Car Dealers Must Disclose Reliance on Negative Credit History to Raise Car Loan Interest Rate

On May 31, 2012, the U.S. District Court for the District of Columbia held that the Fair Credit Reporting Act requires a car dealer to disclose to a car buyer that negative credit history resulted in a higher interest rate on the buyer's car loan - even if the dealer was not the one that reviewed the credit history because only a bank or finance company did so.  The case is National Automobile Dealers Association v. Federal Trade Commission, Civ. A. No. 11-1171 (ESH). 

The National Automobile Dealers Association (NADA) filed the case to challenge the Federal Trade Commission's rule that required such disclosures.  The Fair Credit Reporting Act has long required creditors to notify consumers of "adverse actions" taken based on information in a credit report, such as when credit is denied.  In 2003, Congress amended the FCRA to additionally require users of credit reports to provide a "risk based pricing notice" when negative credit history results in a higher interest rate.  Reasoning that because the dealer is who the buyer directly interacts, the FTC, charged with interpreting the FRCA, held that a car dealer is a "user" of credit reports that must provide this notice.  

NADA sued seeking to have this rule overturned, arguing that a car dealer is not actually a "user" of the credit report if it is a bank or finance company that actually determines the higher interest rate.  To understand the context of NADA's position, one must consider how the typical car financing works.  Dealers selling cars on credit are lenders, and so subject to laws such as the Truth in Lending Act that impose disclosure and other obligations on creditors.  Dealers thus prepare contracts setting forth the loan interest rate, and execute such contracts as lenders as part of the car sale.  Dealers generally then assign the car loan to a bank or finance company immediately after selling the car.  NADA argued that when the bank or finance company reviews a credit report and communicates to the dealer, which in turn inserts the higher interest rate into the contract, the dealer is not a "user" of the credit report.  The FTC rejected that position, and the federal court upheld the FTC's interpretation as reasonable.

NADA's position appears somewhat bold.  Car dealers have long had a hard time accepting the fact that when they sell cars on credit, they are creditors.  Thus one still occasionally sees outright TILA violations where the dealer doesn't even disclose a finance charge or interest rate.  In the "risk based pricing notice" scenario, even if the dealer didn't look directly at the buyer's credit report, it executed a contract containing the interest rate and so relied on the report one way or the other.  The scenario in which NADA's position actually would make sense would be one where the dealer inserts an interest rate and only later contacts a bank or finance company which then pulls the report.  In that situation, one often finds that the dealer can't unload the paper because the bank or finance company demands a higher rate.  The law's response to that situation is to say, too bad so sad.  The dealer made a bad loan and is stuck with it.  But practically, this is where one sees the classic "auto fraud" fact patterns, the "yo-yo sale" and "spot sale."  The dealer prepares new contracts with the higher rate and talks the buyer into signing them, threatening to take the car back if not.  Don't do it!  This is fraud, deception, and an outright TILA violation - an expensive one for the dealer because damages under TILA are double the total finance charge over the course of the loan, which could be tens of thousands of dollars.  


My firm handles lawsuits addressing car dealer or lender misconduct.  If you have been the victim of any fraud or abuse  by a car dealer or lender, contact us to discuss your options.

Telephone Consumer Protection Act: The Federal Courts Giveth and They Taketh Away

Two federal courts recently issued decisions in cases construing the Telephone Consumer Protection Act (TCPA), 47 U.S.C. 227.  The more important decision, out of the Seventh Circuit and written by Judge Easterbrook, held that a consumer's consent to be contacted at a cell phone number by an autodialer or pre-recorded voice does not authorize such calls to be made to individuals other than the consumer, such as if the phone number has subsequently been assigned to a different individual than originally made such consent.  Therefore, individuals who have no relationship with a creditor and who innocently receive misdirected collection calls may sue and recover potentially very large sums of money to compensate them for the inconvenience such calls create.  The other decision, from the Eastern District of Pennsylvania, addresses what happens if the person being called actually did have a relationship with the creditor.  The court there held that a consumer who has consented to be called may not thereafter revoke that consent.  Although this is not a very consumer-friendly decision, consumers make take some solace in the fact that the bulk of other federal court decisions disagree, and hold such revocation effective.

