by Jake Halpern
So what will happen to Shelton’s debt? One might think that once Sherwin Robin won a judgment against Shelton and garnished his bank account that the story would be over. But it’s not. Not necessarily, anyhow. Many debt buyers actually buy and sell legal judgments. For example, Tom Borges—the debt broker from California—arranged many such deals. Tom was bullish about buying and selling judgments and, when I visited him in Napa, he explained why. We were having lunch at an upscale café when Tom pointed to a glass bottle on the table, and told me that judgments were so valuable because, once imposed, debtors were effectively trapped in the bottle: “What I mean by having the debtor in the bottle, is that you got him surrounded and captured for at least ten to twenty years. And if he goes back to work, or buys a home or sells his home, you’re getting paid—as opposed to a straight-up collection account where you can’t even find the guy [because] he is under the radar or he is under a rock and he has got no money. These people can’t run: you already found them. You got them put on the shelf and in the bottle!” Interestingly enough, Tom told me that one of his clients was none other than Associated Receivables, which owned the Georgia Splinter. So it is possible that, at some point in the not-too-distant future, the judgment against Shelton will be crackling across the Internet, bouncing off various satellites and heading due west for Tom’s offices in an immaculately restored Victorian mansion in Napa.
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Astoundingly, if Shelton had only showed up in court and pressed the opposing lawyer to “prove his case”—as Michael Tafelski, had put it—the lawsuit might well have been promptly dismissed and Shelton might have owed absolutely nothing. In fact, another debtor from the Georgia Splinter, a man named Ajay, had turned this strategy into something of an art. Ajay was an immigrant from India who had a lucrative career selling cars, mainly Nissans and Toyotas. In his days as a salesman, Ajay said he lived extravagantly, “drinking, smoking, partying, and eating meat.” In 2006, Ajay and his wife opened a high-end steakhouse in the suburbs of Atlanta. The place was furnished opulently, with ornate, custom-made woodwork that Ajay imported from India. To pay for this, they used their savings and a home equity loan but it wasn’t enough. In the seven months that the restaurant was open, Ajay estimates that they racked up $300,000 of debt on some twenty credit cards.
Ultimately, many of Ajay’s creditors sued him. Around this time, Ajay heard from a friend that he could defeat these lawsuits by making a simple request. He figured it was worth a try. So he showed up at court and told the opposing counsel, “I would like to request a sworn affidavit from the original creditor, validating the accuracy of these charges.” The lawyer ultimately dropped the case. Ajay said that he had used this strategy successfully on a number of occasions. Eventually, he and his wife moved off the financial grid. They now lived entirely on cash, which they had kept on hand—just in case a creditor did obtain a judgment and came looking for their assets. “My bank account has like fifteen or twenty bucks at any given time,” he told me.
When I met Ajay, in the parking lot in front of his old steakhouse, he looked as if he didn’t have a care in the world. The steakhouse had since been turned into a carpet-and-flooring outlet, and he showed me around proudly—as if the place were still his. I asked Ajay if it had been stressful, slowly watching his steakhouse go broke. “I didn’t lose sleep at night, because I am a very positive person,” he told me cheerily.
Since then, he had stopped drinking, smoking, partying, and eating meat. He claimed that he no longer even drank tea—only water. He was, essentially, living the life of an ascetic. “I’m very happy. I have never been happier.”
It was rather amazing to compare Shelton’s and Ajay’s vastly different fates. One of them was being held liable for three times his initial principal balance and the other seemed to have gotten off, more or less, scot-free. What kind of system was this? But the answer seemed clear enough. As long as 90 percent of debtors continue to do what Shelton did—not show up to question or contest their bills—it would remain a very profitable system indeed.
