April 4, 2012
OCC Probing JPMorgan Chase Credit Card Collections
JPMorgan Chase & Co. took procedural shortcuts and used faulty account records in suing tens of thousands of delinquent credit card borrowers for at least two years, current and former employees say.
The process flaws sparked a regulatory probe by the Office of the Comptroller of the Currency and forced the bank to stop suing delinquent borrowers altogether last year.
The bank's errors could call into question the legitimacy of billions of dollars in outstanding claims against debtors and of legal judgments Chase has already won, current and former Chase employees say.
For the banking industry at large, the situation at Chase highlights the risk that shoddy back-office procedures and flawed legal work extends well beyond mortgage servicing.
"We did not verify a single one" of the affidavits attesting to the amounts Chase was seeking to collect, says Howard Hardin, who oversaw a team handling tens of thousands of Chase debt files in San Antonio. "We were told [by superiors] 'We're in a hurry. Go ahead and sign them.'"
Hardin left the bank in 2010 to work in a different industry.
Chase declined repeated requests to discuss details of its consumer debt collection activities.
Company documents, court filings, and interviews with seven current and former employees reveal that Chase's credit card litigation operation was allegedly plagued by unreliable external attorneys, management's disregard for accuracy, and patchy technology.
The bank's computer systems frequently disagreed about how much debtors actually owed, several of the Chase sources say.
The employees' stories corroborate allegations made by Linda Almonte, a former mid-level business process executive in Chase's San Antonio-based Credit Card Litigation Support Group. Dismissed in November 2009 after six months on the job, Almonte filed whistleblower complaints and a wrongful termination suit claiming that she was fired for objecting to the sale of credit card debts with erroneous balances.
Almonte's complaints drew the attention of the OCC, former Chase employees say, and led to the April 2011 shutdown of a formidable collections operation that generated several billion dollars of legal judgments every year.
Few details of the OCC's investigation are available, but current and former Chase employees confirm that staffers from the agency's enforcement division spent two months gathering information in the San Antonio facility late last year. A person familiar with the OCC's review says that the regulator is taking the situation very seriously.
This is the first article in a series that will look at what allegedly went wrong in Chase's credit card litigation operation — and how those missteps could roil the banking and debt collection industries.
The root of Chase's card collections failures was more machine than man. Chase maintains a patchwork of computer systems that don't always communicate well, according to former employees who used them. Meet TSYS, TCSF and RMS.
TSYS is what outsiders assume a global bank's customer data system looks like. Licensed from Total Systems Services Inc. and managed by Chase, it's the modern and versatile system that consumers ultimately talk to when they check their credit card balance online.
TSYS only handles current accounts, however. When customers stop paying credit card bills, their accounts are passed to TCSF, for collections and litigation, and eventually to RMS for charge-offs.
Each of Chase's systems handles its own tasks just fine. The problem employees faced is that TCSF and RMS can only talk to each other through TSYS, and each of the systems operates by its own rules. This means that when presented with the question of how much a customer owes, each might spit out a different answer.
"I came across that on a regular basis," says Carole McGinn, who retired in 2010 from the credit card litigation support group in San Antonio. The discrepancies were usually minor, she and three other employees say, but payments by heavily delinquent borrowers would throw the records seriously out of whack.
"There was no way to reconcile those balances that I knew of," says McGinn, who worked at Chase for almost 15 years.
To overcome this problem, Chase's business process staff reviewed records in multiple systems and reconciled the accounts manually.
Chase's relationship with outside debt collectors posed another potential glitch. In populous states like California, Illinois and Florida, the bank employed in-house attorneys who were wired into all of its relevant computer systems.
Elsewhere, it relied on what credit card litigation staffers referred to as "outhouse attorneys." Paid according to how much money they recovered, the outsiders were connected only to TCSF, the litigation system. Former Chase employees say some of the firms, such as the since-imploded Mann Bracken LLP, were known for poor recordkeeping.
Chase's San Antonio crew was well versed in dealing with their computer systems' quirks and the outside firms' foibles. They adjusted accordingly, monitoring outside law firms for errors and stripping inaccurate charges from accounts.
