Robosigning Credit Cards: The Next Major Bank Scandal?
- Joshua M Brown
- January 17th, 2012
Today we have a monster of a guest post from my friend the Finance Addict who blogs over at FinanceAddict.com. FA asks why all of a sudden JPMorgan and its legal representatives have seemingly disappeared from credit card collection judgments (as per a small piece in American Banker magazine). I have no special insights or opinions on this just yet but it certainly bears watching in light of how much the robosigning of mortgages has cost the banks. Enjoy! – JB
The following statement scared me more than the thought of a Rick Perry presidency. From American Banker:
“If sloppy record keeping and problems with false affidavits is a problem with mortgages, it’s 100 times bigger in credit card accounts,” says Michelle Weinberg of the Legal Assistance Foundation of Metropolitan Chicago.
Worse than mortgages, even? Let’s just review the mortgage situation:
- Robosigning consists of blatantly illegal practices in which banks and mortgage companies had their employees sign affidavits and other documents without verifying the information therein; forge signatures on documents; backdate documents; falsely notarize documents; create new documents to replace missing ones; or some combination of all the above. Did I mention that all of this is illegal?
- Contrary to what the banks would have you believe, robosigning was not a one-off — it happened on a systematic level. So much so that some of the nation’s largest banks (including Bank of America Corp. and JPMorgan Chase & Co., ) were forced to halt foreclosures to “review” these practices in late 2010.
- The companies that did this claimed that they had to cut corners because they couldn’t keep up with all of the paperwork created by the housing boom last decade. But we now know that this is not true — there’s evidence that robo-signing goes back all the way to at least 1998.
- This all means that thousands of Americans were foreclosed upon erroneously and that even homebuyers and sellers in good standing may be unable to prove their rightful ownership.
- The problem is so big that Sheila Bair, the former head of the FDIC, acknowledged that they don’t even know how big it is. It’s so big that the banks are willing to pay around $25 billion to settle the whole thing and be released of all liability.
- This also creates major headaches for institutional investors who bought bonds and structured products supposedly backed by these mortgages. If the mortgage banks don’t have correct legal documents showing that they owned the loans then there’s no way that they could have legally and correctly transferred them to the standalone trusts that are the essential component of these investments. According to the Securities Industry and Financial Markets Association, there are over $7 trillion in U.S. mortgage-related securities outstanding. The Federal Reserve, itself, owns over $840 billion worth of mortgage-backed securities.
So in short the widespread and systematic robosigning of mortgage documents have created a real unresolved nightmare. And now there are indications that similar issues may exist within the credit card industry. Consider the very curious behavior of JP Morgan Chase, as reported in that little-noticed American Banker article from last week:
JPMorgan Chase & Co. has quietly ceased filing lawsuits to collect consumer debts around the nation, dismissing in-house attorneys and virtually shutting down a collections machine that as recently as nine months ago was racking up hundreds of millions of dollars in monthly judgments.
When a bank leaves money on the table for no obvious reason, you know that something’s not quite right.
American Banker says that JPM’s retreat on these lawsuits was first reported by the Wall Street Journal last year and that “document irregularities” were cited for the move. JP Morgan Chase’s decision to fire the lawyers working on these cases was massive (several regional teams were fired) and urgent (the orders came down from on high, i.e. NYC headquarters.) Some of those fired claim that the OCC has been investigating.
To substantiate this, consider the case of one Linda Almonte, a former JP Morgan Chase employee. In 2010 Almonte filed a lawsuit against JPM alleging that she was fired for blowing the whistle on their robosigning credit card processes. As the San Antonio Express News reported, Almonte alleged that
Chase knew that about 5,000 accounts had incorrect balance information, and that more than 11,000 accounts on which it claimed it had court judgments lacked adequate documentation showing judgments actually were obtained.
In some cases, she said, the judgments were against Chase rather than customers.
Almonte brought her concerns to her superiors, warning them the bank was violating federal law by intentionally misrepresenting the accounts, her lawsuit states. Nonetheless, she said she was told to proceed with the sale [of the portfolio of 23,000 delinquent credit card accounts to an external buyer].
Who’s willing to bet that this a one-off case?
This story could quietly disappear or it could get blown wide open…I guess we shall see.
Full disclosure, I currently own some shares in $JPM.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.