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Americans are $21 billion dollars behind on their credit card debt. Banks are increasingly taking borrowers to court, suing them for payments owed. In many cases, these lawsuits rely on false documents, incomplete records and generic testimony from witnesses. State judges report that some lenders try to collect money that has already been paid or increase the size of the debt by adding fees and interest. Banks defend their procedures and insist their court filings are accurate. But consumer groups warn these cases are reminiscent of the mortgage foreclosure crisis with outcomes just as devastating. Diane and guests discuss new concerns over credit card debt collection in the U.S.
- Kathy Kristof contributing editor, Kiplinger's Personal Finance
- Peter Holland director, Consumer Protection Clinic at the University of Maryland Carey School of Law
- Thomas Pahl assistant director, Division of Financial Practices, Federal Trade Commission
- Steve Bartlett president and chief executive officer, The Financial Services Roundtable
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. American borrowers are billions of dollars behind in debt on some 10 million credit cards. Consumer groups say banks are flooding the courts with frivolous lawsuits seeking payment without regard to due process. Credit card companies insist they're following the law and deserve to be paid.
MS. DIANE REHMJoining me to talk about the issue of growing credit card debt: Peter Holland of the University of Maryland Carey School of Law, Thomas Pahl of the Federal Trade Commission, Steve Bartlett of The Financial Services Roundtable, and, joining us from a studio in Pasadena, Calif., Kathy Kristof of Kiplinger's Personal Finance. I hope you'll join us with your questions and comments. Call us on 800-433-8850. Send us your email to firstname.lastname@example.org. Follow us on Facebook or Twitter, and good morning to all of you.
MR. THOMAS PAHLGood morning, Diane.
MR. PETER HOLLANDGood morning, Diane.
MR. STEVE BARTLETTGood morning, Diane.
REHMGood to have you here. And, Peter Holland, I'll start with you. Why are credit card companies suing borrowers?
HOLLANDDiane, what we've noticed in the past few years is just a huge uptick in these lawsuits. Just like with mortgages and refinances, the whole credit bubble involved a lot of credit cards, and therefore, when things went south, a lot of defaulted credit cards. So what we've seen in the last few years is a huge spike in the number of credit cards. If you look at courts across the country, oftentimes in the small claims court across the country, the number one lawsuit is collection lawsuits.
HOLLANDAnd what's happened is, in the words of the FTC, the system is "broken." The creditors are filing just floods and floods of lawsuits all over the country. And according to one New York judge quoted last week in The New York Times, he said that over 90 percent of these cases do not have the proof. So the problem is you mentioned due process. What we're seeing is a business model of file tens, hundreds of thousands of lawsuits. Understand that most people are not going to show up to defend and rely on what they call a default judgment.
HOLLANDWhy aren't they showing up?
HOLLANDWell, there could be any number of reasons from they're scared, from they didn't get served. What we call sewer service is a huge problem nationwide, i.e. fraudulent affidavits of service, someone saying I did serve you but, in fact, they didn't. There's a host of reasons.
REHMPeter Holland, he is director of consumer protection at University of Maryland School of Law. Turning to you now, Kathy Kristof, how widespread are these practices? What do you see happening? I know you've been following this for Kiplinger's Personal Finance.
MS. KATHY KRISTOFRight. You know, we don't really know how widespread the practice is. The reality is doing it wrong, not serving people, getting default judgments. This is actually not a legal practice. And so trying to count the number of times somebody does something illegal is extremely difficult. You have to actually prove it's illegal first.
MS. KATHY KRISTOFWhat we know is that there's anecdotal evidence that this is happening far more often. And the consumers are frequently saying that either they didn't get served, you know, they didn't owe the debt, or they didn't owe the amount that the lender says they owed. And these are all terrible problems obviously 'cause once you get a default judgment, you're stuck. Now, you have to prove that you're innocent instead of proving -- them proving that you're guilty.
REHMNow, The New York Times has called this robo redux. How do you see it?
KRISTOFThat's exactly what you would call it. The robo-signing scandal with mortgages essentially was lenders failing to use the proper practices in order to properly foreclose on individuals. This is doing roughly the same thing with credit cards.
REHMAnd that is the voice of Kathy Kristof. She is with Kiplinger's Personal Finance magazine. Tom Pahl, isn't what's happening here illegal?
PAHLWell, most of these practices are governed by state laws and state procedures. And so what is illegal will depend upon what jurisdiction you're in when the case has been filed.
REHMHow can that be that each state has its own way of charging someone with debt that they may or may not have?
