Sunday, March 29, 2009
(Part 3 of) When Banks Screw Up: The Strange, Alarming, Sad and Ultimately Wonderful Case of Dorothy Chase Stewart.
Back to Dorothy and her foreclosure. (New to this? Click here for links to parts 1 and 2).
When last we left Dorothy, a bankruptcy judge had considered the evidence submitted by her lender, Wells Fargo, evidence submitted by Wells Fargo to prove it was entitled to foreclose on Dorothy's house and reap thousands of dollars. The judge concluded that some of the charges were illegally imposed, and noted repeatedly that Wells Fargo had breached the contract with Ms. Chase Stewart and overcharged her for many things.
It took a while to get there, though, because Wells Fargo seemingly did everything in its power to keep the judge from finding that out. When Wells Fargo first submitted their claim in bankruptcy, a hearing was held by the judge. That first hearing was held on September 25, 2007. Two lawyers appeared representing Wells Fargo -- but they were the third, and fourth, law firms to represent Wells Fargo in the matter. The two lawyers who showed up in court on September 25 weren't the two lawyers who had filed the initial claims and paperwork. When those two lawyers appeared on September 25, Wells Fargo had not provided a "loan history" -- a document telling what's been done on the loan -- and had not provided any proof of costs and expenses, other than lawyer's fees.
Trust the lawyers to show up in court with proof of what they're owed, right?
But even that limited information showed more errors -- one of the lawyers at that first hearing found an overcharge of $1,800 on his own bill -- $1,800 that if it had been properly handled would have been credited to Dorothy's account (reducing what she owed by $1,800.) There was another questionable charge that the lawyers weren't able to talk about that day.
So another hearing was set for more than a month later, with Wells Fargo ordered -- by a federal judge-- to provide documents by October 25. Remember that Wells Fargo controls these documents; it has computers and research assistants and lawyers and all, ready to go, and Wells Fargo had submitted a claim in federal court saying it was owed a lot of money. But it hadn't yet produced documentation proving it was owed that money. So the judge gave them another month.
Wells Fargo then, on the second-last day before the proof was due, asked for more time. The Court held a hearing on that, and gave Wells Fargo more time -- but ordered that the next time around (the third hearing, if you're keeping track) Wells Fargo was to produce for testifying someone from its company who knew what was going on, and gave them another month.
At that third hearing, Wells Fargo finally explained to a court what happens when a loan goes into foreclosure, and why it was having trouble getting documents and proof together. Beyond spelling out how computers, and not people, administer these loans, Wells Fargo also explained what happens when a loan goes into foreclosure and a bankruptcy is filed.
Once a homeowner files for bankruptcy, Wells Fargo (in most cases) calls in its national counsel, one of two law firms, that then hires "local counsel."
"Local counsel" is the lawyer in your town who will be responsible for trying to take your home away and sell it at a sheriff's sale. Those local counsel are hired simply to file the court papers and show up in court. As the Court found, local counsel "typically do not have direct client access and may even be prohibited from contacting" Wells Fargo or the actual loan holder.
That is, lawyers are hired and then forbidden to contact their clients. The local counsel responsible for dealing with you or your lawyer, and for trying to take away your home, may be forbidden to talk to his client.
Think about that when you think Should I call up this lawyer and try to make a deal? He or she probably can't -- not if Wells Fargo is your lender or servicer.
But the local lawyer doesn't have that much to do. As Wells Fargo further explained, the "proof of claim" -- a pleading filed in bankruptcy court saying how much a creditor thinks you might owe them -- is prepared not by local counsel, but by national counsel, who does so "without ever speaking to a Wells Fargo representative." Wells Fargo doesn't then review those proofs of claim.
So a computer says "bankruptcy," hires a lawfirm, forwards documents, and a lawyer then prepares a claim, all without every talking to anyone at Wells Fargo.
Wells Fargo was doing this, in Dorothy's case, even though it and its lawyers had been questioned by this same court once before for overcharging a debtor more than $24,000, an overcharge brought about by "systemic" problems in Wells Fargo's management. The Court had noted, too, that Wells Fargo's errors were not limited to loans in bankruptcy.
So let's set that out carefully: Wells Fargo, not once but twice was found by a court to have acted illegally in how it managed people's mortgages, and to have done so not just on loans in bankruptcy, but "during all stages of a loan's administration."
One of those errors was the calculation of Ms. Chase Stewart's escrow account. The "escrow account" is the account maintained by lenders to pay things like property taxes and insurance. The bankruptcy court in Dorothy's case noted that "[t]he calculation of Debtor's monthly escrow was almost incomprehensible and virtually incorrect in every instance," a problem it found caused Wells Fargo to demand erroneous and larger payments from Ms. Chase Stewart over time -- demanding amounts that were forbidden by federal law.
In all, the Court found that Wells Fargo breached the Note and Mortgage, that the fees were imposed "illegal[ly]" or "negligent[ly]," that Wells Fargo's behavior towards poor Dorothy was "abusive," and that Wells Fargo had, on top of all of that, "offended" the Court by charging or attempting to charge Ms. Stewart fees and charges in bankruptcy pleadings when those fees and charges had not been allowed by the Court.
"The Court finds the actions of Wells Fargo to have been duplicitous and misleading," the judge wrote.
What does it all add up to?
First, the Court noted that when the math was done correctly, Wells Fargo was owed only $24,924.10 in past due charges -- not the $35,036 they'd claimed. Wells Fargo, in the end, had tried to overcharge Dorothy by more than $10,000.
So that helped Dorothy a little.
What helped her a lot was this: The Court imposed "sanctions," punishments, on Wells Fargo and awarded Dorothy damages. It gave Dorothy $10,000 in damages, and awarded her $12,350 for legal fees, and punished Wells Fargo with a $5,000 in sanctions, -- totaling more than Wells Fargo was owed, here -- and ordered that Wells Fargo audit every proof of claim it filed in bankruptcy court and take action.
There's a lot more to this story -- a lot more detail for the lawyers, and related cases in which Wells Fargo did exactly what it did here. This isn't limited to Wells Fargo, either. There are plenty of other lenders and servicers doing what Wells Fargo did, here.
But in the end, Dorothy Chase Stewart won -- she fought in court, and with the help of some lawyers, proved that her lender was abusively and illegally overcharging her, and got the Court to do something about it.
The lesson is obvious: Talk to a lawyer, and find out what's really going on. And be prepared to fight for your house.
Monday, March 23, 2009
I'm going to take a little break from detailing the troubles that poor Dorothy Chase Stewart went through when her lender decided to foreclose on her house because she owed them $155, and talk about something a little more lighthearted for a day:
Lighthearted, right? Maybe not at first blush, but that's before you consider the Case of the Nondischargeable Gun.
