A New Kind of Killer App: RoboSigning 2.0

"Killer," as in what big debt-collection companies are doing to destroy countless families.

We're all familiar with recent excesses in the mortgage industry. One of the more-shocking examples was the practice of "robo-signing." In order for a lender to file suit against a borrower and foreclose a home, the law requires that the lender sign an affidavit. It's a document that states the lender has some basis to believe the borrower in fact owed money to the bank and is now in default. Sounds reasonable.

Where reason went out the window was when some clever companies decided to take the "person" out of "personal knowledge" and have employees sign documents without having any clue about the borrowers. In one case, a single employee was found to have signed around 10,000 documents in one month. Embarrassed banks halted foreclosures, and just last week the government announced a settlement with some big banks over these types of abuses.

When the news hit of how banks were abusing borrowers through robo-signing, not everyone was shocked. Some major players in the debt-collection business were leaning forward at the television, with broad smiles on their faces and pens in hand. They were furiously taking notes because they realized it could be soooo much better for debt collectors. In a flash they saw how they could explode their collections and profits through the use of Five Easy Pieces. To fast forward, this is what they in fact did:

Piece 1: Automated signing. The mortgage boys who were signing 10,000 documents in a month were playing sandlot stickball compared to the debt-collection industry. One robo-signer/debt collector admitted to signing 4,000 documents per day as an officer of five different banks.

Piece 2: Automated filing. No need for pesky appearances of actual humans at the courthouse in order to file a lawsuit. Debt collectors figured out how to file suits by computer for as little as $40 each.

Piece 3: Low-visibility notifications. You'd think that if debt collectors were suing you, they'd want to make a big deal out of it, right? Wrong: Their preferred method of delivery was a plain, first-class letter. Why? Because the mere fact of mailing was considered proper notice. That meant they didn't work really hard to make sure the addresses were accurate. In one case, a debt collector mailed notice of a suit to an address where the intended target had not lived for 23 years.

Piece 4: No-shows mean default judgments. If you owe money, are sued, and don't appear, now it's regarded as dissing the court. In New York, as many as 94 percent of borrowers in debt suits do not show up. This has led to the easiest piece of all for debt collectors...

Piece 5: Now courts become an arm of debt collectors. For as little as 40 bucks and a first-class stamp, debt collectors get to collect using gavels and guns. One borrower was strip-searched and sprayed for lice for a debt owed to AIG (of government-bailout fame). In other cases, people were jailed and bail was set for the same amount that was owed to the debt collectors.

The lobbyists, lawyers, and lackies for debt collectors are quick with a response: "It was a few bad apples, and we fired them." Oh really? Just a few bad apples?

More like a rotten orchard: In 2010, one company reported that it filed 400,000 credit card collection lawsuits, up from 250,000 in 2009. New York City alone had nearly 500,000 debt-related lawsuits filed between January 2006 and July 2008. Michelle Weinberg of the Legal Assistance Foundation of Metropolitan Chicago said: "If sloppy record keeping and problems with false affidavits is a problem with mortgages, it's 100 times bigger in credit card accounts."
That's why it's a good thing that the Consumer Financial Protection Bureau is finally up and running, and is beginning to scrutinize debt collectors. That bureau estimates that 15 percent of U.S. consumers are affected by debt collection, which means roughly 30 million Americans. Compare that to the one million consumers affected by the mortgage mess, and you start to get a sense of why we so far have seen only a weak demo version of the game-changing killer app that's being released in a neighborhood near you.