EPILOGUE
When he started his fund, Aaron hoped to make vast sums of money and achieve what he described as a “breathtaking level of success.” By the fall of 2013, his overriding goal was simply to repay his investors and limit his exposure to the ups and downs of the collections business. At this point, Aaron had come to terms with the fact that his fund would likely lose money or break even at best. He had made some good moves, such as buying the Package; and some bad moves, such as buying the “senior citizen” paper from Bank of America. Most important, perhaps, he had launched the fund in late 2008, just before the worst of the downturn, and the economy had never really bounced back. Too many debtors had remained out of work and unable to pay their debts. This likely hurt Aaron more than anything else.
Aaron thinks often of his investors, especially John, the Texan real-estate tycoon. “I still sweat it,” Aaron told me. “They’ve lost some money, so it’s always a worry if this guy wakes up on the wrong side of the bed and decides he wants to crush me for whatever reason. I’m sure he can probably do it. I don’t think that’s his inclination. I don’t even know what frame of mind the man’s in right now. He’s a very old guy. But, you know, rich old people that are cantankerous can get mad at you.”
Nowadays, real estate is Aaron’s main focus. Even here, however, his past has resurfaced. Not long ago, Aaron began working on a project involving the renovation of 295 apartment units. A major bank initially agreed to help finance the deal, but then balked when it learned about his history in the collections industry. Aaron was incensed, insisting that this very same bank had had no problem selling him the paper it no longer wanted. Last we spoke, he was looking to bankroll and establish what would be Buffalo’s only lesbian bar. The idea came to him after he read an article in the local news about a group of gay women who periodically converged at a given bar, on a given night, and took over the place. Aaron contacted one of the organizers and proposed opening a dedicated hangout where these women could gather. “This is for profit,” he told me. “But I do feel like it is my civic duty to help the city have at least one lesbian bar.” Aaron was so enthused by the idea that he had called up Joseph—the Boston-based investor who had given him $1 million—and asked him if he wanted to participate. Joseph said he might be interested, though he now appeared to have troubles of his own. Just several months after our dinner in Boston, Joseph closed his hedge fund when his single largest investor withdrew its funds.
Meanwhile, to the north—in Bangor, Maine—Brandon was still entrenched in the debt business and looking to buy new types of paper. In the wake of his trip to Las Vegas, two very important deals materialized. First, he managed to buy an enormous quantity of “telco paper,” some 1.8 million accounts, all of them unpaid phone bills from a host of carriers including Verizon, Sprint, and T-Mobile. The accounts had an average face value of $461 and he had bought them for just 4 basis points, or 0.04 cents on the dollar. The second deal came from the lead that he received on our trip to Las Vegas. At the time, Brandon was offered $600 million worth of older credit-card debt. In the end, he managed to buy $2 billion worth of it for 150 basis points, or 1.5 cents on the dollar. In both cases, Brandon’s old friend George helped him fund the deals.
In December 2013, I paid Brandon a visit—to see how he was making out with his new paper—and was surprised to discover that his office was a veritable ghost town. His daughter, Shana, had left town; his mother had moved to Florida; and his son/brother/cousin Tony was nowhere to be seen. What’s more, Brandon had let go of the vast majority of his collectors and employees, including his right-hand-man, Jeremy Mountain. When I arrived, there were just two people in the office: Brandon and Jason, the collector who had gone to jail when his gun went off (accidentally) on the public bus. Brandon was sitting at his desk, smoking a cigarette, not far from a sign that read: THIS IS A SMOKE-FREE AREA. BREATHE EASY, YOU’RE IN MAINE. Brandon quickly explained that he ha
d shifted his business model and he was now operating primarily as a debt buyer, outsourcing the work of collecting to other agencies. He had, in effect, become Aaron.
Brandon’s new business model was, apparently, both more profitable and less stressful for him. When I arrived, he was in the process of selling some of his telco paper to a woman for 25 basis points, or 0.25 cents on the dollar. Brandon himself had paid just 4 basis points, so he was making a sixfold return on his investment. “I got to mask this file and dump it over to this broad,” he told me, as he typed away on his computer. This was the fifth deal that he had done with her. “She just keeps on coming back.”
