By Shane Shifflett and Justin Scheck
When Covid-19 hit the economy, most debt collectors gave
borrowers a break, cutting back on lawsuits amid lockdowns, closed
courts and loan-forbearance initiatives.
One of the biggest and least-known companies in the industry did
the opposite.
Sherman Financial Group filed more lawsuits to squeeze cash from
people behind on their credit-card bills. A Wall Street Journal
analysis, based on the five state-court districts with searchable
online records, showed Sherman had the largest year-over-year
increase of any firm identified between last March 15 and Dec. 31
-- up 52% from the year-earlier period, compared with a 24% decline
in those districts for the industry as a whole.
Sherman, a privately held enterprise, through its subsidiaries
filed 15,420 more debt-collection lawsuits in those districts than
during the year-earlier period. Those courts serve 13% of the U.S.
population.
In doing so, Sherman has cemented its reputation as a maverick
in the industry. Since founding the company two decades ago,
Sherman Chief Executive Ben Navarro has helped transform the once
small and fragmented business of collecting old credit-card debt
into a multibillion-dollar industry dominated by huge firms.
And while many of his competitors have retrenched during
economic downturns, Mr. Navarro has capitalized on them, expanding
in the wake of the 2008 financial crisis and bucking industry
trends during Covid.
During the pandemic, most of Sherman's largest rivals filed
fewer new lawsuits, citing borrower hardship. Two publicly traded
competitors, PRA Group and Encore Capital Group, both sued fewer
people in 2020 than in 2019, and they limited new collection
efforts. California-based Oportun Financial Corp. suspended new
lawsuit filings, dismissed pending cases and capped the interest
rate on its loans.
A spokesman for Sherman and Mr. Navarro, its majority owner,
said that while the company has filed more lawsuits during the
pandemic than a year earlier, it also owned more debt during that
period. In the last nine months of 2020, the spokesman said,
Sherman's debt-collection arm, Resurgent, sued a smaller percentage
of its debtors than in prior years. The company declined to
disclose specifics about the amount of additional debt it holds or
the percentage of borrowers it sued.
The Sherman spokesman, David Wells, said the company's pandemic
response shouldn't be measured by the number of lawsuits if filed.
"In addition to drastically reducing its suit filing rate,
Resurgent implemented many consumer-friendly policies during the
pandemic."
Suing people who were struggling even before the pandemic may
turn out to be a canny move. Government stimulus, breaks on rent
and lockdown-driven spending cuts mean many people without much
savings now have some cash in the bank. Courts can order banks to
take such savings from debtors' accounts and give the money to
creditors. Because Sherman discloses little about its financial
results or operations, it couldn't be determined how profitable its
approach has been.
Sherman, based in Charleston, S.C., got its start buying
distressed debts from other firms. Initially, its competitors were
small and unable to handle large volumes, while Sherman, backed by
big investors, bought large portfolios, using computer systems that
made analyzing old loans and collecting on them more efficient and
profitable. Over the years, Sherman diversified. It bought a bank
that issues high-interest credit cards, often to consumers with
weak credit. If customers default, other Sherman entities try to
collect.
Mr. Navarro, Sherman's 58-year-old founder, has made a fortune
in the business. He and his partners have created a global
investment firm whose holdings have included an office park in
Ireland, a big chunk of the South Amboy, N.J., waterfront, a
window-shade maker and fintech companies that lend money at high
interest rates. Many of those holdings are controlled by shell
companies.
In 2018, Mr. Navarro made an unsuccessful bid to buy the
Carolina Panthers football team, which sold for $2.275 billion.
More recently, Mr. Navarro's family office invested $250 million in
a private-equity fund focused on oil and gas.
Mr. Navarro, who declined to comment for this article, rarely
speaks publicly about the collections business. "I've spent a
career trying to be low key and trying to have our company be as
low key as possible," he told a group of students three years ago
at his alma mater, the University of Rhode Island, according to a
video recorded by one attendee.
When consumers stop paying off their cards, the banks that issue
them usually send letters and make phone calls attempting to
collect. They often give up after 180 days, booking the bad debt as
a loss. Then they sell it, often for just a few cents per dollar of
debt, leaving the new owner to try to collect.
Unlike with mortgages or car loans, there often is no collateral
to seize with a credit-card loan. Collectors call and send letters,
hoping borrowers agree to pay a portion of their debt. Lawsuits are
the last and most expensive resort.
