Have banks been robosigning credit cards?

In a piece of news that has gone largely unnoticed, American Banker reported that JPMorgan Chase quietly halted suits to collect consumer debt. The move comes after a few defeats in state courts and whistle-blower allegations that the company falsely overstated balances on delinquent accounts that it sold to third-party agencies.

Historically, banks have filed lawsuits to compel payment on defaulted loans. While the individual payments may be relatively small, together they represent an income stream in the millions.

Since banks don't typically leave that kind of revenue sitting on the table, Chase's abrupt pullback has raised the question of whether or not banks could be facing documentation issues.

Robosigning played a big role in the mortgage crisis. For a quick review, robosigining was a process by which banks engaged in the (illegal) practice of having employees sign affidavits and documents without verifying the information. Robosigning was not a one-off, it was a systemic practice and there's evidence that it goes as far back as 1998. This created problems so large that a former head of the FDIC has admitted they aren't even sure how big the problem is; thousands of Americans may have been foreclosed upon in error and the lack of documentation means borrowers in good standing may still be unable to prove their status.

As big as an issue as robosigning is with mortgages, it could be even bigger for credit cards:

"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. Even so, Weinberg says, "On documentation issues, it wouldn't occur to me that Chase wouldn't be able to prove up its own account."

But a whistle-blower case that was settled in April 2011 (just before Chase ceased its lawsuits) suggests otherwise:

Linda Almonte, a former team leader in Chase's San Antonio credit card services division, accused the bank of firing her for objecting to the sale of $200 million in legal judgments obtained by bank attorneys. Half the accounts lacked adequate documentation of judgment and one-sixth listed the wrong amounts owed, Almonte claimed in a suit filed in U.S. District Court for the Western District of Texas.

In its response, Chase did not dispute inaccuracies in the debt balances and documentation. Instead, it said its sales agreement allowed for errors and thus was proper. "[T]he parties explicitly agreed that the judgments were purchased 'as is' and 'with all faults,'" Chase's attorney wrote.

So far judges have only questioned consumer debt records in low-profile cases. But given the information still surfacing about financial behavior in the mortgage crisis, this looks like a development to keep an eye on.

If banks are robosigning credit card debt, sloppy documentation could make it harder for banks to file suit against delinquent borrowers. But it could also make it more difficult for credit card holders to prove or fight inaccurate information. The extent of robosigning's influence on mortgages is still being determined, and many homeowners have been left fighting wrongful foreclosures. If the practice of robosigning has extended to credit card debt, it could leave more consumers fighting against errors with missing documentation complicating the process.