State courts around the country are starting to reform the ways they handle lawsuits over unpaid bills, widening the regulatory overhaul of banks' and third parties' debt-collection practices.
New York's top judge last week proposed sweeping reforms for creditors and collectors looking to sue customers, unveiling rules that consumer advocates call the most comprehensive in the nation.
If adopted next month, the proposed rules would join a broader regulatory crackdown on the debt-collection industry. They would also address problems that are common in courts across the country, which are flooded by debt-collection lawsuits and sometimes rely on shortcuts to manage them.
Other states are also trying to fix some of those shortcuts. Maryland's district courts, which have drawn criticism for summoning borrowers to judge-less "rocket docket" mediation sessions with lawyers for banks and debt collectors, modified those sessions after American Banker wrote about them in February.
Now judges make announcements at the beginning of and sometimes during the sessions, making sure that defendants know they are voluntary, according to the incoming chief judge of Maryland's district courts.
That change still falls short of the total elimination that some consumer attorneys argue for. But it is part of a widening crackdown from regulators, legislators, attorneys general and judges over every aspect of the debt-collection industry. Industry members say they fear the squeeze may make some legitimate debts too hard to collect.
The latest blow to the industry came Thursday from New York Attorney General Eric Schneiderman, who said that two of the largest consumer debt buyers agreed to drop collections on about $16 million worth of judgments and pay fines to settle state charges.
"When you get a history of documented abuses … there comes a point where you decide you have to do something," Jonathan Lippman, the chief judge of New York state, said in an interview this week.
Banks and debt collectors regularly resort to the courts when trying to recoup money from customers who have stopped paying their credit card bills or other loans. After writing off debts as uncollectible, banks regularly sell them for pennies on the dollar to third-party collectors, which then file lawsuits en masse to compel borrowers to repay them.
Several systemic problems plague this process, including "robo-signing." Banks have frequently failed to provide complete or accurate paperwork to verify the debts that they sell, meaning that debt collectors sometimes sue borrowers for the wrong amount or for bills they have already repaid. They also sometimes sue borrowers after the statute of limitations has expired on the debts. Schneiderman alleged that Portfolio Recovery Associates and Sherman Financial, the two debt buyers who agreed to settle with his office, regularly filed lawsuits on claims that were too old under New York law.
As a result, state courts are deluged by collections lawsuits that are estimated to number in the millions annually nationwide. Many of these suits are brought on the basis of faulty paperwork, and most of them are filed against people who are low-income and unrepresented by lawyers. More than 100,000 debt-collections lawsuits were filed in New York state courts last year, and 98% of them were filed against people who do not have lawyers, according to Lippman.
"Every creditor certainly has a right to collect on a debt, but we want the process to be fair and equitable," he says. "I think everybody in our profession understands that justice shouldn't just be for those who have the means, and you should have a level playing field."
Mark Schiffman, a spokesman for the trade group ACA International, the Association of Credit and Collection Professionals, says that his group's members abide by court rules now and will continue to do so. But he expresses concerns that New York's proposed changes might eliminate creditors' ability to sue borrowers over some legitimate debts.
"We'll follow whatever the rules are. What we just don't want to see is this being made so onerous that we are just wiping debt away for consumers," he says.
When asked to name other states with consumer credit lawsuit best practices that he admires, Judge Lippman cites court rules in Maryland and Connecticut as well as legislation in California and North Carolina.
"I think it's continuing to be an emerging subject of interest to legislators and to lawyers, and I think there's been a spotlight on this in our state certainly," he says. "I think you'll continue to see reforms, and I hope that New York's efforts in this regard contribute to the dialogue on this."
Maryland in particular has been both praised and criticized for how it handles debt-collection lawsuits. Under Judge Ben C. Clyburn, who is retiring this month as chief judge for the District Court of Maryland, the state implemented new rules that required better documentation from third-party debt buyers who sue borrowers over debts they have purchased from the original creditors. But some of Maryland's district courts are also the home of the controversial rocket dockets or "resolution conferences."