Bank of America Sold Card Debts to Collectors Despite Faulty Records
MAR 29, 2012 6:31pm ET
Bank
of America has sold collections agencies rights to sue over credit card debts
that it has privately noted were potentially inaccurate or already repaid.
The
pricing reflected the accounts' questionable quality, but what is notable is
that the bank could get anything at all for them. B of A was not making
"any representations, warranties, promises, covenants, agreements, or
guaranties of any kind or character whatsoever" about the accuracy or
completeness of the debts' records, according to a 2010 credit card sales
agreement submitted to a California state court in a civil suit involving debt
that B of A had sold to CACH.
In
the "as is" documents Bank of America has drawn up for such sales, it
warned that it would initially provide no records to support the amounts it
said are owed and might be unable to produce them. It also stated that some of
the claims it sold might already have been extinguished in bankruptcy court. B
of A has additionally cautioned that it might be selling loans whose balances
are "approximate" or that consumers have already paid back in full.
Maryland resident Karen Stevens was the victim of one such sale, which resulted
in a three-year legal battle (see related story).
Bank
of America declined requests to comment for this story, other than to say
through spokeswoman Betty Riess that it works with credit card customers to try
to resolve delinquent debt issues. CACH did not respond to several phone and
email messages seeking comment on the terms of its purchases.
Some
industry observers said that the language in Bank of America's sales documents
should be regarded as standard legalese intended to protect it against a
disgruntled buyer's legal claims. And even though Bank of America refused to
stand behind the accuracy of the records it sold, debt buyers are the ones who
make the call to sue.
"The
buyer has the primary responsibility to test the … quality of what they're
buying," says Samuel Golden, a former OCC ombudsman who is a managing
director at consulting firm Alvarez & Marsal in Houston, Texas.
Collectors'
responsibilities aside, other banks' sales agreements suggest Bank of America's
standards are emblematic of wider industry practice that raises risk management
concerns. For less than $1.2 million a month — a rounding error on B of
A's income statement — the company sold CACH accounts that raise
regulatory and reputational questions about the accuracy of its records and its
disclosures to courts.
Industry
Practice
As
the originators of credit card loans, banks are at the headwaters of the rivers
of bad debt that flow into the collections industry. Over the last two years,
Bank of America has charged off $20 billion in delinquent card debt. The bank
settles or collects a portion of that itself and retires other accounts when
borrowers go bankrupt or die. An undisclosed portion of the delinquent debt
gets passed along to collectors. Once sold, rights to such accounts are often
resold within the industry multiple times over several years.
Bank
of America's caution that its card records may be incomplete or inaccurate
suggests that documentation and accuracy problems may originate at the debt's
source. Other banks' debt sale contracts acknowledge potentially large holes in
their records as well.
One
such example involves a 2009 U.S. Bancorp forward flow
agreement, which outlines plans to sell a certain volume of
delinquent accounts in the future. U.S. Bancorp's agreement states that it may
have failed to credit borrowers for some payments and only guarantees the
accuracy of account balances within a 10% margin of error.
Teri
Charest, a spokeswoman for the bank, noted that the contract had expired and
said that, regardless of such past contractual language, the bank scrubs its
card data and that the claims it sells are accurate.
The
bank declined to comment. Palisades' chief counsel Seth Berman says the company
has not bought Chase card debt in several years, but that its standards were
always high.
The
U.S. Office of the Comptroller of the Currency is already investigating
JPMorgan Chase's handling of credit card debt records, as reported by American
Banker earlier this month. A
group of current and former employees described at the time how the bank had
sold card accounts previously deemed "toxic waste" and which suffered
from errors in the amounts being claimed.
CACHing
In
At
Bank of America, records declared unreliable yet sold to CACH were used to file
thousands of lawsuits against consumers, according to a review of hundreds of
cases in the state courts where collection suits are typically filed. The
overwhelming majority of cases end in default judgments, which are awarded to
creditors when borrowers don't show up to contest the claims made against them.
In
cases where debtors do challenge collections demands in court, the original
bank-creditor must testify about the documentation supporting the claims. In
several such instances, people identified as Bank of America employees have
submitted affidavits attesting to the validity of debts sold by the bank to
collections firms.
Even
though Bank of America previously disavowed "the accuracy of the sums
shown as the current balance," the sworn statements vouch for the
borrowers' debts down to the penny and declare that the bank's
"computerized and hard copy records" back the claims. There are other
possible discrepancies, as well: the affidavits state that B of A "has no
further interest in this account for any purpose," while the sales
contracts reference a "revenue sharing plan."
The
prospect that B of A was selling unreliable credit card debts did not deter
CACH from buying them. A subsidiary of SquareTwo Financial, CACH does not
collect debts itself. Instead, it operates like a restaurant franchiser,
acquiring rights to the delinquent debts that are the raw materials of the
collections business. It then works with law firms around the country that do
the actual collections work, providing them with debt files, court witnesses
and other services.