Mark and Nancy Durkee got divorced on April 22, 1988. Lots of people think that the actual "getting divorced" part ends their journey through the courts... but lots of people are wrong about that. In almost every area of law, enforcing the court's ruling can be harder than getting the court's ruling, by which I mean this: It is often times very easy to sue someone and get a judgment, and very hard to then enforce that judgment.
Family law is no different: It can be quite easy, at times, to get into court and have a judge divide up property and order support and pronounce you no longer husband and wife, only to find out that the hard part is actually enforcing what the judge ordered.
Mark and Nancy Durkee show that problem, exactly. See, when they got divorced, in 1988, the judge ordered Mark to do some things. He was supposed to pay child support, and he was supposed to "turn over a certain rifle or its cash equivalent."
Now, as an attorney who's been practicing family law for 11 years now, I can tell you, I get a little nervous whenever the subject of firearms comes up in my cases. But this isn't that kind of story.
Mark, having been ordered to pay support and "turn over a certain rifle" then, naturally, didn't do that. You know, there's nothing magical about a court order, not to some people. A judge can order something (lots of things), but there are a lot of people who simply ignore that order.
It's for those people that the concept of "contempt of court" exists. A "contempt of court" is found (at least in Wisconsin) when a person deliberately ignores or frustrates an order of the Court.
Nancy asked the court to hold Mark in contempt not long after their divorce, telling the Court that Mark wasn't paying child support and hadn't yet turned over "a certain rifle."
We'll leave aside the child support for now, and focus on the "certain rifle." Nancy's motion asked the Court to hold Mark in contempt because he hadn't (apparently years later) turned over the "certain rifle."
Mark said he wasn't in contempt of court because he had filed for bankruptcy after the divorce; the bankruptcy court's orders, he said, freed him from having to turn over the "certain rifle."
A person who files for bankruptcy protection can "discharge" certain kinds of debts -- that is, the Bankruptcy Court can issue an order that the debtor no longer owes those debts; a "discharged" debt cannot be collected as a matter of federal law.
Not all debts can be discharged in bankruptcy, though, and among the debts that bankruptcy can't get rid of are debts owed for support of a child or a spouse. That seems about right: why should bankruptcy be allowed to eliminate child support?
But we're not talking about support, right? We're talking about "a certain rifle." That's not "support."
Or... is it?
Nancy argued that the "certain rifle" was support: she said that she'd traded maintenance for the "certain rifle" and that because of that, the rifle was maintenance. That complicated things, requiring that the divorce court hold a hearing to determine if the rifle was property division, or maintenance.
In Wisconsin, there is no alimony; spousal support is called maintenance. Maintenance is, in a nutshell, money awarded from one spouse to another to either help that receiving spouse get back on his or her feet, and/or to support that receiving spouse as he/she was during the marriage. Property division is not maintenance; it's the Court's order awarding pieces of property, or their cash equivalent, to one or the other spouse.
Property division can be discharged in bankruptcy (sometimes.) Maintenance cannot. But sometimes, what looks like property division can actually be maintenance. That's what Nancy argued at the divorce court's hearing, years after their divorce: the "certain rifle," or it's cash equivalent, she said, was maintenance because she'd given up her right to receive maintenance in exchange for that certain rifle.
The divorce court agreed with Nancy: The rifle, it said, was maintenance, and hadn't been discharged. (Hence the title of this post...)
If you're keeping track, then, Mark has been to state court for his divorce twice (the original time, and now the motion hearing to see if he was in contempt of court for not turning over the rifle) and he's been to bankruptcy court, as well. So after losing in the divorce court (for a second time) and being ordered to turn over the "certain rifle" Mark gave up, right?
No, he did not. He appealed to the Wisconsin Court of Appeals, which considered the issue and decided that Mark would lose, again -- the divorce court and Nancy were right, and Mark was wrong, and the rifle was not property, it was maintenance.
With that, Mark's journey through the courts ended. Having lost three times, he opted, apparently, not to appeal even higher.
There's no word on whether he ever actually gave the gun to Nancy, though.
1. "Mom didn't get us good birthday cards! Can we sue?" (No.)
2. The Gleiss case: Moms have no rights to sue, unless they have rights to sue?
3. Once upon a time, dads had to fight to have a relationship with their kids... but not the GOOD kind of dads.
4. Courts doing what courts do WORST: a decision on a case involving abortion may have reached an okay result, but how they got there is terrible.
An angry dad gets told to be angry, or have his kids, but not both.
Does the state have to provide a lawyer to help your ex avoid paying support?
Creditor intervenes in divorce, still gets nothing.
Man pays $1 million in fees, objects to paying $220,000 in child support.
Violating a court's order can result in the Court modifying the placement regime.
Wisconsin group sues to stop same-sex registry.
When is a parent not a parent? (The Wendy M. Case Examined.)
Part 1: How we got here.
Part 2: Michigan's Courts might be a little smarter than ours.
Part 3: "Being a parent" is not a compelling reason to want to be a parent?
The Case of the Nondischargeable Gun (Is a Rifle Support, or Property?)
She'll Never Get Any Of My Money -- Even If It Means I Don't Get Any Of My Money, Either! (Shirking Child Support Can Have Serious Consequences.)
Monday, March 16, 2009
(Part 2 of ) When Banks Screw Up: The Strange, Alarming, Sad, and Ultimately Wonderful Case of Dorothy Chase Stewart,
When we left Ms. Stewart, she was facing foreclosure on her house even though she was only behind by about $154.11; for $154.11, Wells Fargo was commencing a foreclosure proceeding against Ms. Stewart.
Mind you, Wells Fargo never told Ms. Stewart that she was only $154.11 behind. She probably knew -- since she probably knew that she'd missed a house payment and knew that the extra payment she sent in was not enough to cover that -- but she'd never received any notice her missed payment had resulted in Wells Fargo taking the money she was sending and applying it to all manner of crazy things, like repeated late fees, and putting the money into a "suspense account."
Because Wells Fargo was doing that --appyling the money in a manner contrary to what the contract Ms. Stewart had -- Ms. Stewart's default worsened to the point where a computer put her into foreclosure.
That, like many things in the The Strange, Alarming, Sad, and Ultimately Wonderful Case of Dorothy Chase Stewart, bears repeating. A computer put her into foreclosure.
Wells Fargo, as I said last time, uses (and probably most servicers use) several computer programs that work together to administer the loans it services. After all, Wells Fargo can't expect people to keep track of 7.7 million loans, can it?
You know how everybody who loves college football hates the BCS because of the computers? You know how sometimes your Yahoo account keeps telling you that's not your password even though it is? You know how Hal 9000 went completely nuts and decided he had to kill off humans to save the mission, or something like that? Those computers are servicing your mortgage.
