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.