Sharon Meyer fell behind on a gas credit card. In April 2016, the Wisconsin woman received a computer-generated letter saying her $1,367.17 debt had been sold to Midland Credit Management, an aggressive third-party debt collector.
This was followed quickly by another computer-generated letter from Midland in May demanding repayment. When Meyer failed to settle her debt, Midland reported her in August to the three major credit reporting agencies.
Along with other plaintiffs, Meyer sued Midland and related companies because all those computer-generated harassing form letters were in error; Midland never actually owned her debt, as it admitted in an October 2016 letter. That case, settled out of court, and others filed against Midland and other debt collectors are emblematic of a larger problem in mass debt collection.
Call it robo-signing, the sequel. The broad pattern of abuses during the mortgage foreclosure crisis of 2007-2010 has spread to the wider realm of consumer debt collection. The common denominator both then and now: borrowers in trouble mismatched against aggressive collection. And blameless consumers are collateral damage.
To keep up, third-party debt collectors increasingly turn to technology, cutting corners along the way: They buy unpaid debts and, often without direct knowledge of the cases and with erroneous information, force debtors into court via signed automated affidavits.
More recently, Midland and its parent, Encore Capital Group, were sued by 41 attorneys general over robo-signing practices late last year, the latest in a round of litigation against third-party debt collectors and law firms. In response to a settlement reached in that round of litigation, Ashish Masih, president and CEO of Encore, stated: “While we believe our practices were in accordance with relevant laws, we chose to agree to a settlement, so we can all move ahead.”
“Midland’s robo-signing of inaccurate court documents to collect consumer debt was illegal,” former Illinois Attorney General Lisa Madigan stated in December. “This settlement will provide financial relief to consumers who were victims of this company’s unfair and deceptive debt collection practices.”
April Kuenhoff, an attorney with the National Consumer Law Center, says the abuses are predatory and legally corrosive. “This type of fraud can harm real consumers who end up with judgments against them for debts that they do not owe or for the incorrect amount,” she said. “False affidavits also undermine the legitimacy of the court system; unscrupulous actors cut corners in order to save money.”
While the practice of debt buying and collection is nothing new, the automatic triggering of harassing letters and even court actions has gained momentum in recent years. Here’s how this process works: Debt collectors will purchase debts for pennies on the dollar from credit card companies and other sources of credit, then seek to recover the full balance through a series of letters, auto-filed affidavits and phone calls.
Debt collection and buying is a highly profitable business, especially when automated. Few debtors dispute their bills, and the collection methods can be aggressive: Letters and calls haranguing debtors – in some cases, for debts that they may not even owe -- can continue unabated with little solid federal regulation or enforcement.
According to court records, Midland filed more than 100 collection suits in Milwaukee County alone in 2017. Meyer’s suit alleged that Midland “had no legal basis to collect the account from Meyer and had no ownership in the debt.”
Encore, Midland’s parent company, did not respond to a request for comment. Meyer’s attorney, John Blythin, based in Cudahy, Wis., refused to comment on the suit or to arrange contact with Meyer, who could not be reached.
Although there are no reliable national statistics, this type of robo-signing is pervasive. Midland, according to three class-action suits, was issuing between 200 and 400 computer-generated affidavits a day. The 2016 lawsuits involved some 1.4 million plaintiffs. Another suit was settled in 2017 by the state of Massachusetts, against an unrelated robo-signing law firm pressing more than 100,000 lawsuits against that state’s residents. Several other firms have been named in litigation across the country.
Abuses in third-party debt collection have been a perennial consumer complaint for more than a decade, but have accelerated due to improvements in technology. A 162-page report by the Federal Trade Commission in 2013 found that largely as a result of these advances, debt collectors have an overwhelming advantage over consumers, who dispute only 3 percent of debts.
“If applied to the entire debt buying industry,” the FTC report estimated, “each year [debt] buyers sought to collect about one million debts that consumers asserted they did not owe. The proper handling of this large number of disputed debts is a significant consumer protection concern.”
