Banks have faced an ever-growing number of lawsuits in recent years accusing them of violating consumer protection laws while trying to collect debts.
But lawsuits can be costly and time-consuming for all parties, so many plaintiffs' attorneys are now trying to win quick settlements for their clients by simply threatening banks with debt collection lawsuits.
It's the latest headache for banks when it comes to the unpleasant task of collecting unpaid debts. Many industry sources say the number of so-called pre-litigation demand letters has soared in recent months, with at least one plaintiffs' attorney admitting that he sends about 250 such letters per month.
Banks and their own attorneys have varying ways they respond. Some say the best course of action is to ignore the letters and hope the trial lawyers target another institution.
Often banks will decide to settle, if it turns out there's a legitimate basis for a complaint. But some attorneys say the best approach is to engage an attorney who has sent a letter, discern whether there's a problem and attempt to fix the bank's internal operations. That approach can actually help a bank beef up its compliance procedures, said Charity Olson, an Ann Arbor, Mich., attorney who represents banks in debt collection matters.
"One of the first things an examiner may ask is for an audit of all the consumer complaints you have received," said Olson, whose debt collection clients include two credit card lenders: the $11 billion-asset Comenity Bank in Wilmington, Del., and the $1.5 billion-asset First Premier Bank in Sioux Falls, S.D.
"If the bank's response is that they don't keep track of that, that would be problematic," she said.
Debt collection practices have come under heightened scrutiny in recent years amid consumers' claims of abuse by lenders and collection agencies.
In July the Consumer Financial Protection Bureau released a plan that would limit debt collection agencies to six collection attempts per week and to require confirmation of a debt before contacting a consumer.
But that proposal applies only to collection agencies, debt buyers, collection law firms and loan servicers, not banks or credit card lenders. The CFPB is expected to convene a separate review panel to come up with debt collection guidelines for banks and credit card companies, though how that plays out with Donald Trump in the White House and Republicans controlling the House and the Senate remains to be seen. Since November's election, financial industry groups have called for Congress to overturn any new rules from the CFPB.
In the meantime, banks face an extremely active plaintiffs' bar, which has stepped up its fight against financial institutions over alleged unfair consumer debt collection practices.
Figures on the number of pre-litigation demand letters filed against banks are not publicly available. But court cases are trackable and those numbers have soared. Through Oct. 31, lawyers have filed 4,164 lawsuits nationwide claiming Telephone Consumer Protection Act violations, a 34% increase from a year earlier, according to WebRecon, a Grand Rapids, Mich., firm that tracks debt collection litigation. Lawyers filed 3,285 lawsuits claiming Fair Credit Reporting Act violations, a 9% increase over the same period. WebRecon's litigation figures include claims made against banks, as well as debt collection companies.
It makes sense that lawsuits and demand letters are both on the rise, as the two methods feed off each other, said Jack Gordon, WebRecon's CEO.
"The smarter attorneys cultivate clients that they can represent over and over again through the years, in whatever form makes the most sense," Gordon said.
Lawyers use the letters to protest banks' collections activities on all types of consumer loans, including auto, student loans, mortgages and unsecured loans. Institutions targeted include the country's largest banks, as well as community banks and credit unions.
A pre-litigation demand letter often reads like a form letter intended to be sent to hundreds of recipients, with names added in fill-in-the-blank spaces. In these letters, lawyers will offer an invitation to the bank to respond to allegations of legal violations, before a lawsuit is filed. The bank can avoid the expense of a lawsuit by paying a settlement, typically between a few thousand dollars and up to $50,000 and higher.
If a bank's compliance or risk management department receives such a letter, they should ask in-house or outside counsel involved to draft a letter laying out the law and facts to show "why we're convinced that the financial institution is not liable," said Bill Repasky, an attorney at Frost Brown Todd in Louisville, Ky.
"You want to create the clear understanding that your bank is not low-hanging fruit," said Repasky, who represents community banks in debt collection matters. "If we create the impression that we are not going roll over with an easy settlement, they often will leave us alone and move on to softer targets that have settled with them in the past."
Other lawyers advise banks to eschew direct confrontation with consumers' legal counsel. During a recent seminar hosted by AccountsRecovery.net and WebRecon, an attorney with the debt collections company Stoneleigh Recovery Associates suggested that banks and other collections firms should not respond to a demand letter from a plaintiff's lawyer.
Many bankers will take that approach because they don't want to be held personally responsible, as the Fair Debt Collection Practices Act assigns personal liability to bankers, said Neal Salisian, an attorney at Salisian & Lee in Los Angeles. Some bankers fear that simply responding to a letter would make them personally liable, he said.
"It's a scary situation for a lender or their counsel," Salisian said. "You don't want to fall into a nightmare scenario where you now owe them money."
Ahmad Sulaiman, a Chicago attorney who has sued banks for alleged consumer lending violations, said he only sends a threatening letter if his consumer client has received court approval for a bankruptcy plan. If the bank then keeps asking his client to pay off a debt, he said has no other option but to sue.
"When they continue to contact our client and harass them, that's when we're forced to bring suit," Sulaiman said. "It's rather sad. Many of our clients are tormented by these debt collectors."
Banks can view the demand letters as a way to pinpoint actual problems and make needed corrections, Olson said. Or, they can be a way to provide firm evidence to regulators that a bank is abiding by its rules.
"I have found these pre-suit demand letters to be a rich source of identifying issues that need to be addressed," she said. "And if there isn't a real issue, then it's an opportunity to showcase your compliance efforts to your examiners."