Tuesday, October 10, 2017

NCBJ Report: The Wolf (of Wall Street?) at the Door

The Wolf (of Wall Street?) at the Door:   Lending to the Financial Underclass examined a variety of issues affecting those with limited means.   Bankruptcy Judge D. Sims Crawford from the Northern District of Alabama moderated a discussion with Thad Bartholow with Kellett & Bartholow and Prof. Creola Johnson from the Ohio State University Moritz College of Law.

Prof. Johnson and Mr. Bartholow focused on several areas that they believed were subject to abuse, including car title lending, payday lending, loans made that were never requested and claims on non-existent debt.   

Prof. Johnson spoke about subprime auto loans which carry double digit interest rates with collateral that is easy to repossess.  She said that while the volume of subprime loans was going down, a majority of them would likely end up in default and in bankruptcy.    A trend in subprime auto loans is to include a kill switch in the vehicle which turns off the car if payments are not made which she described as "synthetic foreclosure."    She said that subprime lenders often threatened to repossess cars if regular payments were not made post-petition and gave the example of In re Velichoko, 473 B.R. 64 (Bankr. S.D.N.Y. 2012) where the lender said that bankruptcy did not apply to it and repossessed the car during the bankruptcy.    In order for the debtor to get the car back, the creditor extracted a payment of $800 and execution of a reaffirmation agreement.

Mr. Bartholow suggested that a best practice for chapter 13 cases involving kill switches was to include a plan provision invalidating that clause in the loan agreement.

Another abuse he identified was student loan servicers who may fail to cancel a garnishment after bankruptcy is filed due to defects in their software.

Prof. Johnson spoke about problems raised by payday lending.   She said that technology has changed so that where a payday lender would have previously obtained a post-dated check, now they obtain authority to debt a customer's bank account.    One practice she identified was when payday lenders would have authority to debit the customer's account for the full amount of the loan but would just debit for the amount of a rollover fee.   In that case, the customer would end up paying much more than the original debt.   Another problem she discussed was payday lenders threatening borrowers with criminal prosecution if they did not pay.   Although dishonoring a postdated check will not give rise to theft by check, she said that payday lenders take advantage of poorly educated consumers to make these threats.    

She gave In re Hodge, 367 B.R. 843, 846 (Bankr. M.D. Ala., 2012) and In re Snowden, 422 B.R. 737, 740–41 (Bankr. W.D. Wash. 2009) as examples of bad behavior by payday lenders.    In the Hodge case, the creditor told the debtor that bankruptcy did not apply to checks, threatened the debtor with arrest and continued to make EFT withdrawals from her account post-petition.    In Snowden, the creditor called the debtor sixteen times including at her job as a nurse.

According to Bartholow, the debt buying industry is buying debts without much due diligence and that this places the burden on debtor's counsel to remedy. He claimed that many debt buyers "don't know or don't care" whether the debt they buy is legitimate and that it imposes a massive cost to the bankruptcy system.    He said that because debtors who take out payday loans often take out many of them, they may not remember which ones are real.    He described time-barred claims as a "cancer on the system" and also pointed out the danger of fake claims and miscalculated claims.    

Bartholow said that he has had problems with debtors who are already in chapter 13 taking out post-petition payday loans.   He noted a split of authority as to whether a court order is required to take out these loans but expressed his opinion that it should be required.   He expressed frustration that debtors would keep relying on payday loans which he described as "financial crack."   

Mr. Bartholow described attempts to collect on debts not owed as the CFPB's #1 reported consumer complaint.   He put part of the blame on skip tracing services such as Accurint which may erroneously report that a debt is owed by someone with a similar name.   In one case, he had a client named Marco R who lived in South Texas but was being dunned by a creditor seeking to collect a debt from a debtor named Marcos R who lived near Dallas.   

A related problem he discussed was consumers who may apply for a payday loan but don't agree to accept it.   In some instances, the payday lender will advance the funds anyway and it becomes a swearing match as to whether the customer accepted the loan.

Prof. Johnson talked about trends in the fintech industry but focused on lead aggregators.   Many of the internet ads for payday loans are not from actual payday lenders but companies which use them to generate leads which are then compiled by lead aggregators.    A consumer may think she is applying for a low interest loan only to be paired with a high interest payday lender.   

Mr. Bartholow also talked about abuses with loan modifications.   He said that in many cases, borrowers filed bankruptcy in order to buy time to obtain a loan modification.   However, in other cases, lenders may place a borrower on a trial modification that was not requested by the borrower.   The lender then files a notice of payment change with the court which results in the trustee reducing the payment to the lender.   When it is time to approve the final loan modification, it may extend the loan out forty years and greatly increase the amount the borrower would pay.   However, at that point, the debtor has a choice to either accept the bad deal or face a default created by the creditor's interim loan modification.

Returning to the theme of debt buyers, Mr. Bartholow said that debt buyers usually are engaged in the purchase and sale of spreadsheets and do very little to verify the debts.   He estimated that debt buyers only have loan documents in 5% or less of transactions they do.    When the transaction involves, a payday loan, which is a closed end loan, Rule 3001 requires that "the writing" upon which the debt is based be attached to the claim.   If debt buyers don't have the documents, they are in violation of the rule.

Bartholow also spent some time discussing the Supreme Court decision in Johnson v. Midland Funding.   He stated that in his opinion, the dissent got it right.   However, he said that it will be important to limit Midland Funding to its facts.   The opinion stated that filing a time barred claim that contains the information necessary to readily determine whether it is a time-barred claim is one thing.   However, he opined that the ruling should not apply to a non-existent debt or one that is miscalculated.    

Finally, Prof. Johnson concluded with the story of the Tucker brothers,Scott and Joel Tucker.   Scott Tucker had a payday loan empire that made actual payday loans although the way he processed payments was fraudulent.   He used the money that he made to become a race car driver.   In addition to having fines levied against him, he is now being prosecuted for criminal violations.

Bartholow chimed in with the story of his brother, Joel, who took data obtained from lead aggregators and entered it into spreadsheets which he represented to be legitimate payday loans.   He ultimately sold a portfolio of 15,000 fake payday loans in the amount of $390 which were then placed into the court system by unwary debt buyers.   Judge Marvin Isgur initiated a Show Cause Proceeding in the Southern District of Texas in which he compelled Joel Tucker to appear and testify with regard to the claims under penalty of being incarcerated.   Judge Isgur found Mr. Tucker's testimony to be non-credible.

Disclaimer:   I am currently involved in litigation with Mr. Bartholow's firm.   While I have tried to accurately convey the highlights of what was discussed, nothing in this post should be construed to be a comment on our case.

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