PAHLWell, what happens is that most collection suits are brought in state courts, and state courts come up with their own laws and procedures.
PAHLThat being said, almost every state says that when you go forward with a case, you have to have proper service of process so the consumer knows that a case has been brought against them and that a complaint that is filed in that case has got to lay out enough information so that you as a consumer can know what's being alleged so that you can defend yourself and so that, if necessary, you can go back and say to the court, we need a more definite statement of the debt and why I owe it so that I can defend myself.
REHMYou heard Peter Holland say at the outset that sometimes consumers aren't even notified, even though the credit card company may say they have been notified. What is a judge to do in a situation like that?
PAHLWell, a couple of things. One is that most courts require that an affidavit of service of process be filed with the court and…
REHMWith a signature...
PAHL...with a signature from the process server, so if the service has not actually occurred, that affidavit may be false. And that's something that should be taken up with the judge.
REHMWhen you say a signature from the process server, does that also entail a signature from the recipient?
PAHLIt depends on the jurisdiction. Some states require a signature that you have been served. Others do not. One of the things that we have focused on is trying to find alternative means of making it more likely that consumers will receive notice of lawsuits. For example, some courts have started to use not only process serving but the U.S. mails to try to provide an alternative low-cost means of having consumers become aware of lawsuits.
REHMTom Pahl, he is with the Federal Trade Commission. Turning to you, Steve Bartlett, what's your reaction to what you just heard? Are some banks engaging in illegal activity?
BARTLETTWell, Diane, actually not. Diane, I'm sitting here just sort of incredulous. It's as if my fellow guests are living in a parallel universe. I mean, so let's talk about what we know. Credits cards are an amazingly productive, efficient in addition to our quality of life, $800 billion worth of credit card debt. Like anything else, like cheeseburgers, if you misuse it, then you're going to pay -- have some harm. So, number one, credit cards are a good thing. Two, there's about 2.93 percent, I'm told, delinquency rate.
BARTLETTSo what do you know about someone that is in court for a debt that they're not paying? You know that they bought merchandise, and they have the merchandise. You know that they did not respond to repeated, usually years of attempts to ask them to, please, pay. And then you know that they did not respond to those repeated attempts, and they didn't respond to the -- then the credit card company had to file a lawsuit to collect, and they didn't respond to the lawsuit. So that's what you know.
BARTLETTYou also know that there are a number of organizations out there, credit counseling. So if you're in trouble and having difficulty paying your debt, there are all kinds of opportunities to do that. But the borrower has to take some step. Most borrowers are quite responsible, handle it well, but those that don't end up damaging themselves and also damaging the rest of us, the system, by not paying their debt.
REHMWhat do you -- or how do you respond to the New York judge who said that 90 percent of the credit card debt cases have fraudulent documentation or generic witnesses?
BARTLETTI respond with an incredulous shake of my head. I don't know the judge, and I read that case -- or read that judge's comment. The idea that 90 percent of transactions could be fraudulent just is -- defies any -- the most bizarre science fiction you could -- imagination. So test it yourself. Call tonight, look on your credit card statement, call the 800 number and say, hey, this third item on the bill, I want to know what it's all about.
BARTLETTCredit card company will tell you, just from that phone call, what you bought, when you bought it, what time of day, whether you left a tip and when it's due, so it defies imagination that so -- take this fifth item on your account or take another account, and you get the same answer. So the idea that 90 percent or even 9 percent would be fraudulent makes no sense. The borrower bought a washing machine and is using the washing machine.
REHMSteve Bartlett, he is president, chief executive officer of The Financial Services Roundtable. Peter Holland.
HOLLANDYes, thank you. I would invite my fellow guests to come into court and look at some of the cases that we see. We have contracts from banks, when they transfer this, and they say such things as, these accounts may have already been discharged in bankruptcy. There may be forgery involved. And I'm looking at one contract here, and it says, the current balance -- when the bank sells it off to someone -- the current balance specifically listed may be only approximate.
HOLLANDAnd there's not guarantee or certification that all of those things that he mentioned that you can call your bank and they can tell you to the penny what you bought and what you owe. That does not exist by the time it gets into litigation often. Sometimes it does often. Keep in mind, Diane, that the banks we're talking about are the same banks that when someone faxes in their mortgage modification paperwork, they say we lost it or we didn't receive it.
REHMPeter Holland, he is director of Consumer Protection at the University of Maryland Carey School of Law. Short break. Stay with us.
