Banks Could Be Next Target in Debt Collection Litigation

Just when it seemed that some banks might be putting their legal woes behind them, another threat has emerged that could involve the entire industry — debt- collections litigation.

The Consumer Financial Protection Bureau this summer sued a debt-collections law firm in Atlanta, the agency's first such lawsuit, claiming that it relied on inaccurate information in affidavits and other documents to pursue debts against individuals who did not owe anything, or owed less than what was claimed.

Debt collectors have come under increasing scrutiny from regulators and court officials. Banks themselves have found themselves in lawmakers' crosshairs over their own debt-collection departments, and JPMorgan Chase last year shut down its in-house department that filed lawsuits to collect debts.

The newest issue could swing the door wide open for lawsuits against any bank, of any size, that hires a debt-collections firm, legal experts say.

In its lawsuit filed in federal court in Georgia on July 14, the CFPB accused Frederick J. Hanna & Associates of relying on erroneous information to pursue debt claims. Hanna & Associates "operates less like a law firm than a factory. It relies on an automated system and non-attorney support staff to determine which consumers to sue," the CFPB said.

While the CFPB only sued the debt-collections firm, it may soon proceed to filing suits against banks, said Peter Holland, an adjunct law professor at the University of Maryland.

"Should banks be concerned? Absolutely," said Holland, who also represents consumers in litigation with debt collectors. "Banks are the headwaters. They're the ones that sent the accounts to Hanna where the affidavits are not correct, where the paperwork is not there."

The Hanna & Associates lawsuit, for example, includes this paragraph that specifically points out banks' role:

"Since January 1, 2009, defendants have collected or attempted to collect debts for credit-card issuers such as JPMorgan Chase, Bank of America, Capital One and Discover. … The alleged debts were incurred by consumers primarily for personal, family or household purposes."

If the CFPB believes that a bank sent erroneous information to a debt-collector, it could sue the bank, said Leslie Tayne, a Melville, N.Y., attorney who represents consumers in litigation with debt collectors.

"Banks could be liable if they're not paying attention to what's going on," Tayne said. "You can't just dump hundreds of thousands of accounts on a debt-collection firm and say, 'Go do what you have to do.'"

"There is a set of rules for a reason and I think it would be irresponsible for banks to give out their paper without monitoring what's going on," Tayne said.

Bank of America declined to comment. Capital One, Discover and JPMorgan did not respond to requests for comment. The American Bankers Association also declined to comment.

Although not named in the CFPB's lawsuit, numerous other banks have hired Hanna & Associates to pursue debts, on everything from credit-card debt and car loans, to auto loans and student loans, according to state court records. In the past five years, Hanna & Associates has represented BB&T; Citigroup; HSBC; Merrick Bank in South Jordan, Utah; and SunTrust Banks, among others, according to documents filed with the DeKalb County, Ga., Superior Court.

Last month, Hanna & Associates filed a motion to dismiss the CFPB's lawsuit, arguing that the CFPB is trying to regulate lawyers, an authority that it does not have, and that argument has merit, said Caren Enloe, an attorney with Morris, Manning & Martin in Durham, N.C., who is not involved in the Hanna case.

"The length to which the CFPB is reaching … is a major concern," said Enloe, who represents banks and debt collectors.

"The [CFPB's] claims contravene the centuries-old principle of deference to states in regulating the practice of law, as well as Congress’s express intent notto regulate how lawyers litigate cases in state courts," Hanna & Associates' attorneys said in a Sept. 12 court filing.

Hanna & Associates "completely cooperated with the Consumer Financial Protection Bureau over the course of the last year, including expending thousands of man hours, to assist the bureau with reviewing our law practice," the firm said in a statement on its website. "We strongly deny the allegations of the complaint and, moreover, the overall mischaracterization of our law firm."

"The [CFPB's] complaint contains no allegationsas to why defendants knew or should have known any affidavits contained alleged misrepresentations," Hanna & Associates' attorneys said.

A CFPB spokeswoman declined to comment.

Banks could face other litigation tied to debt collectors. A potential claim could be made by consumers who were wrongly targeted by debt collectors, Holland said.

"It is really not much different from identity theft," Holland said. "Should banks be immune from lawsuits by its customers whose identities were stolen as a result of hacking?"

The CFPB also could also use its authority to bring litigation against a bank for violations of so-called unfair, deceptive or abusive acts and practices statutes, if a bank knowingly sells debt with unverified personal information to a debt-buying firm, said Claudia Wilner, senior staff attorney at the New Economy Project, a New York group that monitors the debt-collection industry.

"That might be something that a regulator would want to look at, selling false or inaccurate information," Wilner said. "That's the kind of unfair, deceptive practices that the CFPB could get at."

Finally, state laws could also be used as the basis for a lawsuit against a bank for how its third-party debt collection firms operate, Holland said. Several state attorneys general, including New York's, have already launched investigations into the practices of debt collectors, and that could eventually be extended to banks, Holland said.