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Consumers Cry Foul Over Debt Collectors
By Jessica Silver-Greenberg
Complaints about debt collectors are pouring into a federal database that tracks allegations of illegal late-night phone calls, arrest threats and other abuse. But few of the complaints are likely to result in enforcement actions.
The debt-collection industry, booming as many Americans struggle to catch up on their payments or walk away from what they owe, was the subject of a record 164,361 complaints through Dec. 8 of this year, according to the Federal Trade Commission. The total is 17% higher than the 140,036 debt-collection complaints the FTC got for all of 2010.
Since the start of this year, though, the FTC has launched just four enforcement actions against debt-collection firms under the primary federal law used to oversee the industry. From 2005 to 2010, the average was two cases a year.
The actions often target companies that are responsible for hundreds, if not thousands, of consumer complaints.
The agency usually goes after debt collectors by filing lawsuits against companies in federal court. Officials also can levy fines and demand that violators reimburse consumers for any money that was obtained illegally.
FTC officials said the small number of enforcement actions against debt collectors is a misleading barometer of its determination to punish violators. J. Reilly Dolan, acting director of the agency's financial-practices division, said in an interview that the FTC "is cracking down on abusive collection practices and directs its resources to go after some of the largest debt collectors."
In March, the FTC announced its largest civil penalty against a debt collector in U.S. history. West Asset Management of Omaha, Neb., agreed to pay $2.8 million to settle accusations that included threatening to arrest people who owed money.
West Asset Management, a unit of West Corp., neither admitted nor denied wrongdoing as part of the settlement. The company declined to comment.
Mr. Dolan added in a statement that the FTC is conducting "an inquiry of the debt buying industry" that includes the "quality of information" in lawsuits filed against borrowers.
He declined to be more specific, but law-enforcement officials in several U.S. states have accused some debt buyers of submitting incomplete, sloppy and even fraudulent documents in courts as proof of what a borrower owes. Such companies purchase batches of soured loans in bulk, often for pennies on the dollar, and then try to collect.
Still, J. Howard Beales, who led the FTC's consumer-protection bureau from 2001 to 2004, said the recent jump in complaints against debt collectors should have triggered an increase in enforcement actions, despite the agency's limited resources. He now is a marketing and public-policy professor at George Washington University.
The number of debt-collection complaints is surging even though the mountain of overdue bills is shrinking. As of Nov. 30, a total of $96.8 billion in auto loans, credit cards and other unsecured consumer-finance debt was at least 60 days past due, down 19% from $119.5 billion at the end of 2010, according to data from Equifax Inc. and Moody's Analytics.
Debt collectors are regulated under a patchwork of state and federal laws. U.S. oversight is shared by the FTC and Consumer Financial Protection Bureau.
The Fair Debt Collection Practices Act dictates how debt collectors can contact consumers behind on their bills. Late-night phone calls are illegal, as are physical threats and repeated calls after the collector has been asked to stop calling.
This year's number of complaints made to the FTC about debt collectors won't be publicly released until early next year. The agency disclosed the total as of Dec. 8 to The Wall Street Journal following a public-records request. The Journal also obtained individual debt-collection complaints from the FTC.
The tally includes complaints received by mail, phone and online. On the FTC's home page, a brown button near the top encourages consumers to "Report it to the FTC," steering them through a form that concludes with: "We have received your complaint.”
People who file complaints with the FTC get a toll-free phone number for follow-up questions and are encouraged to contact state regulators.
The agency compiles information from consumers, law-enforcement officials, the Better Business Bureau and other sources in a database called Consumer Sentinel, which now holds about 6.1 million complaints.
The FTC's enforcement statistics don't include actions taken by more than 2,000 other law-enforcement agencies that have access to the Consumer Sentinel database, which purges complaints after five years. Mr. Dolan said those agencies tap the database hundreds of times a week, but the FTC doesn't keep track of resulting prosecutions, financial penalties or other actions.