The TCPA generally prohibits the making of a call with an automatic dialer or pre-recorded voice to any phone number unless there is an emergency purpose or the caller has the prior express consent of the "called party."  47 U.S.C. 227(b)(1).  The TCPA provides that for each violation (i.e. each call) the aggrieved consumer is entitled to a least $500 damages, and this is to be increased to $1500 per call if the violations are willful.  The FCC has opined since 2008 that a consumer's provision of a phone number to a creditor in a credit application or otherwise constitutes such "express consent."  These two recent cases address wrinkles in the operation of this "express consent" exception.

In the Seventh Circuit decision, Soppet v. Enhanced Recovery Company, LLC, No. 11-3819 (decision dated May 11, 2012), AT&T hired the defendant debt collector to collect a phone bill.  The debt collector used a predictive dialer to call a cellular number, at which its customer had consented to be called in his or her contract with AT&T.  However, the phone number had since been assigned to an unrelated individual, the plaintiff.  The lower court held that the "called party" whose consent must be obtained before autodialed calls may be placed is the party who is actually called, i.e., the current subscriber to the phone number.  The calls here were thus violations of the TCPA.

The Seventh Circuit affirmed, and in doing so, rejected the various statutory construction arguments put forward by the debt collector.  In effect, the collector argued that the court should not read the statute as Congress wrote it, because this would make it too hard to collect debts.  The court noted that it was conceded that the TCPA would be violated if the original customer had provided a false telephone number - whether on purpose or by mistake.  Similarly, were the collector to dial an erroneous number by mistake, it seems clear the TCPA would be violated.

Many people have had the experience of receiving collection or other annoying and potentially expensive autodialed calls directed to a former subscriber to their cellular telephone number.  Under Soppet it is clear that a remedy may be had for such annoyance and expense.  In a lawsuit against the caller, the TCPA makes available substantial minimum damages.

While the Seventh Circuit clarified the broad scope of TCPA liability in Soppet, the Eastern District of Pennsylvania meanwhile issued a particularly narrow decision in Gager v. Dell Financial Services, LLC, No. 3:11-cv-2115 (Mariani, J) (filed May 29, 2012).  

In Gager, the court addressed whether a consumer who has given express consent to be called at a cellular number may revoke that consent.  Numerous courts have held that the consumer can do so, differing only over how - orally or in writing.  Many courts addressing TCPA claims brought in conjunction with claims against debt collectors under the Fair Debt Collection Practices Act have held that because the FDCPA imposes liability for violation of requests to "cease and desist" contact only where those requests are written, withdrawals of consent to receive collection calls must also be in writing.  Starkey v. Firstsource Advantage, LLC, 2010 WL 2541756 (W.D.N.Y. 2010); Cunningham v. Credit Mgmt., L.P., 2010 WL 3791104 (N.D. Tex. 2010); Moore v. Firstsource Advantage, LLC, 2011 WL 4345703 (W.D.N.Y. 2011); Moltz v. Firstsource Advantage, LLC, 2011 WL 3360010 (W.D.N.Y. 2011).

Other courts have rejected this position, holding - sensibly - that one's interpretation of the TCPA should not vary depending on whether the defendant is a debt collector.  The TCPA either allows oral withdrawal of consent or it doesn't.  If it allows withdrawal of consent, nothing in the TCPA suggests it has to be in writing.  Adamcik v. Credit Control Services, Inc., 2011 WL 6793976 (W.D. Tex. 2011) (so holding in case also involving FDCPA claims); Gutierrez v. Barclays Group, 2011 WL 579238 (S.D. Cal. 2011) (so holding in creditor case without FDCPA claims). 

Decisions finding that consent may be revoked - by whatever means - have generally relied on a 1992 FCC order that stated that a customer's release of his or her phone number constitutes authorization to call only "absent instructions to the contrary."  7 FCC Rcd. 8752, 8769 (1992). 

The court in Gager disagreed with both sets of decisions, and held that express consent, once given, cannot be revoked at all, by any means.  In doing so, the court read the 1992 FCC order as referring to instructions to the contrary given at the same time the phone number is provided.  The court acknowledged that consent may be revokable where debt collectors are concerned, because the FDCPA expressly allows a written cease-and-desist request; thus, the court's logic apparently will not apply to TCPA suits against debt collectors.  However, because a creditor, and not a debt collector, was at issue, the court held that consent was irrevokable.

