Bad Paper: Chasing Debt From Wall Street to the Underworld Read online

  Brandon was easy to spot from afar, since he was the only man in the lobby who didn’t look like he had just stepped out of a glossy advertisement for Office Depot. He wore jeans, a checkered button-down shirt, and a black baseball cap emblazoned with a large white “B.” He had heavy stubble on his chin, and he looked as if he hadn’t slept much in the last few days. He introduced himself and took out a silver business-card case stenciled with his own initials, B.W., and the words PROBLEM SOLVER. He handed Elie a card. Jeremy quickly explained who Elie was and that he needed help collecting on some payday loans.

  “I always look down on you payday-loan guys as scum, but now I’m begging for your crumbs because I have no paper,” said Brandon.

  Elie looked surprised, but not insulted.

  “We are starving for inventory,” Brandon continued. “Anything that you have on the back end, I’m interested in. We need inventory for collection and resale. Give us a test file. We’ll collect and put it to sale at the same time.”

  “Where will you work it?” asked Elie.

  “My agency.”

  Elie seemed hesitant. Not long ago, he said, he had been cheated by an agency in Kentucky that never sent him the money that it owed him.

  “How much do they owe you?” asked Brandon.

  “A couple of thousand.”

  “Sometimes you have to take physical action,” Jeremy said.

  Brandon nodded.

  “They don’t call me back and they won’t pay me,” said Elie.

  “As long as they are not still collecting on that paper, you need to just write it off as a loss,” Brandon said.

  “What would you do?” asked Elie.

  “Depends how mad I am,” Brandon said, “and how much money it is.” The bottom line, he explained, was that if he ever brokered a deal for Elie and one of the parties involved was a swindler, Brandon would personally give Elie the money that he was due. And then Brandon would handle the problem himself. This was, of course, the Brandon Wilson insurance program. Before rushing off to his next meeting, Elie promised to send Brandon a “test file.” Brandon didn’t look too thrilled, expressing doubts that Elie had enough paper to keep him busy; and, as it turns out, Elie never even sent over the test file.

  Brandon still had the Rincon paper to look into, but in the meantime, he was on the hunt for other prospects. The market was tight, he said. The paper that was available was overpriced and was being snatched up by “the big guys”—five or six of the largest debt-buying companies. Everyone else was scrambling to make do. As Brandon continued chatting with various buyers and sellers, we bumped into Tom Borges. He was the broker whom I had visited in the summer of 2012 and who—upon discovering that some banks would limit the resale of credit-card debt—had pledged to “reinvent” himself.

  Tom was a swaggering, immaculately groomed fifty-two-year-old man. His skin was deeply tanned and his hair gelled in slick spikes; a shiny silver hoop dangled from his left ear; and his clothing was so tight you’d expect the seams to burst if he flexed his bulging chest and torso muscles too vigorously. Tom is a legend in collections, an enduring figure who has been working as a collector, a debt buyer, or a broker for over three decades. In his early days, Tom ran a collection agency staffed largely by born-again Christians, whom he sometimes recruited at Bible study groups. Tom’s collectors called debtors, listened to their woes, cried with them, prayed with them, and told them that they had to pay only 20 percent of the principal that they owed—moreover, 20 percent of what they paid would go to a Christian charity that helped feed the poor. In the test run for this program, Tom bought a portfolio of debt for $7,000 and collected $180,000 on it in roughly sixty days. In fact, according to Tom, this business model worked so well that he was soon approached by several leading evangelical figures who wanted to expand the size and the scope of the operation. In the end, Tom said that he became cynical about organized religion and decided to keep his business and his spirituality separate. Apparently, though, he still had a fondness for the religiously minded, because when it came to hiring his deputy, he recruited the principal of the Christian school that his children attended. Nowadays, Tom worked almost exclusively as a debt broker and had secured a reputation as a man supremely in the know about the ebb and flow of paper.

