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 BIG 3

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.”