Courthouse 'Rocket Dockets' Give Debt Collectors Edge Over Debtors
The Consumer Financial Protection Bureau is considering new rules to govern debt collection practices that could for the first time include banks and other creditors that are collecting their own debt.
The New York bank took the move one month after signing a consent order with the Office of the Comptroller of the Currency to settle allegations that it took shortcuts in collecting consumer debts. But with accusations of "robo-signing" still fresh, and a related suit by California's attorney general pending, the bank could face a new wave of legal troubles.
Wells Fargo has temporarily stopped selling defaulted consumer debts to collections agencies. Its move follows a more drastic pullback by JPMorgan Chase and a regulatory crackdown on the collections industry.
The Office of the Comptroller of Currency has begun issuing its examiners "best practice" guidelines to end big banks' use of faulty records in the sale of defaulted consumer debt. The move could threaten billions of dollars of sales to collections agencies.
Early on a chilly Friday in January, Franklyn Williamson walked into courtroom 264B of the Prince George's County, Md., district courthouse. An athletic 55-year-old realtor in Silver Spring, Williamson had canceled a Florida trip to appear in court that day. He wasn't there for a trial or an official hearing, however. Like the 169 other people on the docket that morning, Williamson had received an official court summons for a one-on-one meeting with a debt collector.
Greeting Williamson in the courtroom was a handwritten sign instructing him in English and Spanish to check in with a court clerk, who was seated next to an empty judge's chair. As defendants lined up to approach the bench, the clerk sorted their files into stacks for plaintiffs' attorneys representing American Express (AXP), Capital One (COF), SunTrust (STI) and several large debt collection companies.
The attorneys sat around tables in the front, some stationing themselves in the jury and witness boxes. Defendants retreated to the back benches to wait for their names to be called. Eventually, one of the plaintiffs' attorneys picked up Williamson's file and beckoned him up to what Maryland's district courts refer to as his "resolution conference." Consumer advocates have another name for them: rocket dockets.
At first glance these sessions resemble legally mandated mediation: they take place in courtrooms and are administered by clerks and uniformed bailiffs. Attorneys from the Pro Bono Resource Center of Maryland, a local legal aid service, monitor the proceedings and offer some defendants assistance. A court interpreter is often on hand to help non-English-speaking debtors.
What's missing is a judge or other neutral moderator. Whether debtors realize that and that they have no legal obligation to sit down with their debt collectors is a hotly debated topic.
Many of the defendants are "just really not prepared at all. Most of them do think they're at trial," says Nicole McConlogue, the Pro Bono Resource Center of Maryland's consumer protection project manager, who regularly advises people summoned to the resolution conferences.
These debt-collection dockets, which are also used by the district court of Maryland's Montgomery County, are the most formalized version of a process familiar in overworked courts around the country. Consumer attorneys in California, Connecticut, Illinois, Indiana, Massachusetts, Michigan, New York, Texas and Washington describe various local-court efforts to streamline the processing of debt-collection lawsuits by eliminating judges. Some of these courts automatically route cases to traditional mediation sessions presided over by neutral third parties. More commonly, judges and courtroom staff encourage or instruct defendants to step outside for "hallway conferences" with debt collection attorneys, the consumer representatives say.
Courts are relying on these shortcuts to handle a flood of debt-collection lawsuits even as the basis for some of the suits has been called into question. Banks and debt buyers have been facing mounting regulatory scrutiny over serious flaws in their debt collection processes and paperwork, to the extent that one large credit card issuer has stopped filing collections lawsuits entirely. But the tightened standards for how banks and debt collectors handle defaulted consumer debt do not appear to have trickled down to local courts.
"We know that the banks need more oversight in what [debt] they sell," says Peter Holland, a University of Maryland law professor and a longtime critic of the dockets. "We know that the debt buyers need more oversight of what they sue over. So putting them into a courtroom that doesn't have a judge or a neutral [party] overseeing the process just magnifies the potential for error."
Consumer advocates and collections industry groups alike estimate that there are millions of debt-collection lawsuits filed annually, though nobody compiles statistics at a national level. In New York state alone, more than 200,000 debt collections lawsuits were filed in 2011, according to a June report from the nonprofit New Economy Project. In Maryland, third-party debt buyers alone filed 37,000 collections suits in 2011 and 22,000 the following year, according to an upcoming paper by Holland. The defendants tend to be members of minority groups with low incomes and few resources to hire their own lawyers.
Because banks and third-party debt collectors have made them the preferred venue, local courts have been struggling for years to cope with the caseloads. The volume has been especially high since the financial crisis struck. Judge Ben C. Clyburn, the Chief Judge for the District Court of Maryland, estimates that debt-collection cases constitute 70% of his court's entire civil docket.
