Even as banks struggle to put behind them the mortgage robo-signing scandal, new accusations of similar problems with other forms of consumer debt are threatening the industry.
Christopher Willis, a litigation partner at Ballard Spahr LLP who defends banks in consumer finance cases, insists that prevention can still head off most problems. Following are pointers for banks that were pieced together from a discussion with Willis about his firm's watchlist for avoiding documentation troubles.
Know What You're Buying
Before a bank buys a credit card portfolio from another bank, it should make sure it's familiar with prior recordkeeping. In cases where a bank is acquiring a portfolio without the employees who administered it previously, its custodians should first become familiar with the originating entity's operations, says Willis. The last thing a bank wants to do is end up in front of an unsympathetic judge unfamiliar with the records and consigned to arguing that they were compiled in accordance with standard industry practice.
Pay Attention to Early Signs of Trouble
The best way to handle complaints is before they turn into serious trouble. That means reviewing complaint records for signs customers have repeatedly pointed out discrepancies in records of what they owe. "If you assess how customers have reacted to the system, you might be able to find out where a problem is coming from and remediate it," says Willis.
Look Beyond Affidavits
It's important for banks to look beyond affidavit execution — a major source of trouble in the mortgage robo-signing scandal — and focus on account recordkeeping as well, says Willis. That includes "how information gets to them and how it's accessed by the person signing. If an affidavit is built on something unreliable, then you haven't solved your problem," he says.
Look Before You Sue
Before filing collections cases in court, banks should consider whether "there's anything about the file, or the company's experience in a particular jurisdiction, that might raise red flags," recommends Willis. "Take a good look if you've got a credit card account where there's been a lot of communication from the borrower about unauthorized charges."
Insist on Possessing the Documentation
Even in an electronic world, having records in hand matters. Remember the trouble banks had in producing mortgage notes? "If you don't get it [documentation] on the front end, you take the risk that the entity that sold it [the portfolio] to you will no longer be there or be cooperative," Willis warns. "That argues for getting more information at the time of sale."
Banks should make sure to refer to the individual customer information they possess throughout their institutions to make sure they're handling accounts appropriately. "If you've got a credit card division and a mortgage division, you might find out from one that the borrower is a service member. It can be very bad if that information doesn't get transferred over to other business lines," Willis says.
Even if all else fails, the law contains advantages for banks. Consumers who have already had judgments entered against them will struggle to overcome Res Judicata, a legal principle that restriction litigation in settled matters. The plaintiffs bar also faces considerable challenges assembling class actions because differences in consumers' underlying complaints may undermine the claim of commonality.