"We made it work," says a former employee.
"Everything in Dollars Collected"
Things began to change in 2008, when Chase replaced the credit card division's San Antonio management, current and former Chase employees say. The bank installed Edmond Helaire as the San Antonio operations director, and he hired Jason Lazinbat as his No. 2.
Chase staffers who spoke with American Banker say they were never told the reason for the house-cleaning, but several speculate that the bank was looking to increase recoveries. Even before the financial crisis made a shambles of consumers' finances, Chase's expanding credit card portfolio and growing propensity to sue for unpaid debts had dramatically increased the volume of cases it handled.
At the beginning of the last decade, Chase recouped $130 million a year from bad consumer debt of all stripes. By 2009, recoveries on credit cards alone exceeded $1.2 billion. Over the next two years, the bank would charge off more than $20 billion in credit card accounts. Litigation was the most profitable way to handle the bad debts.
Lazinbat was a Chase veteran with experience overseeing teams of debt collectors. He chafed at what he saw as the duplicative checks and balances that the old guard considered essential to ensuring the numbers were accurate, former employees say.
Lazinbat "measured everything in terms of number of dollars collected," says a former Chase employee who requested anonymity. "He did not understand that in the process world, that's not what you look at. That's not the metric."
Chase spokesman Paul Hartwick responded to messages left for Lazinbat, who declined to comment.
Rank-and-file staff began complaining about orders to take shortcuts as part of the broader culture clash, current and former employees say. The conflict ended when Lazinbat and Helaire terminated several key mid-level officials in 2008 and early 2009, employees say.
"Documents Were Trashed"
One of the replacements brought in was Linda Almonte, a congenitally upbeat former Washington Mutual process execution manager who gets excited about Six Sigma quality control.
By the time of Almonte's May 2009 arrival, the rapidly expanding portfolio of delinquent accounts and the quirks in Chase's systems had produced serious problems, she and others say.
The outside attorneys were one flashpoint. The records the law firms used to sue people sometimes differed from Chase's own files at an alarming rate, according to a routine Chase presentation prepared by Almonte and later submitted to the Securities and Exchange Commission. Some law firms' records disagreed with Chase's in almost 20% of cases sampled, a rate far above what is regarded as an acceptable level of errors.
"That's horrendous," says a former Chase attorney who was informed of the numbers by American Banker.
The outsiders' lack of access to TSYS was one weakness. Another was that the law firms' recovery-based pay encouraged slapdash work, says the former attorney and other former Chase employees.
"They did not make a meaningful review of what they had," the attorney says.
The staff of the Credit Card Litigation Support Group grappled with quality control and how to ascertain that customers did, in fact, owe the company money. In one Chase email, Almonte suggested to Lazinbat that the bank should negotiate with delinquent customers before suing them. Doing so, she wrote, would "weed out additional accounts that were settled or payments made that are not showing up in the system."
Other things were falling through the cracks. Borrower correspondence sent to the San Antonio facility, such as bankruptcy notifications, address changes, and hardship requests were being dropped on an unmanned desk, according to a 2009 printout from Chase's troubleshooting log.
"There is no existing … process in place that states what action should take place when … this correspondence is received," notes a log entry submitted by an employee.
(The emails and internal records cited in this story are pulled from Almonte's whistleblower complaints. While Chase has declined to discuss them, former employees attested to the documentation's apparent legitimacy.)
Documents weren't simply misplaced: Chase shredded incoming correspondence such as records of borrower payments and counter-judgments extinguishing debts, Almonte alleged in her wrongful termination suit.
While none of the people who spoke with American Banker witnessed this, McGinn says she also heard colleagues acknowledge that some correspondence had been destroyed.
"I understand there were documents trashed, yes," she says. McGinn retired from the San Antonio facility in June of 2010 after she says she became uneasy with how it was being managed.
"My mouth was going to get me in more trouble than I could live with," McGinn says.
Three Signers, Billions in Debt
Former Chase employees say they used to consider the mass production of affidavits by document signers to be at most a technical concern. This is because quality control staff traditionally vetted the files thoroughly for bankruptcies, identity theft, and errors before passing the documents to signers.