But it's okay, because at least humans supervise the computers, right?
Please say yes, Wells Fargo?
Wells Fargo's computer programs were set up, in Ms. Stewart's case (and, it seems, in 6,699,999 other cases) to do a lot of stuff automatically -- stuff like "misapply payments in contravention of the written agreement," and stuff like "send out demand letters" and even worse. Keep that in mind, too: When you get a letter from your mortgage lender, and it tells you to call a number, and you do, and the person on the other end of the line is mystified and has to put you on hold to transfer you 3 or 4 times before someone can tell you what that letter means, it's probably because nobody in that company sent you a letter. A computer did. So they've got to put you on hold while they figure out what the computer did.
And figuring out what the computer did can be a tough task. Just ask Judge Elizabeth Magner, the Bankruptcy Judge who figured out all this stuff Wells Fargo did. (It's her opinion that I'm getting many of my facts from.) Judge Magner had to hold at least three hearings just to get the information in her Opinion. If a federal judge can be, effectively, put on hold for several months, what luck do you expect to have when you call your servicer?
So it's likely that much of what happened to Ms. Stewart in the first year of her troubles was not even known to her, or to Wells Fargo. Only the computers really knew what was going on. Ms. Stewart didn't, because nobody told her. Wells Fargo's people didn't -- I'm assuming-- because if they did know what was going on, then they made a conscious decision to do these things, so I'll be charitable and say they didn't know what was going on.
And there was a lot going on. Not only were Wells Fargo's Hal 9000s misapplying payments, but they were sending out demand letters and also generating "property inspection" requests and reports.
The "property inspection" system used by Wells Fargo, and as described by Judge Magner, is a marvel of efficiency, assuming by "efficiency" you mean running up costs without any other practical purpose.
According to Wells Fargo, its computer programs were set up to generate a "property inspection" if a loan was more than 20 days past due. The loan documents here (and everywhere I've ever seen) let the lender or servicer inspect the property at reasonable times, including after a default. That only makes sense: the house is their collateral, after all. If you lent me money, and I promised that if I didn't pay you, you could take my comic book collection, you'd want to know that I wasn't destroying the collection, or selling it, or letting the twins play with it, wouldn't you?
The problem with Wells Fargo's explanation that it inspects the properties as soon as they are 20 days past due is that it was... how to say this delicately? It was... not true. Not in Dorothy's case. Wells Fargo -- or its Hal 9000-- said that Ms. Stewart's loan first went past due in December, 2000. But it didn't order a property inspection 20 days after that; instead, it first ordered an inspection in July 2001 -- 8 months later.
However, once the Wells Fargo Hal 9000 got around to ordering a property inspection, it did so with a vengeance. From July 2001 forward, Wells Fargo ordered inspections of Dorothy's property forty-four times.
What's wrong with that? Well, a couple of things.
First, each and every property inspection report -- all forty-four of them -- indicated that the property was in good condition. How often do you need to come see my comic book collection before I've convinced you I'm taking care of it? And how frequently do you need to see it?
Second, Wells Fargo was charging Dorothy for these reports. The computers, those marvels of efficiency, were ordering the reports, paying the vendors, and then filing the reports and charging the amount incurred to Dorothy.
Third, Wells Fargo wasn't even reading the report it ordered almost monthly and charged Dorothy to generate. So Wells Fargo, forty-four times, charged Dorothy to suffer a "property inspection report" that Wells Fargo never even read. The "vendor," -- an inspector of some sort -- take a look at the property and then "upload" a report directly into Wells Fargo's computers, which apparently were set to examine the report and alert Wells Fargo if there was a problem.
How would the computers know, though, if there was a problem? That's a fair question, given that the computers, and Wells Fargo, never knew exactly what kind of house they were inspecting.
What? you say, and that's a fair question, too. It's true: Wells Fargo, the inspectors, and the computers never knew, exactly, which house they should inspect. That didn't stop them from inspecting something, and that didn't stop them from charging poor Dorothy Stewart for those inspections.
We know that Wells Fargo and its inspectors and Hal 9000s didn't know what house they were inspecting because the reports filed for inspections show that more than one kind of house was inspected. From August through February 2002, reports filed made reference to a "frame construction" house. But the July 5, 2001 report -- the first one ever -- made a reference to a "brick house," which isn't a "frame construction house" at all.
Here's what Judge Magner had to say about that:
"The failure of Wells Fargo to notice such significant inconsistencies evident on the face of the report further confirms that they were not reviewed by any human being. If Wells Fargo did not believe the reports were important enough to read, this calls into question the importance of obtaining the reports in the first place."
Here's a final problem with those reports: The mortgage required that Wells Fargo give "notice" to Dorothy Chase Stewart of these inspections "at the time of or prior to" the inspection itself.
Wells Fargo employees testified, however, that they never give notice of the inspections. Why bother, they maybe figured, we're ignoring the rest of that contract.
Wells Fargo didn't just order up useless inspections and then charge Dorothy for them without any reason to do so or notice that they were doing so. They also obtained "Broker Price Opinions," or "BPOs." A "BPO" is when a broker tells a lender what he or she thinks the property is worth; it's not an appraisal (although Wells Fargo said they were.)
Wells Fargo charged Dorothy Chase Stewart for nine BPOs, a total of $1,330, over the course of five years. Wells Fargo justified this by saying that whenever a property goes into foreclosure, it has to get a BPO to see if foreclosing makes sense and how much the property might be worth. (One could argue that Wells Fargo could simply use the local tax assessment, generally a public record and generally available for far less than the $95 to $390 that Wells Fargo charged Dorothy, but that's for another day.)
As you'd guess, there were problems with that explanation, too. The problems included that some of the BPOs were done during Dorothy's bankruptcy -- which meant that there was an order called an "adequate protection" order in place. An "adequate protection" order means that there was a court order in place allowing for Wells Fargo to get paid and ruling that the property available to it was sufficient to cover its investment -- so why were they worried about the value of the house? (Bankruptcy stops foreclosures, at least for a short period of time.)
There were more problems, including that Dorothy was charged twice for what appeared to be the same "BPO," and that particular BPO was given in September 2006. Why is that important? It's important because Dorothy lived in New Orleans, and the area in which her house sat was, in September, 2006, a forbidden zone -- so no broker was there looking at the house to give a price opinion. So either nobody gave an opinion at all (and Dorothy was charged anyway) or somebody gave an opinion, but it was based on something other than actually going and looking at the house (and Dorothy was charged, anyway.)
