currency into the legitimacy of its collections lawsuits. That probe ended in September, when the OCC ordered the bank to repay customers and reform its collections department.
JPMorgan Chase disbanded the group tasked with suing to collect delinquent accounts entirely the following month, leaving the future of its debt collection operation unclear. Its decision to shutter the litigation group, an apparent acknowledgement that further collections suits could be fraught with legal and regulatory risk, may also suggest that the company was bracing for a wave of lawsuits from state attorneys general.
The Mississippi attorney general's complaint, filed in the Chancery Court of the First Judicial District of Hinds County, Miss., alleges "egregious" lapses at every stage of JPMorgan Chase's collections process — from violations of the Servicemembers Civil Relief Act to Microsoft Excel errors that compromised $600 million dollars in defaulted customer account records.
Bank executives were allegedly aware of many of the problems with the collections unit, where employees referred to one of JPMorgan Chase's outside legal providers as an "outhouse" firm. Nevertheless, the bank continued to churn out faulty lawsuits in the hope of obtaining uncontested judgments, the complaint says. Robo-signing of legal documents, sloppy legal work and reliance on inadequate recordkeeping persisted even after the bank was rebuked for similar errors in handling defaulted mortgages, it claims.
"Chase pursued Mississippi consumers for debt that they had paid or settled, did not owe, or had discharged in bankruptcy. Consumers' paychecks were garnished and their credit damaged, making it harder for them to refinance their homes, take out a car or student loans, or even get jobs," Hood said in a written statement. "We have tried for months to resolve our concerns cooperatively, but have been forced into litigation."
If accurate, the state's allegations threaten to escalate JPMorgan Chase's consumer debt collection woes, which have already resulted in a consent order with the OCC, a civil suit filed by California, and investigations by 14 states including Iowa and Massachusetts. Mississippi Attorney General Hood alleges that Chase sought to collect debts from customers who had already paid them and may have similarly mishandled car and student loans.
JPMorgan Chase's control failures date back as far as 2007 but increased as the debt collection operation struggled to keep up with the wave of credit card defaults during the recent recession, the Mississippi complaint says. The bank's consumer-debt recoveries grew more than tenfold during the previous decade, to $1.2 billion in credit-card recoveries in 2009 from $130 million in 2000, the complaint states.
To meet this frantic pace of recoveries, the bank allegedly set collections quotas for employees and fired those who failed to meet them. It used outmoded recordkeeping systems for customer accounts, and its different systems often suffered from discrepancies in basic customer information, the complaint says. These problems were worse with accounts JPMorgan Chase acquired from other financial institutions, including Washington Mutual, BankOne and the card issuer Providian.
For Chase, the main cost of its problems so far has been the substantial revenue it failed to collect during the OCC's two-year investigation. Attorney General Hood is seeking up to $10,000 from the bank for every violation of the Mississippi's Consumer Protection Act, plus compensation for the state's legal costs of pursuing the case. The complaint lists 18 types of alleged violations. Among them: quoting inaccurate debt figures to customers, failing to investigate credit-bureau disputes and selling compromised accounts to debt buyers who then initiated their own collections efforts.
By seeking to hold JPMorgan Chase responsible for misconduct by law firms and collections agencies it hired, the Mississippi lawsuit could serve as a warning to other banks that outsource collections to outside vendors.
The suit alleges widespread violations by Couch, Conville & Blitt, a New Orleans, La., law firm that the bank used for collections litigation beginning in 2009, and Mann Bracken LLP, a defunct law firm which the bank used for arbitration claims through mid-2009. The complaint also names NCO Financial Systems among the collections agencies whose misconduct JPMorgan Chase failed to check.
"Chase engaged these firms to handle official legal proceedings against its customers and let them engage in widespread deception, with no supervision and no repercussions," the complaint states.
Operating through the outside firms, JPMorgan Chase "filed complaints purely as a strategy to obtain default judgments," submitting claims backed by "no evidence whatsoever" in the hopes that borrowers would not respond and the bank would be awarded default judgments, the complaint claims. When borrowers fought the claims, Chase would typically abandon its efforts, it adds.
Couch, Conville & Blitt "failed to conduct any meaningful review of the alleged debt to verify the customer information" and "did not even review documents before they were filed in court," the Mississippi complaint states. Despite spending little effort on the suits, JPMorgan Chase and the law firm would then seek awards for "exorbitant" attorney's fees that ranged up to one-quarter of the total amounts demanded, it says.
Mann Bracken's recordkeeping problems were so widespread prior to its demise that JPMorgan Chase employees referred to the firm as "Mann Broken," the Mississippi lawsuit says. The law firm's customer-account data did not match Chase's about 15% of the time in 2009, it says.
These recordkeeping problems prompted a group of JPMorgan Chase employees to try to fire Mann Bracken in 2008, but top Chase executives blocked the efforts, the complaint states. The bank kept using Mann Bracken until mid-2009, just prior to its closure amid a Congressional investigation.
JPMorgan Chase Chief Executive Jamie Dimon acknowledged vender-oversight problems in a letter to employees in September, writing that the management of third-party firms was an area where the company needed to improve.