REHMAnd in this hour, we're talking about consumer credit card debt. Banks are taking borrowers to court, suing them for payments owed, and it is said that Americans are some $21 billion behind on credit card debt. Peter Holland, you heard what Steve Bartlett said. If an individual buys a washing machine and is using that washing machine, why should that consumer not pay for it?
HOLLANDThat consumer should pay for it. We are not talking here, Diane, about people who owe money and the so-called, you know, will they owe the money anyway? What we're really talking about -- and judges have coming out more and more -- we're talking about an assault on the integrity of the judicial process itself by filing incomplete paperwork, by filing sometimes false paperwork, forged paperwork, robo-signing. So just like I believe that every person should pay what they owe, a parallel American value is don't stake a claim to something that you don't own.
HOLLANDAnd what happens in these cases, because of the incomplete documentation, OK, no contract is filed with the lawsuit, yet they want 30 -- 29 percent interest rate. They want a $39 late fee every month. They want a $39 over-the-limit fee. They want lawyer's fees. Well, if you're going to ask me to pay all of those, what I call, junk fees, but -- if you want to make me to pay those fees, don't you think you ought to have the contract that contains the provisions that says I owe them?
REHMWhat about that, Tom Pahl? What does the FTC say about that?
PAHLWe agree with Peter on that point. I mean, one of the things that we have found is that, you know, though, obviously consumer credit is very valuable in our economy, and no one would dispute that. What we are seeing is process problems in what's done to collect on those.
PAHLAnd in particular, one of the things that we've done is try to encourage state courts and state legislatures to be more specific about what creditors must have when they go to court to provide information in connection with the complaint so that it's more clear to the consumer why they owe the debt, how much is the -- they owe and so that they can actually defend themselves. I think that that's what the real point here is that it is a process problem in collecting on debt. It is not a fundamental question of whether consumer debt is legitimate or not.
REHMSteve Bartlett, what about late charges and other fees that are tacked on to what the consumer may owe?
BARTLETTWell, let me show you that the language of the credit card statements, up until about two years ago, was -- had some real problems with it. It wasn't as clear as it should've been. Both the culmination of the industry, the CARD Act that was passed by Congress and some changes by regulations helped to correct that. So let me just read to you the contract, if you would, and it's pretty clear to understand. I brought it from my wife's Bank of America statement from yesterday.
BARTLETTIt says, late payment warning, if we do not receive your total minimum by the date listed above -- by the way, above is, like, the next line above, 912, in this case -- 9112 in this case -- you may have to pay a late fee of up to $36, and your APR may be increased to 29.9 percent. That's very clear. Let me say that there was a time that it wasn't as clear as it should've been. Shame on us.
BARTLETTBut it's quite clear, and borrowers know that if they're late, they will be assessed to late fee. I don't think that's a bad thing. I think that causes borrowers to be on time or pays the penalty for it.
REHMKathy Kristof, what's wrong with that?
KRISTOFReally, what's wrong with this whole picture is that we're not talking about the lenders who made the original loans. What we're often talking about, just like we were with the mortgages, is the original loan was sold into a secondary market. And when it was sold, it was sold with imperfect documents. And because it was sold with these imperfect documents, loans that were discharged in bankruptcy, loans that are -- they don't know the exact amount, and so they're speculating, loans that are just -- maybe belong to another person.
KRISTOFI've talked to numerous people who were pursued by somebody else's debt while the loan was sold without all of the items of contact, their proper Social Security number, their proper address. They were confused with somebody else, and they were pursued for somebody else's debt. These are the problems that we're seeing. It's not that, gee, you know, John consumer doesn't want to pay his debt. Maybe that's true, too, but that's a separate issue. The issue we have here is individuals who actually do not owe the amount that they're being pursued for, and they're being pursued in error.
REHMPeter Holland, give me an example of a client who comes to you and says, I've just received the statement. I'm due in court. I don't know what this is all about. Just give me an example.
HOLLANDYeah. So we -- and my clinic represent people all the time, and they come in and they say, I don't know what this is about. So we dig and we dig. Sometimes it's someone who was not obligated at all on the account. We've had victims of identity theft. We've had someone who was a -- an authorized user on the account, like a child or a family member, but they're not obligated on the account, yet they get sued anyway.
HOLLANDMy favorite one was my client who's name was Marquis, first name of Marquis, and a judgment was entered against this person, and this person said, I've reviewed the court file, and it says that they served my wife. Well, the problem is I'm female, and I'm not married to another woman. That's what she said in her court papers. And because of the assembly line process, the attorneys suing her wrote back and said that that was without merit, that what she said was without merit.
