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Maryland is Changing the Rules for Debt Collectors

The collections industry is . . . pleased

In the fall of 2007, Kevin Zurrin and his wife, Jennifer Levy, were shocked to learn that they were being dunned for almost $20,000. A writ of property garnishment had been filed in the city’s Circuit Court, and a law firm was coming after them.

Levy says she has no idea of that debt’s origin. An affidavit judgment for more than $9,000 had been filed in 1999, along with a writ of wage garnishment, but she says she never heard about it until eight years later.

Angered that they could be held responsible for a debt they knew nothing about—and that had been documented with little more than a computer printout of Levy’s name and Social Security number—the couple decided to fight. They filed motions, they hired a lawyer, they appealed. They lost. By August 2009, they were desperate. In a hearing before Baltimore Circuit Judge Lynn Stewart, Levy railed about the injustice. “They made these allegations, but they haven’t proven anything,” Levy said. “They throw one piece of paper and put it with another and say you owe $20,000!”

All these years later, Levy had no idea how to compel her adversaries to prove there was ever any debt at all. That matter, it appeared, had been settled during the Clinton Administration, when a judge granted the debt collector a default judgment after Levy did not show up for court (she says she was never properly served). Stewart told Levy she had no jurisdiction to hear the matter and bade the couple, and two representatives from Peroutka and Peroutka, one of the state’s larger debt-collection law firms, goodbye.

Three months later the debt, and the suit seeking to collect it, was dismissed. After years, Stephen Peroutka withdrew as attorney for the plaintiff, which enabled the couple to get the suit vacated and the debt stricken. Zurrin says that means it isn’t even on his wife’s credit report: “If it were, then they would be in violation of federal laws,” he says.

Zurrin and Levy’s multi-year battle was unusual in only one respect: They won. Every year, tens of thousands of lawsuits are filed in Maryland court by collectors working for debt buyers seeking to collect unpaid medical bills, credit card balances, and car loans—along with interest and attorney’s fees that often multiply the original balance. A substantial portion of these debts are “time barred”— uncollectible because of the three-year statute of limitations that governs most debts. But nine times out of 10, the defendant does not show up to court so, until recently, collectors routinely got default judgments on even these debts, giving them the right to garnish the wages and assets of debtors.

Now the game appears to be changing. Since June, the state Commissioner of Financial Regulation has brought cease and desist orders against four debt-collection companies.

Penalties for one company, LVNV, whose collection-agency license was suspended on Oct. 25, could exceed $50 million, according to the agency’s summary order. That company alone, which has offices around the country, filed more than 25,000 collections actions in Maryland. It collected debts for years without a license. The state agency also says that “tens of thousands” of the company’s cases “knowingly contained false, deceptive, or deficient complaints and supporting affidavits.”

In September, Catonsville-based Sunshine Financial agreed to repay or forfeit $665,000 in debts it was trying to collect and pay a $20,000 fine. The company had to drop more than 300 pending collections lawsuits and reapply for its state license, which had been denied in part because the company’s owner and lawyer, J. Scott Morse, was tacking his legal fees onto the debts he was trying to collect on behalf of his own company.

“Attorneys that represent for themselves are prohibited from collecting attorney’s fees under Maryland law,” says W. Thomas Lawrie, an assistant attorney general at the Department of Labor, Licensing, and Regulation who has policed debt collectors since shortly after his arrival in 2008.

“At that time the enforcement actions were related to traditional collection activity—late-night phone calls, harassment,” Lawrie says. “In mid-July 2009, we received a complaint from various consumers through their attorney, and started investigation of Midland Funding.” That resulted in a nearly $1 million settlement by the end of 2009, Lawrie says.

In January 2010, Rockville-based Mann Bracken, one of the nation’s largest collections law firms, abruptly went out of business following the bankruptcy of Axiant, a related debt-collections firm. All of the Maryland cases the firm was handling were immediately dismissed.

While the Commissioner of Financial Regulation was cracking down on debt collectors, a working group empaneled by the judiciary was forging new rules designed to tighten collections practices. Beginning in January, for instance, collectors will have to show that they actually own the debt they are trying to collect. They also have to file paperwork indicating the debt’s origins. “The problem, which has been well documented by judges . . . is that the plaintiff often has insufficient reliable documentation regarding the debt or the debtor and, had the debtor challenged the action, he or she would have prevailed,” reads the committee’s Notice of Proposed Rule Changes, published in July.

Representatives of the debt collection industry did their best to weaken the rules during negotiations, according to DBA International, a membership organization of debt buyers. “Thanks to the work of DBA’s legislative team, the Committee made substantial changes to drafts using language suggested by DBA International and other industry groups,” a Sept. 12 news release from DBA International says.

Lawrie disputes DBA’s account. “It wasn’t DBA International that did anything,” he says. A representative of the organization did not return a phone call from City Paper.

There were changes, though. The original language would have required the documentation in all collections actions; it is now requires only for “assigned debt”—meaning debt that was bought or sold. There is also an exception for credit card debt, since the “terms and conditions” under which such debts are created changes so often, judges did not want to clog their cases with small-print credit card agreements and 500 pages of amendments. So the rule says those documents can omitted as long as the collector does not ask for more than 6 percent annual interest.

Lawrie says compounded interest—piled on previously charged interest and on penalties associated with the original account—had long bloated the claims of many collections agencies and their attorneys. Under the old rules, judges had no way of knowing what part of the claimed debt was the “principal” and what part was interest, fees, and other charges, he says. “Their understanding has kind of picked up over the past two years or so.”

“It was just ripe for abuse,” Maryland District Chief Judge Ben C. Clyburn says, speaking of the collections industry generally. “They knew the people wouldn’t get a lawyer, so they started to trim corners. And every time they cut corners they made a dollar.”

Nathan Willner, a lawyer at Lyons, Doughty, and Veldhuis and president of the Maryland-D.C. Creditors Bar Association, pauses when Clyburn’s statement is read to him. “I’m not in any position to comment on a judge’s observation,” he says. “I can only tell you that our members today are extremely conscientious and interested in doing things properly, and do not cut any corners.”

Willner and his vice president, Jason Weber, take pains to distinguish their organization, which speaks for lawyers, from debt buyers and collection agencies that hire them. “Our industry is on the consumer’s side and on the creditor’s side,” Willner says, and had been “looking for guidance, from county to county, and even courtroom to courtroom,” on just what paperwork was required to get a judgment on a debt.

The new rules, both men say, cover only a small sliver of the debt-collection business—those cases, like the one filed against Levy in 1999, in which the defendant does not come to court. “Now,” Weber says, “everybody has a much more clear understanding of what elements need to be met.”

Clyburn agrees. The new rules “restore the integrity of the court,” he says. “Now we expect more from debt collectors. It’s a win for the consumers. It should have happened years ago.”

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