Editors' Pick: Originally published Jan. 11.
Credit card and student loan debt-collector Frederick J. Hanna & Associates settled charges last month with the Consumer Financial Protection Bureau (CFPB) over allegations that it used illegal debt collection practices on a variety of consumer loans. Hanna agreed to pay $3.1 million stemming from a CFPB investigation that led to a lawsuit filed last July in U.S. District Court in Atlanta.
The CFPB charged that Hanna used its capacity as a law firm to disguise its activity as a bulk debt collector, where legal papers were rubber-stamped by the firm without verification of their contents, reminiscent of the practice known as robo-signing that surfaced in home mortgages during the financial crisis. The CFPB suit charges that Hanna filed hundreds of thousands of lawsuits without bothering to make sure that the people they were taking to court actually owed any money. The CFPB charges that one Hanna attorney signed off on 138,000 lawsuits in two years.
“The Hanna firm relied on deception and faulty evidence to coerce consumers into paying debts that often could not be verified or may not be owed,” said CFPB Director Richard Cordray. “Debt collectors that use the court system for purposes of intimidation should reconsider how their practices are harming consumers.” The CFPB suit demanded that the court "order disgorgement of ill-gotten revenues” and impose civil money penalties. It also asked that Hanna pay the CFPB's costs in bringing the case to trial.
But the suit did not stop at Hanna’s doorstep, where the firm has offices in a Marietta, Ga. shopping mall. J.P. Morgan Chase and the two largest debt buyers in the United States, Encore Capital Group and Portfolio Recovery Associates, all Hanna clients, have been tarred with the same brush.
A CFPB source who spoke on background said "This action is part of the Bureau’s work to address illegal debt collection practices across the consumer financial marketplace, including companies who sell, buy, and collect debt. In separate enforcement actions, the CFPB has ordered three of the Hanna law firm’s clients, JPMorgan Chase, Portfolio Recovery Associates, and Encore Capital Group, to overhaul their debt collection practices and to refund millions to harmed consumers.” The CFPB source noted that Chase, Encore, and Portfolio Recovery have coughed up millions of dollars in consumer relief.
The CFPB found that Hanna focuses almost exclusively on debt collection litigation, and its three principal partners, Frederick J. Hanna, Joseph Cooling and Robert Winter, were architects of the firm’s business practices and strategies. The firm not only works for banks and other debt issuers, but debt buyers, a corner of the collection industry notorious for its abusive practices. Debt buyers purchase consumer loans deemed uncollectible by its originators for pennies on the dollar, then go to work on collecting from the borrowers, often for the full amount.
Industry observers applauded the CFPB's actions, but cautioned that it is just the tip of the iceberg. "The CFPB looked at just one law firm in one state here," said a source.
Indeed, regulators have struggled to get their arms around these businesses, going back at least as far as the robo-signing phenomenon in the home mortgage market. The fact that they continue to find bad actors attests to the profitability of debt buying and debt collection. Last year the Associated Press reported that in 2011, JPM Chase closed the bulk of its debt litigation operations after glitches were found in its IT systems that tracked robo signings. Bank of America sold tens of millions of dollars in credit card debt to debt buyers even though contracts stated that consumers may have already paid off those accounts.