When credit card customers and other small-time borrowers become delinquent, banks typically send out letters demanding repayment before resorting to filing a collections suit. JPMorgan Chase (JPM) recovered $1.4 billion in 2010 from credit card customers even after they had formally defaulted on their debts, according to Securities and Exchange Commission filings. In cases where even legal efforts fail, banks often write off the debt entirely and sell third-party collectors rights to try to collect it for pennies on the dollar of face value.
Both types of plaintiffs have a history of filing collections suits en masse, knowing that the majority of consumers will fail to show up in court, resulting in legally binding default judgments against them. Over the past few years, however, banks and others have come under increasing scrutiny over the validity of their claims.
A key focus are concerns that banks and collections agencies have built their cases on robo-signed affidavits and other procedural shortcuts and relied on faulty, incomplete or nonexistent account records, as American Banker has reported. Third-party debt buyers often sell and resell collections rights to bad debt multiple times over several years, compounding the risk that debtors will be pressed to repay false or faulty claims.
Last year, the Office of the Comptroller of the Currency introduced new guidance for how banks sell off their defaulted consumer debt, and the Consumer Financial Protection Bureau announced a sweeping overhaul of regulations for both original creditors and third-party buyers. The OCC also issued a consent order against JPMorgan Chase, requiring the country's biggest bank to reform its collections department. Chase closed its in-house legal collections unit in October, months after halting sales of defaulted consumer debt to outsiders. Wells Fargo (WFC) and Citigroup (NYSE:C) also drastically scaled back debt sales last year to revamp their processes and avoid running afoul of the changing regulations.
The Maryland courts system does not track the overall number of residents summoned to the resolution conferences, but district court records show that more than 5,100 people were summoned to the dockets in Prince George's County in 2013. As many as 300 people were summoned for some of the individual semi-monthly, two-hour sessions, according to the records.
In Prince George's County, Md. district court, the resolution conference roster is referred to as the "Hy-5" docket, which court staff and attorneys call an allusion to the Hyattsville courtroom where it originated. Similar resolution conferences take place weekly in nearby Montgomery County. Those two courts send people who are sued by debt collectors a notice on official letterhead, informing them of a "resolution conference and/or trial." The notices say that defendants are not required to speak to the plaintiffs' attorneys, but warn that people who do not show up could automatically lose their cases via default judgments against them.
Baltimore City district courts used to hold resolution conferences known as "007" sessions, also in reference to the courtroom where they were held, but discontinued them in 2011. That decision came after years of criticism from consumer advocates and a 2008 expose by the Baltimore Sun. But the rocket dockets have persisted in Prince George's and Montgomery Counties for years.
Court officials and lawyers for banks and debt collectors say the dockets offer consumers an opportunity to raise concerns or objections and negotiate down repayments.
"Anything that brings together a consumer and the owner of the debt to work through an issue as long as it's a respectful and legal process, it's a positive in my book," says Mark Schiffman, a spokesman for the trade group ACA International, the Association of Credit and Collection Professionals.
Consumer advocates dispute the notion that unsupervised dockets or hallway conferences provide a fair venue. Often, the attorneys representing banks and collections agencies are vastly more knowledgeable than the small-dollar debtors they're up against, they note.
"We always advise anyone who's pro se [self-represented] not to go into the hallway you don't have to have that conversation," says Carolyn Coffey, who heads the Consumer Rights Project for MFY Legal Services and advises low-income New Yorkers.
"People are often confused as to who the creditor's attorney is, because they walk around as if they are at home. People often think they are part of the court system and rely on their so-called advice to go and settle," she adds. "In the courtroom, at least you have an attorney or judge, someone impartial, who can ask questions and make sure that people actually owe the debt That's only going to happen if you have someone neutral guiding the settlement talks."
In Maryland debt-collection cases involving less than $5,000 the vast majority of the total are routinely routed to small-claims courts in local district courthouses. Small-claims courts were originally set up as a streamlined way for individuals to settle small disputes. Attorneys were not permitted to appear. However, states including Maryland typically allow or even require corporations to be represented by lawyers, effectively pitting experienced litigators against individuals with limited knowledge of the law.
The creditors' advantage may be bolstered by defendants' confusion about the legal status of the conferences themselves, consumer advocates add. Such uncertainty was prominent among debtors summoned to Prince George's Hy-5 docket in mid-January.
Williamson, the Maryland realtor, was summoned to discuss a lawsuit over an unpaid bill from a credit card with a $450 limit. Midland Funding, the plaintiff, said he owed $1,222, including fees and interest.
By the end of his courtroom meeting with Midland's attorney, Williamson had agreed to pay $611 in monthly installments of $30 each. Leaving the room, he said he felt he'd had no choice but to participate in the resolution conference and work out a deal.