Whatever may be the merit of this reading of the 1992 order, the order certainly doesn't say that consent, once given, is irrevokable, and such an interpretation seems inconsistent with the very idea of consent and so appears an unnaturally strict construction of the statute itself, particularly where the statute being construed is one that Congress intended to protect consumers from having undesired costs and inconvenience imposed on them by undesired cellphone contacts.  The most natural reading of the TCPA "express consent" language seems to be that once a consumer communicates expressly a lack of consent, there is no longer express consent to receive calls.  If the 1992 order clarifies anything, it is that the mere fact of the creditor having the consumer's phone number, alone, cannot be treated as consent where the creditor knows otherwise.  If consent was to be irrevokable, one would expect that to be noted in the statute.

As noted, the Gager court itself distinguished cases against debt collectors.  Thus, consumers receiving autodialed calls or calls with a pre-recorded voice from debt collectors who have sent a written cease-and-desist request may still be able to obtain substantial minimum damages as compensation.  To the extent non-debt collectors are making the calls, the bulk of extant authority continues to hold consent revocable, and so consumers aggrieved by such calls from a business they have had some relationship with will still find it advisable to communicate, ideally in writing, a revocation of their consent to such calls.

My firm handles TCPA claims against debt collectors, creditors, or other abusive companies.  If you have received such calls, contact us.

Credit-Card Plaintiffs Are Often Unable or Unwilling to Prove Their Debt Collection Case at Trial

Recent experiences around the country suggest that even original creditors, such as credit-card companies, are unable or unwilling to go to trial and actually prove their cases.

In Florida, Chase Bank actually went to trial on a case in September 2011 in which it sought about $15,000 on a consumer credit card.  The consumer had a substantial defense in that she had opened the account as a zero-interest account, and Chase later raised the interest rate, allegedly without notice to her.  The consumer won the case at trial.  

As is common, the Bank called the consumer as its first witness and attempted to prove up its case through her.  While this is common, creditors often will neglect to actually ensure the consumer's presence by serving a trial subpoena.  The collection attorney's intention in doing this is to bully the consumer into admitting she received the account statements in the mail.  In this particular case, Chase attempted to do so with account statements that were such obvious frauds that the tactic seems to have monumentally backfired.  The consumer ultimately testified that she calculated the amount she actually owed as about $80. 

As I have discussed before, the use of obviously fraudulent account statements in debt collection lawsuits is common.  The fraudulent nature of the statements is often detectable when, for example, the consumer has moved to a new address during the life of the account, yet the statements attached to creditor motions or introduced at trial bear the current mailing address even when they pre-date the address by years.  In this particular Chase case, the Bank did exactly that, submitting statements that had an address that was a vacant lot as of the time of the statements.  However, they also apparently submitted some statements that contained a fictional address (1234 Main Street, Anytown, USA 00000).  This was unusually sloppy, but in principle, par for the course. 

In the Florida case, the consumer was, of course, all too willing to testify, because she strongly believed in her defense.  Having given the Bank nothing it could use, the Bank called its putative document custodian as its only other witness.  As is to be expected, the witness - unable to identify her own employer - acknowledged that Chase's records were all computerized, and admitted to having absolutely no knowledge whatsoever of how that computer system worked.  She was thus incapable of authenticating Chase's documents.  Ultimately the court entered judgment against the consumer for the $80 she admitted she owed.

I have previously written about the recent revelations about Chase Bank's credit card records, which an internal audit revealed to have numerous errors, apparently due to the keeping of separate databases for active as opposed to defaulted accounts, and an error-prone method to transfer data from one to the other.  Although the kind of whistleblowing that brought the Chase revelations to light has not happened with other banks, there is every reason to believe that unreliable record-keeping plagues the industry.  In a follow-up article after its piece about the Chase revelations, American Banker magazine discussed indirect evidence that other banks' account information is riven with errors.  According to American Banker, when Bank of America sells its credit card accounts to debt buyers, it expressly represents that it does not possess original account documents, and will not guarantee accuracy of the information at all.  US Bancorp will apparently guarantee accuracy to within 10% of the asserted account balance, but no better. 