In
thousands of cases in state courts, CACH has appended a single page from its
purchase agreements with Bank of America attesting to its ownership of
delinquent credit card debt. CACH has omitted from many such filings the more
than 30 additional pages where Bank of America disclaims the accuracy of its
debt records. Even so, attorneys affiliated with CACH have cited the
reliability of Bank of America's records as the foundation for their
collections lawsuits.
In
the case involving CACH in Duval County, Florida, a person described as B of A
"Bank Officer" Michelle Samse swore in an affidavit that "There
is due and payable from WENDY CODY as of 9/18/2009 the sum of $12266.83."
The Samse affidavit, typical of many others, went on to say "The
statements made in this affidavit are based on the computerized and hard copy
books and records of Bank of America, which are maintained in the ordinary course
of business." Attempts to contact Samse and Cody through Bank of America
switchboards and public records searches were unsuccessful.
Trust
Us
The
degree of precision attested to regarding Cody's debt is curious, considering
that Bank of America declared it was unable to produce records to back it up.
"[T]he original contract in this matter has been destroyed, or is no
longer accessible," Semse's affidavit states. "This affidavit is to
be treated as the original document for all purposes."
The
affiliate representing CACH in the Cody case was Collect $outheast, which uses
the phrase "Let us show you the MONEY!" in company promotions.
Collect $outheast and Florida attorneys representing CACH in other cases did
not respond to requests for comment.
Taras
Rudnitsky, a consumer defense attorney in Lake Mary, Florida has regularly
defended consumers against lawsuits filed by CACH affiliates in Duval County.
He says he regularly demands that debt buyers file banks' sales agreements with
the court and invariably runs into stiff opposition.
"In
every single case I have involving a debt buyer, they refuse to produce a
forward flow agreement," he says, referring to the term for sales
contracts under which banks agree to sell a specific number of delinquent
accounts in the future. "When push comes to shove, the case
disappears."
Weak
Link
For
individual clients, dismissal of such a case is a victory, but such outcomes
are the exception. In the vast majority of collections suits, consumers fail to
respond to card payment demands and become liable for default judgments, says
Peter Holland, who runs the University of Maryland Law School's Consumer
Defense clinic and has collected some of the forward flow agreements. As a
result, the questionable reliability of second-hand debt claims is failing to
receive the attention it deserves, he says.
"The
[terms of] forward flows are being hidden from the public and from the
courts," says Holland. "When the banks say explicitly that they don't
have the documentation, that's something courts need to know. When a bank says
a balance is 'approximate,' that's something courts and consumers need to
know."
To
date, it is debt collectors who have been the main focus of complaints and
lawsuits alleging wrongdoing. In the past year alone, collections firms have
paid out a number of multi-million dollar settlements over allegations they
robo-signed affidavits, failed to produce evidence to support payment demands
and sued consumers over debts that were no longer owed.
According
to a trade organization for the collections industry, much of the criticism of
collectors' records stems from banks' failure to provide adequate documentation
of debts.
"We're
not getting what we need from the seller," says Mark Schiffman, a
spokesman for the American Collections Association, which wants to see better
recordkeeping and more documentation included in debt sales. "Consumer
groups want to see original contracts and original documentation. That would
make a lot of these debts disappear because a lot of that documentation may not
exist."
Regulatory
Interest
Washington
regulators are beginning to look at what responsibility banks have for
wrongful collections activity. But questions about jurisdiction and whether
banks will get roped in remain open.
"Not
enough information [is] flowing through to debt collectors," says Tom
Pahl, an assistant director in the Federal Trade Commission's division of
financial practices. Despite its concern, the FTC lacks the authority to
regulate financial institutions
"We
can't reach the banks to say 'Thou shalt file the following pieces of
information with the loans,'" Pahl says. "We're trying to do most of
this through either law enforcement, which is case-by-case, or by jawboning the
industry."
The
Consumer Financial Protection Bureau has jurisdiction over credit cards and
last month announced plans to take a close look at the collections industry.
The bureau's interest has been heightened by revelations of abuses by mortgage
servicers, including robo signing of affidavits, according to spokeswomen
Jennifer Holland.
The
CFPB is "very concerned that the same shortcuts and violations may be
occurring with other kinds of debt collection," she says.
The
OCC, which likewise oversees banks, declined to comment on specific institutions'
sales of credit card receivables. However, it expects banks to adhere to high
standards regarding account records, especially in cases where institutions
attest under oath to their accuracy, according to OCC spokesman Bryan Hubbard.
"There
may be reasons it's hard to do. Large portfolios being bought. Systems
integration. But banks are still accountable for maintaining accurate
records," says Hubbard.
