Legislation would make it easier for debt buyers to sue over old bills
Posted April 28, 2015
Raleigh, N.C. — With lawmakers looking at rolling back limits on companies that buy up and attempt to collect old debts, Chapel Hill lawyer Suzanne Begnoche is reminded of the case of two Elaine Johnsons.
Begnoche's client, Elaine A. Johnson, was being hassled by a debt buyer to pay $2,412.88, despite evidence that the debt in question may have been owed by someone named Elaine E. Johnson, a person with a different Social Security number.
If lawmakers act to loosen the requirements for debt buyers, Begnoche warned, anybody could find themselves fending off people trying to collect debt they don't owe.
"I would view her case as an example of what we're going to revert back to if those bills pass, where entirely innocent people are going to be faced with lawsuits over debts they don't owe," Begnoche said.
Lawyers who practice in the area of consumer finance law said that broad categories of cases – from mistaken identity to collectors trying for debts already paid off – will be back in the courts if either of two debt-buying bills pass the General Assembly this year.
Debt buyers and backers of the legislation, including the North Carolina Retail Merchants Association, the North Carolina Bankers Association, the National Federation of Independent Businesses and the North Carolina Chamber, said such cases of mistaken identity are outliers and that a 2009 law made it too hard to collect on old debts.
"You can't craft rules against the exceptions," said Sen. Michael Lee, R-New Hanover, the lead sponsor of Senate Bill 511 who said cases of mistaken identity are overblown.
Lee's bill has cleared the Senate Judiciary I Committee and will likely be heard on the floor Wednesday. Similar legislation, House Bill 541, is pending in the state House Banking Committee.
Business groups said their members need to be able to find a market for their old accounts that otherwise would be total losses.
"The ability of North Carolina businesses to manage their accounts receivable in a prudent way is critical to our members’ success," said Kate Catlin, a spokeswoman for the N.C. Chamber.
Among the opponents of the bill are the state Department of Justice, which has a division devoted to fielding consumer complaints. After the 2009 law went into effect, complaints about financial service companies dropped steeply, according to a department spokeswoman who pointed to examples of elderly consumers being pressured for debts in cases where they were clearly not the people responsible for them.
"We will run the risk of being back in the situation we were before," said Kevin Anderson, head of the DOJ's Consumer Protection Division.
Billions of dollars at stake
Credit card issuers, department stores and other businesses that extend credit all have debts that go uncollected. Unlike a mortgage issued by a bank, which is backed up by someone's house that can be sold to settle what is owed, most retail debt is unsecured.
At a certain point, either because of federal rules or business realities, the company that issues the debt charges it off, marking it as a financial lost cause. To recoup at least some of their money, the companies will sell off their bad debt for a percentage of what was originally owed.
That's when a debt buyer steps, purchasing the bad debt and taking over the chase.
A 2013 study by the Federal Trade Commission looked at companies making up three-quarters of the debt-buying industry and found they had portfolios with a face value – the amount originally owed – of $143 billion. The debt-buying companies paid $6.5 billion to acquire those accounts, roughly two-thirds of which was credit card debt.
Once debt buyers have an account, they try to track down the person who owed the money to get them to pay. Frequent phone calls, reports to credit reporting agencies and lawsuits are all part of the debt buyer's toolbox.
The Consumer Finance Protection Bureau is drafting rules to govern the industry, and state and federal regulators say actions by debt buyers figure frequently among top consumer complaints. In North Carolina, such complaints are among the lowest per capita in the country, something advocates chalk up to the 2009 law.
Encore Capital Group is a debt buyer that has hired a lobbyist to press for the bills. In response to a request for an interview with either a local representative or company executive, Encore issued a statement on behalf of Sheryl Wright, the company's senior vice present for government affairs.
"This legislation brings requirements for debt purchasers in North Carolina in line with what other states require and changes none of the existing protections for consumers against abusive debt collection practices," Wright wrote.
She pointed to a report by the Federal Reserve Bank of Philadelphia that she said suggests North Carolinians are paying higher rates for borrowing as a result of the 2009 credit-buying law.
