NEW YORK (
) -- Big banks are facing unprecedented pressure to rein in the behavior of buyers of their charged-off credit card debt. This pressure is coming from two sources, one well known and one almost no one has talked about -- yet -- and that will put fear into the heart of every banker who hears them: the CFPB and RICO.
is the nation's protector of consumers in all matters financial. An outgrowth of the financial crisis beginning in 2008, the CFPB is charged specifically with supervision and regulation of two interrelated industries -- banking and private debt collection. This is the first time these two industries have been supervised by the same agency.
The intersection of banking and private debt collection rises when a bank sells defaulted credit card loans. The sale of these loans is common and serves a real purpose for the bank. According to the
, last year the banking industry sold $51 billion in delinquent credit card loans. Those loan sales produced approximately $5 billion in recoveries for the banking industry.
The CFPB sent a message recently that it
for the actions of third parties, including those who buy delinquent loans. The agency has promised new regulations and enforcement actions in an effort to encourage major banks to reform their historical practices of selling charged-off debt to companies who
based on inadequate supporting information.
This practice, called robo-signing, gained infamy during the past few years'
, costing the banking industry more than $35 billion in fines and penalties from the
. Essentially, the debt buying company, now the owner of the debt, files a lawsuit against a consumer and swears an oath to the court that all the claims made in the petition are true and accurate -- although there is frequently no documentation to support the affidavit.
More than 90% of the time
, the debt buyer is relying purely upon a string of digital data and has no proof of the facts of the debt.
Courts have ruled repeatedly that
robo-signing is illegal
and a fraud upon both the court and the consumer.
Yet robo-signing continues unabated. Why? Because it is so highly profitable for the company who bought the debt from the bank.
"The wholesale transgressions of the debt collection industry present the most significant consumer protection issue of the decade," said Drew Edmonson, former attorney general of Oklahoma, in a recent letter to California Attorney General Kamala Harris.
Edmonson is on target. Robo-signing in debt buyer credit card litigation far exceeds the scope of the mortgage robo-signing that drew so much attention. No one knows for sure how many mortgage foreclosure lawsuits were robo-signed -- the best guess is somewhere around 5 million, an injustice for certain. But over that same period there were about
-- five times the robo-signed mortgage foreclosures that created such scandal. And the problem of robo-signed credit card litigation is growing; there will be about 15 million so far this year alone.
The CFPB has made its intentions very clear. Likewise, the state
attorneys general who previously fined
banks tens of millions of dollars for mortgage robo-signing have announced a
against those same banks for credit card robo-signing abuses. It is highly likely that the AG settlement with the banks this time around will be much larger -- some expect $50 billion or more.
If banks think the CFPB and AGs are scary -- and they do -- they should be terrified of RICO. The Racketeer Influenced and Corrupt Organizations Act was intended as a tool to fight organized crime but turns out to have far wider implications.
. If a bank sells bad debts to a debt buyer who has a history of robo-signing -- which is itself a fraud -- logically there exists a conspiracy. The bank becomes a party to the conspiracy because they know of the debt buyers' practice of robo-signing. The result is RICO. This very argument was the subject matter of a
recent law review article
No bank can withstand a RICO conviction. The damage to the bank's reputation would be irreparable -- a cost far exceeding the treble damages and significant monetary penalties that would be assessed.
There is a simple and elegant solution to this risk of CFPB action and exposure to RICO: Banks should sell their delinquent loans only to those debt-buying companies who have pledged not to use litigation as a collection technique -- there are plenty of them and they are capable. If the debt buyer does not sue, there can be no robo-suing, no concerns about inadequate documentation and no vicarious liability for the seller.
Simple and elegant wins every time.
Bill Bartmann is the CEO of debt advisory firm, Bartmann Enterprises, and the CEO of CFS II, a debt collection company. Bartmann is the author of
Bailout Riches! How Everyday Investors Can Make a Fortune Buying Bad Loans for Pennies on the Dollar
. His recently published book,
Out of Control: Cases of Debt-Collection Abuse in America and What We Can Do About It
, documents clear patterns of abusive tactics used by unethical collectors.