State AGs Probing Sales of Credit Card Debt

A group of state attorneys general is investigating how major banks process and sell delinquent credit card accounts.

Attorneys representing Mississippi Attorney General Jim Hood have contacted former JPMorgan Chase (JPM) employees about possible procedural shortfalls or outright errors in defaulted credit card account records that the bank sold to third-party debt collectors. Attorneys general in other states are also involved in the probe and are scrutinizing the practices at other banks as well, says another ex-Chase employee contacted by investigators.

The alleged practices under scrutiny are similar to the mortgage documentation problems that plagued banks' foreclosure proceedings before a national settlement was reached with state AGs.

At issue is whether JPMorgan and other banks were unloading delinquent accounts before they could actually confirm past-due balances. Consumer advocates fear that banks are selling unreliable or in some cases extinguished accounts to debt buyers, who then turn around and sue consumers without disclosing doubts about the accounts' veracity.

Asked about the investigation, JPMorgan Chase declined to comment. A spokeswoman for Hood's office said it was not policy to confirm or deny the existence of investigations, though the office "has been and remains concerned" about consumer finance issues.

In a series of articles earlier this year, seven current and former Chase employees told American Banker that the managers of a credit card processing facility in San Antonio ordered its employees to robo-sign affidavits attesting to the accuracy of debts owed by Chase customers. These process failures were material, numerous Chase employees said, because the bank relied on a patchwork of antiquated computer systems that sometimes disagreed about how much customers owed.

In an interview last week, one of those employees, Carole McGinn, said that she had been contacted by the Mississippi AG's office. "We had a lengthy conversation [on]… the robo-signing of those affidavits," said McGinn, a retired Chase employee who worked with her husband Mac in the bank's Frederick, Md., and San Antonio credit card debt processing facilities.

Mac McGinn previously told American Banker that he had supervised teams of robo-signers in Frederick who were responsible for gathering records and affirming account balances for debt buyers. Even before a flood of defaults hit the bank's credit card operation, he and others were uncomfortable with its processes, which left insufficient time to confirm accounts' accuracy.

"You're not going to go through 150 to 200 affidavits an hour; it's just not possible," he said last week.

The alleged problems at Chase were first publicly aired in a wrongful termination suit by Linda Almonte, a former team manager who claimed she was fired for flagging procedural lapses and dubious accounts in the sale of $200 million in legal judgments. Following her allegations, Chase shuttered its in-house card debt litigation operation and ceased filing new lawsuits on its own behalf in jurisdictions across the country. The Office of the Comptroller of the Currency dispatched investigators to inspect the San Antonio facility, and in February a person familiar with the regulator's actions said that it was taking the matter very seriously.

The OCC declined to comment on the status of any review, though people familiar with Chase's San Antonio credit card facility said that significant numbers of employees still remain employed but idle.

Chase is still sending accounts to debt buyers, however. Lawsuits filed in Florida's Duval County Civil Court, which provides an unusual level of online access to low-dollar collection cases, show that third-party collectors are suing on Chase accounts that defaulted as recently as January.

Though the McGinns said that they have only heard from the Mississippi AG's office, Almonte said that other states are also involved. The ex-Chase employees also said that investigators appear to be broadly interested in collection practices at other banks besides Chase.

Consumer defense attorneys have argued that there are widespread inaccuracies and documentation shortfalls in accounts sold to debt buyers. According to contracts filed in state courts and reported on by American Banker, Bank of America (BAC) sold hundreds of millions of defaulted credit card debts under agreements that warned that the amounts owed were "approximate" and might, in some cases, already have been paid. Despite these reservations, a company called Cach, a subsidiary of Square Two Financial, bought the accounts and then sued upon them, filing affidavits stating that the amounts owed were reliable.

Cach officials have not responded to interview requests, and Bank of America would not comment.