New York Reaches Debt Collections Accord With Sherman, PRA

May 08, 2014 2:50 pm ET

(Updates with company comment in 12th paragraph.)

May 8 (Bloomberg) -- Two of the largest U.S. consumer debt buyers agreed to drop collections on about $16 million to settle allegations they pursued debtors in violation of New York law, an accord reached as federal regulators prepare to crack down on the growing industry.

Portfolio Recovery Associates LLC, based in Norfolk, Virginia, and Sherman Financial Group LLC also agreed to pay a combined $475,000 in penalties, Attorney General Eric Schneiderman said today. The firms, which buy mostly unpaid credit card debt at discounted prices and then get court judgments on the defaults, broke New York law by trying to collect obligations that were too old, the state said.

“Debt collectors must follow the same rules the rest of us do when bringing lawsuits -- in this case, suing for debts that were not enforceable in the first place,” Schneiderman said in a statement.

The debt-collection business is facing greater U.S. oversight as the Consumer Financial Protection Bureau probes for violations and writes the first regulations under the Fair Debt Collection Practices Act of 1977, a federal law that governs the industry. The 2010 Dodd-Frank Act that created the bureau authorized it to draft the regulations.

Top Complaints

Debt-collection practices are among the top causes of consumer complaints to state attorneys general, a group of 30 states and the District of Columbia said in a Feb. 28 letter to the CFPB. The group urged the agency to issue strong rules that also mesh with state laws.

States “are concerned with the rising numbers of debt collection lawsuits that are commenced with boilerplate complaints, contain virtually identical allegations and provide minimal evidentiary support,” the group said.

Schneiderman said his probe of the industry found that debt buyers had for years failed to ensure their claims were filed within appropriate time limits under New York law. The law requires that actions be brought under New York’s six-year limit or the maximum time in the state where the original creditor resides, whichever is shorter.

Some states allow collection efforts for as long as 15 years while others hold the line at three years, according to the website Bankrate.com.

Portfolio Recovery Associates and Sherman Financial, which has headquarters in Charleston, South Carolina, are among the most active debt collectors in New York, the state said.

State Limits

After a ruling by New York’s highest court in 2010 affirming that debt collectors must adhere to state-imposed time limits, the companies followed the law for new cases while continuing to collect on more than 2,400 old, faulty judgments, according to the statement.

Rick Goulart, a spokesman for Portfolio Recovery Associates, said the company is “committed to strict compliance with consumer protection laws.”

“We are pleased that we were able to reach an amicable resolution” of the probe, said Tom Thurmond, division president of Resurgent Capital Services LP, a Greenville, South Carolina- based unit of Sherman Financial. Thurmond said the company is “committed to working proactively with all regulators.”

The companies will ask courts to cancel judgments in the older cases under the agreement, according to the attorney general. Schneiderman said the companies also agreed to improve communications with debtors and make other reforms.

Litigation Surges

The companies didn’t admit or deny the allegations. Portfolio Recovery Associates is a unit of Portfolio Recovery Associates Inc., also based in Norfolk, according to the company’s website.

Debt-collection litigation has surged. There are now 130,000 lawsuits in Cook County, Illinois, twice as many as in 2000, the attorneys general said. In New York City, debt buyers filed nearly 457,000 suits from January 2006 to July 2008. In 2011, more than 200,000 cases were filed in New York State alone, they said.

Last week, New York Chief Judge Jonathan Lippman proposed a new set of rules in debt collection cases. They include requirements that collectors submit detailed proof of debt and affirm that the debt is not outside of statutory time limits.

Benjamin Lawsky, superintendent of New York’s Department of Financial Services, has also pushed for changes aimed at curbing abusive practices.

--With assistance from Carter Dougherty in Washington.