Just this last April American Express went to trial in a case in Kings County Civil Court in which it sought to collect about $16,000.  The case is American Express Bank v. Tancredo, CV-24043-11/KI, NYLJ 1202551841663, at *1, 3 (N.Y.C. Civ. Ct. Kings County Apr. 27, 2012).  Here, the defendant had no attorney.  However, judges of the New York City Civil Court have in recent years been conscientious about ensuring that pro se defendants are not run roughshod over by represented creditors.  Here, American Express started its case with a putative document custodian that sought to introduce account statements and a cardmember agreement through formulaic recitation of no more than the elements of the business records rule exception to the hearsay rule.  The custodian did not identify the entity that issued the credit card.  AmEx called the consumer as a witness, and she indicated she did not know which American Express company issued her card.  In an opinion published in the New York Law Journal, Judge Dear, describing this as "robo-testimony," found it insufficient to establish that the documents were admissible as business records.  In particular, the witness described no office policy at American Express with respect to mailing account statements or cardmember agreements that would suggest these documents were actually mailed to the defendant.  Judge Dear dismissed AmEx's case.  

Notwithstanding that they do not actually want a trial and are not capable of winning at trial, some collection law firms in New York have begun to routinely serve a "notice of trial" early in the case, sometimes doing so improperly while discovery is still pending.  The logic of doing so against a self-represented consumer is plain.  If the consumer misses the court appearance, the creditor may obtain a default judgment.  If not, the consumer will likely be pressured by the judge and creditor attorney to settle the case for a payment plan on 100% of the claimed balance, notwithstanding that the balance may, for numerous reasons unknown to the consumer, be something that, in whole or in part, is not owed.  The logic of serving such a thing on a represented consumer's attorney, however, is mysterious.  It seems to be the product of nothing more than a mindless collection-firm bureaucracy that has decided to serve the same papers in every case.

To illustrate, I recently appeared for trial in a $3800 Citibank case.  Although the trial had been scheduled months in advance and I had served motions in limine seeking to exclude all of its evidence, Citibank did not send, or plan to make available, any witness, nor did it serve a trial subpoena to secure the consumer's attendance; and Citibank sent a local attorney to cover the trial who had no knowledge of the case and no documents to use as exhibits.  Citibank's strategy in its entirety was to have the case adjourned through a request made on the day of trial - not something that made the Judge happy.  Having been given the rest of the day to arrange a witness, Citibank ultimately offered to settle that account and a much larger account not at issue in the case for a small and affordable payment plan.  Although I was looking forward to voir dire-ing Citibank's witness, in the event that it procured one, my client was happy with the result.  

Past success does not guarantee success in any future matter.  Do, however, contact me should you have a debt case in need of defending.

Tenth Circuit Issues Justiciability Decision in FCRA Pre-Emption Case

On May 7, 2012, the Tenth Circuit Court of Appeals issued a decision reversing the District of New Mexico in a case involving federal pre-emption of a New Mexico state law addressing identity theft.  Consumer Data Industry Association v. King, No. 11-2085.  

Congress amended the federal Fair Credit Reporting Act in 2003 to add protections specifically addressing identity theft.  These new provisions made it much easier for a consumer to remove information from a credit report where the consumer's dispute is grounded in identity theft as opposed to, say, a merchant dispute.  Under narrow circumstances, the credit bureaus may keep information in a report notwithstanding the consumer's request, if they conclude the consumer's request is fraudulent or mistaken.  Because this exception threatens to absorb the rule, the New Mexico Legislature passed that state's Fair Credit Reporting and Identity Security Act in 2010, requiring that credit bureaus keep such information removed unless a court, or the consumer him- or her-self, concludes that the request was fraudulent or mistaken.  Although well-meaning, such a provision is likely to be held pre-empted by the federal FCRA provisions.  In the event of a violation of this requirement by the bureaus, the New Mexico law permits any aggrieved consumer, or the state Attorney General, to sue to enforce its provisions.

In this case, a credit bureau industry association sued the New Mexico Attorney General to enjoin enforcement of the New Mexico law.  The district court dismissed the case, holding it not justiciable under Article III of the U.S. Constitution.