Some lawmakers complain that the database is a waste of money. "Collecting information is important," said Rep. Jo Ann Emerson (R., Mo.), a member of the House Appropriations Committee, in a statement. "But acting on that information is at the heart of the FTC's responsibility."
FTC officials wouldn't comment on the database's cost. Last year, the FTC spent an estimated $12 million, or about 4% of its operating budget, on items that include the complaint database and National Do Not Call Registry.
Thomas Maronick, a former FTC director who now is a marketing professor at Towson University in Maryland, said he worried when the database was being developed that it would expose the FTC to disappointment. "It creates the impression among consumers that a single complaint will result in regulatory action, but that is not how things work," Mr. Maronick said.
Mr. Dolan said officials target their enforcement firepower so it will have the maximum impact on consumers and a strong deterrent effect on other debt-collection companies. The FTC also uses the database to spot new problems before they spread more widely, he added.
The biggest subject of complaints so far this year has been Portfolio Recovery Associates Inc., a buyer of distressed consumer debts. The FTC got 2,641 complaints about the Norfolk, Va., company through Nov. 15, a 15% increase from 2,292 during 2010. The company declined to comment.
—Rob Barry contributed to this article
Collection and Credit Firms Facing Broad New Oversight
By Ben Protess
Andrew Harrer/Bloomberg NewsRichard Cordray, director of the Consumer Financial Protection Bureau, before a Senate panel in January.
Large debt collectors and credit reporting companies would face regular federal oversight for the first time under a broad new proposal announced on Thursday by the consumer finance watchdog.
The Consumer Financial Protection Bureau proposed a draft rule that would allow the agency to supervise two significant corners of the financial industry that until now have largely evaded federal scrutiny.
The draft, which limits the parameters of the new powers to the largest debt collection and credit reporting players, is the most significant proposal yet to emerge from the consumer agency and is the first of several efforts under way to police nonbank financial companies.“Our proposed rule would mean that those debt collectors and credit reporting agencies that qualify as larger participants are subject to the same supervision process that we apply to the banks,” Richard Cordray, the new director of the bureau, said in a statement.
The proposal now enters a 60-day comment period. The bureau expects to finalize the rule by July, the two-year anniversary of the agency’s creation.
The bureau has a broad mandate to police Wall Street banks as well as the more shadowy corners of the financial industry. But it was hamstrung without a leader at the helm, the result of a bitter partisan battle in Congress over the appointment of Mr. Cordray.
Under the Dodd-Frank law, the bureau needed a director before it could police financial firms other than banks. Such firms are new territory for the federal government. Until now, state authorities largely have licensed and supervised these companies.
In a sharp challenge to Republican lawmakers in January, President Obama circumvented Congress and opted for a recess appoint of Mr. Cordray. The move empowered the bureau to take on the lightly regulated world of payday lenders, mortgage firms and student lenders. The bureau can also oversee the “larger participants” in industries like debt collection, credit reporting and check cashing, among others.
The bureau kicked off its new effort on Thursday with the proposal to define the largest debt collectors and credit reporting companies. The bureau can also sanction smaller firms that run afoul of federal rules.
Under the debt collector proposal, the bureau would keep watch over companies that make more than $10 million a year from their consumer business, limiting the scope to about 175 firms. These firms account for about two-thirds of business in the debt collection market. The oversight comes after a prolonged upheaval for the industry, which for years has been ensnared in lawsuits and regulatory actions for questionable collection practices.
The bureau’s proposal also takes aim at the largest consumer reporting agencies, defined as companies that make more than $7 million annually from their consumer business. The proposal would capture 30 companies, firms like Experian and Equifax, that account for more than 90 percent of the industry’s business, according to the bureau.
Credit agencies, which produce on-demand reports featuring a consumer’s credit score and borrowing history, are inextricably linked to the consumer finance industry. Consumers clamor for favorable reports, a prerequisite for obtaining credit cards, a home mortgage or even a cellphone.
Later this year, the bureau could roll out plans to oversee check cashing companies and other nonbank firms.