HOLLANDSo she had to hire us, and we went to court. And, of course, it's absurd. But the point is that you're talking about very sophisticated lawyers and, you know, The Financial Services Roundtable. Very large corporations have a lot of power, and they're going against unrepresented people. And if I may, Steve mentioned, you know, the parallel universe that maybe we were living in. There is a parallel universe.
HOLLANDWhen you and I think about going to court, we think about, well, we have a lawyer, and we have zealous representation go into one of these courts. There are -- the only lawyers there are for the creditors. The people have no lawyer, and I've been in courtrooms where literally there is no judge. The courtroom is being run by the lawyers, and they are just...
REHMHow can that be?
HOLLANDEvery time I say that someone says, how can that be, I was shocked when I saw it, too. But I could take you into courtrooms where there is no judge.
REHMThen who is making a decision about what that individual owes or is not charged with?
HOLLANDWell, I've been in where there's a bailiff sitting in the judge's chair, and what things that I've seen in Maryland -- I know they exist elsewhere -- is someone is summoned, and it says, you must appear on this date to talk with the creditor's council, and if you don't appear, a judgment may be entered against you. If you do appear and you don't want to settle, well, maybe you can come back another day for a trial.
REHMSteve Bartlett, I want to go back to the question of the credit card's company selling off the original debt. How does that happen? To whom do they sell, and what obligation does the bank that owns the credit card have to make sure that the collector is accurate and completes his or her tax?
BARTLETTWell, there are roughly two kinds of sales, and it's pretty rare. I think the one that's being talked about here is after months or years and years of a borrower either refusing or declining for whatever -- for their own reasons to pay their debt then -- and a company tries to collect it, then they either go to court or they sell -- if they think that there's just no hope that the debtor is going to pay their debt, then they sell it for 10 cents on the dollar to a debt collector. Now, that's a bad thing. But the borrower owes the money, OK? And so the bank is gone.
REHMHow much, 10 cents on the dollar or the full amount?
BARTLETTTen cents, 20 -- some are -- it's a bit. It's competitive. Oh, the borrower still owes the full amount. The borrower got the washing machine, OK? The borrower got the machine, and that's kind of at the heart of it. And the borrower has, for whatever set of reasons, has refused or declined to pay during that period of time. So all those -- so in that case then, all those records go with it, and the records are quite complete.
BARTLETTAnd I hear the words here, but even looking at The New York Times story, the two debtors that were cited said, well, OK, yeah, I did owe that money. I don't think I owe that much, which is a pretty imprecise kind of statement. So, if you owe money, you should pay it, or you should deal with the credit card company.
BARTLETTCredit card companies are more than willing to work out a system. We have credit card counselors. There are counseling agencies all over the company. Well, they'll help. But someone has to open the mail, answer the calls and give it a try.
REHMTom Pahl, where does the FTC get involved?
PAHLWell, where we're getting involved right now -- and to follow up on Steve's point -- is we're doing an empirical study of debt buying, which is what happens when credit card issuers, usually national banks, sell off their debts to others for collection.
REHMAnd Steve just said that that's rare.
PAHLI disagree with that. I think that's a fairly common practice for national banks to do that, and it happens much earlier in the process than Steve indicated.
PAHLUsually within six months after delinquency because federal banking regulations require that the debts be taken off the banks' books for capital requirement reasons. And so it's a very common practice. There's a lot of debt moving through the system through the purchase and sale. Much of it originates with credit card companies. And what we're trying to do at the FTC is try to do an empirical study to determine what sort of information debt buyers get, to see to what extent problems in the debt collection system are attributable to the sale of this kind of debt.
HOLLANDYeah. I have actually written an article called "The One Hundred Billion Dollar Problem." This is a -- the debt buyers or what I call junk debt buyers, it's a $100 billion a year industry. And what I've worked with, contrary to 10 cents on the dollar, I'm holding a contract in my hand from one of Steve's members, and the sales price is 1.79 cents on the dollar. And quote...
HOLLAND...less than 2 cents on the dollar.
REHMOn the dollar, but the collection agency is due the entire amount.
HOLLANDThey will then sue for 100 cents on the dollar.
HOLLANDBut let me tell you what the public doesn't know and what judges haven't been told. Section 1.8 of this document says, "The balances 'may not reflect credits for payments made.'" So they're selling things, and they're telling the debt buyer there may have been payments made, but we're not saying whether they were or not. It may not be accurate, might have been discharged in bankruptcy, might involve fraud.
