The conventional wisdom has held that banks that issue credit cards must charge large rates of interest in order to cover losses on unpaid debts. It is presumably not cost effective to try and collect large numbers of small unpaid balances. That may have been true in the past, but never underestimate the ingenuity of those who are after a quick buck.
As an indication that something new has been afoot in the banking world, consider this article from Reuters (3/2013): States probing top U.S. banks over debt collection.
“The largest U.S. banks face a multi-state investigation into whether they helped debt collectors pursue faulty judgments against credit card customers, according to people familiar with the matter.”
“At issue is whether weak record-keeping by banks or a failure to pass accurate information to collection agencies harmed consumers.”
“The allegations against the banks echo those central to last year's $25 billion federal-state mortgage settlement to resolve charges that the banks "robo-signed" documents and pursued foreclosures with faulty information.”
“This latest probe targets the same banks, including Bank of America, JPMorgan Chase, Citigroup and Wells Fargo, said the sources who spoke on condition of anonymity because the investigations are continuing.”
Matt Taibbi discusses the new mechanics of debt collection in his book The Divide: American Injustice in the Age ofthe Wealth Gap. In a chapter appropriately titled Big Frauds he considers the practices of Chase Bank and focuses on the story of Linda Almonte a former employee who was fired for pointing out to her supervisors that they were distributing data to debt purchasers that was incorrect.
“The law is, of course, supposed to be precise, and civil lawsuits are designed to be careful, evidenced-based determinations of right and wrong, liability and no liability. But the business of credit card litigation by its very nature has to be half-assed, brutal, reckless, and stupid. The business model just doesn’t work otherwise. The giant consumer credit merchants like Chase who file lawsuits against card holders by the tens of thousands couldn’t even begin to make real money, real margins, if they had to do anything like real legal work or meet anything like a real evidentiary standard.”
Chase, and other banks, decided that by mass producing legal motions they could do essentially no work, legal or otherwise, and still win enough cases to turn a profit. They could pursue this path with their own collection of collaborating law firms, or resell the debt at a discount and let the debt purchasers play the game with their own herd of law firms.
“The system is really a game of mathematical probabilities that the companies have built around the high probability of obtaining uncontested legal judgments.”
The first play in the game is to have a computer create an affidavit form based on whatever information exists in the bank’s database.
“When a bank like Chase goes into court to sue a credit card holder, it must formally list the facts of the case: who owes what, how long the amount has been owed, when the account was opened, and so on. The procedures in every state are different, but at some point in the process, all states require an affidavit from the bank as asserting these facts. The same process holds true, incidentally, for foreclosure filings. The filings for all these court actions, be they credit card default suits or home foreclosures, include affidavits in which an ostensibly authoritative bank executive attests to the facts of the case.”
Taibbi describes some of the things Linda Almonte learned when she was assigned to Chase’s credit card litigation department. The first thing she noted was that the signers of these affidavits were not high ranking bank officers, they were low-paid employees whose main job was to falsify these affidavits by claiming that they were accurate even no check of accuracy was ever intended to be made. They were told to assign themselves a lofty title, but never use that title unless signing affidavits.
“She eventually learned that the whole system operated like a factory. At one end of the office, a paid-by-the-hour temp worker would generate an affidavit on a computer screen, using an automated program that created the legal document and automatically filled in the data from the customer account. Once the document was generated, the temp would print it out and then stick all the unsigned affidavits in a drawer.”
“The robo-signers would then open the drawer, pick up hundreds of affidavits at a time, head back to their cubicles, and sign their names to them, one after another.”
Technically, signing an affidavit implies that the information contained therein has checked for accuracy. But, of course, no checking had been done or could have been done. Almonte recounts the comment by one of the signers who was so proud of his productivity that he claimed “It was a six hour flight and I signed like two thousand affidavits.”
The final step in the assembly line was for a notary to come in and claim that he had witnessed the signatures.
“Then, once they were finished, they would stick the stack of documents back into the same drawer, where they would be retrieved (maybe that day, maybe later) by a notary, who would stamp the affidavits. The notaries, according to Linda, were almost never in the room when the documents were signed.”
How accurate might this data be that was taken from cardholder files that were often many years old? Almonte was assigned to a project that was intended to release a large number (23,000) of records for which a legal finding in favor of Chase had supposedly been obtained. These would be the easiest to collect on and could be sold to a purchaser for a significant fraction of their face value. Since she was being asked to attest to the accuracy of the documentation, she decided to check the files to see if the claim of a legal finding was accurate.
“….there were many problems with the accounts Linda was seeing flowing in from places like California and Illinois. Some were not even judgments. In some files, the cardholders were not even delinquent. In still others, Chase actually owed the cardholders money. In still more, there were judgments, but the judgments weren’t against the borrower—they were against chase itself.”
She sent the following result of her investigation to her superiors:
“Upon completion of the California PAN files we have 11,472 accounts (including MRA’s) with a total balance of $110,138,641.18. Between 50-60% of the files are missing judgments, or the judgment does not contain a date and signature.”
