Bad Paper: Chasing Debt From Wall Street to the Underworld Page 17
The strangest story involved a debtor named Julie, an accounting analyst, who told me that she did not recognize the debt she was being sued over. Part of the problem was that the same debt appeared on her credit report in two places, as if it were two separate debts from two separate creditors: Chase and Washington Mutual. As it turns out, Julie’s original creditor was Providian, which was then bought by Washington Mutual, which was then bought by Chase. Julie was thoroughly confused. And she wasn’t alone. A source at the CFPB told me that as debts are sold from one buyer to another—and interest is added along the way—consumers will often receive calls from a collection agency they’ve never heard of, on behalf of a creditor that they’ve never done business with, over a balance that they don’t recognize.
I called Paul Hartwick, the head of public relations for Chase Credit Card Services, to help make sense of Julie’s predicament. After conducting his own investigation, Hartwick told me that Chase was simply going to call the debt “fraud” and request that it be removed from her credit report. I was surprised and I asked him for an explanation. He gave two reasons: the first was that Julie claimed that she didn’t recognize the charges on the card; the second was that Chase didn’t have much of Julie’s original paperwork, including her original application for the card or the subsequent records of who was actually paying the account. When I asked where the paperwork had gone, he replied, “I don’t know.” He then added that when Chase acquired Washington Mutual—in one of the most important financial rescues of recent times—it was “a really rapid transition.” At some point, Washington Mutual did have these records—right? “Presumably,” replied Hartwick.
“So it’s anyone’s guess what happened to them over time?”
“I don’t know. It could be a lot of different things. It could be simply bad record keeping, it could be a systems conversion [problem], where things were not retained. It could have been a variety of different things.”
Rachele, Amy, and Julie were all being asked to pay amounts that they might not have owed—or simply didn’t owe. But whose responsibility was it to address that? The original creditors, who sold these debts long ago, had no motivation to intervene. Meanwhile, the lawyers like Sherwin—who are responsible for suing on such accounts—are often given limited information and have no easy way of verifying it. Consumer advocates argue that debt buyers who seek judgments based on unverified or unverifiable information are fully culpable. Whoever is to blame, these mistakes aren’t freak occurrences. They are the inevitable result of a haphazard system that transfers debt from one vendor to another—over and over—with minimal oversight or incentive to get it exactly right. Ira Rheingold, who heads the National Association of Consumer Advocates, says mistakes like these occur whenever debt is bought and sold. “It’s something like a game of telephone,” says Rheingold. “The information is just going to get worse and worse and worse.”
* * *
One morning, I traveled to Douglas County, on the outskirts of Atlanta, where I observed a session of Magistrate Court, which is Georgia’s equivalent of small-claims court and—in this instance—could have been called debtors’ court. Several of the debtors from the Georgia Splinter lived in Douglas County, and I was curious to see what their experiences in court might have been like. I showed up early and met a middle-aged married couple who, as it turns out, were not part of the Georgia Splinter. The husband, Frederick, told me that he was a former Marine corporal who spent seven years in the service, including a lengthy stint serving at Guantánamo. Frederick’s wife, Keanne, sold shoes for a living. Keanne was actually the defendant in the case, and she appeared so wound up that she spoke to me only in short, tense replies.
Keanne was being sued over an American Express account that she had taken out in 2005. Although the card was in Keanne’s name, it was mainly Frederick who had used it in order to buy supplies for his construction business. The Great Recession had hit Frederick especially hard, as it had so many contractors in the Atlanta area. “It was like one day, the water is flowing through the stream, and then it just stopped,” Frederick told me. “All of a sudden, the banks stopped the lines of credit for buyers, and you’re just stuck.” At the time, Frederick had just purchased two new properties and renovated them. He had buyers lined up and the buyers had mortgages lined up. “Then the banks backed out on the buyers for their mortgages. I had to let the houses go. I couldn’t pay the contractors. And I owed the credit-card bill for the supplies.” The burden of all of this fell on Keanne. She had, or at least used to have, good credit—better than Frederick, anyhow—and that’s why they had taken out the American Express card in her name. Now it was Keanne, not Frederick, who had to stand up before the judge and explain the situation. It was a prospect that clearly terrified her. To further complicate matters, she did not recognize the name of the debt buyer that was suing her or know how, if at all, it was connected to American Express.
