What Do I Owe You?

Don't ask Bank of America

When a bank sells bad debts to third-party collectors, the first order of business would seem to be to tell the collectors how much they can legally collect.

So when Bank of America sells hundreds of millions of dollars of bad credit-card debts to a third party for a couple of cents on the dollar and tells them at least some of the amounts are “approximate” or have already been paid, as we learn from another outstanding American Banker investigation by Jeff Horwitz this weekend, that’s a major problem.

To compound the seriousness, BofA also told the folks at CACH LLC who bought the bum debts that it “would initially provide no records to support the amounts it said are owed and might be unable to produce them,” in Horwitz’s words. Just what kind of documents and records does BofA actually have on its accounts?

You wouldn’t want to hang a lawsuit on it, as Horwitz finds with a consumer attorney in Florida who deals with CACH lawsuits:

“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.”

You can see that from the Banker’s tough stories last month on JPMorgan Chase’s terrible debt-collection practices and in its reporting today that a similar U.S. Bancorp requires a 10 percent margin of error from purchasers of its bad debts. That Chase is something of a best-practices example here—it says it can find at least half of its customers’ records—tells you something.

Is this just legalistic ass-covering by overlawyered and perhaps even oversued banks? Barring some not-going-to-happen widespread investigation with subpoena power (hi, CFPB!), we’ll never know how many people are getting hounded illegally for debts they’ve already paid or for more than they owe.

But an important companion piece by the Banker’s Maria Aspan shows that this is a real mess.

She finds a Bank of America customer who fought CACH for three years over an account balance she had already paid off. CACH sold her account to another firm called Palisades, which then sued her while including evidence of her payment in its court filings.

You have banks outsourcing their problems to third party bottom feeders, who then outsource their problems to other third-party bottom feeders. Most people who are behind on their bills, or who have been behind recently, can’t afford to hire attorneys to fight these debt collectors. This BofA customer finally did and got a settlement, but Horwitz is good to point out that the “vast majority” of these cases never get challenged by borrowers.

The business model is effectively a reputation laundry for banks that don’t want their names attached to the nasty business of collecting the worst and worst-documented debts, but want to maximize their revenues, even if its for just 1.8 cents on the dollar.

Horwitz notes that even CACH doesn’t pursue the debts itself:

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.

These are like fourth parties or something. One of them, the Banker reports, called itself Collect $outheast and implored clients to “Let us show you the MONEY!” Collect $outheast is a franchise of CACH, which is owned by Square Two Financial. Square Two says this in its annual report to investors:

Our inability to provide sufficient evidence on accounts that are subject to legal collections may negatively impact the liquidation rate on these accounts.

When we collect accounts using a legal channel, courts in certain jurisdictions require that a copy of the account statements or applications be attached to the pleadings to obtain a judgment against the account debtors. If we are unable to produce account documents, or if courts require documentation that the original creditor is not able, or contractually required, to provide, these courts may deny our claims. As our industry has increased its use of legal collection tactics significantly over the last several years, we have witnessed the institution of increased documentation requirements, evidentiary requirements in excess of those required for claims brought by entities other than debt purchasers and more consumer friendly behavior from judges and courts in various jurisdictions. We believe the current trend toward consumer protectionism could lead to judicial proceedings or practices that create increasingly challenging requirements that could limit our ability to effectively pursue litigation on accounts, or substantially increase our costs incurred in pursuing our legal remedies.

Jog down a bit and Square Two also says this:

Negative attention and news regarding the debt collection industry and individual debt collectors may have a negative impact on a debtor’s willingness to pay the charged-off receivables we acquire.

As Audit contributor Felix Salmon says over at Reuters, this is what should happen, if only to force the banks to start keeping good records about who owes them how much.

A tip of The Audit’s green eyeshade to American Banker for bringing the news, and it’s good to see Joe Nocera adding a little negative attention too.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum. Tags: , , , ,