Taking on the country’s
biggest debt buyer, Midland
Funding
By Danielle Douglas, Published: May 9 E-mail the writer
“One man’s stand against debt collectors”
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.
Graphic
Midland's pursuit of debt
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 Northern Virginia 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
with nearly 11,000 lawsuits as companies overwhelmed by delinquent accounts have sold
them for pennies on the dollar.
And it’s not just Northern Virginia. 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 therefore 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 also 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 recent 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.
The debt-buying business was born out of the savings and loan crisis, when the government
auctioned the assets of failed thrifts through the Resolution Trust Corp. Once those sales
died down in the mid-1990s, debt buyers turned their attention to consumer debt.
“We see more debt buyers now than we do original creditors,” said Lisa Mayne, a presiding
judge in Fairfax County. “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.”
Credit card debt is the most common type of defaulted debt they buy, but they also snap up
portfolios of student loans, medical debt, utility bills, tax liens, car loans and mortgages,
according to the Center for Responsible Lending.
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.”
Encore’s entire portfolio of debt is rather large considering that the company is made up of
several subsidiaries and recently acquired Asset Acceptance Capital — one of the largest
debt buyers in the country.
“The cost to collect through the legal channel is nearly five times higher than our cost to
collect through other channels,” Wright said. “There is very little incentive to litigate, unless
we truly feel it is the only option left.”
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 either 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 an
additional 9 percent, such as the Paz case. Only two people have ever 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 SandovalMoshenberg 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,” SandovalMoshenberg said. “He did owe something. Now he’s not going to have to pay it. It just shows
how messed up the system is.”
He added: “What we want ultimately is a situation when only the right people are being
sued, for only the right amount by only a party that legitimately bought the debt, and only
having the evidence to prove the debt. In terms of an efficient functioning of capitalism, that
is the system that we would want.”
Consumer lawyers have raised doubts about whether Midland employees review account
data before affirming its accuracy in sworn affidavits submitted to the court.
One Midland employee, Ivan Jimenez, testified in a 2009 civil lawsuit against the firm that
he signed 200 to 400 affidavits a day. He said that “very few” documents were checked for
accuracy, a claim that mirrors accusations of mortgage servicers “robo-signing” foreclosure
documents.
Midland tried to settle the lawsuit, which eventually won class-action status, for $5.2
million, but an appeals court rejected the deal last year because of the paltry sum each
borrower would have received: $17.38. In the wake of the Ohio case, Midland says it is more
judicious about the affidavit process.
“The Ohio litigation centered around processes that were in place in 2008, which were
substantially restructured after the court expressed concern,” Wright said. “We believe our
current processes are best in class, and that is the result of a constant focus on training,
quality and improvement.”
Not everyone agrees. Thirty-two state attorneys general filed a joint objection in the Ohio
settlement saying they are still seeing evidence of Midland robo-signing now.
“The exact wording in the affidavits have been changed, but they still falsely imply that
Midland had access to all of the records of the underlying account,” said Thomas
Domonoske, a lawyer at Legal Aid Justice Center in Charlottesville, Va. “Midland still
doesn’t buy all of the records.”
Judges across the country have tossed out thin-file lawsuits by the hundreds or imposed
limitations on how many cases can be filed in a day.
After being inundated with debt actions with scant documentation, a group of Fairfax
County judges banded together in 2008 to institute minimum standards for collectors.
The best practices call for, among other things, a statement from the original creditor
showing the balance and the terms of the account agreement. About a dozen courts
throughout Virginia have adopted the guidelines, but there is no uniformity across the state,
said lawyer R. Peyton Whitely of Legal Services of Northern Virginia.
“Short of these best practices or a judge-initiated procedure, Virginia statutory law does not
require debt buyers and other creditors to submit very much in support of default
judgement applications,” he said. “So we’re way behind Maryland and other jurisdictions
that have formally enacted such requirements.”
The collection trade group supports the CFPB’s effort to update the system but cautions
against rules that prohibit creditors or collection agencies from lawfully recovering debt.
“There is no one-size-fits-all solution for such a complex industry,” Schiffman said. Yet,
“One of the biggest problems facing the collection of consumer debt is the lack of national
standards for documentation. This has created confusion and frustration for all involved —
including consumers, collectors, creditors and judges.”
In November, the bureau issued a notice of proposed rulemaking to modernize the legal
framework governing debt collection. It is seeking public comment before formally
proposing anything, asking people whether they have received threatening calls at all hours
of the night or been dragged into court based on inaccurate information.
If the CFPB establishes federal standards for lawsuits, the bureau could face a fight from
states that don’t want national laws to supersede their statutes. Thomas Pahl, counsel in the
office of regulations of the CFPB, said the bureau is trying to work with states on the issue,
and in the meantime, working to support efforts to strengthen local laws.
Encore’s Wright said it is in the company’s interest to have a uniform standard for the
documents needed to collect. She noted that the company has told the CFPB as much in a
recent comment letter.
“We feel strongly that creating best practices and standardizations will provide all
consumers a more informed methodology when working to resolve outstanding debts,” she
said.
It would also level the playing field for debt collectors that play by the rules, said Legal Aid’s
Domonoske.
“These debt buyers file false affidavits, get judgements that wind up in garnishment,
robbing other collectors that follow the law from getting any of the money they’re owed,” he
said. “They’re really cheating the entire system.”
RogerRamjet2
5/10/2014 11:19 PM EDT
What are some of these debts Midland owns like? Providian Bank is a good example of the typical lenders, and this is
how it works for those that default.
A guy gets a credit card with an Account Agreement that charges him $137 to open the account the first time he uses
the card, and the card has a $250 credit limit. He then buys a $35 iron and a $45 coat at Walmart with the card. He
now owes $217 the next month, and when he doesn't pay the bill, he accrues an interest charge of $5 at 29%
interest. When he doesn't pay the next month, the card accrues a late charge of $35, $5 in interest, and an overdraft
fee of $35 a month, totaling $297. The following month, interest is $6, and the late fee is $35 and the overdraft fee is
again $35. A year and a half after the initial $80 purchase, the account shows a $1600 balance to Providian Bank.
Totally legal.
Providian then sells the debt to Midland for $0.17 on the dollar, or around $200, and gives the last statement the guy
received for $1600 as evidence of the debt. Glasser & Glasser in Norfolk is promptly retained to sue the guy for
$1600, with interest at 29%, and accrued interest since the default a year before totaling $500, while the Account
Agreement is invoked for a "33.3% reasonable attorney's fee, totaling $533" and court costs of $63.00. An affidavit
from Midland and Providian is generated, and a sheriff delivers the Warrant in Debt to the guy.
Total sued for? $2,693, but we will gladly settle for a lump sum of eighty cents on the dollar, or $2,154. For an iron
and a coat at Walmart. Or we will take a judgment and garnish 25% of your wages until paid, and in three years the
balance will double again at 29% interest.
How do I know this? I worked for Glasser as local counsel, and it worked in Fairfax, Winchester, Fredericksburg,
Roanoke, Virginia Beach and Richmond. I got paid $15 to say "Judgment on the Affidavit," and slowly sold my soul.