HOLLANDNow, the problem there is those documents are obviously -- and they're incomplete. Obviously, that's inherently unreliable, right? But then the debt buyer takes that document and sues someone for 100 cents on the dollar. And when I go in court, I hear every time from the lawyers, judge, we all know that banks are subject to all kinds of regulation, so their documents are inherently reliable, when what we have in our hand is something saying it might have been discharged and that the balance is only approximate.
REHMPeter Holland of the University of Maryland's Carey School of Law. And you're listening to "The Diane Rehm Show." We're going to open the phones now, 800-433-8850. First to Miami, Fla. Good morning, Seth. You're on the air. Seth.
REHMGo right ahead, sir.
SETHYeah. I was going to ask as to how this affected bankruptcy. From personal experience, I had a situation where I owed, you know, several credit cards. And then I had one organization, which wasn't a credit card, that I didn't owe money to and was putting pressure on me, was going to take me to court. When I asked for documentation, they refused to give it to me. And by the time I was forced to -- now, the other credit cards were willing to work with me.
SETHI was in a tight situation. They would reduce payments to what I could afford. But because I had one that I couldn't deal with, by the time I got through looking at an attorney, I was informed that it was more practical to declare bankruptcy and clear everything off than to fight just one company.
REHMPeter Holland, it sounds pretty complicated, but I don't know how representative it is.
HOLLANDI think it's very representative, and what he identifies, what the caller identifies, is a huge problem. I'd like to say that what we are involved in in my clinic is actually bankruptcy prevention, right? Because if you declare bankruptcy, you're going to wipe out all of the credit cards, the ones where you really owe and the ones where you didn't. So -- and that puts everybody at a competitive disadvantage.
HOLLANDIt puts the people who did it right at a disadvantage, and it, frankly, hurts the economy. So one of the things we're trying to do is identify bogus claims, identify weak claims, identify where they're claiming $2,000 of late payments and interest, but they don't even have the contract, and avoid putting people into bankruptcy.
REHMKathy Kristof, do you want to weigh in?
KRISTOFNo. I mean, I think that what we're talking about here, again, is debt that's being sold with imperfect documentation, and I'm hearing about it happening all of the time. And not only does the debt get sold once, a lot of times it gets sold second and third and fourth time. And it's billions of dollars of debt that is being sold, and it is being sold relatively quickly. So, you know, the notion that this is a rare thing, it's not.
KRISTOFAnd consumers who are on the other side of that are often facing situations where they know that what they're being told is not accurate. And so they have to -- and they have to be aggressive. They have to protect themselves. There is a Fair Debt Collection Practices Act. It does require that anybody who calls to collect the debt from you must verify the debt. They must give you written documentation that says what you owe. If they're not willing to do that, you don't need to deal with them.
BARTLETTWell, that's true. Let's talk about rare for a second, again, 2.93 percent delinquency rate. I wish it were zero, but it is 2.93 percent delinquency rate. We do sponsor credit card companies -- not sponsor, but we help independent credit card counseling agencies. The one that I like and I would side is called CredAbility.org in Atlanta. You can access it from anywhere in the country, and they will help people manage their debt. But the borrower has to take the step. The borrower has to decide, I want to construct a way which I can pay my debt.
BARTLETTRemember, these sales that's been talked about here, that occurs after the borrower has either refused or declined or not responded to repeated inquiries to pay their debts, so that's when the so-called sales happen. And that's the way the bank has of, OK, this borrower is just not going to pay, and so we're going to sell it to somebody, to a debt collection agency, as bad as that sounds. If you don't do that, well, then people wouldn't pay their debts, and instead of 2.93 percent, you'd have -- the system would implode.
REHMTom Pahl, when does the FTC get involved?
PAHLWell, certainly we get involved in enforcing the Fair Debt Collection Practices Act, which prohibits collectors from engaging in unfair, deceptive and abusive conduct, including some of the conduct that's been discussed by the other panelists. One thing, I think, that would be extremely valuable for the credit industry to do, which they don't do now, is to include basic information when they go to court that would help people understand what's owed.
PAHLSpecifically, what we at the FTC have advocated they should have is the name of the original creditor, the last four digits of their original account number, the date of default...
REHMAll right. And we'll...
REHM...take a short break here. We'll be right back.
REHMWe have many callers as we talk about credit card debt, the amount that consumers owe, currently about $21 billion. Let's go to Wellfleet, Mass. Good morning, Chris.