Who was doing these BPOs, you might wonder? The Court certainly did, and Wells Fargo told the judge a company called "Premiere" had done them. When the judge inquired further, Wells Fargo said "Premiere" is an independent company that is "affiliated" with Wells Fargo. So "Premiere," according to Wells Fargo, was a third-party that Wells Fargo hired to do the BPOs.
That, too was... to put it delicately, again... not true. "Premiere" is simply a division of Wells Fargo: So Wells Fargo ordered BPOs, then invoiced itself and paid itself a profit on the inspections -- and charged it all to poor old Ms. Dorothy Chase Stewart.
Oh, and lied to a federal court about that practice. Don't forget that. They charged an old lady and lied to a judge about it.
The actual cost of each BPO to Wells Fargo? $50, according to their lawyers. The other $880 Wells Fargo charged was simply profit it wanted to make off Dorothy.
Remember last time when I said that servicers make their money off imposing charges? See how that works?
The judge considered all that evidence and found that the BPOs were "illegally imposed by Wells Fargo."
So far, then, if you're keeping track, Dorothy missed one payment, in December, 2000. She then made every other payment in a timely manner for nearly a year, and tried to pay extra, such that she was only down $154.11 when Wells Fargo decided to foreclose. Wells Fargo then padded its account by inspecting (?) the property 44 times, and imposing $880 of profit -- profit "illegally imposed by Wells Fargo" on Dorothy Chase Stewart. The cost of that one missed payment has already subjected Ms. Stewart not just to the $350+ in late fees, but also the 44 property inspections and the $1,330 in BPOs. And that's just so far.
One missed payment, computers, and Wells Fargo's need to make money got Dorothy this far. Were they done yet? They were not.
Next time: Force-placed insurance and a 100% penalty for missing a payment?
Shown below: This site says this is the Wells Fargo Home Mortgage Center, in Fort Mill, South Carolina. Not pictured: Hal 9000s subterranean lair.
Wednesday, March 11, 2009
When Banks Screw Up: The Strange, Alarming, Sad, and Ultimately Wonderful Case of Dorothy Chase Stewart (Part 1).
Everyone blames the current economic crisis on two primary factors: First, they say, deregulation allowed greedy lenders to take unfair advantage of innocent consumers. Second, they say, greedy consumers were taking unfair advantage of innocent lenders who then found themselves with worthless portfolios when those unscrupulous homeowners decided not to pay back all the money they'd stolen.
Things are a little more complicated than that, though. A lot more complicated than that, actually. The system that the United States has set up for borrowing and lending money to buy homes, and then for servicing and regulating those loans, and then for enforcing the terms of the loans, is amazingly complex. Amazingly.
How amazingly complex is it? I'll tell you: it's so amazingly complex that lenders have now set up systems to decomplicate things when they have to go to court to enforce their notes; and, it's so amazingly complex that lenders can do things that are blatantly illegal and then argue that they didn't do anything wrong at all and mislead courts about what they're doing and almost get away with it. And, it's so amazingly complex that homeowners, lawyers, and federal judges have to use every resource at their disposal simply to figure out what the lender is doing.
Any consideration of the current economic crisis, any consideration of how to address foreclosures, any consideration of who is "wrong" and who is "right" in any aspect of the current mess needs to begin with considering
The Strange, Alarming, Sad, and Ultimately Wonderful Case of Dorothy Chase Stewart.
And, if you own a home or want to someday, you need to read this. Because it could happen to you.
Let's begin at the beginning.
In 1999, Dorothy Chase Stewart got a loan from a company called "Norwest Mortgage." The loan was secured by a mortgage against her house. Ms. Stewart ran into financial troubles -- of an unclear nature -- and filed bankruptcy. She actually filed bankruptcy three times. Her husband filed in 2002, and she filed in 2004, both without the help of a lawyer. In each of those situations, her case was dismissed because the payments required to be made by a debtor were not made.
(Chapter 13 Bankruptcies typically require that a debtor make payments to a "bankruptcy trustee." The trustee then uses those payments to pay off some or all creditors for a period of time. So it's not true that filing bankruptcy means walking away from your debts.)
Dorothy filed for bankruptcy protection again on June 12, 2007. By that time, her mortgage was held by "Lehmann Brothers" and was being "serviced" by Wells Fargo.
That means that Dorothy owed the payments to Lehmann Brothers, but that Wells Fargo would be the company that would send notices, collect the payments, apply them to the loan, and keep an account of the administration of the loan.
In a bankruptcy case such as Dorothy's, creditors file a "proof of claim," a legal pleading that tells the bankruptcy court how much money the creditor feels it is owed by the debtor; the amount to be listed is the amount owed prior to the filing of a bankruptcy petition. Wells Fargo, as the servicer, filed a proof of claim in Dorothy's case saying they were owed $33,641.80. They filed that "proof of claim" on July 12, 2007. So Wells Fargo, which is charged by contract with administering Dorothy's loan, told a bankruptcy court on July 12, 2007, that Dorothy had owed Lehmann $33,641.80 as of the date she filed bankruptcy.
On August 20, 2007, Wells Fargo "amended" (changed) its claim to add in two additional payments it said it was owed, increasing that to about $35,000.
Of that $35,000 or so, only about $25,000 was for actual past-due payments. Over $7,000 was for attorney's fees and "other... charges." There was also a request, in there, for $776 in "late charges," fees Wells Fargo wanted to assess Dorothy for making late payments before the bankruptcy.
That's where the dispute arose. Dorothy, when her lawyer received the "proof of claim" asking for $35,000 -- of which about $8000 was "late charges," "attorney's fees" and "Other... charges," objected to paying that amount. That set into motion a process that bankruptcy courts use to determine how much a debtor might have to pay a creditor: After Dorothy objected, Wells Fargo submitted additional proof of the amounts it claimed to be owed. It itemized things out, it included invoices, it had affidavits (sworn statements) attesting to how much it was owed.
And yet, Dorothy still objected to paying those amounts. She objected, in part, because Wells Fargo still hadn't put all the information in that it might have, and she objected, in part, because Wells Fargo wasn't supposed to get all that money.
The fees that lenders and servicers can charge are governed by the contracts in place -- that note and mortgage that borrowers sign -- and by state and federal laws that may apply. So to find out if Dorothy might have to pay Wells Fargo attorney's fees, "late charges" and "other... charges," it is necessary to look first at the contract she signed.
Dorothy had borrowed, in 1999, $61,200 on a 30-year note. That's not an outrageous sum; Dorothy was not buying "too much home," it appears. She was not one of the people buying lake homes for no money down. Dorothy, in borrowing that money, agreed that she would make payments on time and agreed to pay a penalty of 5% of the amount due if she paid late. Dorothy and her lender agreed that there would be only one late charge per late payment -- so if Dorothy didn't make her January payment, for example, Wells Fargo could (on behalf of Lehmann) impose a "late charge" on the January payment. Then, if Dorothy did not make her February payment, Wells Fargo could impose a late charge on that payment, too -- but could not impose another late charge on the January payment.
