State Courts Join Widening Debt-Collection Crackdown

State courts around the country are starting to reform the ways they handle lawsuits over unpaid bills, widening the regulatory overhaul of banks' and third parties' debt-collection practices.

New York's top judge last week proposed sweeping reforms for creditors and collectors looking to sue customers, unveiling rules that consumer advocates call the most comprehensive in the nation.

If adopted next month, the proposed rules would join a broader regulatory crackdown on the debt-collection industry. They would also address problems that are common in courts across the country, which are flooded by debt-collection lawsuits and sometimes rely on shortcuts to manage them.

Other states are also trying to fix some of those shortcuts. Maryland's district courts, which have drawn criticism for summoning borrowers to judge-less "rocket docket" mediation sessions with lawyers for banks and debt collectors, modified those sessions after American Banker wrote about them in February.

Now judges make announcements at the beginning of and sometimes during the sessions, making sure that defendants know they are voluntary, according to the incoming chief judge of Maryland's district courts.

That change still falls short of the total elimination that some consumer attorneys argue for. But it is part of a widening crackdown from regulators, legislators, attorneys general and judges over every aspect of the debt-collection industry. Industry members say they fear the squeeze may make some legitimate debts too hard to collect.

The latest blow to the industry came Thursday from New York Attorney General Eric Schneiderman, who said that two of the largest consumer debt buyers agreed to drop collections on about $16 million worth of judgments and pay fines to settle state charges.

"When you get a history of documented abuses … there comes a point where you decide you have to do something," Jonathan Lippman, the chief judge of New York state, said in an interview this week.

Banks and debt collectors regularly resort to the courts when trying to recoup money from customers who have stopped paying their credit card bills or other loans. After writing off debts as uncollectible, banks regularly sell them for pennies on the dollar to third-party collectors, which then file lawsuits en masse to compel borrowers to repay them.

Several systemic problems plague this process, including "robo-signing." Banks have frequently failed to provide complete or accurate paperwork to verify the debts that they sell, meaning that debt collectors sometimes sue borrowers for the wrong amount or for bills they have already repaid. They also sometimes sue borrowers after the statute of limitations has expired on the debts. Schneiderman alleged that Portfolio Recovery Associates and Sherman Financial, the two debt buyers who agreed to settle with his office, regularly filed lawsuits on claims that were too old under New York law.

As a result, state courts are deluged by collections lawsuits that are estimated to number in the millions annually nationwide. Many of these suits are brought on the basis of faulty paperwork, and most of them are filed against people who are low-income and unrepresented by lawyers. More than 100,000 debt-collections lawsuits were filed in New York state courts last year, and 98% of them were filed against people who do not have lawyers, according to Lippman.

"Every creditor certainly has a right to collect on a debt, but we want the process to be fair and equitable," he says. "I think everybody in our profession understands that justice shouldn't just be for those who have the means, and you should have a level playing field."

Mark Schiffman, a spokesman for the trade group ACA International, the Association of Credit and Collection Professionals, says that his group's members abide by court rules now and will continue to do so. But he expresses concerns that New York's proposed changes might eliminate creditors' ability to sue borrowers over some legitimate debts.

"We'll follow whatever the rules are. What we just don't want to see is this being made so onerous that we are just wiping debt away for consumers," he says.

Maryland Modifications

When asked to name other states with consumer credit lawsuit best practices that he admires, Judge Lippman cites court rules in Maryland and Connecticut as well as legislation in California and North Carolina.

"I think it's continuing to be an emerging subject of interest to legislators and to lawyers, and I think there's been a spotlight on this in our state certainly," he says. "I think you'll continue to see reforms, and I hope that New York's efforts in this regard contribute to the dialogue on this."

Maryland in particular has been both praised and criticized for how it handles debt-collection lawsuits. Under Judge Ben C. Clyburn, who is retiring this month as chief judge for the District Court of Maryland, the state implemented new rules that required better documentation from third-party debt buyers who sue borrowers over debts they have purchased from the original creditors. But some of Maryland's district courts are also the home of the controversial rocket dockets or "resolution conferences."

These are court-organized settlement discussions between people that are being sued by banks or debt collectors, and the lawyers that are suing them. As American Banker reported in February, the sessions take place in courtrooms and are effectively run by the plaintiffs' attorneys; no judge or neutral third party presides over them.