CHRISHi. How are you?
CHRISI just wanted to make a point of order, and this is something that happened early in the show. And I don't know if you want to go back and dwell on it, but there was a -- it was raised that in a newspaper article, a judge in New York was quoted as saying that 90 percent of the cases brought by lenders contained fraudulent documentation.
CHRISAnd Mr. Bartlett was asked to respond to that, and he responded that if the assertion were that 90 percent of people's transactions on their bills were fraudulent, which is a completely different thing, and I -- and that misdirection sort of made his response irrelevant. And I was wondering if you wanted to go back and ask him if he had a comment about what the article really said or, you know, at the very least, I wanted to raise it as a point of order.
REHMAll right. Thanks for your call.
BARTLETTThe article actually said -- again, it only quoted one judge. According to Judge Dear, in roughly 90 percent of the credit card lawsuits, the plaintiffs cannot even prove that a person owes the debt. I think that sort of falls on his face. You can prove that the person owes the debt. They went on to say that in this one case that we've cited, the borrower said, OK, I did owe the debt, but I don't think it was that much, her words.
REHMPeter, talk about Felicia Tancreto because she is the person that American Express sued for more than $16,000.
HOLLANDRight. Well, I think her story is, you know, it's a familiar story. I mean, I see people all the time. I just got contacted by...
REHMNo, no. But talk about her, if you can, because she is the person that Judge Dear in Brooklyn was dealing with.
HOLLANDYeah. He said there was no evidence and that the witness that they produced -- he even called it robo-testimony. So we have not just robo-signing, but in Felicia Tancreto's case, someone came to court, and it's just parroted. It's the same words over and over again, and it's robo-testimony.
REHMKathy Kristof, how often is mistaken identity at play in these credit card lawsuits?
KRISTOFWe really don't know. Realistically, when you're talking about, like, the big world of credit cards, the chance that this actually happens to you is probably less than 1 percent, right? But if it happens to happen to you, it's 100 percent. So you have to be aware that it can happen. There are more cases of mistaken identity. There are -- whenever debt is sold, it just -- it's like a game of telephone. You take the original documents, you give them, you know, to the next buyer.
KRISTOFSometimes you miss something, and then it goes to the next buyer and it goes to the next buyer. And pretty soon, it -- the document looks very little like what started. And so you, as a consumer -- 'cause we at Kiplinger like to try and solve problems -- what you need to do is be empowered. You need to know that you have rights. You need to ask for the verification of your debt. You need to get all the information and find out if all those points of contact reflect you. You should also know, do I owe a debt?
REHMAll right. And...
KRISTOFAnd if you do owe a debt, you should be willing to negotiate with the creditor on repaying it.
REHMAnd here's an email from Joanne in Ohio, who says, "I lost my husband in 2003. We had a major credit card in both our names. When he died, the insurance we had taken out paid off the card. I received notices of payments and close since my income would be halved, and I did not want to keep it. Five years later, I started receiving threats of suit for nonpayment. I was incredulous.
REHM"They would call me at work, threaten to talk to my payroll, which I knew was full of it. They tried every tact known to man. And every now and then, almost nine years later, I hear from someone else on this same account. But now, it's blossomed to over $8,000 I owe." What do you make of that Tom Pahl?
PAHLWell, I think there are a number of things that the consumer can do. I think when this -- when she gets contacted about this debt, she should dispute it in writing, which triggers an obligation on behalf of the debt collector to verify the debt. That is get paperwork to prove that she actually owes it. The other thing that she should do is she should complain to the Federal Trade Commission or state attorney generals. Some of the conduct she describes may well be violations of the Fair Debt Collection Practices Act.
REHMAnd here's the question: Are the judges, are the credit card debt collectors more in favor of the banks than they are of the consumer, more likely to believe them?
PAHLWell, I think what the statute is designed to do is to not really make that up to the debt collector. The debt collector has to obtain verification of the debt and provide it to the consumer when they get back to the consumer.
REHMBut then how does something like this happen after he dies, Peter Holland?
HOLLANDWell, I think her -- unfortunately, her story is one I hear all the time, and it starts -- let's go all the way upstream back to the bank that sells something for two cents on the dollar, saying that the information may not be accurate, we may not have the paper, so that goes to debt buyer number one. Well, as soon as there's a problem, OK, that person then sells it to someone else, and that's a problem. You'll see this get passed around and passed around.
