Robo-Signing Is Back: Credit Card Bank Lawsuits Rely on Flawed Docs

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Robo-signing is back -- but with a new set of players and victims.

The first robo-signing iteration hit during the mortgage crisis, as banks and their contractors fraudulently mass-produced forged, unverified, or otherwise false legal documents relating to foreclosures. In autumn 2010, major lenders like JPMorgan Chase (JPM) and Bank of America (BAC) had to suspend their foreclosure operations altogether after widespread robo-signing was revealed. Eventually, a $26 billion settlement was reached between the big banks and aggrieved borrowers.

Now, credit card companies like American Express (AXP), Citigroup (C) and Discover Financial (DFS) are going to court to collect money they say is owed to them, and The New York Times reports that their legal processes are just as faulty as the earlier attempts to turn people out of their homes. Problems include "erroneous documents, incomplete records and generic testimony from witnesses," according to the paper.

One civil court judge in Brooklyn, who presides over as many as 100 credit card debt collection cases a day, told the Times, "I would say that roughly 90 percent of the credit card lawsuits are flawed and can't prove the person owes the debt."

He's not alone: The Times cites "dozens of state judges, regulators and lawyers" as indicating "that such flaws are increasingly common in credit card suits," which are inundating the system: "In all, borrowers are behind on $18.7 billion of credit card debt, or roughly 3 percent of the total, according to Equifax and Moody's Analytics."

In some cases, lenders are going after customers whose bills have already been paid, or bulking up balances by tacking on bogus fees and interest charges. In other instances, the companies have the right to collect the money, but still seem unable to follow proper procedures.

"This is robo-signing redux," said attorney Peter Holland, head of the Consumer Protection Clinic at the University of Maryland Francis King Carey School of Law.

Adam Levin, co-founder of Credit.com, told ABCNews.com that he was unsurprised to hear of this latest malfeasance. "[The credit card companies] are in a frenzy right now to make up for money they're losing after the government restricted the insane fees these institutions were charging," he said. Consumers should contact an attorney or their state consumer affairs agency if they are told they owe money and suspect something amiss about the debt, Levin said.

Unfortunately, borrowers usually don't show up in court to contest these suits, which means that an estimated 95% of cases are resolved by default judgement in favor of the credit card companies -- with any errors or irregularities in documentation going unnoticed. "I do suspect flaws," said one superior court judge in Ventura, Calif. "But there is little I can do."

The lesson: Be sure to show up for your day in court; you never know how weak your lender's case against you might be.

New York-based consumer attorney Brian Bromberg told Marketplace he used to avoid taking on clients who were being sued by credit card companies, but no longer. "What were finding more and more is, once you start taking depositions of the people who are signing off on the original documents, they know nothing." Bromberg says the courts are catching on, demanding stronger evidence even though the enormous volume of cases leaves little time to examine documents.

If you've been served with a spurious lawsuit, or faced any fraudulent effort at debt collection, tell us about it in the comments below.

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Robo-Signing Is Back: Credit Card Bank Lawsuits Rely on Flawed Docs

Credit card sign-on bonuses are certainly enticing, but you shouldn't be signing up for every card that's offering some cash back. This is because each application and subsequent credit pull will generate a hard inquiry that will appear on your creditreport. (Credit pulls that aren't used to decide whether you are actually getting a loan – for instance, one conducted by a landlord or by a bank when you are looking to get a checking account – are considered soft inquiries and will have no impact on your score.)

Each hard credit card inquiry will cost your score between three and five points and stays on your report for two years, though they only negatively impact your score for about half the time they appear.

One missed payment may seem innocuous enough, but in reality a single delinquency can cost a previously stellar credit score to fall more than 100 points. The good news: As long as the missed payment doesn't lead to additional woes, your score will start to rebound relatively quickly and it can get back to good standing in about 12 months following the delinquency.

(Those who already had poor to mediocre credit prior to the new missed payment will experience less of an initial ding, but their scores won't bounce back until well past the 12-month mark.)

To avoid taking the big hit, consumers can try calling creditors to ask for a good will deletion. They are more apt to oblige if the late payment was truly atypical behavior.

You should think twice before officially closing that credit card you opened back in college, especially if you're getting ready to apply for a new line of credit. Closing an old account can have a negative impact on yourcreditscore since it can lower your credit-to-debt utilization ratio, which is essentially how much credit you have at your disposal versus how much credit you are actually using.

According to FICO, it can also cost you points you might have been netting by having an ideal number of credit cards in your wallet.

The exact effect this has on your score will vary, depending on the rest of yourcredit profile, but the advice is consistent.

"If there is no annual fee, just charge something small every now and then," says Adrian Nazari, CEO of Credit Sesame. This will keep the issuer from deciding to close the account for you.

As MainStreet has previously reported, it's never a good idea to bump up against your overall creditlimit because your credit utilization ratio will appear sky-high. However, according to Chris Mettler, founder of CompareCards.com, maxing out a single card can negatively influence your credit score as well. (Again, the exact impact would depend on the rest of your creditprofile.) As such, if you do have a particular card that's bumping up against its limit, you'll want to pay that down as soon as possible.

"You don't want your balance due to be over 33% of the availablecredit line," Mettler says.

Credit card issuers typically only report two things to creditbureaus each month: whether you're up-to-date on all your payments and what your balance at the time is. As such, running up big purchases right before your statement closes – and the issuer reports the information – can negatively impact your credit-to-debt utilization ratio and subsequent score, regardless of whether you go on to pay off that balance on time or not.

"The trick is to make sure your balance is low before it is reported," Nazari says. This is why it can be a good idea to pay off purchases as you make them or prior to the end date of your billing cycle.

Even if you're not particularly credit active, it's a good idea to take advantage of the free annual credit report the Fair Credit Reporting Act entitles you to, if only to scour it for incorrectly attributed delinquencies, accounts or inaccurate balances, which can all do varying amounts of damage to your score. This is because errors on credit reports are all too common. As MainStreet has previously reported, about 30% to 40% of all credit reports have some type of error on them, some of which can unfortunately be difficult (and time-consuming) to remove.

You may think that you don't owe that unpaid medical bill that keeps getting sent to your house, but your score is still in jeopardy if you decide not to pay it. Many places that don't lend money, like a hospital or cable company, will send their unpaid bills to a collections agency after a certain amount of time and they will report you to the credit bureaus. Similar to a missed mortgage, credit card or auto loan payment, this delinquency can cost good scores 100 points or more.

"Whether you are right or wrong, [the bill] will negatively impact your score," Mettler says. As such, consumers may want to shore up the bill in an effort to spare their score or dispute the bill through proper channels to get it eradicated.

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