Lawsuit against Georgia firm turns spotlight on murky world of debt collection
After an Atlanta-area county court garnished Eduardo Austin's wages to collect more than $3,300, the software developer thought he was done paying an old credit card debt from his college days.
But three years later, the law firm that came after him the first time sued anew, winning an order to garnish his wages again for the same debt. Austin fought back, filing a lawsuit in federal court in Atlanta that seeks class-action status.
“There's probably thousands of people this is happening to,” said Austin, 33.
The law firm, Frederick J. Hanna and Associates, of Marietta, Ga., has been hit with scores of lawsuits and hundreds of complaints over the years. They claim the firm often flouts federal and state consumer protection laws when collecting old debts.
Last week, Austin gained a new ally — the fledgling Consumer Financial Protection Bureau, set up after the financial collapse to help police the financial industry.
The CFPB filed a suit alleging the Hanna firm is a veritable factory churning out thousands of poorly researched lawsuits aimed at intimidating victims into paying debts they sometimes already paid or don't legally owe.
The case is among more than a dozen actions against mortgage firms, banks, payday lenders and other financial institutions the CFPB has accused of misdeeds this year alone.
Last month, the CFPB was involved in a $968 million settlement with SunTrust over the Atlanta bank's mortgage and foreclosure practices during the financial crisis.
Its suit against the Hanna firm turns the spotlight on the murky world of debt collection, an industry that mushroomed during the credit bubble of the past decade.
Mountain of old debt
The reason for this mass-production approach to lawsuits, said experts, is that there is more than $100 billion of old, unpaid credit card bills, car loans, mortgages, medical bills and other consumer debt. When the lenders give up on collecting the debts themselves, they sell them or turn them over to firms like Hanna's.
Debt buyers, including a Hanna subsidiary, typically pay pennies on the dollar for huge portfolios of such debt.
Critics say the set-up gives debt investors and collectors enormous incentives to churn through old claims, trying to collect as cheaply and quickly as possible.
While a majority of the debts are legitimate, the high volumes also lead to costly mistakes that traumatize some victims.
The CFPB wants the court to bar Hanna's debt collection practices and seeks civil penalties and restitution for affected consumers.
In an emailed statement, the Hanna firm said it “completely cooperated” with the CFPB's year-long probe, adding, “We were completely blind-sided and obviously disappointed by the Bureau's decision to file suit. We strongly deny the allegations of the complaint and, moreover, the overall mis-characterization of our law firm by the Bureau as a ‘mill' or ‘factory.' ”
Founded in 1981
Frederick Hanna founded the firm in 1981 and grew it into a 400-employee operation that operates out of a grocery-store sized office.
It collects debts for banks and credit card issuers such as JP Morgan Chase, Bank of America and Capital One, and it represents companies that buy portfolios of old consumer debt.
A 2013 article in the Atlanta Legal Aid Society's newsletter describes Hanna as a compassionate man who was the biggest donor to a group that that provides free legal representation to needy clients.
Hanna told the newsletter he came from a working class family in south Georgia and decided to become a lawyer after graduating from Valdosta State.
His firm's success has enabled him to live in a 6,500-square-foot house with a small lake where guests ride swan boats, the newsletter said.
The CFPB lawsuit and other cases give another picture of Hanna and Associates' tactics.
In 2011, Hanna's firm made headlines in a local legal publication when it paid a $120,000 settlement for twice suing a former Georgia Tech professor, Jonathan Houghton, who suffered a traumatic brain injury and run up credit card debt.
Many claims dropped
As part of its high-volume strategy, the CFPB said, Hanna often drops cases when challenged. The firm dropped 40,000 of the 78,000 lawsuits it filed in Georgia in 2009, the agency said.
But most people don't even show up in court to challenge lawsuits charging them with old debts, and debt collectors automatically win a default judgment, said Atlanta attorney Steven Koval.
“People are intimidated,” he said. “You're getting sued for $25,000 and you have no idea how they come up with the number. Often, the company doesn't either.”
Depending on the type of debt and the state, collectors can't legally sue to collect debts once they're 2-10 years old.
In Eduardo Austin's case, the judge threw out Hanna's second suit and ordered the firm to refund the $270 in wages wrongly garnished.
But Austin, angry by then, filed the lawsuit. Austin's attorney, Koval, said about 2,000 other people were sued by Hanna for interest on already-paid debts, which he hopes will gain his case class-action status.
“There were too many for this to be a one-off” mistake, Koval said.