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American Banker: Top New York Judge Toughens Debt-Collection Lawsuit Rules

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American Banker

By Maria Aspan

New York’s chief judge is trying to reform the way banks and third parties sue borrowers over unpaid bills, joining a wave of regulatory efforts to fix widespread problems in the debt-collection industry.

Jonathan Lippman, the chief judge of New York state, proposed new rules on Wednesday that are aimed at shaping the way creditors sue consumers over unpaid bills. State courts are flooded with such lawsuits; more than 100,000 credit collection suits are brought annually in New York alone, according to Judge Lippman. That total was as high as 200,000 in 2011, in the aftermath of the financial crisis, according to estimates from the nonprofit New Economy Project.

Banks and debt collectors regularly resort to the courts when trying to recoup money from customers who have stopped paying their credit card or other loan bills. After writing off debts as uncollectible, banks regularly sell them for pennies on the dollar to third party collectors, which then file lawsuits en masse to recoup on the debts.

Several systemic problems plague this process, however. Banks have been found to frequently provide incomplete or shoddy paperwork to support the debt claims that they sell, resulting in suits against borrowers involving incorrect balances or bills they have already repaid.

State court systems, meanwhile, have taken various shortcuts to manage the flood of debt-collection lawsuits. In addition, many borrowers who are sued lack legal counsel and fail to appear in court to defend themselves, resulting in default judgments against them.

“Creditors frequently secure default judgments for the wrong amount of money, for debt that has already been paid or discharged in court, and for debt on which the statute of limitations has already expired — default judgments have even been obtained against the wrong person,” Judge Lippman said in a speech Wednesday.

Now the judge is joining several state and national regulators in proposing reforms of how creditors sue debtors. The state’s proposed reforms will be open to public comment for a month and are expected to be implemented by the middle of June.

In Lippman’s case, the focus is on how much evidence creditors must submit to support lawsuits in New York state. Under the proposed new rules, creditors who are seeking default judgments will have to support the accuracy and legitimacy of debt claims with more documentation, including the original agreement between the bank and the borrower.

Other proposed rules include: requirements that creditors do not sue over debts that have exceeded the statute of limitations; and those aimed at ensuring borrowers are properly served at their current addresses.

Lippman also proposed reforms for how state courts handle debt collection lawsuits and defendants who do not have legal representation. Lawyers and consumer advocates have criticized the “rocket dockets” and informal “hallway conferences” that courts across the country use to encourage borrowers to settle debt collection lawsuits.

New York has already developed some specialized resources for people defending themselves against debt-collection suits, including a standard “answer form” that explains various defenses against the suits. The form offers users a chance to check off one of the possible defenses. New York will now
institute those “best practices” throughout the state courts, Lippman said.

“This will ensure that unrepresented debtors who appear in court have access to comprehensible information and resources so that they can understand the claims against them and formulate appropriate defenses,” he said.

If Lippman’s proposal is implemented, it will join a wave of other regulatory, legal and legislative changes affecting the debt-collection industry, including federal scrutiny from the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency.

In his speech, Lippman also specifically praised efforts by other state officials, including Attorney General Eric Schneiderman, Superintendent of Financial Services Benjamin Lawsky and Assembly Judiciary Chair Helene Weinstein.

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