California Credit Law Blog

The WSJ reports that debt collectors are teaming up with some banks to offer a credit card to consumers who have old credit card debts. The old debts are barred by the statute of limitations. The debt collectors send misleading letters to the consumers stating that upon payment of a few hundred dollars on the old debts, the bank will issue a credit card. What the solicitations do not make clear is that the payment will revive the old debts. In other words, payment starts the statute of limitations running again.

In California, the statute of limitations is four years from the date of last activity--the last payment or debit on the account. Some states, however, have statutes as short as 3 years or as long as 10 years!

Equifax has a judgment against it for more than a million dollars to a Bay Area man whose identity was stolen. While the consumer was hospitalized, an impostor used his identity to open fraudulent accounts. He found the fraudulent accounts on his credit reports from Experian, Equifax and TransUnion and disputed them. (See my blog on why to dispute in writing, Certified Mail, Return Receipt.)

Equifax went to trial. The identity theft victim told the jury about trying to get Equifax to correct his report. Other witnesses testified about his damages. His expert explained why Equifax's procedures fail to meet the requirements of the Fair Credit Reporting Act.

The jury agreed with the identity theft victim. It awarded him over $6,000 for economic damages, $315,000 for non-economic compensatory damages and $700,000 for punitive damages. The consumer does not have to worry about paying his attorney either. The Fair Credit Reporting Act makes Equifax liable for all his attorney's fees and court costs.

Equifax made post-trial motions to get out from under this verdict, but the trial court denied them all.

As I said before, mixed file and identity theft cases can be great cases. The verdict here proves that. If you have such a claim, give me a call.

By October 2010, new FTC rules will prohibit debt settlement companies from collecting fees on the promise they will reduce or settle a consumer debts. The rules are necessary because the debt settlement companies falsely advertise they can drastically reduce consumers' debts by negotiating with the consumer's creditors. The companies demand and get thousands of dollars in fees even though they do not accomplish anything.

Consumers often pay the fees and end up in a worse position than when they started. The new rules should put these companies out of business. Query--why did it take the FTC so long to make these rules?

A federal statute, 47 U.S.C. Section 415 (a), provides that the statute of limitations for civil actions to collect on unpaid telephone bills is two (2) years. Most state statute of limitations are much longer. California's statute is four (4) years for debts based on contracts. New York's law is six (6) years.

In an interesting decision, a trial court in Queens County, New York, recently held that the two year federal statute preempts state law. If the decision is upheld on appeal, a significant number of collection actions involving telephone bills will be subject to dismissal. The key factual question is whether more than two years have passed since there was any activity on the account.

The economic pundits couldn't disagree more on how to fix the economy. Most agree, however, that at least part of the crisis was due to consumer overspending and under-saving. Folks thought the equity in their houses would continue to rise forever, so they used that equity, often with disastrous results. But now the experts tell us that people have to start spending again (buy cars! go out for dinner!) so the economy will recover. It's enough to make anyone feel guilty and confused about spending on anything that's not an absolute necessity.

But sometimes a small splurge is good for your health. Given the choice of a spa treatment worth $80 or $85 in cash, most people would take the $85. Obviously, $85 would pay for the spa treatment with $5 left over for a latte. But a recent study reported in the New York Times revealed that a substantial minority of the study participants would prefer to just take the treatment. Those folks seem to know that they "need" that spa treatment. They don't want the option of spending spa money on something responsible and boring, like groceries, the mortgage or their credit card balance.

Even more interesting, it develops that an occasional splurge on a satisfying experience is appropriate treatment for a malady called hyperopia. That's the medical term for farsightedness (and the opposite of myopia, nearsightedness), because it results from people looking too far ahead. Folks who suffer from hyperopia are so obsessed with preparing for the future that they are unable to enjoy the present. These people end up looking back sadly on all their lost opportunities for fun.

Remember Aesop's fable of the Grasshopper and the Ant? The industrious (and hyperopic) Ant toiled all summer so she would have a safe and warm winter. Her friend, the fun-loving, carefree (and myopic) Grasshopper, sang the summer away and then had to beg the Ant for food. Although the fable teaches us that we should encourage our inner Ant, sometimes it's good to savor the present and enjoy the moment like a Grasshopper.