The industry was in flux, explained Brandon. With banks becoming so much more cautious about selling their paper, he was on the hunt for “new asset classes” like the telco paper. The Consumer Financial Protection Bureau had begun to change the game. “With the new CFPB, everyone is afraid to operate as they once did,” he told me. “We are waiting for a new normal to kick in.”
By early 2015, the CFPB will be issuing fairly comprehensive rules that will govern and—ostensibly—clean up the buying, selling, and collecting of debt in the United States. The fact that it has taken the federal government this long to act, however, is rather astounding. The debt-collection industry has been on the federal government’s radar for some time. The FTC has issued numerous papers on the industry’s problems, including an especially bleak assessment of the challenges consumers face when sued in court. In a 2010 report on the courts, the FTC concluded: “The system for resolving disputes about consumer debts is broken.” Three years later, an FTC commissioner announced: “Unfortunately, since we issued our 2010 report, it appears that, in most respects, very little has changed.”
Despite this, the FTC has a very modest record of enforcement. In 2009, when many Americans were being hardest hit by the economic downturn, the FTC received 88,190 complaints about debt collectors and yet the commission brought a grand total of just one “enforcement action” against a company for debt-collection violations. It brought three actions in 2010, four in 2011, six in 2012, and six in 2013. One of the six actions taken in 2013 targeted the world’s largest debt collection operation, Expert Global Solutions, and carried a $3.2 million penalty. This is progress, admittedly, but it seems incremental at best. And even the CFPB’s reach is limited. Its ability to enforce its much-heralded new rules will largely come down to funding. The CFPB’s entire budget for 2014 is roughly 10 percent of the Food and Drug Administration’s or 6 percent of the Environmental Protection Agency’s. Here is yet another way of thinking about it: the CFPB’s budget is equivalent to just 2 percent of what JPMorgan Chase set aside in reserves for its litigation expenses in 2013.
To be sure, the CFPB is making a difference with some of its initiatives. It has, for example, created a “consumer complaint database” where consumers can submit and read complaints about a variety of companies in the financial sector. Banks, creditors, and debt buyers can then use this database to help them decide which collection agencies to hire and not to hire. When it comes to enforcement, however, the CFPB’s scope remains somewhat limited because it is focusing almost exclusively on the nation’s 175 largest debt collectors. It will thus fall to the state attorneys general to go after many of the smaller operators, which are often the ones acting most egregiously. This is a tall order. Remember that Buffalo—one of the meccas of the industry—is policed by just two full-time employees in the state attorney general’s office.
When regulators have acted, they’ve often concentrated on debt collecting, as opposed to the buying and selling of debt, which is in many regards the real root of the industry’s problems. The marketplace for commercial debt remains, in many regards, highly chaotic. Financiers such as Aaron can’t rely on the authorities or civil litigation to protect their investors, while debt buyers such as Brandon must make purchases on faith and, when necessary, hunt down the charlatans and threaten them with brute force. Small-time operators such as Jimmy can often buy debt only from dealers like Larry, who don’t know—and don’t want to know—what it is that they are selling. Debtors like Joanna and Theresa end up paying collectors who don’t even own their debts, while others, like Ajay, manage to avoid paying altogether because creditors don’t have the proper paperwork.
There is a growing consensus that the marketplace for debt should be made safer, more transparent, and more reliable for both consumers and creditors; the question is, how? The most extreme solution is to greatly restrict—or even shut down—the marketplace by barring creditors from reselling their unpaid debts. This seems like a drastic measure and it might not help creditors or consumers. If creditors become less confident that they can minimize their losses by selling off debt they can’t collect on themselves, they will inevitably respond by making it more expensive for the least creditworthy consumers (that is, poor people) to borrow money in the first place.
