February 8th, 2012
by Guest Author Shah Gilani, Money Morning
What may be good news for delinquent credit card holders may also be really bad news for banks. Follow up:
It turns out the "robo-signing" of foreclosure affidavits is just the tip of the iceberg.
In what one judge called "robo-testimony," falsely attested-to statements by bank document custodians have been submitted in courts around the country by banks trying to win judgments against delinquent credit card debtors.
Apparently, tens of millions of credit cards issued by banks have not been accompanied by good recordkeeping, either.
Chasing down delinquent borrowers in court requires original credit agreements and accurate payment histories to verify outstanding balances and claims.
As it turns out, banks aren't providing them - either to the courts or to third-party debt collection companies that buy uncollected debts for pennies on the dollar.
As a result of these shoddy practices, judgments already granted to banks could be overturned and they could be sued by state attorney generals or pursued by the Consumer Financial Protection Bureau.
The same banks could even be potentially charged by the Justice Department under the Racketeer Influenced and Corrupt Organizations (RICO) Statutes for selling dubiously documented accounts to debt collection companies.
While some debtors will take comfort in what they read here, investors in banks may want to question how legal issues and regulatory investigations will impact their stocks.
Questionable bank documentation submitted to courts may be the reason JPMorgan Chase & Co. (NYSE: JPM) abruptly abandoned over 1,000 debt collection lawsuits in April 2011.
However, debtors whose pending cases were dismissed aren't out of the woods yet. All of Chases' suits were dismissed "without prejudice," meaning Chase can re-file the cases in the future.
A Debt Collector's Dirty Trick
The only relief long-delinquent borrowers have is the statute of limitations imposed by most states on debt collection.
Statutes of limitation, which are typically between two and 15 years, are by themselves no guarantee that debt collection agencies, which buy accounts from banks, won't try to still collect.
Some debt collection companies entice delinquent borrowers who are beyond their statute of limitation requirements to make payments by offering to reduce the whole amount owed.
Their aim is to get the borrower to make even a single payment. It's an old trick.
By paying anything on a debt that is past the statute of limitations, the debt is brought back to life again and the statute of limitations clock starts all over from the date of the new payment.
It's why debtors are browbeaten and enticed to make payments through mailings, harassing calls, and "transfer of balance" offers for new credit cards, which requires old debts to be rolled into the new credit agreement.
The industry term for restarting the clock on old debts is called "re-aging."
The Federal Trade Commission's Bureau of Consumer Protection calls it illegal and abusive.
Last month the FTC and the Justice Department settled with one of the country's biggest debt collection companies in a case with repercussions for the entire debt collection industry.
Asset Acceptance Capital Corp., which the FTC had charged with violations of federal law - including that it "failed to tell debtors they couldn't be sued" when they tricked them into making payments to "re-age" old debts - was fined $2.5 million without admitting or denying wrongdoing.
I contacted Erik Kardatzke of the Coral Gables, FL, law firm Debt Defense, P.L., a prominent debtor-rights defense attorney who was quoted in a June 2011 Wall Street Journal article about Chase's dismissed suits, to ask about new pending lawsuits.
"I don't see any pending suits by JPMorgan Chase or any of the attorneys or law firms that usually work for them," he said. "I mean, not a single one. This is highly unusual."
Kardatzke is a former debt collection attorney who became disillusioned with the practices of credit card companies and debt collectors preying on consumers.
"I would see victims of predatory lending who would charge $300 on a credit card, and be sued for $3,000 four years later based upon late charges, over the limit fees and 30% interest. I noticed that there was rarely an attorney defending consumers and decided to fill that need," he told me.
The FTC, upon fining Asset Acceptance, announced additional enforcement actions are pending.
They are now joined by the Consumer Financial Protection Bureau, which has the authority to go after banks for abusive collection tactics.
Another Headache for Bank Stocks
All this attention on banks' credit card collection efforts isn't going to help their revenues and earnings.
Not only could credit card borrowers stop paying if they don't believe banks have proper documentation to go after them, but debt collection companies could sue banks for knowingly providing them inadequate or falsified debtor information when they bought uncollected accounts.
The big banks haven't been able to settle charges over their robo-signing of foreclosure documents, which by some estimates could amount to over $25 billion in fines and consumer remuneration in some form or another.
Now, with charges of illegal robo-testimony being used to win court judgments in credit card collection cases, the banks now face another huge legal battle with potentially enormous bottom line consequences.
Robo-signing is just the beginning for the banks.
Related Articles at Money Morning
Related Articles at Global Economic Intersection
Investing Blog articles by Shah Gilani