Capital One Bank and the credit reporting agencies (Equifax, Experian and TransUnion) recently settled with our client who was the victim of identity theft. It took years for the identity theft victim to get Capital One to stop trying to collect on the account it opened for an imposter.

The story began when Capital One sent a pre-approved credit card application to our client at her former college apartment. Someone in the building got the application from the mail and used it to get a VISA card from Capital One in our client's name. The imposter took $500 from the account, but Capital One quickly learned the account was fraudulent--a law enforcement agency told it that professional identity thieves had opened the account--so it closed the account and charged off the account balance.

That should have ended the matter, but it didn't. A year later, Capital One sent another credit card application to our client at the same old address. The imposter again used the application to apply for credit in our client's name and again Capital One issued the imposter a VISA card. This time it gave the imposter a $20,000 credit line and sent "convenience" checks that the imposter used to withdraw almost $18,000. When the imposter failed to make the payments, Capital One located and began to dun our client. She disputed the account, retained a different lawyer, wrote lots of letters. Nothing worked. Capital One sued her to collect on the account.

Then she contacted us.

Continue reading "Capital One Settles With Identity Theft Victim" »

Students graduating from college have a few months to savor their accomplishment before worrying about repaying their student loans. But what happens when they have problems making their payments? A new website, Student Loan Borrower Assistance, includes information on repayment options, avoiding and getting out of default, dealing with collections agencies, and much more.

The website was created by Deanne Loonin, a staff attorney at the nonprofit National Consumer Law Center. She says "the site describes the rights and obligations of student borrowers in plain language, so that they can understand their options, and stand up for themselves."

In a press release, Student Loan Borrower Assistance describes itself as "the first and only independent resource that provides advice and objective information for borrowers, their families, and legal advocates." The site features straightforward information about topics ranging from choosing a student loan to getting out of default and dealing with aggressive collection agencies. It also includes policy briefs, legal case studies, sample documents and promissory notes, and other valuable resources.

This should be an important resource for borrowers, who graduate with an average of $20,000 in student loans.

Consumers who are sued by debt collectors can defend in court by demanding that the debt collector prove it is entitled to collect the debt. Particularly when the debt collector is not the original creditor, the debt collector is frequently unable to prove it owns the debt. The result? The court dismisses the debt collector's case and the consumer wins.

Yesterday, the New York Times reported that an Ohio federal judge dismissed 14 foreclosure cases brought on behalf of Deutche Bank National Trust Company for a similar reason: Judge Christopher Boyko ruled that the bank had failed to prove it owned the properties it was trying to seize. The bank is trustee for securitization pools which claim to hold mortgages underlying the foreclosed properties.

Securitization pools are comprised of thousands of individual home loans packaged together by Wall Street firms. The pools are then sold to investors in different slices, based on risk. Trustee banks oversee these pools' operations and ensure that consumer payments go to the appropriate investors.

Deuthche Bank's problem was that it couldn't show that it really owned the note and mortgage on the properties it was trying to foreclose. Apparently that isn't unusual: One mortgage securities specialist quoted in the report said he has heard of instances where the same mortgage loan was in two or three mortgage pools. The report also cited a University of Iowa study that found 40 percent of creditors foreclosing on borrowers did not show proof of ownership, even though such proof gives them standing to foreclose and is required by law.

Attorneys for Deutche Bank argued that the judge didn't understand how foreclosures were supposed to work when securitization pools hold the mortgages, but Judge Boyko wasn't impressed; he said the bank's argument revealed a "condescending mindset." Needless to say, consumer advocates have applauded the ruling.

Consumers in New York City are faced with unprecedented numbers of debt collection suits, according to a new study by the Urban Justice Center (UJC), a provider of free legal services to low-income working poor New Yorkers.