Before court was called into session, a young man in a suit walked into the atrium and called out Keanne’s name. He explained that he represented the debt buyer and he wanted to speak with us. Frederick and Keanne introduced themselves and I explained that I was an author, observing the courts.
“I’m not comfortable with you being here,” said the lawyer.
“We are comfortable with him being here,” Frederick said.
The lawyer hesitated as if reluctant to proceed. He eventually handed Frederick and Keanne a bill for $3,762 that looked like a credit-card statement, only in two separate places it stated: “This is an account summary. It is not a credit card statement from the originating creditor and has not previously been provided to the consumer.” It was hard to know what, exactly, this document was. It looked as if someone might have transposed information from a spreadsheet—including a name, an address, dates, an account number, and a balance—and used it to create a mockup of a credit-card bill. There was no detailed listing of purchases, payments, or fees and it was impossible for Frederick to know, at a glance, whether the amount of $3,762 was accurate. Frederick asked the lawyer if he had any of the original paperwork, including the original signed contract. The lawyer replied that, under Georgia case law, he was not required to provide the original signed contract. I chimed in and pressed the lawyer on whether he actually had this or any of the other original paperwork. I was genuinely curious.
“Are you an attorney?” the lawyer asked me.
“No,” I told him.
The lawyer then said he would have to talk to the judge because I was not allowed to “represent” them.
“He’s not representing us,” protested Frederick.
This conversation continued for the next several minutes, with Frederick again asking for more paperwork, so that he could understand the nature of the $3,762 that they owed and whom, exactly, they owed it to. The lawyer finally told Frederick and Keanne, “Let’s take it in front of the judge.”
We all proceeded into the courtroom. Moments later, the lawyer tapped me on the shoulder and gestured for me to follow him back outside. He said he intended to have me sworn in and brought before the judge as a witness. I thought he was joking until, several minutes later, the judge gestured for me to stand next to Keanne, raise my right hand, and promise to tell the truth, the whole truth, and nothing but the truth. The young lawyer, who was suing Keanne, then began with his opening arguments—namely that I was representing the defendant and was thus practicing law without a license. He then asked the judge to instruct me that I could face “criminal sanctions” for doing this.
I felt that I should say something in my own defense because I was, apparently, on trial at this point. I recounted what had happened, explaining that I had introduced myself as an author and had merely asked one or two simple questions during this pretrial meeting. No one, I argued, could possibly infer that I was playing lawyer and mounting a vigorous defense.
The judge nodded her head thoughtfully.
The young lawyer, still looking quite de
termined, then asked the judge to instruct me that I could not write about what I had witnessed earlier because it was all confidential. The judge apparently agreed because she then turned to me and explained, “You can’t put any of that in your book.” I waited for a more detailed explanation of why, but none was offered. Throughout all of this, Keanne stood alongside me, quietly waiting her turn to participate in a lawsuit that concerned the $3,762 that she allegedly owed. Finally, the judge asked the lawyer what he wanted to do over the matter of the debt. The lawyer asked for a moment to consult with his client by phone. He stepped out of the courtroom and then, moments later, returned and said that he would be dismissing the case.
After leaving the courtroom, both Keanne and I were thoroughly confused. I knew from experience that the presence of a journalist or author could ruffle or unnerve some people, but that alone couldn’t explain what had just happened. And what, exactly, had just happened? Frederick and Keanne had shown up in court, along with me, and we had asked the lawyer to provide the evidence that supported his case. Little did we realize that this simple action was the equivalent of mounting a vigorous defense.
Later, I got to talking with a lawyer named Michael Tafelski, who worked for Georgia Legal Services, representing poor debtors. Tafelski had been in court that morning and had witnessed much of what had transpired. He told me he wasn’t in the least bit surprised that the case had been dismissed. In order to prevail in cases like this one, all a debtor had to do was show up and utter the “magic words.”