That is changing somewhat, according to Judge John P. Morrissey, who will succeed Clyburn as the chief judge of the District Court of Maryland next month. His current role is district judge of Prince George's County, which is one of two districts that currently use the resolution conferences to try to manage the thousands of debt-collection lawsuits they process every year.

Now in that county, "a judge goes in in the morning and makes an opening statement … to indicate that the resolution conference is voluntary, with no obligation" for the defendants to participate, Judge Morrissey said in an interview this week. He said when he was assigned to the courtroom recently, he made a second announcement later in the morning, to ensure that later-arriving defendants were equally informed.

The judge does not remain in the room to oversee the discussions between attorneys and defendants, because "the judges can't be involved in settlement negotiations," Morrissey says.

Consumer advocates have criticized the moderator-free mediation system as implicitly advantageous to the lawyers who call borrowers up to meet with them, and as confusing to the people who are being sued, many of whom do not have lawyers. Last year, about 5,100 people were summoned to the dockets, according to Maryland district court records.

Judge Morrissey says the courts are "trying hard" to ensure a level playing field for creditors and the people they are suing, in part by looking for ways to increase the legal aid or pro bono representation available to defendants who cannot afford lawyers. He is also joining Maryland's access-to-justice commission, which examines court policy with the goal of ensuring that low-income and self-represented citizens receive fair treatment.

The ongoing existence of the resolution conferences is useful for both the courts and for the people being sued, Morrissey says.

"I've worked diligently to tailor this program, and we've made numerous changes to it to try to make sure that it's fair," he says.

The sessions help borrowers who legitimately owe debts, by allowing them to negotiate for a better deal, he says.

"I think all parties should be encouraged to settle if they can," Morrissey says. "It's entirely voluntary. … It's indicated in the forms, it's indicated by the courts and it's indicated by the judge that they don't have to do that. But frankly, people want the opportunity."

'Huge Improvement'

Judge Morrissey would not comment on the proposed New York state court reforms, saying that he had not yet read them. Those proposed rules would require creditors to provide more documentation to substantiate their lawsuits and would ensure that borrowers are not sued over debts that have exceeded the statute of limitations.

But Judge Lippman also focused on how the courts themselves handle such suits, proposing that all of the states' courts adopt a standard "answer form" to help people defending themselves against debt collection claims. The form, which is already used in New York City civil courts, offers 23 different options for a person to check off as a defense or other response, including "I have paid part or all of the alleged debt," "I dispute the amount of the debt" or "this debt has been discharged in bankruptcy."

Carolyn Coffey, head of the Consumer Rights Project for MFY Legal Services, says that the form has been a "huge improvement" for people defending themselves against debt-collection lawsuits in the New York City courts.

"The answer form is very clear, with a list of the most common defenses in the consumer debt cases," so when her legal aid service works with people who have used it, "we don't have to help people amend their [defenses] as much, because they've nailed it on the first go-round," she says. "Extending the answer form statewide is a really simple and very helpful solution."

Consumer attorneys in other states agreed with Coffey's praise for New York's proposed reforms.

"It's very much cutting-edge stuff. They're way ahead of everyone else," says Aurora Dawn Harris, a lawyer who represents consumers in Southern California.

Michelle Weinberg, a supervising attorney at the legal aid agency LAF in Chicago, says that judges in Illinois' Cook County had convened a committee years ago to discuss similar possible reforms with lawyers for consumers and creditors. The discussions did not yield any results then, she says, although she expressed hope that New York's new proposals would resurrect the issue.

New York's "answer form" for defendants is "comprehensive, and it has just about everything I could think of in very short form," she says. "The example of the New York court hopefully will help the Circuit Court of Cook County recognize how important and necessary these rules are."

Representatives of banks and debt collectors, which are bracing for more regulations on several fronts, were more critical about New York's proposed reforms. The lawyer Joann Needleman, who represents creditors and debt buyers as a partner with the firm Maurice & Needleman, called the proposals "judicial advocacy gone wild," according to the headline of a blog post she wrote last week.

By promoting the use of the answer form, the courts are giving consumers documentation to assert claims that might not be complete or accurate, Needleman argues.

"So in effect the New York Courts are now giving legal advice to consumers," she wrote.

Schiffman, of the Association of Credit and Collection Professionals, was less immediately critical about New York's proposed rules. But he expressed concern that his industry was being unfairly singled out by regulators and authorities even for its legitimate business practices.

"We hope these changes are being made not just for debt collection but for all types of litigation," he said.