by Matt Taibbi
Thanks to intense state-by-state lobbying by companies like Chase and MBNA, it’s usually enough to send a notice by mail to some old address, often the original mailing address when the account was opened, which might have been ten years earlier. In some states, banks and debt buyers can even make use of an automated online summons system, in which a few lines of customer data are entered (perhaps or perhaps not by an actual human being), and, get this, a postcard is then sent in the mail to whatever ancient address the company has on file. Visitors to online high-speed litigation sites like the deliciously named www.turbocourt.com can get a window into the world of up-tempo collections. Its website, complete with cutesy illustrations, promises friction-free collection:
We’ll GUIDE you through a customized interview, PREPARE the exact documents you need, HELP you file and prepare the next steps! It’s as easy as that—a do-it-yourself service that’s fast and stress-free!
Even in those instances where a flesh-and-blood process server is supposed to be employed, the system is full of cracks. The command structure here typically goes from the bank, which wants to sue the customer, to the law firm hired by the bank to press the suit, to the process servers hired by the law firm to find and serve the cardholder.
On paper, it’s a simple and logical system, but here again the question of margin creeps in. Most of these process servers are paid bulk rates by the lawyers and make as little as four dollars per customer to serve notice.
Four dollars per customer.
How does anyone make money driving thirty or forty miles to personally deliver a summons to one defendant, just to make four bucks? Your local pizza maker has a higher rate of return on a delivery, and even he knows that that job stops being economically viable beyond ten or fifteen miles.
So what happens? Many process servers and law firms engage in a wink-wink-nudge-nudge business called gutter service or sewer service, in which the law firm hands the list of summonses to the server, and the server simply dumps them (in the “gutter,” hence the name).
In return, the process server hands the law firm an “affidavit of service,” swearing that he properly served the customer. Process service once required a signature of the defendant to prove proper service; now all that’s needed is the server’s own word that he did the job.
Around the time that Chase was obtaining judgments against those 23,000 account holders, dozens of law firms and process servers in New York State alone were being accused of gutter service practices. William Singler, the head of a Long Island firm called American Legal Process, was arrested for gutter service in the spring of 2009; soon afterward lawsuits in other parts of the state asked thirty-six different law firms, including national firms like Zwicker & Associates often used by Chase, to disclose how often they used American Legal Process to issue summonses.
Later on, several states would sue Chase, based in part upon information given by Linda, and some would mention the practice. A suit filed and signed by California attorney general Kamala Harris in the spring of 2013 would make particular note of it. “Defendants, through their agents for service of process,” the state’s complaint read, “falsely state in proofs of service that the consumer was personally served, when in fact he or she was not served at all—a practice known as ‘sewer service.’ ”
Thus not only may a credit card customer legally be served at some ancient address without her knowledge, it’s highly possible that the server won’t even bother to extend her that courtesy.
This is why, in a huge percentage of credit card cases, the cardholder never even sees the summons and consequently never appears in court to defend himself. For instance, in the year many of these cases were pursued, 2009, there were 240,000 filings of credit card suits in New York City alone. In an astonishing 158,000 of those cases, the creditor won a default judgment. “In two-thirds of the cases,” says Straniere, “no one even shows up.”
Once a bank like Chase “serves” its delinquent customer, there are just three paths on the flowchart of outcomes. They are:
The customer doesn’t show up in court and loses by default judgment.
The customer answers the summons and settles with the bank.
The customer answers the summons and contests the case.
In the first two cases—and this is a crucial part of this entire scheme, and the key reason that Linda’s bosses were so unconcerned about the absence of good paperwork in the debt sale—the collector typically does not come into court with any supporting documentary evidence. “They almost never have [evidence] on the first appearance,” says Straniere. All the collectors have, typically, is a complaint and the assertion of an owed balance.
But in the vast majority of cases, that’s enough. Two-thirds of the time, the defendant doesn’t show and loses automatically. Others get the summons, assume they really do owe the balance stated, and either agree to pay or settle, never forcing the bank to prove its claims.
In the third path, however, when the customer contests the case, the bank is forced to go back and dig up supporting documents. If the entity doing the suing is the actual bank that issued the card, that’s less of a problem. Say Chase’s credit card litigation department is filing the suit. In that case, all it needs to do is make a few calls to its regional offices to dig up the card balances and other documents. It’s a time-consuming process and puts some strain on the bottom line cost-wise, but it’s feasible.
But if the collector on the account is a debt buyer like DebtOne that has bought the account from the bank like Chase, now there’s a problem, because the big banks often intentionally keep the files thin when they sell their credit card accounts to companies like these.
Why? Because very often, the contract between a company like Chase and a company like DebtOne specifies that if the buyer needs any additional documents to collect on the debt, he has to come back to Chase and buy them. “Each time you need more paperwork to press your case, the bank charges you for more paperwork,” explains Straniere.
“It’s another way for them to make money,” explains Linda.
For this reason, when credit card holders actually contest the lawsuits filed against them, the plaintiff in the vast majority of cases (particularly if it’s a debt buyer) simply drops the case.