The bureau’s oversight of these industries will largely mirror its supervision of Wall Street. The bureau will examine these firms individually and may also order the companies to turn over detailed snapshots of their businesses.
“This oversight would help restore confidence that the federal government is standing beside the American consumer,” Mr. Cordray said.
Bringing Expired Debt Back to Life
By: Jessica Siver-Greenberg
No one was more surprised than Thomas Carpenito with the credit-card invitation that landed in his mailbox earlier this year.
The 27-year-old deli owner from White Plains, N.Y., had about $10,000 in old debts and a credit rating 200 points below "good." He recalled thinking the post office had delivered the letter to the wrong house.
Far from a mistake, the offer was part of a controversial and growing partnership between debt collectors and banks that profits both. To get the new credit card, Mr. Carpenito agreed to repay $400 on a seven-year-old debt that had expired under New York's statute of limitations.
"It was totally worth it," he said. Having no credit cards made Mr. Carpenito feel "like dirt," he said, especially when out on dates. His new credit card, stamped with the MasterCard Inc. logo, was offered by Jefferson Capital Systems LLC, the debt-collection arm of CompuCredit Holdings Corp., in Atlanta.
CompuCredit, a leader in the business, collected about $15 million in newly resurrected debts and fees by issuing credit cards to people with banged-up credit in the first nine months of this year, according to a securities filing. It also has drawn scrutiny by federal authorities for allegedly deceptive practices.
Many U.S. banks, hungry for new revenue streams, are eager partners. They receive fees and higher-than-average interest rates by granting debt collectors access to their license with MasterCard. The debt companies typically agree to cover losses to banks if borrowers stop paying.
Some lenders say borrowers have a moral obligation to pay their debts even if they are no longer legally responsible. Others are leery about subprime borrowers. But the debt-driven credit cards show some banks tiptoeing back into subprime lending after suffering big losses during the financial crisis.
Collectors aren't afraid of the risks in issuing new credit cards because they instantly turn a profit on virtually worthless debts—purchased for pennies on the dollar—when people agree to start making payments on them. The credit-card agreements essentially create assets out of thin air.
The cards, born a decade ago, are gaining new momentum as debt-collection firms look for new ways to collect, said William Weinstein, chief executive of Weinstein & Riley, a Seattle debt collector.
No one knows how many of these credit cards, usually stamped with the MasterCard logo, are in people's wallets. MasterCard declined to comment.
Thomas Carpenito got a credit card for agreeing to pay $400 of an old debt that New York state law had expunged.
Genesis Financial Solutions, of Beaverton, Ore., said it was opening about 100,000 new accounts a year in its "Balance Transfer Program." Unlike typical balance-transfer offers, where consumers are lured with low interest rates to move credit balances, Genesis borrowers move expired debts onto the new card.
Irving Levin, the chief executive of Genesis, said the company's credit cards were an opportunity for consumers in a "very much underserved segment."
"I got a bunch of cards when I was younger, and the companies were basically giving them away," said Mr. Carpenito of his past debt troubles. "I couldn't really handle the bills, and I fell way behind."
Federal authorities have declared some of the offers deceptive because they failed to clearly explain to people they needn't pay back even a penny of the past debts because the obligations had expired under statutes of limitations set by individual states.
Mr. Carpenito's credit card from CompuCredit carried the name of Monterey County Bank, a unit of Northern California Bancorp. In 2010, the Federal Deposit Insurance Corp. accused Monterey of helping Tighorn Financial Services LLC disguise efforts to resurrect expired debts through new credit-card offers. Tighorn, a debt collector based in Sioux Falls, S.D., didn't return calls for comment.
Bank officials last year agreed to a $3 million settlement without admitting or denying wrongdoing. "Our bank no longer participates in any balance transfer card programs," Charles T. Chrietzberg Jr., Monterey County Bank's chairman, president and chief executive, said in an email in response to questions.