To be justiciable under Article III, the suit must address a real injury, caused by the defendant, which the court is capable of redressing by ordering some relief.  The district court held, essentially, that because the law permits any aggrieved consumer to sue the bureaus, an injunction directed only at the New Mexico Attorney General would not redress the bureaus' threatened injury of being sued.

The Tenth Circuit, unsurprisingly, reversed, essentially holding that an order at the Attorney General would redress some injury, and so satisfies Article III requirements, which the district court read too stringently.  In effect, the court held that Article III does not make the perfect the enemy of the good.  Here, the injunction sought was "good enough" to satisfy Article III justiciability.

As a practical matter, it seems unlikely that the credit bureaus will be deluged by consumer suits under the New Mexico law.  The district court on remand will likely hold the law pre-empted and enjoin enforcement, and such a decision is likely to be followed by state courts; the very prospect should deter many consumers from filing such suits.  

This is a shame.  New Mexico is in a perfect position to act as a "laboratory of democracy" testing an alternative approach to identity-theft protection that may better serve consumers than the current federal regime, which New Mexico citizens obviously felt granted too much unsupervised discretion to the credit bureaus.  Citizens there and elsewhere may still lobby Congress to similarly amend the FCRA - or to amend the FCRA to permit states to adopt stronger identity-theft protections.

Broaden Credit Protections for Military Personnel

Four Democratic Senators and the Delaware Attorney General recently proposed a bill that would amend the Servicemembers Civil Relief Act (SCRA) to provide broader protections against abusive creditor conduct.  The bill was covered recently by American Banker magazine. 

The SCRA provides general protections to active-duty military personnel against unconscionably high interest rates in loans.  It also allows for the activated personnel to cancel residential leases and pause payments on a mortgage, and provides for debt-collection (and other) lawsuits, such as mortgage foreclosures, to be stayed while servicemembers are activated,and prohibits default judgments from being entered in such suits, so as to prevent the unfairness of making servicemembers litigate while otherwise engaged, often abroad or in a war zone.

The proposed bill, S. 3179, entitled the Servicemembers Housing Protection Act, would extend the SCRA's protections concerning leases and mortgage foreclosures to a broader array of activated personnel, and to deceased servicemembers' surviving spouses For the time being, the bill has been referred to the Senate Veteran's Affairs Committee.

It is about time the SCRA was strengthened, but the proposals are certainly not enough.  Private military contractors employed abroad in providing services to the military are in an equally unfair and untenable position in the event they are sued in a U.S. court, and should be equally able to invoke the SCRA's provisions concerning lawsuit stays as proper military personnel.  Spouses should be protected before the death of the servicemember.  

Finally, the weakest provision of the SCRA concerns the interest-rate cap.  For loans entered into before active-duty service began, the applicable interest rate is reduced to 6%.  This is one of the only federal caps on interest rates - generally the National Bank Act and Federal Deposit Insurance Act permit national banks and FDIC-insured banks to charge any rate of interest permitted in their home state, which allows banks to organize entities in states such as South Dakota and Nevada that have no usury limit through which they can make credit-card and other loans at unconscionably high interest rates.  

However, the SCRA limit is very narrow, and the SCRA permits predatory lenders to take unfair advantage of active-duty personnel by lending to them at unconscionable interest rates so long as the loan is executed during active military service.  

Congress did take some action in 2006 to address this situation, passing amendments to the 2007 Defense Authorization Act that cap interest rates on loans to military personnel at 36% and also prohibit certain payday lending transactions.  The provisions are summarized by the Center for Responsible Lending.   However, 36% is an absurdly high limit.  A financially marginal consumer with a substantial loan at 25% will often repay the loan multiple times over in interest payments over a period of years without ever reducing principal before finally defaulting as the result of an unexpected medical expense or loss of income. 

Some opponents of usury caps for servicemember loans argue that these will lead to tighter credit for servicemembers.  Allowing impoverished borrowers to further impoverish themselves by taking unsustainable loans that enrich unscrupulous lenders while preventing them from accumulating savings and ultimately ruining their credit is no good answer to this quandary.  Increased pay together with a federal low-interest lending program would present a far better solution.

