Consider this unnerving situation: You apply for a loan only to learn that your credit report is marred by a delinquent debt — one that you have already paid or maybe don’t recognize.
You could be a victim of unscrupulous debt collectors who have placed invalid or fake debts on your consumer credit reports to coerce you to pay them. The tactic is called illegal “debt parking,” or sometimes “passive debt collection.”
The Federal Trade Commission recently took action against a Missouri collection company and its owners, alleging that they collected more than $24 million from consumers, largely by placing “bogus or highly questionable” debts on their credit reports.
“The defendants used this illegal ‘debt parking’ to coerce people to pay debts they didn’t owe or didn’t recognize,” Andrew Smith, director of the F.T.C.’s bureau of consumer protection, said in prepared remarks about the agency’s settlement with the company, Midwest Recovery Systems. The F.T.C. said in a related blog post that the case was its first legal challenge to debt parking under the Fair Debt Collection Practices Act.
In debt parking cases, collectors don’t contact the consumer before reporting the debt to credit bureaus. That means people learn about the debt only when it is flagged as they are applying for a mortgage or a car loan or even a job. Because they don’t want to lose the loan or the job offer, consumers may feel pressured to pay off the “bad” debt quickly.
Midwest Recovery received thousands of complaints from consumers each month, the F.T.C.’s complaint said. When the company itself investigated the complaints, it found that as many as 97 percent of the debts were inaccurate or not valid, the agency said.
That’s not surprising, according to the F.T.C., because many of the debts that Midwest Recovery was pursuing had been obtained from other companies, including payday lenders, that the agency has previously sued for illegal practices. (Debts are often sold, sometimes multiple times, to different collection agencies.)
The debts that Midwest Recovery sought to collect included payday loans, some of which were “fabricated from consumers’ sensitive financial information,” the complaint said.
The debts also included “significant quantities” of medical debt, which often causes confusion because of the complex system of insurance coverage and cost sharing associated with health care bills. More than 43 million people have medical debts on their credit reports, and medical debts make up more than half of the debts reported by collection companies, the F.T.C. said.
In one example cited in the complaint, a consumer applying for a mortgage was told that a $1,500 medical debt placed on his credit report by Midwest Recovery had lowered his credit score, putting his loan approval at risk. The borrower contacted the hospital and learned that he owed just an $80 co-payment, which he then paid. Despite the finding, the F.T.C. said, Midwest Recovery refused to remove the larger debt and threatened the consumer with a lawsuit if he didn’t pay.
In some cases, the company appears to have re-reported debts that it had removed from the consumer’s credit reports — sometimes after the borrower paid the company and was assured that the debt would be struck from the credit report.
The settlement with the F.T.C., filed in U.S. District Court for the Eastern District of Missouri, prohibits Midwest Recovery and its owners from debt parking and from pursuing consumers for debts without a “reasonable basis.” Midwest Recovery must also contact the credit reporting bureaus, which maintain consumer credit reports, and ask that all debts reported by Midwest Recovery be deleted.
Midwest Recovery and its three owners, Brandon M. Tumber, Kenny W. Conway and Joseph H. Smith, “neither admit nor deny” the allegations in complaint, according to the settlement. A lawyer representing the company and Mr. Tumber didn’t respond to a request for comment. Attempts to reach the co-owners at a phone number listed for Midwest Recovery were unsuccessful.
The settlement includes a financial judgment of $24.3 million, but the payment is partly suspended because of Midwest Recovery’s “inability to pay,” the F.T.C. said, so the company must pay about $57,000. One of the owners must also sell his stake in another debt collection company and pay that amount to the F.T.C. If the defendants are found to have misrepresented their ability to pay, the full judgment is due.
The settlement will be final when the judge officially enters the order, an F.T.C. spokesman, Jay Mayfield, said. A court conference is scheduled for next week.
Rohit Chopra, one of the trade commission’s five members, voted against the settlement and criticized it as inadequate. In a statement, he said he disagreed with the terms because the defendants were not barred from working in the debt collection industry and consumers “will receive almost no help whatsoever.”
Mr. Chopra said he would like to see the F.T.C. work closely with the Consumer Financial Protection Bureau on such cases because that could help victims qualify for compensation from the bureau’s civil penalty fund.
Also, he said, a “systemic fix” for debt parking probably requires the major credit-reporting bureaus — Equifax, Experian and TransUnion — to take action to cut off debts submitted by problem collection firms.
The Consumer Financial Protection Bureau is expected to publish a second round of debt-collection rules this month to address debt parking, among other issues.
Here are some questions and answers about debt collection:
How can I protect myself against debt parking?
Check your credit report regularly, said Chi Chi Wu, a lawyer with the National Consumer Law Center. If you find items that appear incorrect, contact the lender or collection agency listed on your report, as well as the credit bureau that issued the report.
A report by the Federal Trade Commission in 2012 found that one in four consumers identified errors in credit reports that might affect scores, and 5 percent had errors that could result in less favorable terms for loans.
The F.T.C. advised checking your report before applying for a loan or a job to avoid surprises.
How do I check my credit report?
You can get free credit reports from Equifax, Experian and TransUnion at annualcreditreport.com. Normally, you can get just one free report from each bureau once a year. But because of the pandemic, the bureaus are offering free weekly reports through April.
How can I dispute a debt that I believe is incorrect?
It’s best to dispute the debt in writing to both the collection agency and the credit bureau that provided the report, Ms. Wu said. The Consumer Financial Protection Bureau offers letter templates and other tips for dealing with debt collectors on its website.
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