Inside the Credit Card Robosigning Scandal

A few weeks back I had the pleasure of posting the Finance Addict‘s look at how robosigning may not have stopped at the mortgage market.  Here we get some meat on those bones and an even closer look courtesy of an insider. Enjoy! – JB


The Finance Addict is an opinionated ex-banker who follows the global economy and keeps a critical eye on the so-called Masters of the Universe.

Earlier this month I wrote about how robosigning (illegal practices involving false affidavits, bogus notaries, dead signers and other such niceties) is not just an issue for mortgages and foreclosures. Other forms of consumer credit — most notably credit cards — are affected by these practices, too. And now there’s discussion of whether banks could face prosecution for this under the RICO Act, a law most commonly used against organized crime rings. Quite a change from the usual white-collar stuff, don’t you think?

Credit card accounts get charged-off when a customer falls several months behind on payment. The issuer then sends the file to a collection unit, either an internal division or a debt collection company that it’s hired. If the issuer still can’t get the customer to pay up then it might sell the file, along with millions of others, to a debt collection agency. In fact it’s common for the file to be sold on from agency to agency, with each buyer hoping that it can finally make the debtor pay, even if it needs the help of a court to do so. Going to court might actually be part of the agency’s strategy. And that’s where robosigning comes in.

As with judicial foreclosures the card issuer or collection agency usually needs to have records showing that a contract existed with the customer, that the customer breached this contract and that the company suffered damages as a result. Furthermore the “preparer of records” must prove that s/he has actual knowledge of the events recorded – and that’s even harder to do with credit cards than with mortgages. I might have the right documents proving I lent you money to buy a house, but what kind of documents would prove that I lent you money to buy movie tickets or to fill up your car? As one lost court case for JPMorgan reads, “credit card statements contain information that is conveyed from multiple entities, from the reporting merchant through various intermediaries” before actually reaching the issuer. How can an issuer, let alone a collection agency once or multiple times removed, prove that its employees have actual knowledge of these events ? Of course they can’t, but why let a little thing like that stand in the way?

Instead the issuer or agency shows up in court and hopes that the debtors don’t so that it can get a default judgment in its favor. (Which happens a lot since they often send correspondence to the wrong address to begin with.) Or as Peter Holland of the University of Maryland Law School describes, they take the smaller balances to small claims court where rules of evidence are more relaxed and where informal proof, like affidavits, are more readily accepted.

And it turns out that a lot of these affidavits are highly suspect. Joe Horwitz of American Banker broke this story wide open and continues to follow it. He writes

 An employee for Asta funding testified that she churned out affidavits every 13 seconds. An employee at Collect America (now known as SquareTwo Financial) stated in a deposition that if a debtor’s file said the moon was made out of green cheese he would formally vouch for it. A third firm, Portfolio Recovery Associates, had to promise it would stop using affidavits signed by Martha Kunkle, a woman who had been dead 15 years. 

And this is where the RICO act comes in. Because as Vaugh Iskanian and Annie Kellough wrote in the Oklahoma Bar Journal last year, there are several legal ways to skin a cat or, in this case, to nab a financial institution that continues to work with a debt collection agency that it knows to be a serial violator of the Federal Debt Collection Practices Act (“FDCPA”) and other laws. The emphasis in the following excerpt is mine:

The standard for violating the conspiracy provision under RICO is much more liberal and, potentially, any entity that knowingly endorses or encourages the substantive violations could be held accountable. Without actively participating in any racketeering activity, it is still “unlawful for any person to conspire to violate any of the provisions” of RICO.

The conduct of the entity itself does not have to fulfill the requirements for violation of the substantive provisions. Knowledge and facilitation of the acts is sufficient to find an entity guilty of conspiracy under RICO.

Now Iskanian and Kellough only laid out this strategy in December. No one’s tested it — yet. But with credit cards being far more widespread than mortgages, judges keen to reassert their power to right wrongs, an atmosphere of general hostility to financial institutions, this might change in a BIG way going forward.

Related story: Have banks been robosigning credit cards, too?

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