“What are the magic words?” I asked.
“Prove your case,” replied Tafelski, meaning present some evidence.
According to Tafelski, creditors’ lawyers almost never had enough evidence to withstand careful scrutiny or cross-examination in court. And so they tried to corner debtors in pretrial and get them to sign a “consent agreement,” a legal document admitting that they owed the money and promised to pay it. This was what I had witnessed and unwittingly interrupted. And the strategy worked most of the time, Tafelski said. Most debtors simply never showed up in the first place, he explained, and those who did often signed the consent agreement. For those debtors who were nervous—and perhaps had never been to a courthouse before—signing on the dotted line and avoiding an encounter with a judge might seem like a good idea.
At another Georgia courthouse, I met a defendant named Gwen, who was being sued by a company called Midland Funding LLC. Midland was, it seemed, the owner of a number of unpaid Target credit-card accounts, including Gwen’s. Gwen showed up ten minutes late to court, protesting the debt. At this point, the judge had already marked her as a no-show and had entered a default judgment against her. After apologizing profusely, Gwen begged the judge to reconsider her situation. Gwen had actually already made her case in writing, in papers that she had submitted to the court a month earlier. She had written: “This account was already disputed and found to not be my account. This dispute was won against Target National Bank in January 2012. The account per Target was then removed from my records and credit history.” After reviewing her papers, the judge was apparently persuaded, because he voided the default judgment and allowed the hearing to go forward. At this point, the lawyer for Midland Funding immediately dismissed the case. The whole scenario seemed to play out exactly as Michael Tafelski had described. A debtor showed up, pushed back, and the case was dropped. In this case, there was the added possibility that the debt might not even have been Gwen’s.
* * *
In truth, Gwen and Keanne were the outliers—because they actually showed up in the courtroom. The vast majority of debtors, roughly 90 percent by most estimates, are no-shows. That fact struck me as rather astounding. How was it that nine out of ten people simply didn’t appear in court to defend themselves? It seemed possible that many of them had become “anesthetized” to calls from collectors, as Sherwin Robin put it. Many debtors don’t understand that if they fail to respond to a legal complaint or show up in court to contest it, they are effectively opening up their bank accounts to being garnished. It may also be that they’re not able to pay the debt, and so contesting it seems pointless. Sometimes the fault lies with the “process servers” who are hired to hand-deliver the notices to debtors informing them that they are being sued. In a phenomenon sometimes called “sewer service,” process servers never deliver the papers they are given, but then file a false affidavit saying that they did. (In 2009, the New York State attorney general brought a lawsuit against several law firms and collection agencies for sewer service, alleging that 100,000 consumers had been victimized and that over $500 million had been seized improperly.) Another explanation is that the debtors do show up at court, but never enter the courtroom because they meet with a lawyer in pretrial and sign the “consent agreement,” promising to pay. This is what Frederick and Keanne almost did.
Whatever the explanation, debtors rarely go before an actual judge. And this simple reality shapes the entire market for debt. John H. Bedard, Jr., a Georgia-based lawyer who represents and advises creditors’ lawyers, made this very point when I met him, several days later. In Bedard’s frank and thoughtful account, the high default rate shapes the entire industry—everything from the price of debt to the evidence that collection attorneys bring to court. “When no one shows up, the plaintiffs are not generally required to put up their evidence,” he explained. This meant that the debt buyers had no incentive to obtain the kind of documentation that would hold up in court as admissible evidence—documentation proving that “the debt exists and the person whom you’ve sued owes it.”
The absence of such documentation is striking. In 2013, an FTC study found that six of the nation’s largest debt buyers typically receive very few documents at the time of purchase. When purchasing debts, the FTC noted, these buyers received the “account statements”—that is, the actual monthly bills where charges appear, with dates, on an item-by-item basis—for just 6 percent of the accounts that they purchased. And the debt buyers received copies of the original account applications—the documents proving that consumers opened the account and agreed to the terms—for less than 1 percent of accounts that they purchased. What’s more, debt buyers often did not receive a breakdown of what debtors owed in principal, interest, and fees.
