Debt collection industry's methods draw scrutiny

“Dawn of a Zombie Robo-Signer” read the headline in a recent Wall Street Journal article.

The story cast a harsh light on Portfolio Recovery Associates for its reliance on sworn statements from a dead woman. The Norfolk company buys defaulted consumer debt and attempts to collect on it.

The signature of Martha Kunkle, who had been dead since 1995, appeared on thousands of questionable affidavits that Portfolio submitted in lawsuits against borrowers, the article said.

The use of these faulty affidavits “even if isolated, reflects an epidemic of mass-produced, sloppy and inaccurate documentation in the debt-collection industry,” the Journal said, citing complaints from regulators.

Portfolio Recovery immediately responded in a letter to the Journal and a filing with the Securities and Exchange Commission. The affidavits signed by Kunkle, it said, were provided to Portfolio and other companies that bought pools of debt from Providian, a credit-card issuer, as part of the account documents.

“Providian employees apparently prepared and wrongly signed Martha Kunkle’s name to the affidavits,” Portfolio said in its letter.

When it became aware of the defective affidavits in January 2008, Portfolio said, it immediately directed its lawyers to stop using them. In its letter and the SEC filing, Portfolio described itself as “a victim of the Providian process, not a participant in it as the article implies.”

Portfolio called the zombie headline “sensational,” adding that it had no reason to believe Martha Kunkle is deceased. “She was a named defendant and active participant” in litigation resulting from the use of the questionable affidavits, it said.

The article, however, sheds light on what consumer advocates said is a growing problem: the industry’s use of weak documentation in legal efforts to collect on defaulted consumer debt.

Companies have been buying charged-off consumer debt for decades, but the industry has come under heightened scrutiny in recent years from consumer advocates, the Federal Trade Commission and state regulators.

One reason for the attention is that individuals still find themselves mistakenly targeted by debt buyers’ suits. Another is that the amounts being sought are sometimes miscalculated. Both lapses were cited by the Government Accountability Office in a 2009 report that recommended changes to the Fair Debt Collections Practice Act.

The FTC, the agency responsible for enforcing the act, has been studying debt collectors and debt buyers in an effort to update the 33-year-old statute. The act, which prohibits abusive, deceptive and unfair collection practices, hasn’t kept pace with industry changes, including the application of more advanced technology, the FTC acknowledged in a 2009 report.

“The conduct of debt collection has been transformed in many ways, such as the dramatic advent of debt buying and the vastly increased number of debt collection suits and arbitration proceedings,” the agency said.

As part of its ongoing study of collection practices, the FTC last year asked for detailed information from nine large debt buyers, including Portfolio, about their annual revenues and earnings, the sizes and numbers of debt portfolios they purchase and whether they resold the debt they didn’t collect. The agency has not yet made its findings public.

Portfolio said it cooperated fully with the FTC’s request and viewed the inquiry “as an appropriate and intelligent process of gathering facts.” The company said it doesn’t resell any of the debt it buys, so it wouldn’t be affected by that part of the FTC’s study.

In response to questions from The Virginian-Pilot about its use of lawsuits to collect the debts it purchased, Portfolio said it resorted to legal action “only when a debtor has the ability to pay but refuses.”

The company relies on a handful of sources for collecting the debt it buys, including call centers in Norfolk and four other cities. Its employees typically contact borrowers by phone and letters before the company resorts to a lawsuit. For the nine months through September 2010, Portfolio’s legal collections generated $91.5 million, or almost a quarter of the company’s cash collections for the period.

One distinction between consumer lenders and debt buyers is the amount of information they have about specific accounts, such as a borrower’s payment history. Debt buyers typically obtain limited data when buying a pool of charged-off loans. In some instances, their contracts with card issuers and other creditors enable them to get additional information if needed.

But when a debt buyer isn’t able to gather sufficient documentation for a lawsuit, the company often relies on an affidavit from an employee who swears that he or she personally reviewed a debtor’s records and found them in order.

Portfolio defended the accuracy of its affidavits, the legal documents that attest to ownership of specific debts. At Portfolio, the affidavit process “includes verifying the account specifics through our internal records, as well as the records that have been supplied to us from the banks that have sold us the accounts and contractually warranted their accuracy,” the company said in an e-mail.

However, the documentation that some debt buyers provide in their court filings “is vapor-thin,” said Thomas B. Dickenson, a Norfolk lawyer who handles debt collections and personal bankruptcy cases. Some, he said, “will attach a printout of a computer screen.” With courts throughout the country flooded by collection-related lawsuits, judges and legislators aren’t waiting for the Fair Debt Collections Practice Act to be revamped.

Two years ago, Norfolk’s General District Court drew up a checklist of the documentation that debt buyers had to provide when seeking judgments against debtors. What prompted the court to act was that lawyers sometimes failed to accurately identify a debtor or the debtor’s original creditor, said Chief Judge Bruce Wilcox. With these lapses in documentation, he said, “You start to wonder, 'What is it they are relying on?’”

In addition, the fees and interest that some debt buyers were seeking seemed excessive and their calculations sometimes appeared to be out of line, Wilcox said. If there had been no activity in a debtor’s credit-card account for several years, “the interest may be significant and may be more than the original debt,” he noted.

At least one state has taken aggressive steps to change the collection process. North Carolina enacted a statute two years ago that imposed specific requirements for debt-buying firms filing collection-related law suits.

To bring a suit against an individual, the debt buyer must provide the individual with a written notice 30 days in advance. The notice must include details about the amount that the debt buyer claims to own, along with proof of its ownership. Debt buyers must also provide a breakdown of the charges and fees that they say they are owed.

However, the need for greater documentation added to debt buyers’ cost of doing business in North Carolina and reduced their ability to negotiate partial settlements with debtors, said Barbara Sinsley, general counsel for the debt-buying trade association DBA International. Some debt buyers seek court judgments against debtors more quickly than they would have under less stringent rules, she said.

Lawyers in North Carolina who handle consumer-debt issues respond that more rigorous documentation of debt buyers’ claims was needed.

“I’ve handled cases where people with a common name were sued over something that was not theirs,” said Suzanne Begnoche, a Chapel Hill, N.C., lawyer who specializes in consumer-debt issues.

Some debt buyers’ suits still lack adequate proof that individuals held the card accounts claimed, but the volume of suits being filed has fallen off sharply, she said.

Portfolio, which seeks to collect on debts from across the country, hasn’t abandoned its business in North Carolina. “We have met the additional requirements,” it said, “and yes, we continue to file law suits there.”

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com