In courtrooms across New York State, lawsuits poured in by the hundreds as if manufactured on an assembly line. Some included generic testimony, others relied on bogus affidavits, churned out so rapidly that they were seldom viewed for accuracy.
Sound familiar? The same problems that dogged the foreclosure of homes — and prompted public outcry and a multibillion-dollar settlement by some of the nation’s biggest banks — are increasingly showing up in the practices of large buyers of bad consumer debt.
The companies, which buy huge swaths of soured bills from lenders for pennies on the dollar, are deluging the courts with shoddy lawsuits, according to a review of debt collection lawsuits along with interviews with state judges and prosecutors.
As part of an effort to stamp out such practices, New York’s state attorney general, Eric T. Schneiderman, was expected to reach a settlement on Friday with a debt buyer, the Encore Capital Group, over concerns that the company filed thousands of flawed debt collection lawsuits against state residents, according to several people briefed on the matter who spoke on the condition of anonymity.
The settlement, which requires Encore to pay a $675,000 penalty and vacate more than 4,500 court judgments against borrowers — is part of a broader push by state and federal authorities to root out questionable debt collection practices that can stymie vulnerable borrowers just as they are trying to dig out from the financial crisis.
“We are pleased to have addressed and resolved the attorney general’s concerns in a manner that supports consumers’ interests,” said Lisa Margolin-Feher, a spokeswoman for Encore Capital, adding that the company was committed to “treating consumers fairly and with respect.” That commitment, she said, was demonstrated when it created “the industry’s first consumer bill of rights.”
The action against Encore Capital, which is based in San Diego, is the latest in a series of enforcement actions Mr. Schneiderman has brought against debt buyers. In May, he reached agreements with two other large buyers of stale consumer debts, the PRA Group in Norfolk, Va., and the Sherman Financial Group, based in New York. Under those deals, the companies agreed to nullify judgments, valued at more than $16 million, against New York residents.
Together, the settlements take aim at the booming world of buying consumer debt, an industry that scoops up billions of dollars in long-overdue credit card bills, auto loans and other debt from lenders. The sums are vast. Between 2006 and 2009, the top nine debt buyers purchased 90 million consumer accounts valued at about $143 billion, according to the Federal Trade Commission.
While the total amount of bad debt has shrunk as the financial crisis recedes, one in seven adults in the United States is being pursued by debt collectors, according to the Federal Reserve Bank of New York.
To obtain payments on some of that debt, buyers like Encore Capital often turn to the courts in a practice that some state authorities say effectively turns the civil court system into a debt collection arm. In New York State alone, according to a tally by Mr. Schneiderman’s office, Encore Capital and its subsidiaries filed more than 239,000 lawsuits from 2007 to 2012.
Encore Capital collected $564.7 million in legal collections in 2013, according to a regulatory filing, up more than 49 percent from those in 2011. The PRA Group brought in roughly $80.2 million through legal collections in the last three months of 2013, up roughly 22 percent from a year earlier, according to a regulatory filing.
Some of those lawsuits deluging the courts are marred by errors, according to the interviews. A review by The New York Times of court records shows that some lawsuits include fabricated credit card statements created years after borrowers stopped paying their bills.
The concerns about erroneous documents recall those that arose after the 2008 mortgage crisis, when banks were accused of robo-signing — a process of producing similar documents by the hundreds without reviewing them for accuracy.
But unlike mortgage foreclosure lawsuits, consumer debt collection cases often play out far from public view, consumer lawyers say, because borrowers seldom show up in court to contest the suits.
As a result, an estimated 95 percent of debt collection lawsuits result in default judgments against borrowers, an automatic victory for the debt buyers that enables them to garnishee consumers’ wages or freeze bank accounts.
While some consumers deny that they owe money at all, more commonly, state authorities say, borrowers have fallen behind on their bills but dispute the size of the debts that they owe.
The problems, state prosecutors say, trace to the way that the debts change hands. When debt buyers purchase bundles of bad loans from lenders, they often receive scant information about the accounts. Critical information, like original account statements or payment histories, are sometimes missing entirely.
To fill those gulfs, some debt buyers produce affidavits that assert the accuracy of the outstanding debt. In a 2009 deposition, an employee of a large debt-buying company testified to signing roughly 2,000 affidavits a day.
Such hastily prepared documents are pervasive, prosecutors say. In the investigation against Encore, for example, Mr. Schneiderman’s office found that employees signed affidavits without ensuring that the information was accurate. Wielding those affidavits, Encore won judgments against New York residents, according to settlement documents reviewed by The Times.
Poring over thousands of lawsuits, Mr. Schneiderman’s office also unearthed cases where Encore Capital sued borrowers for debts that exceeded the statute of limitations. A patchwork of state laws imposes statutes of limitations, typically between three and seven years, that outline how long debt collectors have to file suit against consumers.
As part of its settlement, Encore Capital agreed to reform its collection practices, including alerting consumers about the statute of limitations governing debts.