But given their growing concerns about possible errors in underlying collections and litigation records, these procedural issues began to seem substantive.
One of Chase's most prolific affidavit signers was Ruben Alcaraz, one of three San Antonio liaisons with the in-house collections attorneys, court filings indicate. By law, collection affidavits require the signer to be familiar with the bank's pertinent records.
(The failure to follow similar procedures in the mortgage market is what created the industry's foreclosure robosigning problems.)
"Based upon my review of the Plaintiff's books and records of Defendant's account(s), I have personal knowledge of the facts set forth in the attached pleading," states one Pennsylvania card-debt affidavit signed by Alcaraz. "This verification is made subject to the penalties of [Pennsylvania law] relating to unsworn falsification to authorities."
Numerous former employees say that Alcaraz and his colleagues rarely if ever reviewed such files. They routinely signed stacks of affidavits on flights and in meetings, which in some cases were attended by Helaire, Lazinbat and Chase compliance staffers. Nobody objected, Almonte and others say.
Alcaraz also describes himself in the court documents as an "officer of the bank" and an "Assistant Treasurer." High-level Chase management had instructed the staff to stop signing documents using such titles around the middle of the last decade, four Chase sources say. But Lazinbat ordered them to do it anyway. An operator for Chase's internal switchboard identified Alcaraz as a "business analyst."
"Hardly, if ever, was anything verified," Almonte's SEC complaint states. "There was constant complaining by the Attorney Liaisons about having to manually sign these affidavits … they always questioned why they could not have them digitally signed in bulk."
"Each and every one of those [affidavits] should have been manually checked," says Hardin, framing the issue as one of basic quality control. "There was a lot of need for diligence, and sometimes that just didn't happen."
A message left for Alcaraz was returned by Chase spokesman Hartwick, who said that Alcaraz declined to comment.
"A Huge Cleanup"
Almonte says she initially limited her criticism of Chase's operations to pushing internally for improvements.
"I have a lot of areas where the ball was dropped … and now we have a huge cleanup," she wrote in an email to Lazinbat in October 2009.
While Almonte says her relationship with Helaire and Lazinbat was initially excellent, it fell apart when she began questioning how the bank was handling the sale of $200 million of legal judgments to an outside debt collection company.
Nearly half of the files her team sampled were missing proofs of judgment or other essential information, she wrote to colleagues. Even more worrisome, she alleged in her wrongful-termination suit, nearly a quarter of the files misstated how much the borrower owed.
In the "vast majority" of those instances, the actual debt was "lower that what Chase was representing," her suit stated.
Among the files Chase was selling, Almonte said, were former Providian Financial Corp debts that had previously belonged to the failed Washington Mutual. (JPMorgan acquired Wamu's assets from the Federal Deposit Insurance Corp. in 2008.) The Providian files had been labeled with a code that that the credit card litigation group used to signal "toxic waste," she says.
Another person familiar with the files confirmed that the Providian accounts were commonly referred to with that term. The debt had long been considered unreliable and lacked documentation. It was never supposed to be sold, this person says.
A review of state court records shows that second-hand debt buyers are suing people who allegedly owe money on the Chase-Wamu-Providian accounts, however. Informed that the files have surfaced in court, the former Chase employee who confirmed the files' "toxic" status was appalled.
"That's crazy," the person says. "I can't believe they [Chase officials] did that."
Almonte called for the bank to halt the debt sale, but was warned by Lazinbat that "she had better go along with the plan to sell the misrepresented asset," she later wrote in her employment lawsuit.
Almonte says she refused Lazinbat's order and escalated her concerns to his boss, Helaire. Chase fired her on Nov. 30, 2009.
Carole McGinn was not a party to discussions about the debt sale but confirms the thrust of Almonte's claims. "I know she [Almonte] was looking into things that they didn't want her looking into," McGinn says.
The following March, Almonte filed her wrongful termination suit. First reported by the San Antonio Express-News, the case brought Chase's alleged problems into public view.
"This is not an accident anymore," Almonte now says. "The same people who created this problem at Chase are still in charge. They aren't going to fix it unless they're forced to."
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