Lady Justice Awakens Slowly after Seven Year Coma; Rule of Law Needs Major Overhaul

While we typically think of the rule of law as being designed to protect the weak against the strong, and ordinary citizens against the privileged, those with wealth will use their political power to shape the rule of law to provide a framework within which they can exploit others.They will use their political power, too, to ensure the preservation of inequalities rather than the attainment of a more egalitarian and more just economy and society.

Joseph Stiglitz, “The Price of Inequality,” p. 191.

SIGTARP’s January 27, 2016 Executive Summary Quarterly Report to Congress breathlessly claims “significant criminal prosecutions and civil fraud enforcement actions against bankers.” (p. 3 of the 520-page report).  Sorry, SIGTARP, but this is bullshit.  Please note that SIGTARP, unlike some of the other so-called “regulators” (SEC?  Please.  OCC? No.  Dep’t of Justice? Really, no.  Just follow Lanny Breuer,¹ former US Attorney General Eric Holder (really?) and friends all the way home to famed cushy K Street lobbyist/powerbroker law firm Covington and Burling² ), has at least tried to prosecute and to hold Treasury accountable to do its damn job (see, e.g. former SIGTARP chief, Neil Barofsky’s book and record of fighting with Timothy Geithner, remember “foaming the runway?”), but this is not “significant.”

To be fair, SIGTARP’s mission³ is to protect the taxpayer-sponsored bailout fund TARP from abuses.  But a key mission of the TARP was supposed to be homeowner assistance and foreclosure prevention (it didn’t turn out that way, thank you, Geithner, see Barofsky).  Anyway, notably missing from the freshly unveiled perp list are any whales.  No too-big-to-fails or TBTF celebrity executives.  They are all probably basking at Davos or off buying some elections (how ’bout that Citizen United decision…yes!).  Do you spy any?  No, you don’t, with the exception of “3 former officers of Bank of America.” I haven’t scratched this surface yet but I blindly guess that either (1) these guys had enemies within Bank of America or within other powerful bank circles; (2) DOJ didn’t really do it; the New York Attorney General probably forced it or all of the above.  This is just the big guys picking off the small guys.

This quarter, SIGTARP’s investigations resulted in significant criminal prosecutions and civil fraud enforcement actions against bankers. Highlighted enforcement
actions against bankers this quarter include: the first indictment of a TARP institution by the Department of Justice; SIGTARP’s arrest of the former CEO
of a bank still in TARP; the guilty plea of a TARP bank CEO; the conviction by a federal jury after trial of a TARP bank chairman and his wife who was also a
TARP bank senior officer; the conviction by a federal jury after trial of a bank CEO for fraud involving a TARP application; the sentencing to prison of a TARP bank
senior officer; the sentencing to prison of a bank CEO for fraud involving a TARP application; and the Securities and Exchange Commission’s filing of fraud charges
against 11 officers and directors of a failed TARP bank. Already, nearly 100 bankers investigated by SIGTARP have been the subject of a government criminal prosecution or civil fraud enforcement action by DOJ, state and local prosecutors, two state Attorneys General, and the SEC.

These charges related to bankers’ conduct leading up to and during the financial crisis.
• The total number of bankers/banks charged with a crime investigated by SIGTARP is 75 (74 individuals + 1 bank).
• DOJ agreed to defer prosecution for criminal conduct for 2 bankers who cooperated with the investigation.
• DOJ and the New York Attorney General have brought civil fraud charges against 3 former officers of Bank of America investigated by SIGTARP.
• The SEC has brought civil fraud charges against additional bankers (in addition to SEC actions against those criminally charged) investigated by SIGTARP.

Already, 30 bank officials investigated by SIGTARP have been sentenced to prison, including 11 officials at banks that received TARP. The remaining 19
officials were at banks that applied for TARP using fraudulent bank books, but did not receive TARP.

SIGTARP has been successful in finding the evidence needed to support conviction, resulting in a 99% conviction rate of criminally-charged defendants who
were investigated by SIGTARP.

