January 11, 2014

J.P. Morgan Is Sued for Alleged Misconduct in Credit-Card Collections

Mississippi Suit Claims J.P. Morgan Made Misleading Statements to Borrowers

J.P. Morgan Chase JPM -0.46% & Co.'s legal problems worsened Tuesday when the State of Mississippi alleged it committed misconduct while suing credit-card users for delinquent payments.

Mississippi Attorney General Jim Hood filed a lawsuit following an 18-month investigation and several months of discussions with J.P. Morgan. The complaint alleges J.P. Morgan "knowingly and willfully made false and misleading statements" while recouping old debts and filed legal documents in Mississippi that were "uncertified and lacked evidence."

J.P. Morgan, according to the complaint, pursued Mississippi consumers for delinquent amounts they didn't owe or debts that already had been paid.

The New York bank allegedly "harassed" one woman, along with her mother and ex-husband, over a debt that had been settled in full, according to the complaint, filed in Mississippi's Chancery Court of the First Judicial District of Hinds County. The episode damaged her credit score and prevented her from landing a mortgage-refinancing loan, according to the complaint. The consumers affected weren't named in the suit.

"Consumers' paychecks were garnished and their credit damaged, making it harder for them to refinance their homes, take out a car or student loans, or even get jobs," Mr. Hood said in a statement. J.P. Morgan declined to comment.

J.P. Morgan is reeling from a barrage of legal troubles ranging from its overseas hiring practices to its trading operations. It has agreed in recent months to pay nearly $20 billion to settle an array of lawsuits and investigations relating to a 2012 trading debacle, past sales of mortgage bonds and problems it inherited with the purchases of securities firm Bear Stearns Cos. and the banking operations of Seattle thrift Washington Mutual Inc. WMIH +0.75%

Mississippi is the second state to sue J.P. Morgan for its credit-card practices. California filed a suit in May. At least 15 other states are examining how J.P. Morgan handled its credit-card-collection suits, and J.P. Morgan Chase is in early settlement discussions with 14 of them, said Iowa Attorney General Tom Miller.

The Consumer Financial Protection Bureau also is investigating as it seeks input on a new set of rules that would help ensure debt collectors are seeking the correct amount of money from customers. Earlier this year, J.P. Morgan hired away a top CFPB adviser on debt collection, John Tonetti, to work as a senior vice president in risk management for the bank's consumer-banking division.

One federal regulator in September ordered J.P. Morgan to fix its debt-collection operations. The Office of the Comptroller of the Currency said in a 58-page document that J.P. Morgan, along with outside lawyers, allegedly failed to verify the accuracy of information, and, in some cases, judgments against consumers allegedly contained "financial errors."

The bank didn't immediately pay a fine to the OCC. A bank official said in a release the problems affected less than 1% of J.P. Morgan customers but that "any mistake is regrettable....we are committed to fixing this and getting it right."

In Mississippi, according to the state's attorney general, J.P. Morgan and an outside law firm didn't file "any documentation" when seeking consumer payments in court. Instead, the bank and law firm filed "requests for admissions" that asked the consumer to acknowledge the past due amount and "relied on the fact that many consumers would not have the time, knowledge or capacity to respond to its allegations," according to the suit.

The bank and the law firm "had no intention of actually litigating cases they filed, and either dismissed or failed to prosecute cases in which a consumer filed an answer denying the allegations," according to the suit.

J.P. Morgan officials previously have said the bank acted proactively to fix the debt-collection problems by reviewing customers' accounts, stopping filing lawsuits in 2011 and providing compensation to consumers. Mississippi's lawsuit involved about 800 consumer cases, according to a person familiar with the case.

Another finding highlighted by Mr. Hood was the bank's "abysmal" oversight of outside firms that helped with collections. The bank and its outside law firm, according to the lawsuit, "routinely" violated the Servicemembers Civil Relief Act when they declared in legal documents that consumers weren't in the military despite not knowing whether the alleged debtor was. Military service provides consumers with certain benefits, such as a court-appointed attorney or a stay of proceedings in some cases.

The outside law firm J.P. Morgan hired to handle arbitration cases failed to keep track of payments, and yet the bank used it until mid-2009 to pursue payments despite an attempt by employees in the collection unit to terminate the relationship, according to the lawsuit.

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