The number of debt-collection lawsuits filed across the country
doubled between 1993 and 2013, according to the Pew Charitable
Trusts, and debt claims are now the most common type of civil case
in nine of 12 states examined by Pew. The cases frequently end in
default judgments letting debt collectors garnish wages or bank
accounts to satisfy the debt, plus interest and fees.
Among the people Sherman sued during the pandemic was Shalinda
McGregor, 30 years old, who owes $1,372.51 in credit-card debt. She
said she had been unable to pay the debt since she quit nursing
school and moved to rural Wolcott, N.Y., to care for her father
after he had a heart attack.
For the past few years, she worked in an apple-processing plant
six nights a week. In the summer when the plant slows, she collects
unemployment. She said she defaulted because she could never make
enough money to pay off her debts.
Sherman sues only a small percentage of customers who don't
resolve their debts during collections efforts, the spokesman said,
and offers payment plans or partial debt forgiveness before
suing.
Ms. McGregor said she got letters seeking repayment for years
before she was sued, which she ignored, assuming they were from
scammers. She hasn't responded to Sherman's lawsuit and said she
has been out of work since catching Covid in January and intends to
file for bankruptcy because of the credit-card debt.
Sherman's lawsuit against Ms. McGregor, filed on Sept. 3, was
one of the roughly one million debt-collection lawsuits in 2019 and
2020 in the five jurisdictions analyzed by the Journal -- New York,
Wisconsin, Maryland, Missouri and Harris County, Texas, which
includes Houston.
Of the top 10 filers of debt-collection lawsuits in those
jurisdictions in 2020, eight, including well-known lenders such as
Bank of America Corp. and Capital One Financial Corp., filed the
same amount or fewer lawsuits during the pandemic than a year
earlier. Citigroup Inc. notched an increase.
"The modest, single-digit year-over-year percentage increase in
collections litigation nationally is largely the result of cases
that predate the pandemic by months," a Citigroup spokeswoman
said.
In 2020, Sherman-owned companies filed 12% of the debt lawsuits
in those jurisdictions, up from 6% a year earlier.
Sherman's spokesman said the company bought 60% more debt in
2019 than in the prior year, so that when the pandemic hit, it held
more debts over which to potentially sue people. Nationally, he
said, Sherman spent millions of dollars less on lawsuit fees during
2020 than its two largest publicly traded competitors, which he
said indicated Sherman filed fewer lawsuits than those rivals
countrywide. None of the companies disclose how many suits they
file.
Sherman has previously succeeded amid times of economic hardship
by harnessing technology and data in its collection efforts. In
2009, Sherman's revenue hit $1.2 billion, allowing Mr. Navarro and
his partners to buy out the company's long-time investors, two
insurance companies that needed to boost capital, and take the
company private.
"We not just survived, but thrived," Mr. Navarro later said to
the Rhode Island college students. He played a clip from the film
"It's A Wonderful Life" in which the customers of George Bailey's
building-and-loan company demand to withdraw their money amid a
bank run as banker Henry Potter tries to drive it out of
business.
"The only bad news," Mr. Navarro told the students, "is that I
was Potter. I'm not sure what that says about me, but anyway we
were able to make the most of the financial crisis."
The Sherman spokesman said Mr. Navarro's whole speech was
intended to show students how they could succeed "by focusing on
humility, kindness and preparation."
Mr. Navarro told the students he started Sherman, which he named
after his dog, in 1998 in a one-bedroom apartment with a fax
machine and newborn baby. He had been co-head of mortgage sales and
trading at Citigroup when he decided that no one had brought basic
technology to the business of collecting bad consumer loans.
"Collections were done on pencil and paper and note cards, and
physical note card files in much of the industry," said Tim Grant,
an early employee who would become a senior executive before
leaving Sherman a few years ago. Big credit-card issuers sold old
debts for pennies on the dollar into an informal marketplace full
of brokers -- a business that has been plagued by consumer
complaints and regulatory scrutiny.
"Sherman was most definitely trying very, very hard to be a
white knight in what had been a somewhat dirty business," Mr. Grant
said.
Mr. Navarro wanted to use computer programs to estimate the
profitability of debt portfolios. He assembled a 100-person
information-technology staff, hired people with front-office
experience and integrated the company's various business units so
they could handle bigger volumes and different types of debt,
according to a 2006 report to investors.
To get Sherman off the ground, Mr. Navarro sold 91% of the firm
for $40 million to two insurance firms. "They had phenomenal
analytics," said Daniel Gross, the former CEO of one of the firms,
Enhance Financial Services Inc.