Recently (as in too late), on September 9, 2015, the DOJ earnestly vowed it would start doing its job by noticing its obligation to police Wall Street “aggressively,” perhaps with investigations and prosecutions of individual employees and executives.  It seems the Department of Justice had an epiphany that “seeking accountability from the individuals who perpetuated the wrongdoing” might be an “effective” way to “combat corporate misconduct.”  Dep’t of Justice, Memorandum, Sept. 9, 2015.  You think?

Well, hello, Lady Justice, you late bloomer, you!  Did you blackout from September 2008 to September 2015?  Or is it maybe, just maybe, an election year?

I have bad news for the sleepyhead Lady.  During your nap, there was a huge financial crisis and America was foreclosed.  The rule of law aged poorly.  Suffice it to say that your ordinary stewards of the law failed.  The situation is damaged.  As in severely damaged.  Botox will not help.  A facelift will not help.  Organ transplants and blood transfusions will be necessary.

Joseph Stiglitz might have said it better than me, with his PhDs from MIT, his Nobel Prize and whatnot.   In his book,“The Price of Inequality,” he said:

Given the success of the financial sector and corporations more generally in stripping away the regulations that protect ordinary citizens, the legal system is often the only source of protection that poor and middle-class Americans have.  But instead of a system with high social cohesion, high levels of social responsibility and good regulations protecting our environment, workers and consumers, we maintain a very expensive system of ex post accountability, which to too large an extent relies on penalties for those who do injury (say, to the environment) after the fact rather than restricting action before the damage is done.

p. 100

As one banker friend put it to me, anyone, even his twelve-year-old son could have made a fortune if the govt. had been willing to lend money to him at those terms But the bankers treated the resulting profits as if they were a result of their genius, fully deserving of the same compensation to which they had become accustomed.

p. 110

One chapter, entitled “Justice for All?  How Inequality is Eroding the Rule of Law” explores the example of the “robo-signing” frauds that were a fraction of the overall frauds banks have visited upon American homeowners in the foreclosure epidemic:

While a good “rule of law” is supposed to protect the weak against the powerful, we’ll see how these legal frameworks have sometimes done just the opposite, and the effect has been a large transfer of wealth from the bottom and middle to the top.

p. 188

Early on in the housing bubble, it became clear that the banks were engaged not only in reckless lending—so reckless that it would endanger the entire economic system—but also in predatory lending, taking advantage of the least educated and financially unsophisticated in our society by selling them costly mortgages and hiding details of the fees in fine print incomprehensible to most people.

p. 191

That’s why “power”—political power—matters so much.  If economic power in a country becomes too unevenly distributed, political consequences will follow.  While we typically think of the rule of law as being designed to protect the weak against the strong, and ordinary citizens against the privileged, those with wealth will use their political power to shape the rule of law to provide a framework within which they can exploit others.They will use their political power, too, to ensure the preservation of inequalities rather than the attainment of a more egalitarian and more just economy and society.


The immensity of the task led the banks to invent “robo-signing.”  Instead of hiring people to examine records, to verify that the individual did owe the amount claimed, signing an affidavit at the end that they had done so, many banks arranged for a single person to sign hundreds of these affidavits without even looking at the records.  Checking records to comply with legal procedure would hurt the bank’s bottom line.  The banks adopted a policy of lying to the court.  Bank officers knew this—the system was set up in a way that made it impossible for them to examine the records, as they claimed to have done.

This brought a new twist to the old doctrine of too-big-to-fail.  The big banks knew that they were so big that if they lost on their gambles of risky lending they would have to be bailed out.  They also knew that they were so big that if they got caught lying, they were too big and powerful to be held accountable.  What was the government to do? Reverse the millions of foreclosures that had already occurred?  Fine the banks billions of dollars—as the authorities should have done? But this would have put the banks again in a precarious position, requiring another government bailout, for which it had neither the money nor the political will.  Lying to a court is normally a very serious matter.  Lying to the court routinely, hundreds of times, should have been an even greater offense.  There was a pattern of crime.  If corporations had been people in a state that enforced a “three strikes” rule these repeat offenders would have been sentenced to multiple life sentences without parole.  In fact, no bank officer has gone to jail for these offenses.  Indeed, as this bank goes to press, neither Attorney General Eric Holder nor any of the other U.S. district attorneys have brought suits for foreclosure fraud.  By contrast, following the savings and loan crisis, by 1990, the Department of Justice had been sent 7,000 criminal referrals, resulting in 1,100 charges by 1992, and 839 convictions (of which around 650 led to a prison sentence).  Today the banks are simply negotiating what their fines should be—and in some cases the fines may be less than the profits that they have garnered from their illicit activity.