The contract said other things, too, but we'll get to those in a bit. First, we'll focus on the late charges and whether Wells Fargo was to be paid those.
The contract signed by Dorothy and her lender also described how payments were to be applied when Dorothy made them. So the contract, like all such contracts, set out how much Dorothy was to pay, and what would happen if she didn't pay on time, and what should be done with the money when she did pay.
That's where things get complicated, though. It seems so simple, but it's not. The contracts, when you know how to read them, seem very simple. And they are. It's the system set up to enforce and interpret those contracts that is complicated. And things get even more complicated when the lenders decide to... cheat.
It gets complicated because Wells Fargo doesn't just service Dorothy's loan. Wells Fargo, at the time of the hearing, serviced about 7.7 million different home loans. As you might guess, keeping track of 7.7 million accounts requires something more than a pad of paper and a pen, and so to help it, Wells Fargo used computer programs. Wells Fargo in fact used the most widely-used computer program available for keeping track of mortgage loans.
The computer program can do a lot of things, as we'll see -- but computer programs only do what they're told to do. They don't think about things, they don't analyze things, they don't have the power to say Hey, wait, that doesn't seem right. Trusting a computer program is risky. And telling a computer program what to do is tricky; tell it the wrong thing and you mess things up a lot, sometimes.
And the tendency for things to go wrong is increased when there is an incentive to help things along, as there is in this case.
The incentive comes from the method in which servicers get paid for what they do. Lenders, of course, get paid by the borrower-- they get interest and principal repaid. But servicers don't do their servicing for free. They need to get paid, too, and so the lenders have to come up with ways to pay them.
One way servicers get paid is to impose "fees" for the things they do. That's perfectly legal -- if done correctly-- as the notes almost always provide that fees can be imposed if the lender takes action. Another way servicers get paid is to take the money they collect and invest it, collecting interest on that note.
Keep that in mind. It'll become important. But let's focus on the "fees," because that's where we began: those late fees.
The note and mortgage in Dorothy's case allowed the imposition of a late fee. They also set out how money should be applied when a payment came in. Wells Fargo used a computer program to adminster both Dorothy's loan and the 7,699,999 other loans it kept track of, and so Wells Fargo had to tell the computer program what to do with Dorothy's money when it came in.
Wells Fargo should have told the computer program to apply Dorothy's money the way the note required it to be applied. Wells Fargo should have said "Hey, computer system, when Dorothy pays money, put that money first to escrow items. Then, if there's any left over, apply that to interest. Then, if there's still money left over, apply that to principal. If you've still got some, then, pay off any fees and costs."
That's what Dorothy's note and mortgage required: When Dorothy sent money to Wells Fargo, that was the order in which payments were to be applied: escrow, then interest, then principal, then fees and costs.
Here's a problem, though: Wells Fargo maybe doesn't want to wait to get paid and collect its fees until Dorothy has paid everything else off.
Here's another problem: Wells Fargo maybe has a bit of an incentive to apply payments differently.
I don't know if they did it on purpose, or if it was an accident. What I do know is that payments were not applied by Wells Fargo as required by the note and mortgage.
Dorothy first missed a payment on her loan in December, 2000 -- so just a little while after she took out her loan, she missed a payment. When her payment was not received by December 15, 2000, Dorothy's account was (via computer) assessed a late charge of $27.71.
Wells Fargo did not tell Dorothy that it had done that. It assessed a $27.71 late charge and never told Dorothy about that charge.
Is that a big deal?
Maybe. Let's see what happened.
Wells Fargo, which didn't bother telling Dorothy about the $27 late charge it imposed, sent Dorothy an "acceleration letter" on January 3, 2001. Wells Fargo never produced this letter, so it's not clear what it said -- but an acceleration letter is typically a letter from a lender telling a borrower, more or less, Hey, you've defaulted, now you owe us the entire amount of your note or we're going to foreclose. Or it warns that the lender could do that; almost every home loan includes a provision that if you miss a required payment, the lender can "accelerate" the note -- meaning they don't have to wait 30 years for you to pay in full; they can demand you pay in full now.
So Wells Fargo opted not to tell Dorothy it was imposing a $27 fee, and instead (apparently) warned her that she might have to pay the full amount due or be foreclosed.
Dorothy then made her January, 2001 payment. She paid $654.11 -- the regular amount due -- on January 12, 2001.
According to the note, the legally-binding contract between Dorothy and her lender, that $654.11 was to be applied to "escrow," then interest, then principal, then late fees. Dorothy didn't escrow, so the note required that Dorothy's money be applied to accrued interest, then to the outstanding principal, and if anything was left over, it could be applied to late fees.
Wells Fargo, though, applied some of the payment to the December installment, and then applied some of the payment to a December late fee -- the one it had not told Dorothy that she owed. That left it with a little money left over, $72.29.
The contract required that the $72.29 be applied to escrow, interest, principal, or fees.
But Wells Fargo instead put that $72.29 into a "suspense account."
You may never have heard of a suspense account. I didn't, until I began doing this type of law.
A "suspense account" is an account a servicer uses to hold any money that they don't know what else to do with. When a servicer gets money paid on a loan that doesn't match the amounts it believes it should be getting, that money sometimes goes into a "suspense account," instead of onto the loan.
So if you're paying your mortgage and you over pay by, say, $10, your $10 might go into a "suspense account."
But wait: doesn't the note and mortgage say what to do with that money?
You'd think so. You'd certainly think so. The note and mortgage, for example, in almost every single case, allow a borrower to "prepay" the loan (with or without a penalty)-- and they say what should be done with every payment received. So if I owe money to a lender, like Lehmann, and I can prepay the loan, I should be allowed to send in extra money, or money that doesn't match the exact amount owed, and have that applied as required by the note.
I should. But that conflicts with two other realities: reality one -- that computers do most of this nowadays, and reality two-- that servicers want to be paid and have incentives to not apply the money. Those incentives include the fact that it's more complicated to tell the computer what to do with weird amounts of money that don't quite match (and complicated = expensive, remember) and those incentives include that the "suspense account" generates interest that is used to pay the servicer.
So Wells Fargo did not apply the $72.29 to Dorothy's interest, as the note required, or her principal. It put that $72.29 into a suspense account and began to draw interest on it.
Before you say well, that's only $72.29, what's the big deal? remember that Wells Fargo didn't have just Dorothy's loan. It had 7,699,999 others.