In the 2008 financial crisis, robo-signing was used to force homeowners who were behind on their mortgage payments into foreclosure. Millions found themselves in court fighting to save their homes after bank employees often skipped the necessary due diligence and legal paperwork.
After a wave of lawsuits, federal regulators reached a $9.3 billion settlement with 13 banks in the years following the mortgage/credit crisis; the settlement involved nearly 4 million borrowers.
In 2015, the Consumer Financial Protection Bureau also took Encore and debt collector/buyer Portfolio Recovery Associates to court. Echoing other robo-signing cases, the CFPB accused those companies of sending letters with “incorrect balances, interest rates, and payment due dates” and filing “affidavits that contained misleading statements in debt collection lawsuits across the country.” Alleging that the companies “collected payments by pressuring consumers with false statements and churning out lawsuits using robo-signed court documents,” the CFPB ordered them to stop collecting on $125 million in debts and pay refunds totaling more than $80 million.
“Encore and Portfolio Recovery Associates threatened and deceived consumers to collect on debts they should have known were inaccurate or had other problems,” said CFPB Director Richard Cordray at the time. Cordray led the bureau from 2012-2017 as its first director.
Robo-signing is seen as an especially pernicious practice because it is so intimidating: an official-looking letter from a powerful company threatening legal action against people who may not have the means to defend themselves, even when the claim against them is wrong.
The result for consumers is often wage garnishment and downgraded credit scores. It’s humiliating as well. Sometimes, though, there is no actual debt owed, resulting in harassment by collectors for “zombie” debt.
“The practice of robo-signing hurts consumers, especially our lower-income consumers who may not have the means to fight a debt collector in court,” said Mississippi Attorney General Jim Hood when the settlement was announced on December 13 of last year. “Midland illegally attempted to collect debts it had not verified through robo-signing and other illegal practices.”
The Fair Debt Collection Practices Act is supposed to police abusive debt-collection practices such as calling debtors at work or at odd hours. Since there’s sparse federal regulation of these practices now, state attorneys general are the most active enforcers. And the problem isn’t going away: Millions have easy access to credit through online sources, payday loans and credit cards.
According to the Federal Trade Commission’s Sentinel database of consumer complaints, debt collection was the most often cited of the nearly 3 million complaints the agency received in 2017, constituting nearly one-quarter of the reports received from consumer agencies across the country (more than 608,000). The report, however, did not specifically cite companies or the practices involved, leaving an incomplete picture of the larger problem.
“The FTC is currently compiling data on consumer complaints from 2018 and we call on them to use this opportunity to release more data,” said Kuehnhoff, “such as information about the number and types of debt collection complaints, the names of companies who are receiving those complaints, and an analysis of the metropolitan areas and regions where debt collection complaints are most common.”
An FTC spokesperson, who was initially unfamiliar with the Midland suits, would not comment directly on the robo-signing practices nor say whether the agency is pursuing any litigation in that area.
The Consumer Financial Protection Bureau is reportedly writing new rules on debt collection practices, which are expected soon, according to Kuehnhoff.
“In order to combat robo-signing,” she said, “more enforcement is needed of existing laws. Separately, the CFPB should adopt regulations governing the use of affidavits and the need for collectors to have and refer to original account level documentation.”
Kuehnhoff, co-author of “Consumer Complaints About Debt Collection: Analysis of Unpublished Data from the FTC,” said states “should require original account-level documentation open to review in any court action before a default judgment can be entered. This would give consumers a heads-up and ample opportunity to repay their debts and avoid litigation.”
Outside of the attorney general actions, federal enforcement of debt collection laws of late has been greatly reduced. The consumer protection bureau effectively halted major enforcement actions in 2018 when President Trump appointed as interim CFPB director Mick Mulvaney, head of the Office of Management and Budget, who who as a congressman had opposed establishing the consumer bureau. Last year, the bureau dropped enforcement action against a group of payday lenders. Mulvaney has since moved on to become Trump’s acting chief of staff.
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