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Consumer Financial Protection Bureau sues debt collection firm for mass-produced law suits

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WASHINGTON - The Consumer Financial Protection Bureau sued a major debt collection law firm on Monday, alleging it is a "mill" that produces shoddy, mass-produced credit-card collection lawsuits.

The bureau's claim, filed in federal court in Atlanta, states that Frederick J. Hanna & Associates has filed hundreds of thousands of lawsuits on behalf of banks including JPMorgan Chase, Bank of America, Capital One and Discover without doing even basic checks to determine whether the people they sued actually owed debts.

"The Hanna firm relies on deception and faulty evidence to drag consumers to court and collect millions," the bureau's director, Richard Cordray, said in a statement. "We believe they are taking advantage of consumers' lack of legal expertise to intimidate them into paying debts they may not even owe."

Though Hanna & Associates' lawsuits have all the trappings of formal litigation, the bureau alleges, the firm is really a bulk debt-collection agency masquerading as a law firm. Hanna & Associates attorneys were told not to spend more than one minute reviewing most cases before they were filed, the bureau claims, and in Georgia, one Hanna & Associates attorney signed off on 138,000 lawsuits over two years, a pace that the bureau declared incompatible with legitimate legal work.

The bureau's suit seeks to force Hanna & Associates and its owners to change its collection practices, pay restitution to consumers and disgorge "ill-gotten revenues."

In response to the suit, the law firm issued a statement declaring that "we strongly deny the allegations of the complaint and, moreover, the overall characterization of our law firm." Hanna "completely co-operated" with the bureau's investigation, the firm said, "and we are obviously disappointed by today's events."

The bureau's suit may signal additional actions against credit card collections law firms, which file millions of lawsuits a year. Consumer advocates and plaintiff's attorneys have long alleged that the debt collection industry is rife with misconduct.

"The current business model is of filing shoddy paperwork and relying on courts to rubber-stamp it," said Peter Holland, a professor at the University of Maryland's law school who runs its consumer debt clinic. "The CFPB looked at just one law firm in just one state."

The suit against Hanna & Associates may also have ramifications for the banks the law firm serves. Mass litigation has long been a cornerstone of major banks' collection strategies, with the banks using a handful of law firms like Hanna & Associates to file suit over billions of dollars of alleged debts since the recession. But how banks handle and collect on alleged debts has become increasingly controversial.

In 2011, JPMorgan Chase was forced to largely shutter its debt litigation operation following allegations of discrepancies in internal computer systems that track debts and the "robo-signing" of legal documents en masse. Other lenders — including Bank of America — routinely sold tens of millions of dollars of credit card debts to collections industry buyers under contracts stating that some of the accounts might already have been paid off by consumers.

In the run-up to a settlement with the Office of the Comptroller of the Currency last year, JPMorgan estimated that 9 per cent of the lawsuits filed on its behalf between 2008 and 2011 had errors, though the bank argued that the mistakes were mostly not serious. Which entities will end up bearing the bulk of regulators' scrutiny for such sloppiness remains an open question.

Banks should think about their potential liability, Holland said. "Their law-firm agents are in their name filing things that are not accurate."

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