Unifund v. Youngman - Fourth Department's Significant Decision Will Stand in Debt Case

The Court of Appeals recently denied leave to review the Fourth Department's decision in Unifund CCR Partners v. Youngman, 89 A.D.3d 1377, 932 N.Y.S.2d 609 (4th Dep’t Nov. 10. 2011), lv. denied, 2012 N.Y. Slip Op. 72420.

In Unifund, the Fourth Department picked up where it left off in Palisades Collection, LLC v. Kedik, 67 A.D.3d 1329, 1331, 890 N.Y.S.2d 230, 231 (4th Dep’t 2009), holding debt buyers seeking to collect alleged debts strictly to the usual rules of evidence and procedure and rejecting motions for summary judgment that grossly fail to comply with those usual rules.

To paraphrase Jerry Jarzombek, the legendary Texas debt defense lawyer (he's lost something like six out of 4,000 cases or some such ridiculous number) (who I often paraphrase to this effect), the fact affidavit in the usual debt buyer case is essentially as though the plaintiff in a car accident case was to submit a witness affidavit that says "I wasn't there, and I didn't see the accident, but I did read about it, and that guy ran the red light."  Specifically, the debt buyer typically says: (1) although I have no assignment agreement that mentions this account, I do have these documents on Citibank letterhead with this account number on them, and how would I have those if I didn't own the account; (2) I can attest to the fact that these records came from Citibank and ended up in our records; (3) I've never worked for Citibank and know nothing about its records (I wasn't there and didn't see the accident), but these are records that Citibank created in the ordinary course of business at or about the time of the events recorded and maintained and reproduced in a reliable manner (that guy ran the red light).

In Kedik, the debt buyer actually did a bit better than the above, submitting a spreadsheet purportedly listing the assigned account, but its affiant failed adequately to explain where the spreadsheet came from and so failed to show that the spreadsheet was admissible under the business records exception to the hearsay rule.  Unifund takes the logical step of applying the principles of evidence that Kedik applied to proof of assignment to all the putative evidence submitted with such a motion for summary judgment, in particular, account statements.  An employee of Unifund does not have personal knowedge of Chase's records, so cannot authenticate them.  Only someone from Chase could authenticate them.

Even more significantly, the Fourth Department ordered that the defendant's cross-motion for summary judgment be granted and the complaint dismissed.  A debt buyer at least in the Fourth Department will face loss of its case if it makes a motion for summary judgment that inadequately proves standing or inadequately authenticates creditor records.

Lower courts in many places hesitate to treat debt collection suits as real lawsuits to which the usual rules of evidence and procedure apply.  There is often an assumption that the defendant owes the plaintiff money unless a defense of some kind can be marshaled.  See John Skiba's blog post, Are Judges Biased Against Consumers?  One hopes that Unifund helps change the culture in this respect.

The next step for the Fourth Department should be to address original creditors' evidentiary failings.  With routine use of robo-signers original creditors' records affidavits are no more compliant with personal-knowledge requirements than debt buyers', and never make the required threshold showings required under the business records exception in more than utterly conclusory, and thus inadequate, terms.  

Discover Bank Record Falsification Basis for Civil RICO Act Claims

A law firm in Pennsylvania recently filed a RICO class action against Discover Bank alleging systematic, nationwide litigation fraud through the use of falsified documents.  http://www.courthousenews.com/2012/03/14/44677.htm.

The specific conduct alleged in the lawsuit actually seems to occur in the bulk of credit-card lawsuits brought by every original creditor.  In any jurisdiction, to get a judgment in such a case, at some point the creditor must provide a copy of a putative cardmember agreement.  In almost every case, the creditor appears to provide basically a copy of the agreement it happened to be using for new accounts during some year that the account was open, often the last year it was open.  Then the creditor submits a records custodian's affidavit that states tersely that the exhibit attached is "a copy of the terms and conditions governing the account."

But it is indeed not.  To illustrate, if a debtor opened an account in 2008, they should have received a copy of a complete cardmember agreement in force in 2008.  The agreement may be modified from time to time, in which case the creditor should mail a copy of each amendment.  No creditor sends a complete new, revised copy of the agreement.  Thus, if the creditor provides a complete new, revised 2011 cardmember agreement and says that's the agreement that governed the account, that's just a complete, bald-faced falsehood.  It's not specific to Discover Bank.  Indeed, the same law firm has filed and settled numerous suits against other creditors based on the same behavior.  

