N.Y.'s Lawsky Offers Tougher Rules for Collection Suits

New York financial regulator Benjamin Lawsky is urging the state to make it harder for collectors to win court judgments using shoddy documentation.

Lawsky, superintendent of New York's Department of Financial Services, sent a letter Friday to the chief administrator of the state’s court system in which he proposes rules intended to stop litigation abuses by debt collectors.

The rules would require collectors to include more supporting information in the court documents they file to recoup debts, thereby preventing the mass-filing of complaints with faulty affidavits and without details or documentation, a practice known as robo-signing.

Affidavits would have to include details such as the date of the chargeoff and last payment, and plaintiffs would have to attest that they have personal knowledge of the debtors' records.

"It is intolerable for professional collection companies to abuse the justice system and use the courts as a tool for collecting unverifiable debts from consumers who never had a fair opportunity to contest them," Lawsky writes in his letter.

Lawsky joined the mounting regulatory crackdown on debt-collection practices in July, when he proposed reforms to the state's documentation requirements for collections suits. The Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and other agencies are also investigating abuses by the industry.

The letter responds to the court's proposal to require standardized affidavits statewide, a practice that only the New York City courts currently require. Lawsky cites a study the New Economy Project released this year, which reviewed 90 lawsuits filed by debt buyers across the state. It found that not one of them complied with the affidavit requirements; nonetheless, the buyer was granted default judgment in all but three cases.

Other reforms Lawsky proposed include requiring debt collectors to include loan documentation in their complaints, and to notify consumers before beginning a collection action. Consumers would be allowed to reverse default judgments if the collector fails to follow the court's rules.

Regulators are increasingly turning their attention to the documentation of consumer debt on the part of banks and the companies they sell debt. In May the California attorney general sued JPMorgan Chase (JPM) for allegedly filing robo-signed collection suits. JPMorgan and Wells Fargo have since stopped selling debt to third-party buyers; last week, JPMorgan shut down its unit tasked with managing its lawsuits against delinquent consumers.

Last month New York Attorney general fined five debt collectors for collecting on loans that violated the state's interest-rate cap.