So to recap: Two-thirds of the defendants who get served with summonses don’t show up, and they lose. A large portion of the remaining cardholders settle or pay voluntarily. In the rare case where the defendant contests, the plaintiff most often simply vanishes and drops the case. In only the rarest of instances does a credit card lawsuit ever stay contested by both sides long enough to actually proceed to trial. “I haven’t tried a credit card case since, I don’t know, 1997 or 1998,” says Straniere.
What all this means is that the bulk of the credit card collection business is conducted without any supporting documentation showing up or being seen by human eyes at any part of the process. The meat of the business is collecting unopposed default judgments from defendants who either never receive a summons or receive one and never appear in court.
For debt buyers like DebtOne, the whole game is a bluff. If they buy a pile of open accounts or already-won judgments, what they’re banking on is collecting from delinquent customers who don’t fight back. If the collection is contested at all, the firm simply disappears and moves on. At no time in the process do most collectors ever actually need to produce evidence of a legitimate debt or a legitimate judgment. This is why executives like the ones who fired Linda, perversely enough, have an accurate read on the situation.
In the big picture, it doesn’t matter what documents you send when you sell a bunch of credit card accounts. All you need is a list of names and addresses.
So how do you collect money from a cardholder who doesn’t answer his or her summons? That’s easy: you take it! The laws are different from state to state, but in most places in America, once the bank or debt buyer has that default judgment in hand, it can legally do just about anything t
o the cardholder. It can put a lien on his property, it can attach her salary, it can even take his car or her office furniture. A bank or debt buyer’s collection powers aren’t as elaborate as, say, the federal government’s powers to reseize money owed by student borrowers. But they’re a lot broader than you would think.
In the state of New Jersey, for instance, the bank or debt buyer can basically take anything the cardholder owns, so long as it leaves him with the clothes he’s wearing and maybe a little pocket change—technically, a thousand dollars’ worth of personal property. The state charges only a five-dollar fee to green-light the attachment of a bank account or the repossession of an automobile. From the Superior Court’s brochure “Collecting a Money Judgment”:
If you ask that the court officer seize the debtor’s motor vehicle, you must be able to show that the vehicle is registered in the name of the debtor. This is done by getting a certified copy of the title.… The fee for this procedure is $5.
Collectors can also request a “statement of docketing” from the court, which essentially puts a freeze on the cardholder’s property:
Once your judgment is recorded in the Superior Court, the debtor cannot sell with clear title any real estate owned in New Jersey until your debt is paid.
“There are people out there who never even knew they were served and taken to court,” says Linda. “Then five years later they go to sell their house, and they find they can’t do it because of a missed payment at Circuit City years ago.”
All this extraordinary behavior never took place a few decades ago. Credit card companies almost never sued delinquent cardholders, particularly those with small balances. It simply wasn’t economical for companies to devote any resources at all to chasing after a thousand dollars here and there.
But as time passed, and the machinery of collections became more streamlined and brutal, we reached the current state of affairs. Now a Chase bank executive can sit in an office in San Antonio and with a few brief keystrokes transfer the right to seize the salary and automobile of a stranger in Chicago or Newark to some random company in Louisiana.
At one point in time that process also required significant legal due diligence and the transfer of documentation, but executives soon realized that in the overwhelmed modern court system, simply attesting to having the right documentation works just as well as really having it. This is the same realization that struck Bank of America when it found that saying it had foreclosure documents was almost as good as having them—and the same one that touched process servers at American Legal Process, who found that claiming to have delivered a summons was almost as good as (and certainly cheaper than) actually doing it.
In this case, Straniere’s office took one look at DebtOne’s assignments and immediately saw a host of problems. For one thing, the assignments were signed, not by a lawyer for either Chase or DebtOne, but by Chase robo-signers. Moreover, DebtOne, a Louisiana company, was not registered to do business in the state of New York.
Also, Chase never informed any of its customers that their debt had been assigned to a new company, which according to the judge’s ruling was a red flag in light of recent experience. “On a regular basis this court encounters defendants being sued on the same debt by more than one creditor alleging it is the assignee of the original credit card obligation,” he wrote. “… Without receiving such notice of the assignment, a debtor seeking to make any application to the court would not have any idea as to which alleged creditor is to be served.”
Straniere in his decision also expressed concern about whether the defendants had been served properly, noting that “the recent experience of the Civil Court show[s] large numbers of default judgments being obtained in credit card cases against consumers far in excess of the default rate in regard to all other litigation.”
For that and other reasons, Straniere vacated all 133 assignments. His decision had absolutely nothing to do with the abuses Linda Almonte had witnessed. In fact, until I told him, he had never heard of her and had no idea those problems even existed.
All Straniere saw was the broad sloppiness and inattention to procedure that attended the entire deal in general. The DebtOne deal was simply a typical transaction in a consumer credit industry that depends upon robo-signing, mass fraud, and intentionally thin paperwork as essential elements of its profit model.
Straniere didn’t nix the DebtOne judgments because he knew, as Almonte knew, that a large percentage of them were rife with errors and might not even have been valid judgments. He did it because the accounts had been so sloppily transferred that it was impossible to tell the difference.