Donald Redmond, vice president of government relations at Norfolk-based PRA Group, attended Tuesday's Senate Judiciary I Committee hearing. When asked about questions raised by advocates against the bill, Redmond said he needed permission from elsewhere in the company before answering reporters' questions. As of late afternoon, he had not returned an email seeking comment.
In general, the industry makes the case that North Carolina's 2009 law makes collecting on old debts too hard.
Under current rules, debt buyers that want to bring a lawsuit against someone in North Carolina have to have evidence that meets certain common standards, including having documentation that shows the debtor acknowledged the arrangement in writing.
Lee and Rep. Jeff Collins, R-Nash, argue that their bill actually increases consumer protections, particularly when it comes to older debt that companies are barred from suing to collect.
But the most controversial parts of both bills would loosen those standards for evidence, allowing companies to use charge-off statements that were not necessarily authenticated by the original issuer of the debt. Ellen Harnick, senior policy council with the Center for Responsible Lending and Self Help Credit Union, said the change in rules will make it cheaper for debt buyers to acquire and pursue a debt.
Nathan Batts, general counsel with the Bankers Association, said allowing use of the charge-off statements would bring North Carolina into line with other states. As well, he said, the costs involved in dealing with North Carolina's law means that debt buyers pay less when they purchase old debt from banks and retailers.
"The debt-buyer industry has expressed concern that current state law presents significant challenges when seeking to enforce the debt or negotiate with a borrower. As a result, the purchase price of these loans is further reduced," Batts said.
But in committee, Harnick argued that making things easier for debt buyers makes things harder on debtors and innocent parties alike.
"This shifts the burden of proof from the party bringing the lawsuit to the person being sued," she told senators.
Lee responded angrily to that claim, calling it "incredibly misleading," and adding, "There's no burden-shifting going on in a legal sense."
Lawyers who work in this field say there's a difference between "legal sense" and everyday practice.
Relying on default judgments
Glenn Barfield, a Goldsboro lawyer, helped draft the 2009 law after helping clients defend a number of lawsuits.
At the time, he said, lawyers for debt buyers would file suit through the mail. Often enough, he said, people would get the service, figure the suit was bogus and ignore it. Others simply couldn't wrangle the time off from work or the money to pay a lawyer in order to respond. Either action allowed the debt buyers to file for default judgment, again through the mail. That judgment is a legal order telling someone to pay their debt.
The debt buyer, Barfield said, could then wait until someone wanted to buy a house or a car and suddenly found a black mark on their credit score.
He said that, when he began defending the cases, they were often dismissed by the debt buyers.
"The business model did not work if they went to court," he said.
In essence, advocates against the bill complain, debt buyers took advantage of weak rules of evidence to blanket the courts with lawsuits that left defendants confused.
"When you take shortcuts in the court system, you increase the odds that people will be treated unfairly," the DOJ's Anderson said.
On occasions when Barfield's' clients could counter-sue, he said, it was not uncommon to win settlements from the company. But often in such cases, it was impossible for either side to produce records on old debts to definitively showed who owed what.
"We're going to be worse off than we were in 2009," Barfield said of the debt-buying bills, which allow the debt buyers to simply present a charge-off statement.
Lee said that people or their lawyers will still be able to ask the debt buyers to provide the backup for those charge-off statements.
"The debtor just simply has to come to court and respond to it," Lee said.
Sen. Gladys Robinson, D-Guilford, said that people in her district are often intimidated by the legal system and don't know basic things such as the fact that they can come to court on their own without a lawyer.
"We have a lot of folks in North Carolina that are illiterate about these financial practices," Robinson said.
"If they don't know to respond when they get things in the mail, I don't know how to craft this legislation to protect folks," Lee said.
Others argued that people who move may miss a mailing and that debt buyers' interest is in charging someone, even if they only guess that they have found the right person.
"It certainly can happen to anybody," Begnoche said, adding that people with common names are more susceptible.