What the banks did was not just a matter of failing to comply with a few technicalities.This was not a victimless crime.  To many bankers, theperjury committed as they signed affidavits to rush the foreclosures was just a detail that could be overlooked.  But a basic principle of the rule of law and property rights is that you shouldn’t throw someone out of his home when you can’t prove he owes you money. But so assiduously did the banks pursue their foreclosures that some people were thrown out of their homes who did not owe any money.  To some lenders this is just collateral damage as the banks tell millions of Americans they must give up their homes—some eight million since the crisis began, and an estimated three to four million still to go. The pace of foreclosures would have been even higher had it not been for government intervention to stop the robo-signing.

The banks’ defense—that most of the people thrown out of their homes did owe money—was evidence that America had strayed from the rule of law and from a basic understanding of it. One is supposed to be innocent until proven guilty. But in the banks’ logic, the homeowner had to prove he was not guilty, that he didn’t owe money. In our system of justice it is unconscionable to convict an innocent person, and it should be equally unconscionable to evict anyone who doesn’t owe money on her home. We are supposed to have a system that protects the innocent.  The U.S. justice system requires a burden of proof and establishes procedural safeguards to help meet that requirement.  But the banks short-circuited these safeguards. 

In fact, the system we had in place made it easy for them to get away with these shortcuts—at least until there was a popular uproar. In most states, homeowners could be thrown out of their homes without a court hearing.  Without a hearing, an individual cannot easily (or at all) forestall an unjust foreclosure.  To some observers, this situation resembles what happened in Russia in the days of the “Wild East” after the collapse of communism, where the rule of law—bankruptcy legislation in particular—was used as a legal mechanism to replace one group of owners with another.  Courts were bought, documents forged, and the process went smoothly.  In America, the venality operates at a higher level.  It is not particular judges who are bought but the laws themselves, through campaign contributions and lobbying, in what has come to be called “corruption, American-style.” In some states judges are elected, and in those states there’s an even closer connection between money and “justice.” Monied interests use campaign contributions to get judges who are sympathetic to their causes.

The administration’s response to the massive violations of the rule of law by the banks reflects our new style of corruption: the Obama administration actually fought against attempts by states to hold the banks accountable. Indeed, one of the federal-government controlled banks, threatened to cease doing business in Massachusetts when that state’s attorney general brought suit against the banks.

Massachusetts attorney general Martha Coakley had tried to reach a settlement with the banks for over a year, but they had proved intransigent and uncooperative.   To them the crimes they had committed were just a matter for negotiation.  The banks (she charged) had acted both deceptively and fraudulently; they had not only improperly foreclosed on troubled borrowers (citing fourteen instances), relying to do so on fraudulent legal documentation, but they had also, in many cases, promised to modify loans for homeowners and then reneged on the promise.  The problems were not accidental but systematic, with the MERS recording system corrupting the framework put into place by the state for recording ownership. The Massachusetts attorney general was explicit in rejecting the “too big to be accountable” argument.  “The banks may think that they are too big to fail or too big to care about the impact of their actions, but we believe they are not too big to have to obey the law.”


¹In its documentary, “The Untouchables,” PBS’s Frontline interviewed Breuer, then DOJ Chief, who told reporters that he could not pursue criminal charges against Wall Street executives or banks because the proof was just too difficult to find.  Frontline’s edited transcript of Breuer is here.

