Consider this troubling situation: You are applying for a loan only to find out that your credit report is marred by past due debt that you have already paid or that you may not recognize.
You could fall victim to unscrupulous debt collectors who have entered invalid or bogus debts on your consumer credit reports to force you to pay them. The tactic is called illegal “debt parking” or sometimes “passive debt collection”.
The Federal Trade Commission recently took action against a Missouri collection company and its owners, alleging they had raised more than $ 24 million from consumers, largely by placing “bogus or very bad” debt on their credit reports.
“The defendants used this illegal ‘debt parking’ to coerce people into paying debts they didn’t owe or didn’t recognize,” said Andrew Smith, director of the FTC’s consumer protection office, in remarks on the agency’s regulations with the company. , Midwestern Recovery Systems.
The FTC said in a related blog post that the case was its first court challenge to parking debt under the Fair Debt Collection Practices Act.
In debt parking cases, debt collectors do not contact the consumer before reporting the debt to the credit bureaus. This means that people are only told about debt when it is reported when they apply for a mortgage, car loan, or even a job. Because they don’t want to lose the loan or the job offer, consumers may feel pressured to pay off “bad” debt quickly.
Midwest Recovery has received thousands of consumer complaints each month, according to the FTC complaint. When the company itself investigated the complaints, it found that up to 97% of the debts were inaccurate or invalid, the agency said.
This is not surprising, according to the FTC, because many of the debts Midwest Recovery was pursuing had been obtained from other companies, including payday lenders, which the agency has previously sued for illegal practices. (Receivables are often sold, sometimes multiple times, to different collection agencies.)
The debts Midwest Recovery sought to collect included payday loans, some of which were “made from sensitive consumer financial information,” according to the complaint.
Debt also included “significant amounts” of medical debt, which is often confusing due to the complex system of insurance coverage and cost sharing associated with health care bills. More than 43 million people have medical debts on their credit reports, and medical debts account for more than half of the debts reported by collection companies, the FTC said.
In an example cited in the complaint, a consumer applying for a mortgage was told that a medical debt of $ 1,500 on his credit report by Midwest Recovery had lowered his credit rating, jeopardizing his credit approval. ready. The borrower contacted the hospital and learned that he only owed a co-payment of $ 80, which he then paid. Despite the discovery, the FTC said, Midwest Recovery refused to write off the largest debt and threatened the consumer with lawsuits if he didn’t pay.
In some cases, the business appears to have re-declared debts that it removed from the consumer’s credit reports – sometimes after the borrower paid the business and ensured that the debt would be written off from the credit report. credit.
The settlement with the FTC, filed with the United States District Court for the Eastern District of Missouri, prohibits Midwest Recovery and its owners from parking for debts and suing consumers for debts without “reasonable basis.” Midwest Recovery should also contact the credit bureaus, which maintain consumer credit reports, and request that all debts reported by Midwest Recovery be removed.
Midwest Recovery and its three owners, Brandon M. Tumber, Kenny W. Conway and Joseph H. Smith, “neither admit nor deny” the allegations in the complaint, according to the settlement. A lawyer representing the company and Tumber did not respond to a request for comment. Attempts to reach the co-owners at a telephone number listed for Midwest Recovery were unsuccessful.
The settlement includes a financial judgment of $ 24.3 million, but payment is in part suspended due to Midwest Recovery’s “inability to pay”, the FTC said, causing the company to pay around 57,000. $. One of the owners must also sell their stake in another collection company and remit that amount to the FTC. If it turns out that the defendants have made false statements about their ability to pay, the full judgment is due.
The settlement will be final when the judge officially issues the order, said FTC spokesman Jay Mayfield. A judicial conference is scheduled for next week.
Rohit Chopra, one of the five members of the trade commission, voted against the regulation and criticized it as insufficient. In a statement, he said he disagreed with the terms because defendants were not barred from working in the debt collection industry and consumers “will receive almost no help.”
Chopra said he would like to see the FTC work closely with the Office of Consumer Financial Protection on such cases because it could help victims claim compensation from the office’s civil sanctions fund.
Additionally, he said, a “systemic solution” to debt parking likely requires the major credit bureaus – Equifax, Experian and TransUnion – to take action to reduce debts submitted by credit companies. recovery of problems.
The Consumer Financial Protection Bureau is expected to release a second set of debt collection rules this month to address, among other things, debt parking.
Here are some questions and answers about debt collection:
How can I protect myself against debt parking?
Regularly check your credit report, said Chi Chi Wu, an attorney at the National Consumer Law Center. If you find anything that appears to be incorrect, contact the lender or collection agency listed on your report, as well as the credit bureau that issued the report.
A 2012 FTC report found that 1 in 4 consumers identified errors in credit reports that could affect scores, and 5% had errors that could result in less favorable loan terms.
The FTC has advised you check your report before applying for a loan or a job to avoid surprises.
How do I check my credit report?
You can get free credit reports from Equifax, Experian, and TransUnion at annualcreditreport.com. Normally, you can only get one free report from each office once a year. But due to the pandemic, bureaus are offering free weekly reports until April.
How do I dispute a debt that I consider incorrect?
It’s best to dispute the debt in writing to the collection agency and the credit bureau that provided the report, Wu said. The Consumer Financial Protection Bureau offers sample letters and other tips for dealing with agents. collection on its website.