  I knew Tom fairly well prior to seeing him in Las Vegas. I had spoken with him a number of times about the collections industry and, in the summer of 2012, had even spent several days hanging out with him at his Victorian mansion in Napa, California. During my visit, Tom had told me at length that the industry was changing and that his sources—insiders who worked closely with the banks—were all telling him that credit-card paper was becoming increasingly scarce. What’s more, at least one bank—Chase—had suspended the sale of all credit-card debt. At the time, Tom was scrambling to acquire other types of paper, such as “cosmetic surgery debt.” The sorts of debtors who got breast implants or face-lifts, he assured me, could ultimately pay 99 percent of the time. Tom was also acquiring payday loans. He explained that his clients could buy these loans, work them, and make a 30-percent return on their money in just sixty days. In any case, Tom had been hoarding as much paper as he could in anticipation of the imminent shortage.

  Now, in Vegas, Tom seemed remarkably calm and composed as he greeted Brandon and lamented out loud that some banks were now stipulating that whoever bought their credit-card paper could never resell it.

  “Really?” said Brandon, genuinely surprised.

  “How do you like that shit?” asked Tom.

  “Really?” Brandon repeated.

  “Work it, but never [sell] ’til death do you part,” Tom said, shaking his head. “So whatever’s out there is what’s left. That’s why you’re having a hard time finding anything.”

  “How we going to bust this open, Tom?”

  “Well, we got a few buckets we can still pull out,” Tom said reassuringly. There was still debt in his inventory, including $70 million worth of fresh paper from an agency that purchased directly from the banks. This particular portfolio of debt, apparently, had no restrictions about resale. “We’re about ready to bring that to market,” said Tom. “I’m sure you’re going to be interested in that.”

  “Definitely,” said Brandon.

  “A lot of it’s ninety-day-old paper,” added Tom.

  “I’m interested.”

  “I know you’re interested,” said Tom.

  “I’m definitely interested.”

  “Yeah,” said Tom, “I know.”

  There was, however, a catch to doing business with Tom. The catch was that Brandon, and all other would-be clients, had to sign a contract guaranteeing that after making an initial purchase from one of Tom’s sellers, they would continue to use Tom as their broker for all subsequent deals with that seller. This was Tom’s way of locking himself into an ongoing business relationship between a particular buyer and seller. “I call it handcuffing,” Tom later told me, “because they are handcuffed to me for life.” In truth, this wasn’t all that different from the tactic that Brandon himself used when brokering for Aaron. Once he set up a deal, Brandon usually insisted on brokering all subsequent deals between the same two parties. In this scenario with Tom, Brandon would, in effect, be getting the Brandon treatment.

  “That’s how we make money, man,” explained Tom.

  “No doubt,” said Brandon.

  Brandon waved a friendly good-bye to Tom Borges and, moments later, told me that he would not be doing business with him. Not ever. “Borges wants to throw me off the scent,” Brandon told me, almost in a growl. “Borges don’t want me in there. He don’t want me and my foot in the door because then I don’t need Borges.” The trick now, explained Brandon, was finding a “bucket” of older debt—the sort that had no preconditions from a bank.

  I asked Brandon if the new preconditions, which he had just learned about, made him nervous.

  “It doesn’t make me nervous, cuz it doesn’t change the status quo
,” replied Brandon, “and the status quo is there’s no paper coming.” At the end of the day, he added, it didn’t really matter why there was a shortage. “It’s like if [a guy] is dead and I say, ‘Oh, he got hit by a car?’ And then they’re like, ‘No, he got hit by a truck.’ Well, what difference does it make, right? He’s fucking dead and there’s nothing we can do about it.”

  * * *

  Eventually, Brandon and I met up with Aaron in the hotel’s main lobby. Brandon pulled out his wallet, peeled off ten hundred-dollar bills from a thick wad of cash, and handed them to Aaron. Brandon was, apparently, slowly paying off what he owed. The transaction looked suspiciously like a drug deal, and several members of the Office Depot crowd exchanged befuddled glances and then resumed their conversations. Aaron and Brandon began discussing the Rincon paper and whether it was any good.