²When Holder ran home to Covington, it sent out a gushing press release and was covered by the New York Times Dealbook, “Covington already employs a number of former Justice Department officials, including Lanny Breuer, the former assistant attorney general for the department’s criminal division under Mr. Holder; Mr. Breuer’s successor, Mythili Raman; and Michael Chertoff, a former assistant attorney general and secretary of Homeland Security.” Deal Book, N.Y. Times, Eric Holder Returns to Covington & Burling (July 6, 2015). Covington is bragging about its revolving door with the government, y’all.  Access begets power begets riches!  Get it?  Nobody is even hiding any of this.

See also Matt Taibbi, Eric Holder, Wall Street Double Agent, Comes in From the Cold, Rolling Stone (July 8, 2015).

³Newcomer regulator Consumer Financial Protection Bureau (CFPB) has also tried to promote justice for consumers, by promulgating consumer-protection-oriented rules and regulations, writing amicus curiae briefs, and creating a complaint system and searchable consumer complaint database.  So of course, the powers-that-be are trying to get rid of these regulators-who-regulate-for-ordinary-people, God forbid.  See, e.g., As CFPB Advances Consumer Protection, Attacks on CFPB Escalate.

Freddie and Fannie Sell Your Home Loans to Vultures for Pennies on Dollar: Vultures Pick the Bones of Distressed American Homeowners

Freddie Mac Kicks Off 2016 with Largest Ever Delinquent Loan Auction article here:

The transaction announced on Friday is Freddie Mac’s third bulk NPL sale worth more than $1 billion. The previous two were worth $1.1 billion each. Overall, it will be Freddie Mac’s ninth bulk Standard Pool Offering (SPO) auction since the first sale closed in August 2014 and the two EXPOs will be the second and third sold. Freddie Mac’s first-ever EXPO sold in June via auction to Corona Asset Management, and included 157 deeply delinquent loans with an aggregate UPB of about $31 million.

Everybody loses!  And by “everybody” I mean you, if you’re an American homeowner, because everybody else is making out like a bandit while killing home values and throwing homeowners on the street after stripping their last dollar.   The investors were paid. And Freddie Mac  and Fannie Mae didn’t lose because they were mere “guarantors” leaching off the government spigot whilst refusing homeowners the principal reduction relief that might have actually saved a few million homes (I’m talking to you FHFA execs; you know who you are and you know what you did).

Reminder to the non-insiders:  Freddie and Fannie were the notorious quasi-governmental GSEs (government-sponsored-enterprises that are sorta government but sorta not until taken under conservatorship because they mismanaged themselves so egregiously) (as in wink, wink, they were “private” but counter-parties knew there was a secret pact for the US federal government to back them).  In sum, Freddie Mac and Fannie Mae were behemoth welchers who had to be rescued by the federal government for their own epic accounting failures not merely confined to home lending but to multiple abuses.  Oh, and then there are the vultures, the buyers of these loans, on questionable ownership of the collateral paper, for pennies on the dollar, knowing that they are “scratch and dent” and paying nothing for them but “betting on the come.”  Hooray for gambling!  Double points for gambling with middle class Americans’ homes and wealth.  Many of the vultures were founded by the same fine executives who used to work for Countrywide, Fremont and some of the other geniuses who managed to get rich, evade prosecutions, and kill the dreams of roughly millions of American families.  These vultures employ upstanding “default servicers” to “play lender” (i.e. go in and defraud courts, judges, and cloud the public title records by just outright pretending to “be” the “lender,” a mockery of the meaning of most of the states’ statutes governing foreclosure–judicial or non-judicial) and try to collect full boat for their grab bags of bargain basement loans.

And who would like to accept my wager that a large percentage of these allegedly “defaulted” or “delinquent” loans aren’t even defaulted or delinquent but were manipulated into foreclosure by the sharp tactics of Fannie, Freddie, and the fine servicer henchmen at their command.  It’s difficult to pay when they keep sending your money back, or putting it in “suspense accounts,” or wrongfully applying it to force-placed insurance when you’ve sent proof of insurance 700 times.  It’s difficult to pay when the correct owner of your loan is already paid and you’re paying an agent of an undisclosed “principal,” with the agent pretending to be the principal.  I’m just spit-balling based on about 100 cases I’ve seen….