She was told to not worry, it wouldn’t make any difference. And her bosses were right. The beauty of the system from their point of view was that accuracy made little difference in the performance of the project as a money maker.
“At one point in time that process also required significant legal due diligence and the transfer of documentation, but executives soon realized that in the overwhelmed modern court system, simply attesting to having the right documentation works just as well as really having it. This is the same realization that struck Bank of America when it found that saying it had foreclosure documents was almost as good as having them….”
The banks also know that the probabilities are in their favor. They know that about two-thirds of those whose cases go to court never show up to contest the case. Since a judge is not likely to review the bank’s records, that is an automatic win for the banks or the purchasers of debt. Of the remainder, some will choose to pay the supposed debt and some will contest the case. The banks win in two of the three cases. It makes no economic sense for a bank or debt purchaser to get involved in an actual legal case, so those are usually dropped. The profit has already been made.
“What all this means is that the bulk of the credit card collection business is conducted without any supporting documentation showing up or being seen by human eyes at any part of the process. The meat of the business is collecting unopposed default judgments from defendants who either never receive a summons or receive one and never appear in court.”
Defendants who never receive a summons? How could that be? Aren’t summons presented face-to-face and don’t they require a signature from the person being served?
“Thanks to intense state-by-state lobbying by companies like Chase and MBNA, it’s usually enough to send a notice by mail to some old address, often the original mailing address when the account was opened, which might have been ten years earlier. In some states, banks and debt buyers can even make use of an automated online summons system, in which a few lines of customer data are entered (perhaps and perhaps not by an actual human being), and, get this, a postcard is then sent in the mail to whatever ancient address the company has on file.”
In some locations serving of a summons to an individual by a live human being is still required.
“On paper, it’s a simple and logical system, but here again the question of margin creeps in. Most of these process servers are paid bulk rates by the lawyers and make as little as four dollars per customer to serve notice.
“So what happens? Many process servers and law firms engage in a wink-wink-nudge-nudge business called gutter service or sewer service, in which the law firm hands the list of summonses to the server, and the server simply dumps them (in the ‘gutter,’ hence the name).
“In return, the process server hands the law firm an ‘affidavit of service,’ swearing that he properly served the customer. Process service once required a signature of the defendant to prove proper service; now all that is needed is the server’s own word that he did the job.”
If this leaves you slightly incredulous, Taibbi provides this information:
“Around the time that Chase was obtaining judgments against those 23,000 account holders, dozens of law firms and process servers in New York State alone were being accused of gutter service practices. William Singler, the head of a Long Island firm called American Legal Process, was arrested for gutter service in the spring of 2009….”
“Later on, several states would sue Chase, based in part upon information given by Linda, and some would mention the practice. A suit signed and filed by California attorney general Kamala Harris in the spring of 2013 would make particular note of it. ‘Defendants, through their agents for service of process,’ the state’s complaint read, ‘falsely state in proofs of service that the consumer was personally served, when in fact he or she was not served at all—a practice known as “sewer service”’.”
So, it becomes more understandable why two-thirds of the people never show up in court. And what happens to these unfortunates?
“So how do you collect money from a cardholder who doesn’t answer his or her summons? That’s easy: you take it! The laws are different from state to state, but in most places in America, once the bank or debt buyer has that default judgment in hand, it can legally do just about anything to the cardholder. It can put a lien on his property, it can attach her salary, it can even take his car or her office furniture.”
“In the state of New Jersey, for instance, the bank or debt buyer can basically take anything the cardholder owns, so long as it leaves him with the clothes he’s wearing and maybe a little pocket change—technically, a thousand dollars worth of personal property. The state charges only a five-dollar fee to green-light the attachment of a bank account or the repossession of an automobile.”
“’There are people out there who never knew they were served and taken to court,’ says Linda, ‘Then five years later they go to sell their house, and they find they can’t do it because of a missed payment at Circuit City years ago’.”
Taibbi’s book is focused on comparing the way our society treats the wealthy and powerful as opposed to the way the poor and powerless are treated. His chapter on massive bank fraud is titled Big Frauds. He precedes it with a chapter called Little Frauds in which he describes how those who apply for welfare are assumed to be guilty of fraud unless an investigation renders them innocent. In the case of the welfare recipient who is deemed to have misreported information, loss of benefits and perhaps criminal charges are the options available. A simple mistake can lead to jail time. There are many people hired to search out a few dollars of welfare fraud. Few people seem to be concerned about bank fraud where billions of dollars are involved.
“Banks commit the legal crime of fraud wholesale; they do so out in the open, have entire departments committed to it, and have employees who’ve spent years literally doing nothing but commit, over and over again, the same legal crime that some welfare mothers go to jail for doing once. But they’re not charged, because there is no political crime. The system is not disgusted by the organized, mechanized search for profit. It’s more like it’s impressed by it.”
Chase eventually settled with Linda Almonte, and fired some lawyers and bank employees. Taibbi views it as mere public-relations fluff. More information can be found here.