  Brandon worried that the paper might be bad paper for a number of reasons. He suspected that after Rincon collapsed, a number of collection agencies hired by Rincon had continued to collect on the paper—illegally and very aggressively—and had pocketed whatever they made. Whoever bought that paper next, Brandon reasoned, could get hit with lawsuits from angry debtors as soon as they started trying to collect on it. Plus, the FTC would be keeping a close eye on what happened to the paper. And finally, there was the issue of the “chains of title” and whether or not there was hard-and-fast proof that Rincon had even owned this paper. Nonetheless, Brandon concluded, “Anything’s good at the right price. There could be a profit, but I wouldn’t pay more than two and a half bips.” A bip, more formally called a basis point, is one hundredth of a penny. That means Brandon would offer no more than $102,500 for $410 million worth of debt that the FTC was selling. “That’s like a low ball of a low ball [offer],” he said.

  “That’s what makes it so tempting for people that really don’t know anything about business,” said Aaron, shaking his head knowingly. “Like I can buy this for one tenth of a penny or less. How can I lose money?” Then he turned to me and added, “Guess what? You can.”

  “Yeah, right, you can,” said Brandon.

  The Rincon paper was being auctioned off by a court-appointed receiver and with the aid of well-known debt broker named John Pratt, based in Ohio. According to his company, Portfolio Management Group, the FTC had examined the paper, sorted out the good from the bad, and was now selling some 248,000 accounts with a “face value” of $410 million. The paper was being sold on an “as is” basis. Pratt later told me that even he had not yet seen the actual chains of title for the Rincon paper because the FTC would release them only to the winner of the auction, after the sale. By industry standards, it was not that unusual to withhold the chains of title in this manner, said Pratt. He then added, “All the paperwork in this case was in storage somewhere.”

  “From the FTC’s perspective,” said Pratt, “they very rarely sell debt—they don’t have the experience—so it wouldn’t even be on their radar that there might be some bogus chains of title in the mix. But when I auction debt, I have to tell people this might be a possibility, in order to be transparent.” In this case, Pratt’s company was helping organize the auction and he himself was also bidding on the paper, which meant that he, too, was trying to determine how much it was worth. “This is the risk,” said Pratt. “And this risk exists in all debt purchases.”

  Brandon’s worst fears seemed to be confirmed the following day. In an open-air patio at the hotel, he and I bumped into a friend of his, a debt broker named Mattea Heldner. Mattea was in Las Vegas along with her son, a creditor’s attorney named Galen Hair who had, incidentally, gained quite a bit of attention at the convention for handing out condoms with his firm’s internet address and two slogans: “Don’t get screwed by consumer attorneys!” and “There’s no need to pull out of the industry!”

  Mattea told us that she had handled deals for Rincon in the past and she claimed to be intimately familiar with the paper that the FTC had seized.

  “Did you bid on the Rincon stuff?” asked Mattea.

  “I did not actually bid—but I was going to,” replied Brandon.

  “You should talk to me.”

  “I was only going to bid two and a half bips,” said Brandon.

  “Well, that’s all I would have suggested,” said Mattea, because it was “bad paper.” Brandon nodded and confided what he’d heard about the paper, including the speculation that some of the files had been stolen.

  “They were stolen after the offices had closed down,” confirmed Mattea.

  “Stolen—right. Exactly,” said Brandon. This meant some of the paper was “tainted,” Brandon said, and even though the auctioneers claimed to be selling only the nontainted paper, this was hardly reassuring.

  Mattea agreed. She was skeptical that the FTC, or its court-appointed receiver, had been able to neatly separate the tainted paper from the untainted paper. There was simply too much paper and no easy way to sift through it carefully. As Mattea saw it, there were two potential problems affecting all the paper that Rincon owned. The first was that some of Rincon’s paper had likely been stolen after the FTC shut down the company’s operations. The second was that some of the “signed bills of sale”—proving Rincon’s ownership—were missing because they had been “lost.” Mattea was certain about this, she explained, because she had heard it directly from the owners of Rincon.