Let's say that 1 in 1,000 people had $72.29 held in a suspense account. Heck, let's say 1 in 10,000 people had $72.29 in a suspense account. If only 1 in every 10,000 of the loans Wells Fargo was servicing at the time had $72.29 in a suspense account, that means 769 people had $72.29 in their "suspense account." That's $55,663.20 held in an account paying Wells Fargo. Just from that what's the big deal? amount.
Things got worse, then, for Dorothy. Wells Fargo, which still hadn't told Dorothy about that December late charge, had instead sent her two notices that she was delinquent on her loan (and, technically, she was; she'd still missed a payment that had not been made up, remember.)
Because the January payment that Dorothy made was applied to December, Wells Fargo then imposed a late charge on the January payment -- because it hadn't been made. Another $27.71 imposed, without (it seems) Wells Fargo telling Dorothy about it.
Dorothy then paid on February 12, 2001 -- again, within the time limits for her February payment. She still hadn't made up the previous payment. Again, Wells Fargo applied the payment to the last payment, the January payment, and to the late charge that had been assessed.
Now ask yourself: If Dorothy should have known that she was charged a late fee for December (as many of you probably said), should she also have assumed that she was being charged a late fee for January, and February, even though those payments were made on time?
Contracts in Wisconsin, at least, impose what's called a "duty of good faith." That's kind of an ambiguous duty, but it means that the parties have to treat each other fairly. I don't know if Louisiana (where this all took place) imposes a similar duty. But consider: Was Wells Fargo acting fairly in how it applied the payments?
Oh, and, in February 2001, Wells Fargo again had money left over after paying the January payment and late fee -- so it put that into the suspense account, too.
Go back to that math problem. If 1 in every 10,000 Wells Fargo customers had $144.58 in their suspense account, Wells Fargo has $111,326 in its account, earning interest.
Starting to see how this works? So far, Dorothy missed one payment. Wells Fargo has then imposed $55.42 in late charges, and has $144.58 of Dorothy's money in a suspense account, from which Wells Fargo is earning interest.
This went on for a whole year. Dorothy for the whole year of 2001 made her payments in a timely manner, and each time she did that, Wells Fargo applied the payment to the earlier month's payment, paid the earlier late fee, imposed another late fee, and then put the remainder of the money into the suspense account. So by the end of 2001, Wells Fargo had imposed $360.22 in late fees.
And it gets worse. (I'll be saying that a lot, as we go along.) It gets worse because Dorothy apparently tried to fix things; in that year, she paid an extra $400 to Wells Fargo, money that by the note should have been applied to interest, then principal, then late fees. Instead, Wells Fargo applied that money to late fees, first, then to "Other... charges." (We'll cover that in more detail later.)
So by October, 2001, even though Dorothy had paid all of her 2001 payments plus another $400 towards the single payment she'd missed, Wells Fargo said she was more than $600 behind.
Then Wells Fargo began not accepting payments from Dorothy. Dorothy made payments in October and November, 2001, and both of those were returned. Wells Fargo referred the matter for foreclosure.
How much was Dorothy actually behind when her servicer decided to foreclose on her house?
Think about that, until we get to the next part. Think about a servicer -- not the lender, the servicer-- deciding to foreclose on a house because the borrower is behind $154.11.
And before you say Well, she was in default-- you cold-hearted people out there will say that -- let me rephrase: The servicer decided to foreclose even though it was only owed $154.11, and even though the borrower had actually paid a little extra that year and even though the servicer had at least that much in its suspense account!
Instead of writing to the borrower and saying, Hey, Borrower, you owe us about $154.11 in addition to your regular payment. Why don't you pay that and get caught up? Wells Fargo rejected her payments and decided to foreclose on her house.
Oh, and Wells Fargo never bothered telling Dorothy about the late charges that year. It never bothered telling her about the "suspense account." It never notified her how it was applying her charges.
So let's rephrase that one more time: The servicer decided to foreclose even though it was only owed $154.11, and even though the borrower had actually paid a little extra that year and even though the servicer had at least that much in its suspense account and even though the borrower, poor Dorothy, really had no way of knowing how much she might owe the lender at that point, because the lender had never bothered telling her.
Next: Part Two, coming up: What happened after the foreclosure, and a little more about the computers that control the world of mortgages.
Thursday, March 5, 2009
Don't help out your kids.
At least not in a way that's going to hurt you and them, eventually.
There's a natural urge in all of us, I suppose, to help out our kids -- give them money, provide them advice, teach them how to tie their shoes -- hopefully not necessarily in that order, but you get the point.
That help should, though, never extend to cosigning anything with your kids or grandkids or friends or relatives. Just don't co-sign. Ever.
That lesson, don't co-sign, is lesson number 1 in the case of Legacy Property Management Services LLC v. Koier, but don't worry. There are more lessons to be had from this case.
In 2004, according to the Wisconsin Court of Appeals, Judith Koier rented an apartment for her daughter and her daughter's children; her daughter didn't have a good enough credit rating to rent the apartment on her own, so Judith did what parents want to do and tried to help her daughter out by renting the apartment for her.
Did she help her daughter out? That's debatable. Those of you who say sure, she did need to ask whether it's helping a child to move them into an apartment they don't qualify for renting. There's been a lot of talk these days about whether people were borrowing too much to buy houses they couldn't afford. If that's wrong, why isn't it wrong for a parent to help her daughter move into an apartment her daughter didn't meet the qualifications for renting? Could it have helped her daughter more if Ms. Koier had instead helped her daughter find an apartment that was more affordable, and then helped her daughter improve her credit rating?
That's for another time. And I'm only guessing that Daughter Koier couldn't afford the rent, because it's not clear whether she could or could not afford the rent. What is clear is that Daughter Koier stopped paying rent, resulting in an eviction action being filed... against Judith Koier.
That brings up lesson number 2, which is this: Your creditors will not necessarily treat you fairly. That lesson can be derived from what the landlord, Koier's creditor, did next. When you get sued, you're entitled to receive notice of that lawsuit. That notice typically has to be personally given to you. The landlord at least (in Wisconsin) has to make an effort to have someone hand the lawsuit documents to you personally. If they can't find you, personally, then they can use alternative means of suing.
Judith Koier's landlord really made no effort to serve her personally. Instead, he had a process server try to serve Judith at the apartment.
Why is that not fair? Because the landlord knew Judith never lived there. The lease specifically said that Daughter Koier was living there, and the landlord had been given Judith's address and had Judith's credit report, so he knew (or could have known, which is often the same thing in the law) where to find Judith.
When Judith wasn't at the apartment -- of course-- the landlord then got to "serve by publication." That's when a notice of the lawsuit is published in a local newspaper, and a copy of the notice is mailed to the defendant's last-known address. Judith's landlord published the notice, and mailed a copy of it to Judith -- using the apartment address.