SIGTARP Reports Servicers Wrongfully Terminating Homeowners from HAMP Modifications

In the newest SIGTARP Report dated January 27, 2016, reviewing the use of bailout TARP money and the shenanigans of your favorite large financial institutions to abuse and damage the people they received money to help, get your smelling salts and vapors because the findings are, wait for it, yes, loan servicers are still abusing homeowners and getting away with it on the regular:

Given the high percentage of homeowners falling out of HAMP and known problems with servicers not following HAMP rules, in October 2013, SIGTARP recommended that Treasury research and analyze whether, and to what extent, the conduct of HAMP mortgage servicers contributed to homeowners redefaulting on HAMP permanent mortgage modifications.iv Although Treasury has not conducted a full analysis, Treasury has partially implemented SIGTARP’s recommendation, and reviews samples of 100 homeowners who had redefaulted out of HAMP at each of the largest HAMP servicers each quarter as part of Treasury’s on-site and remote compliance testing at each of the largest servicers. SIGTARP’s concerns over servicer misconduct contributing to homeowner redefaults in HAMP have been borne out. Treasury’s findings in its on-site visits to the largest seven mortgage servicers in HAMP over the most recent four quarters show disturbing and what should be unacceptable results, as 6 of 7 of the mortgage servicers had wrongfully terminated homeowners who were in “good standing” out of HAMP.v These staggering findings clearly show that servicer misconduct is contributing to some homeowners falling out of HAMP. Homeowners were wrongly terminated from HAMP by their servicer despite making timely mortgage payments, putting them at risk of losing their home. These homeowners were forced out of HAMP through no fault of their own. Mortgage servicers did not give these homeowners a fair shot. As these instances were found through sampling, Treasury does not know how many other homeowners were also wrongfully forced out of HAMP.

Once again, bravo and well done, servicers Bank of America, N.A. CitiMortgage Inc JPMorgan Chase Bank, N.A. Nationstar Mortgage LLC Ocwen Loan Servicing, LLC Select Portfolio Servicing, Inc. Wells Fargo Bank, N.A. and the rest of you!! Your parents must be so proud.

Also, a special congratulations and shout out to bank lawyers and to those members of the judiciary who continue to turn a blind eye, an impressive feat given the sheer numbers of homeowner cases brought against these servicers to try to eke out the slightest dribble of relief.


The Big Short Delivers

The movie version of the Big Short exceeded my expectations.  It made mortgage-backed-securities not only interesting, but funny.  Steve Carell’s acting was genius, as was Christian Bale’s—go see it.  It’s based on Michael Lewis’s (Liar’s Poker) biopic of the people who saw the housing bubble, and shorted the market.  It nails the revolving door relationship between the SEC and the banks, the sad red-light district of the credit-ratings agencies of Moody’s, S&P, etc.  It also highlights what was known (or could have been known) and how the big banks artificially refused to properly mark the markets (in credit default swaps, MBS, and CDOs) until they could do their best to unload their own positions.

We’ve been covering these stories since 2009, and what needs to be covered is the sequel:  what happened to the homeowners affected by the foreclosures?  Was there justice?  How has our court system treated them?

But if you liked the movie, the Big Short, you might like to know more:

Taibbi hammers Goldman

In the Wake of SEC v. Goldman

Barry Ritzholtz on Media Mistreatment of SEC v. Goldman

Securitization Trustee US Bank, NA Disclaims Responsibility

Ex-SEC Attorney Exposes Cover-Up

Goldman Sachs Sells Triple Housing-Backed AAAs While Shorting Same

Goldman, oh Goldman

Two Million Dollar Montana Verdict Against Ocwen and Deutsche for Wrongful Foreclosure

Recently, Ocwen and Deutsche were popped with a two-million-dollar jury verdict for a wrongful foreclosure in Montana.  A couple bought a farmhouse for cash, and were in the process of remodeling it, when they discovered that Ocwen had sold the property at foreclosure by mistake.  Ocwen refused to quitclaim the property back to the owners, claiming that they were prevented from doing so by a “scrivener’s error.”  The couple sued.

