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NYC Consumer Debt Defense Project

Robo Redux

Sunday, August 19, 2012

Each day in Civil Court in Brooklyn, Judge Noach Dear presides over as many as 100 credit card collection cases, a scene repeated day in and day out in courtrooms across the country.

The borrowers typically do not show up to defend themselves. Many do not know they are being sued, others are too poor or too intimidated to fight back. The result, in an estimated 95 percent of the cases, is a default judgment in favor of the bank or other debt collectors.

But as Jessica Silver-Greenberg reported recently in The Times, many of the suits rely on erroneous documents, faulty records and boilerplate testimony — a pattern that resembles in many respects the “robo signing” scandal of 2010, in which banks filed false court documents in foreclosure cases, depriving homeowners of due process that may have saved their homes.

Some credit card companies, including American Express and Citigroup, defend their procedures and insist that safeguards are in place to ensure that their court filings are accurate. But consumer advocates say that in many cases the suits involve debt that has already been discharged in separate bankruptcy proceedings or otherwise settled or collected. Where debts remain, the amounts are often inflated by excessive fees.

According to Judge Dear, in roughly 90 percent of credit card lawsuits the plaintiffs cannot even prove that a person owes the debt. Which is another way of saying that the courts are often being used as de facto debt-collection mills, allowing banks and others to seize money in violation of basic protections.

The outcomes can be devastating. Once a default judgment is entered, wages can be garnished, bank accounts frozen or liens filed to collect the debt — whether or not the amount was actually owed or the process was fair. Judgments — which are generally enforceable for 20 years — also appear on credit reports, preventing people from obtaining mortgages, credit or even jobs.

Big money is at stake. According to Equifax and Moody’s Analytics, borrowers are behind on nearly $21 billion in debt on some 10 million credits cards. In addition, debt collectors who buy bad debt for pennies on the dollar from creditors are trying to squeeze billions of dollars more from delinquent borrowers.

But as the foreclosure robo-signing experience showed, big money can mean big abuses that will not end without stronger enforcement of existing law by state attorneys general as well as new laws and regulation at the state and federal levels. The aim should be to prohibit banks from suing for old debts or from selling bad debt to third-party collectors without first notifying the debtor and providing detailed records of the amounts owed.

A bill in the New York Legislature, the Consumer Credit Fairness Act, would provide many of these protections, while a model law developed by the National Consumer Law Center would set standards for all states. New York’s Department of Financial Services and the federal Consumer Financial Protection Bureau should also exercise their powers to regulate debt collection.

In the meantime, going to court may be the consumer’s best defense. Judge Dear recently dismissed a suit brought by American Express against a woman who contested the amount being demanded. The Amex employee who testified, the judge noted, gave what he called “robo-testimony” — the same generic evidence given in other cases.

Amex defended its practices, but for that one woman, on that day, due process trumped robo-talk.

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