How a regulatory pact with major debt collectors should ease debtors' legal hassles

WASHINGTON – Charice Goude knew she had to pay back her overdue credit card bill. She just did not want to pay it back twice.

But when the Brooklyn Center woman asked Portfolio Recovery Associates, the nation's second-largest debt collector, to provide proof of what she owed and why she owed it, Goude got back indecipherable documents or no information at all.

She could not afford a lawyer, but did get some advice from Minneapolis consumer rights attorney Patrick Helwig. Yet when she showed up in court, Goude said the judge cut off her presentation and urged her to settle.

Goude refused, but Portfolio eventually got a $4,113.12 judgment against her for a $3,208.74 debt that her records show was paid off years before.

"I feel like the court system is in cahoots with these people," Goude said.

A recent settlement between the U.S. Consumer Finance Protection Bureau (CFPB) and Portfolio and Encore Capital Group Inc., the country's biggest debt collector, is supposed to change that.

According to a September consent order, Encore and Portfolio can no longer file suits until they "provide consumers with information about the debt, such as the name of the creditor and charge-off balance [and] offer [consumers] access to original documents relating to the account," CFPB director Richard Cordray said in a speech last month.

In addition to tens of millions of dollars in refunds to consumers and penalties paid to the government, giving specific information to consumers before suing them is just one of a long list of court-mandated restrictions that the CFPB has placed on the two debt collection giants. The government agency hopes the sanctions cause the rest of the industry to follow suit.

Portfolio, known as PRA, and Encore, which includes St. Paul-based subsidiary Midland Credit Management, can no longer:

• Sell the debts they buy to other debt collectors.

• Collect debts they know are inaccurate or cannot be legally enforced.

• Mass produce lawsuits using misleading documents and robo-signed court filings.

Both companies denied that they did anything illegal.

"Encore maintains that it acted in accordance with all relevant laws," Encore said in a news release. "When the CFPB provided a different interpretation, Encore, in keeping with its industry leadership in consumer-centric approaches, chose voluntarily to change its practices, although not agreeing with the CFPB's position."

In a news release, Steve Fredrickson, the CEO of PRA's parent company, said "it was time to end this drawn out process and eliminate the threat of litigation, so we can focus with renewed vigor on serving our customers and growing our business. Given the circumstances, we went the extra mile to achieve closure, despite our objection to the CFPB's characterization of PRA's business practices."

Cordray strongly criticized the companies' practices in his speech.

"Encore and PRA collected debt by suing large numbers of consumers in state courts across the country, knowing they would win the vast majority of the lawsuits by default when consumers failed to defend themselves," Cordray said in his speech.

Goude can attest to that. On her day in debt collection court, "none of the debtors were there except me," she said. "Each time another case was called, the attorney for the debt collector went up, asked for a summary judgment because the debtor was not there and got it."

When people don't have the money to pay their debts, said Herwig, "the problem becomes having the money to pay to defend yourself in court."

Goude's debt problems stemmed from being laid off during the 2009 recession, but the judgment continues to haunt her credit rating even though she is working again.

If Portfolio's case against Goude had been brought today, Herwig says it would violate the new CFPB court order in at least four ways.

Portfolio "did not respond at all to Charice's discovery requests after she disputed the debt," Herwig said. The company "did not provide a chronological listing of all prior owners of the debt and the date of each transfer." Nor did it "have any document signed by Charice" when she opened her credit card account. Finally, Portfolio did not describe how it calculated the amount Goude owed.

PRA did not respond to a request for comment on Goude's case.

Minneapolis consumer lawyer Pete Barry has complained for decades about these kinds of tactics by debt collectors. Banks and credit card companies write uncollected debt off their books because they know it is worthless. Then, they sell it for pennies on the dollar to debt collectors like Encore and Portfolio that, Barry charged, game the judicial system to get judgments they don't deserve.

"It's about time the federal government got around to doing something," Barry said. When companies "are allowed to act like scofflaws, it undermines not only consumer rights, but the American economy."

Despite fanfare surrounding the recent CFPB settlement with Encore and Portfolio, Barry said the punishment may still not fit the crimes.

The settlement demands that Encore refund $42 million to consumers. Portfolio must refund $19 million. Encore must stop collecting $125 million in invalid claims. Portfolio must stop collecting on $3 million. Encore must pay the government a $10 million penalty. Portfolio's penalty is $8 million.

In comparison, CFPB says Encore and Portfolio have bought up $200 billion "in defaulted consumer debts on credit cards, phone bills and other accounts."

If the companies have acquired the right to collect $200 billion in debt for pennies on the dollar, Barry said, they are hardly being penalized and the penalties they face could be met with write-offs or credits that actually cost them nothing out-of-pocket.

"If the government has not properly defined how the money is to be distributed, it will never be distributed," Barry maintained.

As for Goude, she wishes the bank that held her credit card had told her it was selling the debt to a collector and that the debt collector had answered her questions.

"I think there should be a system in place that they formally tell you what the process is," she said. "They need to be very specific about their intent."

And of course, she understands the financial plan that, while often unachievable in the current American economy, should be applied as much as possible.

"Don't borrow," she said. "Pay cash."

Jim Spencer • 202-383-6123