"If you don't show up, they file a final judgment," he said.
Midland is a unit of Encore Capital Group (ECPG), one of the largest buyers of charged-off credit card debt and a fixture of courtrooms around the country. Encore spent $169 million filing debt-collection lawsuits and recouped $448 million through such "legal collections" in 2012, according to its annual report. Company representatives did not respond to multiple requests for comment.
Judge Clyburn of Maryland, who is well regarded by consumer advocates, calls the resolution conferences voluntary and part of an effort to manage the deluge of collections suits filed by banks and third parties. The court is tweaking the language on its official summons to make it clearer to defendants that they are not required to attend them, he says. The notice currently tells defendants that they may request a trial. Those who believe they owe nothing are also told to fill out and return paperwork saying they intend to defend themselves against their suits.
After American Banker began reporting on the rocket dockets, Clyburn said he would take a closer look at the resolution conferences and raise the issue with a state access-to-justice commission he vice-chairs. The commission reviews Maryland court policy with the goal of ensuring low-income and self-represented citizens receive fair treatment.
"We don't want the appearance of the credit bar using the imprimatur of the court in any way to legitimize" the conferences, Clyburn says. "We walk a fine line, but we try to do it in a way that's voluntary."
He referred specific queries about the Prince George's and Montgomery county systems to the administrative judges for those districts, Thomas Love and Eugene Wolfe, respectively. Love did not respond to multiple interview requests made directly and via the Maryland Courts' press office.
Wolfe says that resolution conferences provide a service to defendants who have failed to respond to the lawsuits against them. He rejects the suggestion that a judge or other neutral party should oversee the sessions.
"We're not there as mediators," Wolfe says. "If we start going through documents, and we then say, 'You don't have XYZ,' then I think we become advocates. And that's not what we're supposed to be."
The summons reminds defendants who want to contest the debts to fill out the paperwork saying they intend to defend themselves against their suits, the judge says. For those who acknowledge debts, the resolution conferences offer opportunities to negotiate better terms than they will get from default judgments, he adds.
"What we're trying to do is up front get them [defendants] to do something, so I'm not going to be inundated" later with requests to vacate judgments, he says.
Creditors and their lawyers are strongly in favor of the unsupervised conferences.
"It helps the court resolve cases that really don't need to have a trial," says Neal Markowitz, a lawyer who represents both banks and debt collection firms at the sessions. During a January Hy-5 docket, he represented clients including American Express and SunTrust.
"The court is providing the service and having a legal aid team in there," he says. "I don't know how much more debtor-friendly you can get."
Sonya Conway, a spokeswoman for American Express, said, "We follow the court process as mandated by the presiding judge." Capital One spokeswoman Pam Girardo said, "The Maryland judicial system asks law firms to participate in this process to talk to customers who want to pursue this option." SunTrust spokesman Hugh Suhr declined to comment.
One thing creditors, consumer advocates, and court officials agree on is that local courts are struggling to keep up with the high volume of collections lawsuits. Yet as the use of unsupervised proceedings has risen, so have the objections.
"We've got good judges, who tell the clients what their rights are or to look at the documents. Then there are the bad judges who tell the defendant, 'Well, why don't you go out into the hallway and talk to the attorney,'" says Claire Johnson Raba, a staff attorney with Bay Area Legal Aid in San Francisco.
"A lot of these judges just want to get these cases over and done with and out the door," she adds. "The bad judges really put the debtors at the mercy of the debt collection attorneys."
Claudia Wilner, a senior staff attorney with New York's New Economy Project, says that while "it's common for a court to encourage the parties to settle generally," the problem with courts encouraging "hallway conferences" in debt-collection cases is that "there's always a represented party and an unrepresented party. One thing that the court could do is just require a little more information from the debt buyers before they get into these extended settlements or hallway conversations."
In the small-claims court in Indiana's Vanderburgh County, initial hearings are presided over by an official who is not a judge. Attorneys from "some of the big collectors will stand off in the corner and they'll call people up to them," according to Katherine Rybak, a staff attorney with Indiana Legal Services.
Judge Robert J. Tornatta, the judge who supervises the system in Vanderburgh County, cites the nature of the cases and the volume as a reason for that shortcut. The small-claims court fielded some 14,000 new cases in 2013, he says.
In debt-collection small-claims cases, "the vast majority of the time the person owes the debt and just can't pay it," he says. "The court is supposed to be neutral you really can't take the debtor's side and say, 'Hey, these are your rights.'"
Besides judicial impartiality, Tornatta also cited a more practical concern when asked if Vanderburgh County would consider appointing a judge or a neutral third party to oversee such proceedings.
"I don't know where the court's going to get the resources to do it," he says. "We're doing what we can right now to hang onto the resources we have."
Chris Cumming contributed reporting.