Mr. Carpenito's credit card is now underwritten by another lender. In November, CompuCredit's debt-collection arm got a credit line from another bank, PrivateBancorp Inc. in LaSalle, Ill., according to a securities filing, "to facilitate the growth of this segment's operations."
CompuCredit didn't respond to requests for comment.
Last month, its chairman and chief executive, David Hanna, told investors that the "current economic environment could lead to increased opportunities…as consumers with less access to credit create additional demand."
Regulators Weigh In
Two allegations of deception were settled with no admission of wrongdoing. Excerpts from the actions:
FDIC v. Monterey County Bank
The FDIC has reason to believe that the Bank has engaged in unsafe or unsound banking practices, and engaged in deceptive practices … in connection with the Bank's credit card relationship with two other firms.
FTC v. Compucredit Corporation and Jefferson Capital Systems
The Commission requests [relief] against CompuCredit Corporation and Jefferson Capital Systems for engaging in unfair or deceptive acts or practices in violation of … the FTC Act and for engaging in acts and practices in violation of the Fair Debt Collection Practices Act.
In 2008, CompuCredit agreed to return more than $114 million to customers after the Federal Trade Commission accused the company of deceptive practices that included failure to disclose high credit-card fees and failure to tell customers that accepting a Majestic credit card—emblazoned with a Visa Inc. logo—essentially enrolled them in a debt-repayment program. The company didn't admit to any wrongdoing in the settlement.
Visa, which declined to comment, is no longer in the debt-collection credit-card business, according to lawyers for debtors who have gotten card offers.
People who stop paying bills earn lousy credit ratings but eventually are freed of old debt under statutes of limitations that vary by state and range from three years to 10 years from the last loan payment.
But if a debtor agrees to make even a single payment on an expired debt, the clock starts anew on some part of the old obligation, a process called "re-aging."
So if borrowers again fall behind on their payments, debt collectors can turn to their usual tools: letters, phone calls and lawsuits. By restarting a debt's statute of limitations, the collectors have years to retrieve payments.
Regulators scrutinize offers to see whether they clearly state that borrowers are agreeing to repay part—or in some cases all—of an expired debt if they agree to a new credit card.
The pitches usually come in the form of a letter.
"Make your fresh start today," said one Emblem credit card offer viewed by The Wall Street Journal. A sentence near the top of the offer said, "This communication is from a debt collector."
Kindra Weaver, an office administrator who lives in Artesia, N.M., said she had no idea the $300 she paid in March for a Milestone credit card from Genesis Financial Solutions settled a debt long past the statute of limitations.
But she said she would happily do it again. "No one else wanted to even work with me," said Ms. Weaver, 26 years old. "I lost my job at one point and couldn't make ends meet. But I feel so much better about my life now that I was able to pay and get back on track."
Ms. Weaver has a $300 credit limit that can go up if she stays current with her monthly payments. Her credit card carries an annual interest rate of 19%, compared with an average rate of 13.7%.
Milestone credit cards are issued by Mid America Bank & Trust Co., a 91-year-old bank in Dixon, Mo. A regulatory filing shows the bank collected $1.1 million in "credit card program fee income" in the first nine months of 2011. The bank had profits of $1.2 million over the same period. Mid America declined to comment for this article.
Card Acquisition LLC says on its website that the Sioux Falls company's Affirm credit card can help debt collectors wring profits out of seemingly lost causes. The cards give "the debtor a positive way to settle their debt," the website said. Company officials didn't respond to calls for comment.
Participating banks say borrowers with poor credit—stemming from lost jobs or other financial catastrophes, for example—deserve another chance.
How to restart lending to them is "a question at the very center of the recovery," John D. Hawke Jr., the nation's top regulator of national banks from 1998 to 2008, said in an interview.
Last year, West Virginia Attorney General Darrell McGraw barred Jefferson Capital Systems, the debt-collection unit of CompuCredit, from offering state residents an Emblem credit card through the company's "Fresh Start Solution Program."