HOLLANDI have people that we've got wiped out in bankruptcy, and you know what, in the bankruptcy -- so that debt buyer just sells it to some other unwitting debt buyer.
REHMAll right. To Lisbon, N.H. Good morning, Kathryn.
KATHRYNThank you for your show.
KATHRYNSo we got a letter recently. My husband's name is akin to Bill Smith -- I'm not going to say what his name is 'cause I don't know if he'd appreciate it -- got a letter saying that he owed from a lawyer's office saying, you know, he owed $1,200 and, you know, must pay immediately and, you know, blah, blah. And so it took several phone calls. And the knowledge that he knows that since he's been a grownup, which is, you know, for 30-something years, that he's only had the same three credit cards that he always pays, and so he's very clear that this is not his.
KATHRYNSo we took several, several, several phone calls to this lawyer's office that handles collections before I was able to speak with somebody, and I said, what is this? And they said, you don't know what it is? And, of course, then I had to get authorization to speak on his behalf 'cause he wasn't going to deal with it. And they finally said it's a credit card debt. And I said, well, that can't be. And it took not much to get it cleared up, which was basically one of the last four of my husband's Social compared to the debt, and it was cleared up.
KATHRYNBut the other thing I found out in the process was that they even had a sheriff serve papers to our old house. We had just moved. So they went to great extremes to collect $1,200 to somebody that is as simple as the Social Security number didn't even match.
PAHLYou're exactly right. One of the things that we at the FTC have advocated is that in complaints that are filed in court on debt collection matters, the collector should be providing the last four digits of the original account number. So that would be a very easy way of figuring out that the credit card at issue was not the credit card that these guys were collecting on, and that isn't measured. That should be simple for creditors to do and should help clear up a lot of these problems make it much easier for you to have that conversation with the debt collector to say, hey, this is not our debt.
REHMSteve Bartlett, why do you think so many of the individuals who've been presented with these allegations, let's call them, don't show up in court?
BARTLETTOh, I think in some cases, you never know. But in most cases it's because -- remember the credit card company is trying to contact that individual for months or years and been unable to. They've moved or they're not taking -- they're not opening their mail, or for some reason, they're just choosing not to, or they don't know where they are. I think it -- and so I would think that would be the reason.
BARTLETTI don't -- I can't imagine a reason why a person would get a notice of a court date and not show up other than they just don't want to. I can't imagine a reason. With the case that was just cited, I agree, both the credit card company and a good lawyer would actually cite the last four digits of the card that should...
REHMPeter Holland, why do you think they don't show up in court?
HOLLANDWell, I think there's a number of reasons. One is people are genuinely scared and they may say, you know, I do owe money. I know I owed them money. Another one is the working poor. I mean, they -- they're maybe working an hourly job and to take a day off and go to court is a problem. So here is what the issue is, Diane. It's not let's blame them for not showing up. That's a problem, and we could have a conversation. But these lawsuits we're talking about are taken on what's called a default judgment.
HOLLANDThe plaintiff, the banks and the debt buyers know that 90 percent of the people are not going to show up. And so what happens when nobody's looking? And what we see is gouging. We see overreaching. We see unjustified fees. And so the system is there. The judge is supposed to be the gatekeeper.
REHMTom Pahl, should the banks be prohibited from selling the debt to debt collectors?
PAHLI think that we at the FTC have done is focus more on making sure that when debts are sold that the process is in place so that adequate information goes along with the debt. There's nothing inherently wrong with a one company who owns an asset like a debt selling it to another company for them to make whatever use they can of it.
PAHLBut what's real concern to us is the extent to which information for problems that may occur in going from the original creditor to the debt buyer resulting in collection attempts to the wrong people of the wrong amount. It's not the sale of debt per se. It's the process and the information that comes along with the debt sale.
REHMAll right. And, Peter.
HOLLANDYeah. I would agree. I mean, my question to, you know, the members of Steve's organization is why do you sell these assets with a disclaimer that they're not fully documented, with a disclaimer that the balance may not be accurate? That's not treating your customers right, and you know that the only purpose of that is they're going to put it into litigation and sue someone and say, this is how much you owe, when we know, in fact, that might not be right.
BARTLETTI think the reason that you sell it, and I think you -- I agree with Tom earlier that we should be allowed to sell it to get it collected. If you didn't, then what would happen is there would be no end to the process, and you'd have a lot of people with marginal credit that wouldn't be allowed any credit at all because it wouldn't be collectible.
