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Post date: December 1 2005

Court Affirms Ruling Against Sub-prime Credit Card Issuer

Attorney General Spitzer today hailed an appellate court ruling upholding a lower court decision halting a major credit card issuer’s predatory and abusive lending and debt collection practices.

The Appellate Division, Third Department of State Supreme Court in Albany upheld a 2004 decision issued by the late Justice Joseph R. Cannizzaro against Cross Country Bank, one of the nation’s largest sub-prime credit card issuers, and its debt collection affiliate, Applied Card Systems.

"My office is committed to protecting consumers against predatory lending practices," Spitzer said. "This decision puts all lenders on notice that such practices will not be tolerated in New York."

In the lower court decision, Justice Cannizzaro ruled that Cross Country Bank and Applied Card Systems, both of Wilmington, Delaware, engaged in fraud, deception, false advertising and abusive debt collection practices.

In issuing his decision, Justice Cannizzaro ordered Cross Country Bank and Applied Card Systems to halt all of the illegal practices cited in Spitzer’s lawsuit and scheduled further proceedings to determine the amount of restitution and penalties each must pay. After the decision was entered, Spitzer filed a motion seeking monetary relief of approximately $40 million. A ruling on that motion is expected shortly.

In today’s decision, the appellate court found that Justice Cannizzaro correctly determined that Cross Country Bank had engaged in all of the fraudulent and deceptive practices that Spitzer’s office had alleged.

The Third Department also found that Spitzer’s claims were not preempted by the federal Truth-In-Lending Law.

The Attorney General filed this lawsuit in 2003, alleging that Cross Country Bank targeted consumers with poor credit records with deceptive credit card solicitations, that offered credit lines of up to $2,500. The vast majority of consumers, however, actually received approximately only $400 in credit, much of which was immediately applied to fees imposed by the bank, such as annual, application and monthly maintenance fees, which significantly reduced the already minimal amount of credit available to the consumers.

The effect of the limited credit lines and compounding fees and finance charges was to trap these unwary consumers in a vicious cycle of pyramiding debt from which they could not escape.

Specifically, Spitzer alleged that Cross Country Bank:

  • Misrepresented the amount of credit available to cardholders;
  • Fraudulently induced consumers into purchasing credit insurance that was of little or no benefit to cardholders;
  • Fraudulently induced consumers to unwittingly enroll in fee-based membership programs; and
  • Misrepresented the features of its secured credit cards.

Spitzer’s lawsuit claimed that, as a result of these acts, many cardholders unknowingly exceeded their credit limit, thus incurring additional $30 overlimit fees. In addition, consumers who were unable to bring their balance below the credit limit by the payment due date incurred $30 late fees.

As part of his lawsuit, the Attorney General also alleged that, after Cross Country Bank drove the cardholders into delinquency, its affiliate, Applied Credit Services employed a variety of abusive and illegal collection techniques designed to harass cardholders into making
a payment. These unlawful tactics included misrepresenting the caller’s identity; making repeated, frequent and disruptive telephone calls; calling cardholders at their place of employment; using rude insulting and/or obscene language; and making false and improper threats. In addition, the Attorney General alleged that Applied Card Systems debited payments from cardholders’ accounts without authorization and misrepresented payoff amounts.

Justice Cannizzaro found that the Attorney General had established all of his claims against Applied Card Systems and ordered Applied Systems to cease engaging in the practices cited by Spitzer.

This case is being handled by Assistant Attorneys General Mark Fleischer, Matthew Barbaro and Jane Azia of the Consumer Frauds and Protection Bureau, under the supervision of Senior Counsel Peter H. Schiff and Thomas Conway, Chief of the Consumer Frauds and Protection Bureau.