  Later on, I tracked down John Pratt, who was helping organize the auction, and told him the gist of what Mattea had said. Pratt wasn’t the least bit surprised, and told me that he knew Mattea well and that she was simply spreading malicious rumors in the hopes of sabotaging his auction. Pratt claimed that he and Mattea had been involved in a business dispute and now she was simply seeking to get back at him. “If you studied her for any length of time, you would see that she is a Wiccan witch and, in fact, she threatened to turn me into a frog once,” he told me. “I forget if it was a frog or a toad.” Mattea said that she had never done business with John and that this allegation was absurd. She acknowledged that she had been a Wiccan priestess since 1981, but explained, “I never threatened to turn anyone into a toad because that is just impossible. The tenet of my religion is not to hurt people. It is to celebrate nature and life.”

  I eventually went directly to the FTC and asked Chris Koegel, an assistant director in the Division of Financial Practices, about the integrity of the Rincon paper. He told me that he believed the paper was good, but then added, “Can I say with one-hundred-percent absolute certainty that somebody didn’t steal some of the information and walk out the door with it, you know, independently? No, I can’t. I have no idea what happened with every single employee that walked out that door.” When it came to the quality and integrity of the paper that it was selling, neither the FTC nor the court-appointed receiver were willing to make any promises. In fact, the “purchase and sale agreement” stated explicitly that the “seller does not warrant in any manner whether all or any data, including but not limited to the balance, date of charge off, date of last payment and loan type, supplied to Purchaser is true and accurate.”

  At this point, I was rather dumbfounded. It seemed astounding to me that this was how the federal government was auctioning debt that it had seized. It was effectively admitting that the debt might have been stolen, prior to sale; what’s more, it was refusing to make any guarantees about the debt itself. Equally astounding was that information about the worth of this paper was being determined by hearsay of theft, speculations about lost chains of title, and rumors of spells cast by witches.

  “The whole thing just smells bad,” Brandon concluded, in his conversation with Mattea.

  “Right,” she replied.

  * * *

  The chatter in the convention hall was squarely focused on the regulators. Everyone either seemed to be angling to buy the FTC’s paper or speculating about whether the FTC—and its new companion, the Consumer Financial Protection Bureau—was going to shake up the industry. People spoke with drea
d of receiving a letter in the mail from the CFPB, announcing that an investigation or inquiry was under way. I heard one lawyer tell an audience of listeners that such a letter was a “nuclear bomb.” “It will shut down everything,” he said. “The first thing that will happen is you will get an absolute sense of panic.” The fear that this might happen stemmed from the fact that—just one month earlier, in January 2013—the CFPB had officially begun to monitor the nation’s largest debt-collection companies. This meant that a team of examiners from the CFPB could show up, any day, to scrutinize the business practices of one of these companies.

  This was such a concern, apparently, that there was even an informational session for conventioneers: “Handling an FTC or CFPB Investigation.” The panel’s moderator was a well-respected former FTC lawyer—now in private practice—who quickly sought to reassure the audience: “Most of you, thankfully, will never go through an investigation.” He went on to explain that the FTC conducted fewer than fifty investigations a year and that it pursued only the most egregious offenders. When it came to the CFPB, he assured the crowd that these new regulators were “just getting their toe in the water” and it would likely be some time before they would become “more of a threat.” As of January 2013, the CFPB has the authority to supervise companies whose collection activities generate more than $10 million in annual receipts, which includes the nation’s 175 largest players; and while the CFPB can also go after certain smaller companies, it says it will be focusing its attention almost exclusively on the big players. The problem is that there are 9,599 debt-collection businesses in the United States. In short, the CFPB’s toe in the water remained at quite some distance from the industry’s self-proclaimed bottom-feeders, like Brandon.