Posted on Thursday, June 30, 2011
Attorneys general in 38 states are fighting a proposed class-action settlement they said could make it much harder for state law-enforcement officials to regulate debt collectors.
The proposed settlement involves a February agreement by Encore Capital Group Inc., the nation's largest debt buyer by revenue, to pay $5.7 million to settle all class-action lawsuits accusing the San Diego company of violating U.S. or state laws with flawed or phony affidavits.
U.S. District Judge David A. Katz in Toledo, Ohio, ruled in 2009 that Encore employees used "false and misleading" affidavits to collect credit-card debts. As part of the case, one employee testified in a deposition that he signed 200 to 400 affidavits a day, few of which were reviewed for accuracy.
This month, the 38 state attorneys general asked the federal judge to throw out the proposed settlement. They contend that approval of the deal would help the debt-collection industry dodge enforcement actions by state officials.
According to the state attorneys general, Encore could use the settlement as a precedent throughout the U.S., arguing that other allegations of flawed affidavits should be thrown out because of the Ohio deal. Some observers said the outcome could shape the industry's legal strategy for defending itself in enforcement actions.
Howard Beales, who led the Federal Trade Commission's Bureau of Consumer Protection from 2001 to 2004, said the deal could hamper state enforcement efforts by "making it harder for them to argue that there's anything left to go after that hasn't been addressed by the settlement."
The move is a sign of friction between U.S. and state regulators who police the business of collecting debts. An increase in bad debts following the recession has led to a number of lawsuits against borrowers, but some federal and state judges along with regulators have accused some debt collectors of using incomplete, sloppy and even fraudulent documents in courts. Debt-collection firms often submit affidavits to courts as proof of what a borrower owes.
In the most extreme instances, a small number of borrowers have ended up in jail because of bad paperwork.
The debt-collection industry is regulated through a patchwork of laws, with federal oversight divided between the Federal Trade Commission and the new Consumer Financial Protection Bureau, which begins operations in July. State officials generally are more aggressive than federal agencies, according to lawyers for borrowers interviewed by The Wall Street Journal.
In an interview, Minnesota Attorney General Lori Swanson called the proposed settlement "wholly deficient" and "paltry," because plaintiffs in the class-action suit would get $10 each from Encore. More significant, she said, the deal "could throw a monkey wrench in enforcement of the debt-collection industry."
Ms. Swanson accused Encore in a state-court lawsuit in May of including defective affidavits in debt-collection lawsuits against Minnesota residents.
J. Brandon Black, Encore's president and chief executive, declined to comment on the objections by state officials. In a statement, Encore said the proposed settlement is "fair." The company said it is "confident the court will uphold the agreement."
Terms of the proposed settlement call for about 1.4 million borrowers included in the proposed federal class-action suit to drop claims against Encore in return for $5.7 million.
Brad Puffer, a spokesman for Massachusetts Attorney General Martha Coakley, said final approval of the deal could leave Encore and other debt-collection firms "free to assert…wrongful debt-collection practices" across the U.S.
Last year, the FTC received 140,036 complaints against debt-collection firms, up 17% from 2009. Since the start of 2010, the agency has brought five enforcement actions against debt-collection firms under the primary federal law used to oversee the industry, resulting in civil penalties of several million dollars, according to the FTC.
In a statement, Joel Winston, director of the agency's financial-practices division, said the FTC has "broad authority but limited resources." As a result, the agency "focuses on the larger collectors" and usually relies on state officials to police smaller companies, he said.
A spokeswoman for the Consumer Financial Protection Bureau declined to comment. The agency was formed by last year's Dodd-Frank financial-overhaul law.
Encore and rival debt-collection firms buy delinquent loans in bulk, sometimes filing lawsuits to collect the money. Roughly 94% of collection cases filed against borrowers result in default judgments in favor of the debt buyer, according to industry estimates. Few borrowers have a lawyer, some don't know they are being sued, and others don't appear in court, both federal and state judges said.
Last year, Encore collected $266.8 million from 425,000 lawsuits filed against borrowers, up 15% from $232.7 million in 334,000 suits filed in 2009.
A number of cases brought by debt buyers are plagued by faulty documentation, according to 20 judges around the country interviewed by The Wall Street Journal last year.
In the Ohio case, Judge Katz ruled that Encore employees determined the validity of a debt "based entirely" on a printout. Encore said in February that it modified affidavit practices, without specifying the changes.
In the court filing in a Ohio federal court seeking to block the proposed settlement, the state attorneys general said documentation-related lawsuits such as the Ohio case "are potentially valuable," citing a federal judge's February ruling awarding a borrower $723,000 in damages against Encore and another company.
Encore said in a statement that the February ruling has "nothing to do with the issues in the Ohio case." The company said it takes the Minnesota allegations seriously but believes its paperwork procedures are "legally sound."
Judge Katz will review the proposed settlement at a July 11 hearing. He couldn't be reached for comment.
By JESSICA SILVER-GREENBERG, THE WALL STREET JOURNAL