BARTLETTI do think that all the documents should be in order. What the FTC is proposing is correct that you give them the correct and the accurate information. I don't know what to do with the -- apparently the common case of someone not showing up in court. If someone doesn't show up after they've been served, I'm not sure what I would advise the judge to do if they didn't show up. Give them a second chance, a third chance, I don't know.
HOLLANDNo. I think you advise him to scrutinize the paperwork, which is what the law says. If you want a default judgment, you submit proper documentation. And it better be the Is dotted and the Ts crossed so that if you're going to enter judgment, you know it's in the right amount against the right person.
REHMAnd you're listening to "The Diane Rehm Show." Calling in Oklahoma City from Jerry, good morning to you. Jerry, are you there? OK. Let's go to Megan in Durham, N.C.
MEGANHi. How are you?
REHMFine. Thanks. Go right ahead, please.
MEGANWell, first, I wanted to make the point to the fellow who seems to be the industry mouthpiece that as far as the kind of people who are defaulting and ending up having to go to court -- I used a credit card I got for two weeks when I lost my job in 2007. I paid it up after the two weeks. The only thing that ever was done on it was payments, but because of the fees and the interest and the over-the-limit, et cetera, it was basically they ended up asking me for $1,500 on a $500-limit card. And I had already paid the balance.
MEGANI stopped paying on it once I reached the limit because I realized that, yeah, they were willing to have $20 a month payment plan, but that was only because they were asking me to pay $1,500 on what was essentially a $500 loan.
REHMWhat do you think of that, Tom Pahl?
PAHLWell, I think one thing that would be very helpful for consumers is to get a breakdown from creditors or other people filing cases to know how much of what's being demanded of them is the original principal or the interest...
REHMCan they get that information very easily?
PAHLThey can ask for it. There's no legal obligation that it be provided.
REHMAnd that's a problem.
HOLLANDWell, it ought to be in the monthly statements, right? So if they -- if you're going to sue someone, you ought to have all of the monthly statements showing principal, interest, late fees. And that's the problem is that that's never -- or very infrequently is that provided. When you talk to the debt-buying industry, they have said publicly in a letter I have, the reason we don't have it is the banks don't keep it.
HOLLANDSo, again, I go back to why would a bank not keep those records? And when they sell, why would you sell something knowing that you're going to cause harm because you don't have the proof?
REHMHere is what I want to know. If the bank sells it to the debt collector for, say, a penny and a half on the dollar, if the collector gets back a certain amount of money, how much does the bank get of what it has recovered from the...
HOLLANDWell, that's a fascinating question, and I'll be interested to hear Steve's response. Many of these contracts of sale are to a separate entity, often a publicly traded company, and it says, we're selling it in fee simple. We have no more interest in it. That's it. That's the end of it. OK. So, really, once it's sold, the bank has no more interest in it, right? It's gone. They sold it for 2 cents.
HOLLANDNow, I have seen one agreement that, in spite of all that language, it talks about a revenue-sharing agreement at the back end. And so we're still kind of -- these documents are not public. They don't want them to be public. So we're still obtaining them and trying to understand.
BARTLETTWell, it's my understanding that it's sold and sold, and that's why the bank is selling it.
REHMNo revenue sharing at all?
BARTLETTThat is my understanding. I don't know that, but that's my understanding.
REHMYou don't know that?
BARTLETTThat is the common understanding of it so...
REHMYeah. And what...
BARTLETTBut I will say that you have to remember that these are cases in which the borrower has refused to pay over an extended period of time. They're called uncollectible. So these debt collectors are trying to collect the uncollectible. So if they can collect 2 cents on the dollar, then they can get their money back, but they may or may not be able to collect 2 cents on the dollar.
REHMHow big a problem is this for the debt of the nation, Tom?
PAHLWell, I think that the debt-buying issue -- I think it is a major issue 'cause it's one of the things that we have seen is that there are significant problems in collection on debts, suing on debts. And one of the things that happens with debt that is sold, it tends to get older. You are transferring documents from one person to another. So any inaccuracies you're concerned about are likely to be a greater concern in those circumstances.
REHMAnd there is no time limit, I gather.
PAHLThere's no time limit on selling. Yes, it's correct.
REHMTom Pahl, he is with the Federal Trade Commission. Peter Holland is at the Carey School of Law at the University of Maryland. Steve Bartlett is with The Financial Services Roundtable. Kathy Kristof is contributing editor for Kiplinger's Personal Finance. Thank you all so much.
PAHLThank you, Diane.
REHMAnd thanks for listening. I'm Diane Rehm.
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