After a four-day-trial, a Montana jury unanimously awarded homeowners $350,000 in lost profitability, $100,000 for emotional distress and $1.6 million in punitive damages against Deutsche Bank National Trust Co. and Ocwen.

As reported by Ed Kemmick at Last Best News, full article here:

As part of their legal battle against Deutsche Bank, the Normans were granted a motion for summary judgment for quiet title, and the bank signed a “disclaimer of interest” in the property on May 8, 2014. The trouble was, Heenan said, the bank did not actually record the disclaimer with the Yellowstone County clerk and recorder until August of this year.

At trial, Heenan maintained that the defendants’ actions, far from being merely a series of mistakes, constituted an intentional disregard of facts that were likely to cause injury to the Normans, and that “disregard or indifference” amounted to malice.

The 12-person jury agreed, and last Thursday it unanimously awarded the compensatory damages totaling $450,000, then went into deliberations again on Friday and unanimously awarded the punitive damages of $1.6 million.

– See more at:

Congratulations to Montana attorney, John Sheenan, for the win!  Sheenan is a member of the National Association of Consumer Advocates (NACA).

Wells Fargo Settlement with Department of Justice Announced for Bankrupt Homeowners Who Did Not Receive Change of Payment Notices

On Thursday, the Department of Justice released a settlement with Wells Fargo concerning Wells Fargo’s failure to send payment change notices and updated escrow statements to homeowners in bankruptcy:

Settlement Terms

Wells Fargo agrees to pay a total of $81.6 million to homeowners who were in bankruptcy between Dec. 1, 2011, and March 31, 2015, and who were affected by Wells Fargo’s failure to timely file PCNs and escrow statements, including:

  • $53.6 million will be paid to more than 42,000 homeowners whose payments increased as to which Wells Fargo failed to timely file a PCN with the court. The payment will be in the form of a credit to the homeowner’s mortgage account in a lump sum amount, which averages $1,254 per homeowner and varies depending on the homeowner’s mortgage balance. More than 70 percent of the total payments will go to homeowners who have mortgage balances under $300,000. These payments will be made regardless of whether homeowners actually paid the increased amount.
  • An estimated $10 million will be paid by crediting homeowners’ accounts at the end of their bankruptcy cases if, upon a detailed review of the accounts, it is determined the homeowners were not fully compensated through the initial crediting process described above. Wells Fargo estimates that 15 to 20 percent of homeowners who receive the initial payments will be due additional amounts at case closing.
  • $1.5 million will be refunded in cash to about 3,000 homeowners where notices of decreases in monthly payments were not timely provided and the homeowners paid more than the actual amount due.
  • $1 million will be refunded in cash to about 2,400 homeowners who satisfied escrow shortages by making a lump sum payment, but whose monthly payments did not decrease to account for the lump sum payment.
  • $4.5 million will be paid by crediting the mortgage escrow accounts of about 6,000 homeowners who did not receive timely escrow statements. Wells Fargo will credit the amount of any increase in escrow shortage that was incurred between the time Wells Fargo should have performed the analysis and the time it actually did perform the analysis. As a result, homeowners will not be responsible for any increase in the escrow shortage stemming from Wells Fargo’s failure to timely perform the escrow analysis.
  • $4 million will be paid to about 12,000 homeowners by crediting mortgage accounts in the amount of $333, where Wells Fargo failed to timely perform an escrow analysis that would have resulted in a PCN being filed and the homeowner is not already receiving remediation for a missed or untimely PCN.
  • $4 million will be refunded in cash to about 6,000 homeowners who did not receive timely escrow statements and whose escrow accounts contained surpluses that Wells Fargo had not refunded or credited toward the next year’s escrow payment.
  • $3 million in remediation to about 8,000 homeowners has already been completed by Wells Fargo for certain violations.