Sherman grew quickly as wages for many working and middle-class
consumers stagnated and they turned to more widely available
credit. Between 2001 and 2020, consumer credit-card debt grew by
37% to $819 billion, according to New York Fed data, and
credit-card debt sold by banks increased by 87%, Federal Reserve
data show.
In some cases, Sherman admitted to suing the wrong people. Other
times, it attempted to collect debts so old they were no longer
legally collectible, court records show.
The company said identity theft can lead to suing the wrong
people, and Resurgent takes steps to detect and remedy cases of
mistaken identity, the spokesman said.
Between Sherman's inception and September 2006, its companies
recovered more than $3.8 billion in old debts, it said in a 2006
presentation. Between 2005 and 2009, before the company was taken
private and data became unavailable, Sherman was the nation's
biggest buyer of defaulted credit-card debt, according to the
Nilson Report, a credit-industry analysis firm.
In 2005, Sherman bought a small bank, rebranded it Credit One,
and increased the business from $647 million in outstanding
credit-card receivables in 2006 to $6.81 billion in 2020, the most
recent reported figure, according to Nilson Report. Credit One was
the seventh-largest credit-card provider in 2020, ranked by active
accounts.
Between 2011 and 2020, the bank was the subject of 13,500
consumer complaints filed to the federal Consumer Financial
Protection Bureau over late fees and delays in processing payments
that generate late fees, according to a Journal analysis of federal
records made public via a public-records request.
Credit One received the most complaints of any firm with less
than $10 billion in assets supervised by the Office of the
Comptroller of the Currency, a federal banking regulator, and the
ninth-most complaints about financial products of the largest
credit-card issuers ranked by outstanding loans.
"The level of complaints is representative of an institution of
our size, " Sherman's spokesman said. "We work hard to address all
customer complaints, and our goal is to have as few as
possible."
Since Mr. Navarro's group took full control of the company,
there has been little publicly available information about
Sherman's activities. Court records, some of the only public
documents, show that Sherman filed thousands of lawsuits against
borrowers, leading to some problems with authorities.
In 2011, Maryland sued Sherman's primary debt-collection
subsidiaries, alleging they flooded courts with cases but were
unlicensed to collect there. Sherman suits "contained false,
deceptive, or deficient complaints and supporting affidavits,"
state regulators wrote. In a 2012 settlement, without admitting
wrongdoing, Sherman paid a $1 million penalty and gave credits
worth about $3.8 million to Maryland consumers.
In 2014, the New York attorney general later said, Sherman
collected from at least 400 borrowers whose debts weren't legally
collectible. Sherman paid a $175,000 fine for those violations. In
September, the New Mexico attorney general sued Sherman, alleging
it undertook illegal collections practices. The Sherman spokesman
declined to comment because the lawsuit is pending.
The spokesman said the CFPB has never taken an enforcement
action relating to debt collection against Sherman's
debt-collection companies, and in 2020 those companies underwent 54
regularly scheduled regulatory examinations and a COVID-specific
assessment with zero violations.
Laws regulating collection efforts vary. Some states, including
Kentucky, allow debt collectors to seize nearly everything a debtor
owns. Last year, Carol Bradley, 78-year-old retiree who lives on
the outskirts of Louisville, filed for bankruptcy after a Sherman
subsidiary emptied her bank account to collect on a 15-year-old
debt.
Sherman had acquired a $12,008 debt that Ms. Bradley had
defaulted on in 2006. Sherman later sued Ms. Bradley, and a judge
in 2011 awarded Sherman a default judgment, allowing it to force
her bank to pull money from her account.
Sherman didn't act on that judgment until last year, the Sherman
spokesman said, when the company's computer models determined Ms.
Bradley had money to pay. In May, Sherman used a garnishment order
to compel her bank to transfer her balance of $6,770.78 to
Sherman.
Ms. Bradley, who declined to comment, lives on a fixed income,
court records show. Bankruptcy laws enable debtors to seek the
return of garnishments filed immediately before a bankruptcy. Ms.
Bradley did so, and Sherman settled the matter by returning the
money.
--Lisa Schwartz contributed to this article.
Write to Shane Shifflett at Shane.Shifflett@wsj.com and Justin
Scheck at justin.scheck@wsj.com
(END) Dow Jones Newswires
April 07, 2021 10:18 ET (14:18 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.