Bad-check collectors come under fire

Debt collectors aren't supposed to zing you with false threats, but bad-check collectors who work for prosecutors have been doing so for years, under an exemption from federal collection law.

Now, however, the collectors are under fire from the federal government's consumer protection cop. On Monday, the U.S. Consumer Financial Protection Bureau cracked down on one of the largest bad-check contractors in the U.S., sending a warning to the rest of the industry.

"National Corrective Group masqueraded as prosecutors and used deceptive tactics to intimidate consumers into paying hundreds of dollars in extra fees," CFPB Director Richard Cordray said. The debt collector sent letters with prosecutors' letterhead -- and their signatures -- threatening criminal action.

The company's actions disqualified it from the legal exemption from collection rules, the CFPB said. In a settlement awaiting court approval, the California-based company and two affiliates agreed to pay a $50,000 fine and stop posing as an arm of the law.

Outsourcing law enforcement
Ten states allow local prosecutors to use pretrial diversion programs to collect bad checks. County prosecutors may contract with debt collectors to handle reimbursement of bounced checks, most of which are the result of errors, not fraud.

Consumer advocates say prosecutors are outsourcing a piece of the justice system to profit-driven debt collectors. As a result, intimidated consumers often pay collection fees that dwarf the amount of the check. National Corrective Group, for example, charged consumers $130 to $190 for financial accountability classes that it implied were mandatory, according to court papers.

In most states, consumers who bounce a check may be charged fees by the affected merchant as well as their bank, but they are not legally required to pay debt collectors for education programs.

"I'm glad the federal government finally took some steps to stop it," said Steven Ort, a consumer rights attorney in Iowa. "Nobody should be threatened with criminal prosecution by a debt collection outfit."

Ort represented Lori Liles in a landmark class-action lawsuit against American Corrective Counseling Services Inc., a major bad-check collector. After Liles bounced a $42 check at Wal-Mart in 2000, she received a letter from the company on the county attorney's stationery falsely saying that a criminal complaint was being processed against her. The letter said she must pay $135 in fees, as well as the amount of the check.

After the company settled the case, collectors and a lobby group for district attorneys convinced Congress to create an exemption from debt collection law for check diversion contractors. The exemption from the U.S. Fair Debt Collection Practices Act took effect in 2006.

"There's a certain level of frustration," Ort said. "You go through this [court action] and put a stop to it, and then they change the law." A bad check must be intentional for it to be considered a crime, he said, so threats of prosecution are baseless for routine overdrafts.

Collectors reined in
The CFPB's crackdown moves to rein in practices that have flourished under the exemption. National Corrective Group is the successor company of American Corrective Counseling Services, having bought its business in 2009.

In court papers made public Monday, the consumer protection bureau said the company overstepped the limits of its exemption from collection law. The exemption requires prosecutors to review consumers' cases before check collectors can contact them, the CFPB said. Less than 1 percent of consumers who received warning letters of criminal action had their cases referred to authorities for possible prosecution.

Under the proposed settlement, National Corrective Group must stop using district attorneys' letterhead and signatures, and refrain from making false threats of arrest and prosecution. In addition, prosecutors' offices must review cases before the collector can offer them the diversion program. The law also requires collectors to inform you of your right to dispute the allegations.

The federal crackdown may bring changes in check collection programs in general, the National District Attorneys Association said. "We don't expect wholesale changes," association executive director Kay Chopard Cohen said in an email response to questions. "But we hope that working together we can make sure the law is properly enforced and citizen rights protected at the same time."

The agency's court complaint also names as defendants National Corrective Group's chief executive Mats Jonsson and its affiliate companies, American Justice Solutions Inc. and Victim Services Inc.

The states with pretrial bad-check diversion programs are Arizona, California, Connecticut, Florida, Illinois, Minnesota, Oklahoma, Oregon, South Carolina and Wisconsin, according to the National Conference of State Legislatures.

Some states have taken steps to rein in abusive check collection programs in advance of the federal crackdown. In 2013, Oregon lawmakers prohibited public agencies from allowing their seal or letterhead to be used by debt collectors. As a result, some Oregon prosecutors stopped outsourcing check collection.

"The changes make it more difficult and resource-intensive for Oregon District Attorney's offices to use bad-check diversion programs," Lane County District Attorney Alex Gardner said in a 2013 news release.

See related: Know your rights under the Fair Debt Collection Practices Act

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Updated: 01-22-2018