At a roundtable hosted by the FTC and CFPB in 2013, I met two entrepreneurs who were promoting their own solutions. One of them was a former American Express executive named Mark Parsells, who was now the CEO of a company called the Global Debt Registry. The company boasts an easy-to-use central database that tracks the ownership of consumer debts once they are charged off by banks or original creditors. Each debt is assigned a “universal loan identification number,” or ULIN, which functions like a “vehicle identification number,” or VIN, on a car. When a car changes hands, its license plate number changes, but the VIN remains the same; likewise, when a debt is bought or sold, the account number and the creditor information may change, but the ULIN would remain the same. The registry also maintains electronic records of the original data and documents associated with each debt, such as statements and loan applications. So, when a debt buyer decides to sell a portfolio of debts, it reports the sale—including ULINs for each and every account—to the registry’s database. This wouldn’t be a public database per se, but if a debtor received an inquiry from a strange collection agency, he or she could access the registry’s secure website to verify whether this agency owned the debt or was authorized to collect on it. The registry keeps track of not just credit-card debts but also auto debts, medical debts, and even payday loans. The idea sounded promising, but Parsells told me that it hadn’t taken off yet because the big banks and debt buyers were still waiting for more direction from federal regulators.
Many people will be skeptical of trusting a private, profit-driven company to administer the marketplace for consumer debt. And perhaps rightly so. In the world of mortgages, a private company called Mortgage Electronic Registration Systems (or MERS) has attempted to do just this. Lenders embraced MERS because it promised to create such a central registry and, perhaps more enticingly, to save them millions of dollars on paperwork and public recording fees every time a mortgage was bought or sold. The system was fraught with problems, and critics claim that it helped lenders foreclose on many homes improperly. But perhaps this only begs the question: Why can’t—or hasn’t—the government helped establish such registries? Isn’t it the government’s role to minimize chaos, create a safe marketplace, and track the ownership of debt? After all, the Department of Motor Vehicles tracks who owns what car and the Register of Deeds records who owns a piece of property.
When I visited the FTC in Washington, D.C., I posed this very question to Thomas Kane, an FTC attorney who investigates and brings actions against debt collectors. The question wasn’t entirely a fair one, because it was well beyond Kane’s purview, but I wondered if anyone at the FTC was giving this any thought. “Yeah, I don’t know,” replied Kane. “The commission hasn’t weighed in on something like that. I think that the commission would have to have a lot more information.”
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Even with stricter government regulation, the industry’s savviest actors will find new ways to thrive off debt. This became clear to me one morning, not long ago, when I paid a visit to the legendary Attica prison in upstate New York. I went t
here to visit an inmate and former debt-collection agency owner named Benny, who remains something of a legend on the East Side of Buffalo. When I mentioned to Jimmy that I was going to meet Benny, even he seemed shocked. “He’s a beast,” Jimmy told me, with a rare trace of fear in his voice. “He used to be in the BMW boys—big diesel nigger. Wait until you talk to him. He’s a goon. What you going to talk to him for? That shit cost a nickel.”
Upon my arrival at Attica, a guard stamped my hand with invisible ink and told me, “If you don’t have that ink on your hand on the way out, you will be spending your nights here until you can prove who you are.” A guard then escorted me through a series of huge, clanking, barred gates until I reached the cafeteria, where inmates were allowed to meet with their families.
As I waited for Benny to arrive, I read through his criminal records, which I had obtained from the New York State Department of Corrections. Benny was first incarcerated in 1992 on a first-degree manslaughter charge. During his incarceration, his disciplinary record indicated that he had twenty-eight “misbehavior reports,” eleven of which were for drugs. Benny served seventeen years in state prison, got out in 2009, and then was sent back in 2011 on an attempted-robbery charge.
A few minutes later, the guards escorted Benny in. He wore standard-issue baggy prison pants, which contrasted oddly with his collared, short-sleeved golf shirt. He took a seat and looked out at the cafeteria, where other inmates were now meeting with their wives and their children. “I did seventeen years, so I’m watching guys come in and out,” he told me. “They all from my neighborhood, and I watch them come in and out until they can’t get back out.”