Debt-collection companies earn quick payday, but documentation can hinder strategy
WASHINGTON — Leoncio Paz took on one of the country's biggest debt collectors — and won.
The case was pretty cut and dry: Midland Funding sued Paz for $5,216 on an old credit card debt. Paz, 48, said the amount was more than he owed. But rather than accept the charges, as so many others do, the maintenance man from Alexandria, Va., contacted a legal aid attorney.
That attorney figured out that the amount Midland sought in its sworn affidavit included all sorts of fees that the company lacked the documentation to collect. And when Paz challenged the case on those grounds, Midland dropped the suit.
“It's highly likely that a lot of people are being sued for a lot more than they probably owe,” said attorney Simon Sandoval-Moshenberg, who represented Paz.
Midland has sued thousands of people just like Paz in hopes of a quick payday. The company has a reputation of buying soured credit card debt and heading straight to court to collect, a tactic that consumer lawyers say scares people into settling.
The strategy has been so effective that in the Virginia suburbs of Washington alone, Midland has recovered more than $27 million since 2003 — a year the firm filed a few dozen cases at most. But in the past four years, it has flooded courts from Loudoun County to Prince William County, Va., with nearly 11,000 lawsuits as companies overwhelmed by delinquent accounts have sold them for pennies on the dollar.
State attorneys general, judges and consumer lawyers nationwide are complaining of a broken debt collection system that allows companies such as Midland to file tens of thousands of cases built on flimsy documentation.
The information Midland relies on is the same as is “used when credit card users call or get their balance online,” said Greg Call, general counsel of Encore, Midland's parent company. “We have over 180 million pages of documentation from issuers supporting the debts that we collect, with access to even more.”
Paz was surprised when Midland came knocking. He did not, after all, take out a credit card with the firm. It bought his debt from the lender who issued the card. Midland is a unit of Encore Capital Group, a San Diego-based corporation that buys portfolios of charged-off debt — delinquent accounts that lenders give up on.
These “debt buyers” often purchase no more than an electronic file of names, addresses and amounts owed on accounts that are more than 180 days past due. More detailed information is usually available, but it would cost more and would cut into their profits.
“Debt buyers play an important role in the economy in that they recover rightfully owed consumer debt,” said Mark Schiffman, a spokesman for the Association of Credit and Collection Professionals, a trade group. “Companies and government rely on the repayment of credit, fees, services to keep their business functioning.”
He said debt buyers help companies offset some of the unpaid accounts they incur. Selling accounts to debt buyers helps banks reduce losses from lending money, which maintains the flow of credit at low rates.
Still, the collection system is riddled with problems. Government agencies receive hundreds of thousands of consumer complaints about harassing phone calls, lack of verification of debt and people discovering a collection attempt only through their dinged credit report.
The Consumer Financial Protection Bureau plans to issue rules to fix these problems this year, but it is unclear whether those rules will radically alter the business model of debt buyers and reduce the number of cases clogging court calendars.
In the meantime, debt buyers are taking advantage of a patchwork of state and federal laws with varying degrees of consumer protection.
The federal Fair Debt Collection Practices Act says consumers have the right to request information that verifies what they owe, but regulators say debt buyers do not always comply. That may be a consequence of the way charged-off debts are sold.
A report by the Center for Responsible Lending said portfolios of debt often contain inaccurate, outdated or missing account information, especially if the debt is resold multiple times.
“We see more debt buyers now than we do original creditors,” said Lisa Mayne, a presiding judge in Fairfax, Va. “Back in the day, you had local banks coming in with their attorneys. Now, the majority of cases we see are from companies that have bought the debt.”
The three largest publicly traded debt buyers — Encore, Asta Funding and Portfolio Recovery Associates — spent more than $1.2 billion last year to buy portfolios of debt worth more than $85 billion, according to regulatory filings.
Encore, which owns the debt of one in five Americans, accounted for most of that spending. The company said it files lawsuits in fewer than 5 percent of the open accounts in its total portfolio, but it would not break out how many of those cases derive from the Midland unit.
“We only turn to legal action when a consumer does not respond to multiple efforts to reach him or her by mail and telephone,” said Sheryl Wright, Encore's senior vice president of corporate and government affairs. “As a matter of practice, we work toward finding a mutually acceptable payment plan with consumers, often at a significant discount.”
In Northern Virginia, Encore's Midland unit has filed 16,878 lawsuits from 2003 to March of this year in the district courts of five counties. The company won nearly two-thirds of those cases through judgments against consumers who failed to appear in court or simply agreed to pay the amount.
Almost 20 percent of those people wound up having their wages garnished, according to a review conducted by The Washington Post. Debts range from as little as $53 to as much as $23,786.
Judges have dismissed 15 percent of Midland's cases, while the company has abandoned 9 percent, such as the Paz case. Only two people have won a case against Midland outright.
Sandoval-Moshenberg said the company abandons cases when consumers fight back because it knows the cases could not withstand closer examination in court.
His client Paz did owe at least a few thousand dollars on his JCPenney credit card. Paz made his last payment in March 2011, two years before the debt landed him in court.
“I paid as much as I could for years, but it got tough, and I didn't have the ability to pay,” the father of three said.
Paz was willing to work out a payment plan with Midland, but Sandoval-Moshenberg said he suggested that they review the case first. The attorney got the case dropped, and then in turn he filed suit against Midland for allegedly submitting a “false, deceptive or misleading” affidavit in violation of federal law.
“There's a certain extent to which Mr. Paz is sort of getting away with something,” Sandoval-Moshenberg said. “He did owe something. Now he's not going to have to pay it. It just shows how messed up the system is.”