Judith apparently never learned about the eviction action, because she didn't appear in court at the hearing. Because Judith didn't go to court, she got a default judgment entered against her for nearly $3,000.
At some point Judith found out about this because at some point Judith did what I tell everyone to do: she got a lawyer. Judith probably got a lawyer because her wages were being garnished. Her lawyer then wrote to the creditor and asked for some proof of how the lawsuit was started, and then negotiated a payment plan between the creditor and Judith.
Lesson number 3: It might be better to fight now rather than later.
Now, I don't know how Judith and her lawyer made the decision to pay rather than settle. I've got some guesses (which we'll get to in a moment) but it's not clear from the case what Judith's lawyer told her about this action when he first began representing her. It's not clear, in particular, whether Judith's lawyer told her she should fight this in Court now, or whether Judith's lawyer told her to settle now, or whether he gave her those or other options at all. Lawyer-client communications being privileged, I don't know what her lawyer said. I just know what Judith did, and what Judith did turned out to be the wrong thing: Judith agreed to pay the debt.
Or, more specifically, Judith agreed to pay the debt and then didn't pay the debt. After agreeing to pay the debt, Judith didn't abide by the payment plan and was garnished again.
All that took place in 2005-2006.
In 2008, Judith, with her lawyer, finally filed a motion to "vacate" the judgment. ("Vacate" the judgment means to "make it go away," like it never was entered in the first place.) They argued -- correctly, mostly -- to the small claims court that the judgments were "void" -- they should never have had any effect, Judith and her lawyer said, because they weren't served properly. Judith argued that trying to serve her at the apartment was improper. The small claims court denied the motion and said that it was filed too late.
While they lost in that court, Judith appealed, and kind of won. But she mostly lost. It turns out that Judith was right that her motion wasn't too late; the Wisconsin Court of Appeals said void judgments can be attacked at any time, even 3 years after they were entered and two years after a garnishment mostly paid them. Implicit in the Court of Appeals' ruling was the idea that, yes, the judgment was void.
So if Judith was right that she filed her motion in time, and probably right that the judgment was actually void, how, you might ask, did she mostly lose? Fair question, and one that's best answered by a word only lawyers use:
"Estoppel" is a legal term meaning, more or less, you can't do what you want to do because of what you did in the past. Put more simply, it means you can't do that.
"Estoppel" applies when one person does something, and another person relies on that action to do something else, so that now, if the first person changes their actions, the second person will be harmed.
It might be more clear to spell it out this way: Judith agreed to pay the debt. The creditor relied on that, took her money, and spent it. Now, Judith can't come back and unagree to pay the debt, because doing that would harm the creditor. Judith is estopped from challenging the debt.
She can't challenge the debt because she didn't challenge the debt in the past.
The Court of Appeals held that Judith, in 2006, knew everything she needed to know: she knew that she'd been sued and she knew that the landlord hadn't really tried to provide her notice. Then she just went ahead and agreed to pay the debt anyway, waiting two years before challenging it.
So Judith lost. She had to pay the judgment (which was paid, by that point.) That raises an interesting question about this case.
Interesting questions, to lawyers, generally mean expensive questions to clients. That's probably true here, too.
The interesting question in this case is this: why did Judith, two years later, challenge the debt? By that point, the garnishments were over and (presumably) she'd paid the full $3,000 or so she owed. (Court records show the judgment was "satisfied" by October 31, 2008). Why, if the fight was all over, did Judith go start the fight up all over again?
I'm not Judith, and I'm not her lawyer, so I can only guess, but my guess is this: Judith, I bet, challenged the small claims suit because the landlord sued her again.
Court records also show that the landlord, having sued Judith for $3,000 or so in small claims, then sued her in November, 2007 in what might be (but isn't) called "large claims." That 2007 lawsuit was actually the third lawsuit filed against Judith by this landlord. The first, in April, 2005, was to evict everyone from the apartment. The second, in November, 2005, was for about $3,000 in damages. The third, filed in 2007, was seeking (apparently) even more rent from Judith.
So my guess -- and it's only a guess -- is that Judith was okay with paying the $3,000 or so, maybe reluctantly, because it would often be cheaper to pay that than to hire a lawyer to fight that kind of case.
That's true, often, but not all the time. It is almost always cheaper to settle than to fight these cases. But it's not automatically true, for a couple of reasons. For one thing, there may have been laws that allowed Judith to claim her attorney's fees for fighting. (That's a topic for another day.) A second, and more important reason why it might not have been cheaper to settle way back in 2006 is demonstrated because the landlord came back (remember lesson number 2, above) and wanted more money from Judith. Once Judith was sued again, that made it more worthwhile to fight the old case (and might have actually required Judith to fight that small claims case, for complicated legal reasons.)
That interesting question -- why did Judith fight this so much later -- helps demonstrate why rules 1-3 in this post are so true. Becuase the result of Judith's not following those three rules turned out to be: three legal actions filed against her, a judgment of slightly more than $3,000, two garnishments, an appeal, a still-pending lawsuit that might require jury to hear it... and endless trouble, costs, and headaches.
Plus, her daughter wasn't in the apartment all that long.
If you're going to prepay your rent, don't call it a loan. (Court rejects tenant's self-serving testimony.)
Toasters are death traps: When does a tenant have to pay for repairs to the apartment?
Update: The Wisconsin Supreme Court modifies the Court of Appeals' decision in that case.
You can't do what you want to do (Why it's a bad idea to co-sign for your kids.)
Pop Quiz: What do you REALLY know about Landlord-Tenant Law?
Toasters are death traps: When does a tenant have to pay for repairs to the apartment?
Update: The Wisconsin Supreme Court modifies the Court of Appeals' decision in that case.
You can't do what you want to do (Why it's a bad idea to co-sign for your kids.)
Pop Quiz: What do you REALLY know about Landlord-Tenant Law?
Sunday, March 1, 2009
I bet you agreed to pay a debt collector to bug you.
I bet you agreed to pay debt collectors to bug you -- and you didn't even know it, until I just told you what you did.
As if things aren't bad enough for those people who find themselves unable to pay their bills, for whatever reason, there are some companies out there who try to charge you for the... privilege?... of having them call to bug you to get you to pay their bills.
That's right: They charge you to call you and bug you about paying your bill -- so you might pay them what you owe, plus a little extra for the trouble they went to in bugging you. Nice, isn't it? Here's the real kicker: you probably agreed to do just that.
You know all those papers and documents and receipts and brochures and things that companies give you? You know all those little READ THIS IMPORTANT INFORMATION ABOUT YOUR ACCOUNT letters you get from your credit card company, the ones you open up to see if they've raised your credit limit or lowered your payment, then throw away in boredom?
You should've read them.