We suggest that another fraudulent pattern of behavior on the part of credit-card plaintiffs is ripe for a RICO class action.  That is the use of falsified account statements.  It is occasionally obvious that account statements are fake, but most fakes are sophisticated enough that it is not obvious.  One situation where it is obvious, though, is where the account holder has moved during the time period covered by the account statements.  In those cases, generally what we see is that the creditor submits to the court as "true copies of the account statements sent to the defendant" accounts statements that all contain the current address, where the defendant did not live or receive mail during the first months covered.  This reveals that what the creditor has actually done is to essentially merge whatever is currently in its database into a form to generate current account statements.  The statements cannot purport to be "copies" of something mailed to the debtor (as required to make out an "account stated" claim), but are instead falsely described in those terms in the custodian's affidavit.

Contact me if you have received such an affidavit and exhibits in New York.  Provided you can defeat the creditor's suit, you may be able to turn around and sue them in a class action.

Power of the People Stronger Than the Power of the Bankers

Fight Back! News reports on people's victory in New Jersey where, through coordinated popular mobilizations and legal action, sufficient pressure was put on the state government and the bank that the bank finally conceded that it did not own the mortgage and that its default foreclosure was illegitimate and should  not go forward.  See http://www.fightbacknews.org/2012/5/11/people-s-power-nabs-banksters-their-attempted-nj-home-heist.

This is some truly inspiring organizing and one hopes to see more of it in this economy.  During the Great Depression, of course, we had troops of armed farmers showing up at Sheriff's sales and ensuring that nobody bid against the current owner, or showing up at evictions and moving the evictee's stuff back into their house.  Illegitimate bank action brought, in response, sharp community solidarity.  There is some of this out there today.  We need more.    

Increasing Awareness of Credit Card "Robo-Signer" Abuses

A recent series in the American Banker magazine has led to greater public awareness of abusive and fraudulent litigation tactics in consumer debt-collection lawsuits brought by credit-card originators.  Business Week takes up the story as well.

So-called "robo-signing" - in which bank employees sign off on thousands of litigation documents that they have not read and the contents of which they have no knowledge - has caused a public scandal for many of the same companies in the mortgage foreclosure context, leading some banks to institute foreclosure moratoria while they supposedly put some internal controls in place to ensure that their litigation documents are legitimate.  The phenomenon has long been strongly suspected by credit-card defense attorneys and in some cases confirmed by deposition or trial testimony.  It has not, until now, led to public scandal, however, and indeed, the banks have taken action more in the nature of covering it up than of the contrition shown in the foreclosure context.  

For example, an examination of Citibank's records-custodian affidavits in credit-card cases reveals a progressive removal of information suggesting that the affiants are robo-signers.  Affiants described a few years ago as essentially third-party debt collectors with the full-time job of supervising outside attorneys and no role in record-keeping other than that of transmitting records to counsel are described in current versions of the same form affidavits vaguely as records custodians and agents of Citibank and fully participatory and knowledgeable of the record-keeping process.  The likelihood remains that the same individuals in the past as now basically go to work and sit around signing affidavits all day at a pace rendering it humanly impossible to have obtained personal knowledge of the facts of a single case.

The specific impetus for the new public revelations are the assertions of a whistleblower from JPMorgan Chase named Linda Almonte.  Ms. Almonte was fired after raising her concerns internally at Chase, and subsequently "told all" in a letter to the SEC.  She tells of Chase employees absent-mindedly working through stacks of records-custodian affiavits, signing huge piles of them while attending unrelated meetings, without having reviewed or obtained knowledge of underlying records.  No surprise there for debt defense lawyers, though the revelations are notable for their publicity. Of more interest is that Ms. Almonte reveals that an internal audit at Chase actually disclosed that the bulk of the credit-card account records reviewed did contain significant errors, apparently stemming from Chase's blending of various record-keeping systems over the course of its various corporate mergers and reorganizations.  

Indeed, there appears to be more to the process of spitting out a current account balance owed in a credit-card lawsuit than just pressing a button on a computer.  Chase's various systems had to be reconciled essentially by hand by low-level employees whose work basically wasn't checked but was simply trusted by the "robo-signers."  As Chase is not the only bank that has gone through mergers and reorganizations over the years, this certainly suggests that all originators' assertions regarding the contents of their records should be treated with skepticism and potential sources of error in merged or revised record-keeping systems investigated.