The study's results are shocking. In 2006 alone, debt collectors tried to collect nearly $1 billion from New York City consumers, and got judgments for about $800 million--an 80% success rate. Most of those suits are filed by debt buyers--not the original creditors--and about four out of every five of those suits result in default judgments for the debt collector, in which the consumer never appears in court or enters into a settlement agreement. The study revealed that 99% of the time that debt buyers brought lawsuits, they submitted invalid hearsay "evidence" that would be inadmissible in court if anyone ever challenged it.

What's the reason for the steep rise in consumer lawsuits? One reason is that regulators and courts largely gutted the regulatory schemes governing fees and interest that creditors are allowed to charge, beginning in the 1970s and continuing through the 1990s. A second factor is that these days nearly every consumer has access to credit of some kind or another, but lower-income consumers generally have to pay higher interest rates for their credit. Third, identity theft is on the rise. If a consumer's identity is stolen, she likely doesn't even know about the underlying debt, and probably isn't informed about a debt collection lawsuit either. Finally, the market for the purchase of defaulted debt--including debt that can no longer legally be collected--is exploding. Debt buyers purchase defaulted debt for pennies on the dollar, and then try to collect the full amount, an exceedingly profitable venture if it works.

Continue reading "Consumers Are Targets of Skyrocketing Numbers of Debt Collection Suits, Most By Debt Buyers" »

Loan servicers tack on all kinds of bogus fees and charges to consumers going through Chapter 13 bankruptcy and whose homes are being foreclosed upon, according to an article in today's New York Times. Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question.

The article suggests that when housing sales are down and the loan originating side of the lender is originating fewer mortgages, the loan servicing side makes up for the shortfall. That is because loan servicing can be extremely lucrative. Servicers, which collect payments from borrowers and pass them on to investors who own the loans, generally receive a percentage of loan income and typically generate profit margins of about 20 percent. Servicers typically keep charges such as late fees assessed on delinquent or defaulted loans, so defaults can give servicers an opportunity for additional profit.

Bankruptcy lawyers say that many of these servicer charges are blatantly illegal. For example, some lender charge hundreds of dollars in fax fees, overnight delivery fees and loan payoff fees that are never approved by the bankruptcy court.

Another problem is that in nearly three-quarters of bankruptcies, the lender says the borrower owes more than the borrower calculates, often due to excessive and unnecessary fees. In one especially egregious case, Wells Fargo charged the borrower for 16 unnecessary inspections of the borrowers’ property in the 29 months the bankruptcy case was pending.

This post linked to BusinessWeek's fine article about consumers who file bankruptcy under Chapter 7 and are supposed to have their debts erased. Many post-bankruptcy consumers were finding that debt collectors were continuing to pursue them for debts already discharged in bankruptcy. BusinessWeek's article said the driving force behind this phenomenon is a vibrant market in which certain debt buyers avidly buy and sell debts that should have been extinguished.

I just received a telephone call from one of these debt buyer's New York lawyers. This person disputed the accuracy of a quote in the article from a lawyer for one of the debt buyers and demanded I take down the post. So, First Amendment consideration aside, read the article yourself. It's well worth it.

Millions of consumers are facing foreclosure due to risky adjustable-rate mortgages. Countrywide, one of the nation's largest mortgage lenders, has gotten a ton of bad press lately for its high-profile role in the crisis.

Yesterday Chris Arnold reported in a story on National Public Radio that Countrywide planned to refinance or modify some $16 billion worth of loans for more than 80,000 borrowers who will soon hit an unaffordable rate reset, or those who have already fallen behind after their payments rose. Some of those borrowers' interest rates had risen to as high as 13%.

It was good news for Neighborhood Assistance Corporation of America, a nonprofit national housing advocacy group that had organized protests outside Countrywide's headquarters just a few weeks ago. Countrywide even hired Neighborhood Assistance Corporation as a contractor to contact homeowners and figure out how much they can afford to pay.

But some critics are skeptical about how much far Countrywide's efforts will go to alleviate the crisis. Ira Rheingold, executive director of the National Association of Consumer Advocates, says the 80,000 loans Countrywide is committed to modifying is a small chunk of the 2 million people who face losing their homes.

On the other hand according to the story, critics also fault consumers for committing to more house than they could afford.