Debt-buying giant Encore Capital Group Inc. agreed Friday to settle claims that it used improper collection strategies in New York, including obtaining judgments against consumers for debts that were too old to collect.
New York Attorney General Eric Schneiderman's office announced the settlement. Under terms, San Diego-based Encore Capital will pay a $675,000 penalty and vacate more than 4,500 court judgments against borrowers totaling nearly $18 million.
Encore Capital is one of the most active collection plaintiffs in New York State, filing tens of thousands of debt collection actions each year, according to Schneiderman's office. The company buys unpaid debts such as credit card debts from original creditors or other debt buyers and then uses subsidiaries, including Midland Credit Management, to collect on those debts.
The settlement is part of a larger push by federal and state authorities to stop questionable debt collection practices that they believe hurt vulnerable borrowers just as they are trying to dig out from the financial crisis.
According to state regulators, lawsuits from debt buyers tend to pour in by the hundreds as if manufactured on an assembly line. They often include generic testimony or bogus affidavits and are churned out so fast that they're rarely reviewed for accuracy. Similar problems dogged the foreclosure of homes and led to a public outcry and multibillion-dollar settlement by some of the nation's biggest banks.
"We are pleased to have addressed and resolved the attorney generals concerns in a manner that supports consumers interests," said Lisa Margolin-Feher, a spokesperson for Encore Capital, adding that the company is committed to treating consumers fairly. That commitment, she said, was demonstrated when it created "the industrys first consumer bill of rights."
In May, Schneiderman's office reached agreements with other large debt buyers including Portfolio Recovery Associates LLC (PRA Group) and Sherman Financial Group LLC. Under those deals, the companies agreed to nullify judgments, valued at more than $16 million, against New York residents.
In New York State, according to Schneiderman's office, Encore Capital and its subsidiaries filed more than 239,000 lawsuits from 2007 to 2012. The debt buyer collected $564.7 million in legal collections in 2013, according to a regulatory filing, up more than 49% from those in 2011.
Unlike mortgage foreclosure lawsuits, collection cases tend to play out away from public view, consumer lawyers say, because borrowers seldom show up in court to contest the suits. As a result, an estimated 95% of collection lawsuits result in default judgments against borrowers, an automatic victory for the debt buyers that enables them to garnishee consumers wages or freeze bank accounts.
Regulators believe the problems are a result of the way debts change hands. When debt buyers purchase bad loan bundles, they often receive little information - such as original account statements or payment histories - about the accounts. That's led some debt buyers to quickly produce affidavits - often rife with mistakes, regulators say - asserting the accuracy of outstanding debts.