Mr. McGraw said the program was "abusive" because people didn't realize they were agreeing to pay debt that had expired. Other issuers still can do business in West Virginia. Some companies are concerned regulatory scrutiny could slow growth.
Angela Hoover, a 47-year-old laboratory assistant from Strasburg, Pa., said she was ready to sign up for an Emblem credit card in November. After reading the offer letter three times, she realized she would have to pay $434 in old debts before she could get the card.
The letter's "legal hogwash" was confusing, she said. "I am just grateful I didn't accept it."
Debts Go Bad
By: Jessica Siver-Greenberg
A personal bankruptcy is supposed to cut borrowers loose from lenders and debt collectors, but Capital One Financial Corp.—one of the nation's largest credit-card issuers—sometimes doesn't want to let go.
Leila Torres, a 35-year-old waitress who lives in Hawthorne, N.J., concluded her Chapter 7 bankruptcy case in 2009. She was stunned when she got a letter notifying her that Capital One was suing her for $4,266 in credit-card debt.
"I was trying to move on, and this whole thing has sucked me back into a nightmare," she says.
Capital One dropped the suit after Ms. Torres accused the company in a separate lawsuit filed in September of flouting bankruptcy law. Capital One asked a bankruptcy judge to throw out her suit, but he refused.
It wasn't the first time the company went after its customers for debts that had been snuffed out in bankruptcy, even though the practice is illegal. A court-appointed auditor concluded earlier this year that Capital One pursued 15,500 "erroneous claims" seeking money previously erased by a bankruptcy-court judge.
More than 800 of those borrowers have filed lawsuits or other legal actions against Capital One, the auditor said in a Dec. 6 court filing. Without admitting or denying wrongdoing, Capital One agreed to reimburse about 130 borrowers, lawyers and bankruptcy trustees for legal costs incurred trying to fend off Capital One.
A spokeswoman for the McLean, Va., company said: "It is our policy and practice not to collect on discharged debt."
In a court filing earlier this year, Capital One disputed the auditor's finding of 15,500 erroneous claims but didn't disclose what the company thought the correct tally should be.
Debt collection is a major component of Capital One's business.
The auditor is scrutinizing Capital One as part of a 2010 settlement between the company and a U.S. bankruptcy trustee in Massachusetts.
Separately, David W. Houston III, chief judge of the U.S. Bankruptcy Court in Aberdeen, Miss., said he plans to demand that Capital One show up in his courtroom to explain its debt-collection practices.
In October, the judge rejected the company's request to throw out a lawsuit that alleged Capital One tried to collect $43,396.59 that was legally erased in an earlier bankruptcy case filed by the same person.
"I want some proof from the company that this was a legitimate error and not a conscious, malevolent effort to go out and collect a debt that's been discharged," Judge Houston said in an interview.
Capital One said in a court filing that it didn't know about the previous bankruptcy.
Once the company found out, it abandoned its claim, saying it made a mistake that was "neither willful nor intentional," according to the filing.
Capital One is the 10th-largest U.S. bank by assets, best known for the credit cards pitched in its "What's in your wallet?" ads. The company's banking unit has grown to nearly 1,000 branches, and federal regulators are reviewing the proposed $9 billion acquisition by Capital One of ING Groep NV's U.S. online-banking business.
Debt collection is a major component of Capital One's business that gets little attention from analysts and investors. As of Sept. 30, Capital One had $2.7 billion in net income so far this year on revenue of $12.22 billion, but it also was forced to write off $2.9 billion in uncollectible loans.
As a result, like most lenders, Capital One invests significant resources into trying to collect from customers who are behind on their bills. But unlike most others who outsource their debt collection, Capital One largely relies on employees.
If a customer files for bankruptcy, the company often lines up with other creditors to collect whatever assets are left. This is entirely legal, up to the point that a customer's debts are officially erased by a bankruptcy judge.
Capital One is accused of filing claims to get debts that were previously discharged in some cases.
There is a lucrative niche in collecting even small amounts from debtors in the window between when a bankruptcy proceeding is filed and when it is completed.