You should read everything given to you by a company you do business with. Because for every time you luck out by not reading the stuff they give you, there will be a time that you get harmed by not reading that stuff -- harmed by having to pay someone extra simply because they called you to get you to pay your bill.
For instance, do you have a Cingular, or AT&T, cell phone? If so, not reading the fine print might make things a lot harder for you in the future (or maybe it already has.)
Cingular, a company that has since been bought out by AT&T, had clauses in its contracts with customers, clauses that said something to the effect that you, the cell phone user, agreed to pay Cingular "the fees of any collection agency," including attorney's fees, if Cingular had to try to collect your bill.
In other words, if you failed to pay your bill, for whatever reason, and Cingular had to make efforts to collect it from you, you were going to pay their costs in doing so -- up to 33% of the bill, plus attorney's fees.
Plus attorney's fees.
Do the math. My cell phone bill is about $150 per month. If I couldn't pay for one month and Cingular (I don't use Cingular, but I'll pretend) hired a collection agency to collect from me, they could get their $150, plus an extra $50 -- that's on top of any late charges or penalties they assessed.
If I missed three months before they tried to collect, the "collection fee" could be up to $150.
Not counting attorney's fees. If they hired a lawyer and a collection agency, I'd pay the 33% plus attorney's fees. My missed payments could cost thousands.
And Cingular customers agreed to do that. They agreed to do that because they didn't read the contracts and say Hey, I don't want to pay you to collect against me. Not that I'm planning on not paying, but still... and then having said that, they might have shopped around to go get a different plan, one which wouldn't charge them the fees.
Luckily for Cingular customers, though, someone read the contracts. That someone, or someones, were lawyers, and their reading the contracts was lucky, a little, for Cingular customers, and lucky -- a lot -- for lawyers.
What happened was that Cingular, having gotten its customers to pay the collection costs, then decided that it didn't want to actually hire someone to collect against those customers. So instead of hiring a collection agency, or a lawyer, Cingular simply sold the debt.
When a company is owed money, it can do one of a few things. It could always ignore that it is owed; very few companies choose that route. Or it could try to collect the money itself, but that requires that the company assign its own people to do that -- diverting them from the other business of the company. Or it could hire someone to collect the money for it, which may result in the company owing someone else money to collect, so it's worse off than it was: it's owed money and it has to pay someone else.
So a lot of companies take the fourth route: They sell their debt, letting people pay them a (typically) reduced amount in exchange for which the "debt buyer" gets the right to collect the money. So if you owed Cingular $100, they might sell your debt for $90, or $80, or $10, to a "debt buyer" who then has the right to try to collect the full amount owed from you. Cingular gets some money, the debt collector/buyer gets to try to bug you -- everyone's happy.
Cingular, in this case, sold its debt to a company called "AFNI," which then began trying to collect from people, including people in Wisconsin. AFNI wanted to charge the extra fee allowed for by the contract, and they wrote to Wisconsin's Department of Financial Institutions to ask whether adding such fees was legal.
AFNI made a bit of a mistake, there: They asked, more or less, whether the fees were legal, not whether debt collectors could charge such fees. That's a distinction that matters. It matters because Wisconsin has a set of laws referred to as the "Wisconsin Consumer Act."
The "Wisconsin Consumer Act" exists to try to regulate creditor/debtor relations and protect consumers -- among other reasons. The Act prohibits debt collectors from doing certain things -- such as claiming they have a right to do something when they don't.
AFNI did another thing wrong: They didn't actually ask for that advice until after they were sued for the issue. Asking for advice after you've been sued is a bad idea. Had AFNI asked for advice before they began this, things might have been different. (Then again, had the cell phone customers read their contracts before they began this, things might have been different, too.)
AFNI, having decided that it didn't have to worry about the law before beginning collecting, tried to collect from cell phone customers who were in default, and tried to add collection charges onto those balances they claimed were owed. The customers, some of them at least, decided they'd do what everyone should do when they have a dispute: They called a lawyer.
The lawyers got to work, then, and filed a class action suit against AFNI on behalf of all Wisconsin consumers from whom AFNI tried to collect not just the balance owed, but also the collection fee.
As a general rule, I am opposed to class action suits, and here's why: They generally help the lawyers far more than they help the consumers. Typically, the lawyers' not only dwarf the amounts to be paid to consumers, but also, the amount "paid" to consumers is "paid" via coupons or discounts or the like.
Not only do class actions, in my opinion help lawyers more than consumers, but they're completely unnecessary in situations like this, because if you are a consumer who's been victimized by a debt collector in Wisconsin, you might be able to sue that debt collector and, if you win, you might have that debt collector pay your legal fees. So you can sue the debt collector, and the debt collector will pay your lawyer. (Sometimes!)
But in the AFNI case, the consumers didn't individually sue. They filed a class action, which helps the lawyers a lot (and helps the defendants a lot, too, frankly), and the class-action lawyers helped the consumers, a little, by proving that AFNI could not, under federal law, charge the collection fee.
That federal law is the Fair Debt Collection Practices Act, a law that regulates people like AFNI who are collecting money that was owed to someone else, or money owed to themselves under very rare circumstances. The Fair Debt Collection Practices Act (FDCPA) says collectors can't charge you, the debtor, anything that's not allowed by the contract, or by law.
AFNI claimed it was allowed by contract to collect the fee -- and they pointed to the contracts with Cingular, where the cell phone users had agreed to pay a collection fee.
But! said the debtors' lawyers, and the Court -- But! The debtors only agreed to pay those fees if CINGULAR incurred them, not if AFNI did.
And the debtors' lawyers were right. The Court ruled that AFNI had violated the FDCPA, and also violated the "Wisconsin Consumer Act" by trying to collect that fee -- because the customers had agreed to pay Cingular the fees, but not AFNI.
So the customers were lucky; having not read their contracts, they got lucky that Cingular was lazy and sold the debt instead of hiring AFNI to collect it -- a distinction that made a huge difference.
How huge? A judgment for damages was entered-- a judgment of $206,000, ordering AFNI to pay $206,000 in damages for trying to collect fees from debtors. That's not including the attorney's fees AFNI had to pay to the plaintiffs' lawyers in that case. In their initial request, the plaintiffs' lawyers asked that they be paid $62,000+ for work through that part of the case. (The $206,000 was ultimately paid by AFNI along with an undisclosed amount of attorney's fees.)
Were the customers better off for not having read their contracts? No -- they benefitted from a technicality. They got lucky that Cingular made a choice that ultimately made that part of the contracts unenforceable, and they got luckier that they were able to get in touch with lawyers who could make that distinction and prove it to the Court. So it all boils down to:
Read the things your companies give you.
But when you don't do that, make sure you at least call a lawyer once trouble starts.