Beware of Institutional Vulture Debt Buyers and Default Judgments

Vulture debt buyers are buying up questionable debt (credit card, student loan, auto, you name it) for pennies on the dollar and filing lawsuits in volume, obtaining default judgments in bulk, on junk evidence.  The CFPB is going to step in with some new rules.

Full article in the American Bar Association journal here.

Here are three names to watch out for:


The debt-buying industry plays a legitimate role in righting the economy, providing some compensation (pennies on the dollar) to banks and other lenders that discharge unpaid debts and sell them. And it is huge, having become so in less than 15 years.

The biggest firm is Encore Capital Group, based in San Diego; it is the parent of Midland Funding, the company that pursues payment. Encore last year surpassed $1 billion in revenues, a 39 percent increase over 2013, spurred by major acquisitions, among them Asset Acceptance for $200 million and the United Kingdom debt buyer Cabot Credit Management for $177 million.

Next largest is Portfolio Recovery Associates, based in Norfolk, Virginia. In 2014, PRA reported revenue of $881 million and acquired Aktiv Kapital, a Norway-based debt buyer.

Encore, PRA and Asta Funding are the three biggest publicly traded debt buyers. The top five together purchase more than 80 percent of all credit card debt sold in this country, according to the worldwide trade association Debt Buyers Association International, which represents more than 575 companies and is based in Sacramento, California. (Because other firms are privately held, the other two top firms could not be determined.)

All have been tagged for widely publicized problems concerning abuses, including lawsuits filed with little or no documentation of the debt or its assignment to a buyer; mistaken identity in pursuing payment; suing for time-barred debts; and seeking high amounts in fees and interest for which there is no proof or accounting.

In July, the industry was stunned by a broad enforcement agreement JPMorgan Chase entered into with the Consumer Financial Protection Bureau and the attorneys general of 47 states. And in September, the agency hit at the industry’s heart, issuing a similarly sweeping order against the Encore Capital Group and Portfolio Recovery Associates.

JPMorgan Chase, a major seller of debt, admitted that a significant number of its own 538,000 collections suits filed between 2009 and 2013 were questionable or seriously flawed. Some of them had already been settled, paid in full or discharged in bankruptcy—based solely on robo-signed affidavits made with little or no review of pertinent documents (more than 150,000 times, the CFPB said)—or otherwise already found to be unenforceable.

“The evidence showed fundamental flaws in debt sales,” says Claudia Wilner, a staff attorney with the National Center for Law and Economic Justice in New York City. “These are not old cases. This is up to 2014, so it’s very recent. Debt buyers are trying to convince regulators that they’re legitimate and all is above board, but we know there still are many mistakes and inaccuracies.”

The CFPB’s subsequent order against the debt buyers says Encore must refund as much as $42 million to consumers for misrepresenting that it could sue on time-barred debt, or telling courts a debt was assumed because it hadn’t been disputed. PRA must refund $19 million for wrongly saying a lawyer had reviewed a debt, for collectors saying they were calling on behalf of lawyers and for improperly getting payments or judgments on time-barred debts.

Also, both companies must cease collection on similar judgments and drop pending lawsuits in such cases, as well as adhere to a laundry list of reforms concerning proof and verification of debts.

The two debt buyers admitted no wrongdoing, but they did not challenge the order.

What seems the harshest penalty in the CFPB agreement and orders is the prohibition on reselling debt, a common practice in an industry with big and small companies. Some debt buyers work portfolios to a certain extent and then sell the uncollected remains to others down the food chain. Debt buyers often resell accounts that don’t pan out, passing them along to others for even lesser amounts. Those collectors, in turn, might work longer or wring harder to get money from the portfolios.

But JPMorgan already has virtually ended debt sales, PRA has never resold debt and Encore stopped doing so about 10 years ago, says Jan Stieger, executive director of DBA International, the trade association of companies involved in debt buying.

“The effect on the small and medium-size companies is devastating,” Stieger says. “They can’t buy [volume] from the big banks, and the industry could become less competitive because only the big five or 10 buyers might survive.”