Months later, perhaps because of the Straniere decision (which caused judges in other jurisdictions to review their own batches of assignments from this debt sale), Chase issued a series of curious decisions. In June 2011 it announced that it had dropped one thousand collection suits related to the Almonte allegations. The suits were from five of the biggest states in the debt sale: New Jersey, California, Florida, New York, and Illinois. In May the bank had already announced the firing of its lead counsel in four of those five states, along with the bank’s senior counsel overall, Gail Siegel, who was one of the lawyers present in San Antonio on the day Linda was fired.
The decision by Chase to give up on collections from one thousand accounts was hailed by the few reporters who covered it as a big deal. Forbes reporter Stephanie Eidelman, who had previously interviewed Linda, called it “A Whistleblower Triumph,” while CNN reporter Colin Barr wondered, “Do we have a credit-card robosigning scandal on our hands?” But Barr pointed out that even this embarrassing episode, which apparently resulted in a purge of the bank’s top lawyers, was not likely to hurt the company’s bottom line much:
Assuming the bank has dropped 1,000 cases against debtors with an average balance of, say, $30,000—twice the national average balance—the amount JPMorgan is forgoing is on the order of $30 million. That’s about 12 hours’ worth of profits at the first-quarter rate.
In point of fact, the average balance in the thousand cases was about a thousand dollars—meaning that Chase was really only forgoing about a million dollars in collections. In other words, Linda Almonte’s whistle-blowing odyssey—a journey that had cost her all her savings, nearly wrecked her marriage, and reduced her kids to dependence on food stamps—had ultimately cost JPMorgan just a few minutes in profits. From the bank’s point of view, Linda’s defection was very nearly a worst-case scenario. And even the worst case, it turns out, isn’t all that bad.
Months after Chase made those decisions, in September 2011, which by then was nearly two years after her firing, I would stand with Linda in the lobby of One World Financial Center in Lower Manhattan, listening vaguely as she shouted into a cell phone. Nearby, a group of tourists were looking out an east-facing window, gazing down at the first floors of the new World Trade Center. Some of them peered back at us with quizzical expressions.
“ALMONTE,” she repeated. “A-L-M-O-N-T-E. I filed my complaint over a year ago.”
Linda had come up from Florida to take me on a tour through the court system in nearby Newark, showing me how to search for credit card judgments pertaining to her case. At the end of her trip, she decided to drop in on the local SEC office to check on the status of her whistle-blower complaint.
Linda had formally filed her claim in November 2010, nearly a full year earlier. But now she was showing up at the SEC office in New York, asking for a status update, and here’s what they were asking her: What complaint? They were saying they had no record of her claim whatsoever.
Linda eventually got permission to go upstairs to the SEC’s New York office, where she was essentially fed the same line she’d heard over and over again in the last year: “We’re looking into it.”
In May 2012, Mary Schapiro testified before the House Appropriations Committee about the SEC whistle-blower program. She told the House that the program was “already providing high-quality information,” but when asked how
many awards had actually been paid out, she admitted—none. The program was just under two years old, and not a single whistle-blower case had been made.
The final irony in all this? At the same time that Chase was pumping out tens of thousands of bogus collection notices into the economy, the company was being supported, financially, by the federal government in a dozen different ways.
Most people, when they hear the term “bailouts,” think of the Troubled Asset Relief Program, called TARP. And when people think of TARP, they reflexively remember hearing that the banks that borrowed billions from that program have all paid their money back. So—no harm, no foul. It’s not like we gave them the money. Thus while it is true, for instance, that Linda Almonte’s employer, JPMorgan Chase, accepted $25 billion through the TARP program and used that money to buy not only Washington Mutual (for a state-struck pennies-on-the-dollar price) but a pair of $60 million Gulfstream jets and an $18 million hangar facility in Westchester County, that’s all okay because, well, Chase paid the money back a year later. So it’s not like it came out of our pockets.
Less well known is that Chase was extended billions more in guarantees to help buy the corpse of Bear Stearns. It was allowed to borrow $33 billion more against the state’s credit card—if it defaulted on those loans, we’d have picked up the bill—through an even more obscure Federal Reserve program called the Temporary Liquidity Guarantee Program. A whole alphabet soup of other Fed bailout programs, like the Commercial Paper Funding Facility, the Term Auction Facility, and the Primary Dealer Credit Facility, allow banks like Chase to borrow billions of dollars at near-zero or zero interest.
But all of it—TARP, the more obscure bailout facilities like TAF, even the fact that the Federal Reserve and the SEC allow banks like Chase to overestimate the value of their portfolios systematically in their annual accounting statements—it all pales in importance to the fact that, as a commercial bank holding company, Chase gets to borrow virtually unlimited sums of money from the Fed for free. In 2010 we found out through an audit of the Federal Reserve that America’s biggest banks had borrowed $16 trillion from the Fed at far below market interest rates, through the Fed’s emergency lending program. Chase itself, according to one calculation, had borrowed $390 billion in these cheap loans from the Fed.