Securitization as Usury Laundering

Professor Adam Levitin has written an article in the Yale Journal of Regulation in which he argues that because the bulk of credit-card debt and much mortgage debt is securitized in transactions in which actual payment flows go to and from state-law entities (trusts), state regulators should be able to pursue otherwise unachievable consumer protection goals by regulating the activity of the state-law trust rather than the national bank or FDIC-insured bank sponsoring it, which would be immune to such regulation because of federal pre-emption.  Professor Levitin - who has been active for some years in advocating for federal action to regulate consumer credit, including testifying in Congress at hearings on credit-card practices, including hearings about the CARD Act - calls this concept "Hydraulic Regulation," the idea being that state regulators can in practice achieve regulation of the primary target, federally exempt actors, by regulating secondary targets (state-law trusts), with market mechanisms hydraulically transmitting the force of the latter onto the former.  This article stands as a laudable example of academic engagement in the real-life concerns of consumer attorneys and regulators, and provides an extremely worthwhile contribution to both worlds that should be closely considered.

Professor Levitin goes into some detail in evaluating the caselaw concerning federal pre-emption, including looking at the payday lender "charter-rental" cases, which essentially conclude that the mere fact that a loan was issued on national bank letterhead does not mean there is federal pre-emption.  If the debtor can show that the loan was in substance a loan from a non-exempt payday lender, the debtor may be able to invoke state-law protections.

In a subsequent blog post, Professor Levitin states more explicitly than in the article that he believes that in light of the securitization phenomenon, debtors should be able to raise a state-law usury defense against collection actions seeking to recover credit-card or other debt that has been securitized.  (Further discussed on Naked Capitalism)  This is a potentially very interesting argument for consumer law attorneys to pursue.

If published opinions are any gauge, debtors have had little luck raising securitization-related defenses to debt-collection lawsuits.  Many of the worst opinions have come in cases where pro se defendants attempted to pursue the defense, and all the negative opinions address efforts to raise securitization in an effort to show a lack of standing to sue or to argue that the trust must be joined to the lawsuit as the "real party in interest."  See, e.g., http://www.creditinfocenter.com/forums/there-lawyer-house/308095-yet-another-case-securitization-defense-failure.html.

These arguments are problematic insofar as the securitization transaction documents themselves generally provide some language to the effect that at charge-off securitized receivables revert back to the originator.  Sometimes the transaction documents clearly state that only receivables and not underlying contracts or accounts are assigned or transferred, adding further confusion.  In light of these transaction characteristics, courts have generally had little difficulty brushing off assertions that the trust is the only proper plaintiff, and hold that the originator can sue as the actual counterparty and as the party presently entitled to payment.

Indeed, Professor Levitin's discussion of the issue also seems to overlook these characteristics, as Professor Levitin appears to assume that the trusts are going around suing people and so that there should be a clear-cut issue presented of whether the trust succeeds to its sponsor's federal pre-emption (as he persuasively argues it does not).  But it is always the national bank or FDIC-insured originator actually filing lawsuits to collect these debts.  This makes it more difficult than would otherwise be the case to raise even a usury defense.  However, unlike previous attempts to invoke standing as an issue where securitized debt is concerned, state courts have long held with respect to usury that attempts to "launder" usury will not be tolerated, and state courts will look behind the form of a transaction that has been contrived to create a non-usurious appearance that deviates from a usurious economic substance.  For example, courts have often deemed otherwise exempt transactions, such as installment sales or leases, to be truly loans where the documentation of the transaction as not a loan was essentially a legal fiction.  Similarly, courts have treated exempt parties (corporations) as covered parties where the use of the exempt party was a subterfuge, as when the real recipient of the loan was a person and the insertion of a corporation into the transaction was for the sole purpose of evading the usury laws.  A similar argument can be made that where the credit-card loan transaction economically consists of a state-law trust obtaining money from public investors and passing it (perhaps through another trust and then) to the consumer while the originator stands in the background and performs contractual "servicing" duties in return for a fee, the fact that on paper the loans are from a national bank should not matter.