About $120 billion in debt will wind up in Chapter 7 or Chapter 13 bankruptcy proceedings this year, estimates Sean McVity, a debt broker in Harrison, N.Y. Portfolio Recovery Associates Inc., based in Norfolk, Va., bought $1.52 billion of bankruptcy debt in the first nine months of 2011, paying nine cents on the dollar, according to a securities filing.
Buyers are hungry for bankruptcy debt because they often wind up doubling their initial investment, according to Mr. McVity.
William Weinstein, chief executive of Weinstein & Riley, a debt-collection company in Seattle, said he proceeds carefully when buying bankruptcy-related debt because some firms "aggressively pursue payments in violation of the law."
For example, collectors sometimes report erased debts to credit bureaus, a pressure tactic that is in violation of the law if the debt has been discharged.
About 1.4 million Americans filed for Chapter 7 or Chapter 13 bankruptcy-court protection in the fiscal year ended Sept. 30, down 8% from a year earlier but nearly double the number of bankruptcy filings in 2007.
In 2008, a U.S. bankruptcy trustee in Massachusetts accused Capital One of illegally trying 5,600 times to collect debts already wiped out by a bankruptcy judge.
The trustee, who declined to comment, said the wrongful claims were the result of Capital One's failure to keep track of bankruptcy filings by its customers. The trustee began investigating the company when it allegedly sought $5,542.50 from a couple 14 years after the debt was erased.
Capital One denied any wrongdoing but agreed to turn over internal records detailing 2.2 million filings of bankruptcy-court claims between 2005 and 2010.
The company also agreed to supervision from a court-appointed monitor that will last until the auditor has completed a review of the bankruptcy-collection records.
So far, the auditor has identified 15,500 allegedly erroneous claims.
The Capital One spokeswoman wouldn't comment on the allegations, settlement or ongoing scrutiny. In a court filing, Capital One said it beefed up record-keeping procedures before being prodded by the bankruptcy trustee.
Judge Says Widow Harassed
Collection Firm Was Hired by Bank of America to Pursue Dead Man’s Debt
By: Jessica Siver-Greenberg
Bank of America Corp. and a debt collector it hired to go after deceased customers' debts violated state law by repeatedly calling a Florida woman about paying the credit-card bill of her late husband, a Florida state-court judge ruled this month.
Judge Keith R. Kyle in Lee County, Fla., found that collection attempts by West Asset Management, an Omaha, Neb., firm working on behalf of Bank of America, amounted to harassment.
The ruling clears the way for the plaintiff to get punitive damages from the collector, a unit of West Corp., and Bank of America, which is the second largest U.S. bank by deposits. A civil jury will determine the size of the award next year.
The companies declined to comment on the latest ruling. Judge Kyle didn't return calls for comment.
The case could set a precedent across the U.S. and discourage lenders from using collectors to get money from surviving relatives on debts left behind by the deceased, according to other state-court judges.
Bank of America and other major U.S. lenders hand over accounts of the deceased to firms specializing in death-debt collection. The collection firms then zero in on family members who they think might agree to pay some of what the dead person owed even though they have no legal obligation to do so.
In a 2010 investigation of the industry, the Federal Trade Commission found that some death-debt collectors flout federal and state laws by duping relatives into thinking that they have to pay the debts of the deceased. Surviving family members typically have no legal obligation to pay unless they co-signed a loan.
The latest ruling is part of an August lawsuit filed by Linda Long, a 68-year-old retired office worker, alleging that the debt-collection firm harassed her by calling as many as 10 times a day about $16,651.52 that her husband Millard had accumulated on a Bank of America credit card before his death from colon cancer in March 2010.
Mrs. Long was the subject of a page-one article in December about collecting debts left by people who die.
Bank of America won't say how much debt-recovery work is outsourced to collection firms focused on death-debt collection. The bank says it complies with all applicable laws.
William Howard, Mrs. Long's lawyer, called the judge's ruling a "stunning victory for Mrs. Long and other widows and family members."