In Bedard’s view, the original creditors were only willing to sell debt cheaply—for pennies on the dollar—so long as they were not asked to delve back into their records and find more information or evidence. Retrieving such information often proved labor-intensive and costly. If the banks had to do this, the result would be a higher price for the same debt. Meanwhile, the debt buyers weren’t interested in paying more for this additional documentation, because they usually didn’t need it. As Bedard saw it, everything hinged upon consumers’ not showing up in court to contest the evidence—or the lack thereof. He maintained that if all the debtors in America started showing up in court, the effect would be colossal. “It would bring the debt-buying industry, as we know it, to a grinding halt,” Bedard told me.
Some debt buyers do go through the trouble of obtaining records—typically affidavits from the banks—so that they’ll have compelling evidence when they sue debtors in court. Even then, there’s a problem: not all banks are able to furnish accurate records. There have been numerous reports, for example, that Chase—the nation’s largest bank—was simply “robo-signing” affidavits en masse with little regard for accuracy. Mac McGinn, who ran Chase’s “media research department,” explained to me how the process worked. Before bringing a lawsuit, a debt buyer would ask Chase to verify the exact amount of money a debtor owed. They would then send Chase an unsigned affidavit to be reviewed and signed. Those unsigned affidavits would come to McGinn, whose department handled all queries about old paperwork. He would ask the bank’s notaries, who worked for him, to sit down with a Chase bank officer. That officer would—in theory—review each individual request carefully and then sign an affidavit. Often, says Mac, the bank officers would sign
two hundred to three hundred affidavits in a little over an hour. Sometimes the bank officer doing the job would have little to no experience reviewing these types of records. According to Mac, they were just signing whatever was placed in front of them. “There’s no way in hell that you could go through that many affidavits and not have some sort of error,” he told me. The bank allowed it, he said, because it was able to charge for each and every affidavit it provided: “The bank was making money, they didn’t care what was going on.” When I asked him for his reaction, he told me, “I was pissed at what they were doing.”
At one point, Mac raised his concerns with a superior. Mac said that she, and the other “higher-ups,” were unconcerned, so he “let it go.” Mac left Chase in 2008. Chase has never admitted to any wrongdoing—though in 2013, the Office of the Comptroller of the Currency ordered the bank to improve its legal debt-collection practices and ensure that its affidavits were, in fact, accurate. Chase then announced that it had ceased all of its own efforts to sue its former customers over credit-card debts.
Down in Georgia, creditors were often suing debtors en masse under similarly troubling circumstances. At one point, I spoke with a Georgia lawyer named Dennis Henry, who used to work for one of the biggest collection law firms in the state. He was in charge of all the outgoing legal paperwork. Henry said that his firm was filing roughly ten thousand new lawsuits against Georgia debtors each month. Dennis’s job was to sign the paperwork on every single one of these lawsuits. The Fair Debt Collection Practices Act prohibits debt collectors, including lawyers, from making false representations. When a letter is sent on a lawyer’s letterhead, for example, a debtor is likely to assume that the lawyer is actually involved in the process and—consequently—that this is a very serious matter. In situations like this, courts have said that the lawyer must be “meaningfully involved” in the process. That’s where Dennis came in. He was to review and sign every single lawsuit that the firm filed. He claims that he worked twelve-to-fourteen-hour shifts and signed roughly five hundred lawsuits a day. In theory, he was providing his lawyer’s eye and making sure that everything was exactly as it should be. But it proved impossible. “There’s no way that you could effectively double-check all that stuff,” he told me. “No possible way.” One could argue that Dennis met his obligation to be “meaningfully involved” simply by monitoring his staff (of nonlawyers) and ensuring that they understood and followed all of the requirements of the law—which is presumably the argument that Dennis would have made in court, if challenged. Only it never came to that. In the end, Dennis was fired from the firm in 2011, after a local news station produced evidence that someone else in the office might have been signing his name on legal documents as well. Dennis admitted to me that this was true and that the person signing his name was one of his subordinates. He maintains that the firm had put him in an impossible situation. For its part, the firm said only that it disputes these facts but declined to comment in detail.