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By Herb Weisbaum ConsumerMan
msnbc.com contributor
updated 2/3/2011 8:05:47 PM ET 2011-02-04T01:05:47

Is it a scam? Is it just a big misunderstanding? Or has a collection agency in Oklahoma broken the law?

Hundreds of thousands of people who rented movies from Hollywood Video or Movie Gallery had collection notices put in their credit files without any notice or chance to contest the charges.

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Both companies filed for bankruptcy last year and their outstanding debts were turned over to National Credit Solutions (NCS) in Oklahoma City.

Many of those people who found collection notices in their files claim they don’t owe money to either company.

A few weeks ago, Seattle teacher Martin Piccoli had the credit limit on his Discover Card slashed from $8,700 to just $600 because of an NCS collection notice he didn’t know about. The bill was $166 for “overdue videos and late fees.”

“I was just blown away,” he says. “I can firmly state that I owed them nothing and that I never received any communication from them: no phone calls, no mail, absolutely nothing.”

When Piccoli contacted NCS, the representative was able to recite the videos he had rented in 2009 and 2010. He recognized the titles, but disputed the late fees.

“Indeed, if I had owed late charges on the 2009 videos, Hollywood Video would not have let me rent the other videos in 2010,” he wrote in his complaint to the Washington state attorney general’s office.

Piccoli assumed that if Discover had discovered the negative information in his file, others would, too. The NCS representative said she could make that bad mark go away if he paid on the spot.

“I felt like I was being mugged in a way,” Piccoli says.

He paid, and the collection notice was gone the next day.

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Piccoli is one of 48 people who have filed similar complaints about NCS with the Washington attorney general’s office.

“We’re very concerned given the number of complaints and the nature of the complaints,” says Assistant Attorney General Mary Lobdell. “We want to make sure people are aware that this is going on, that they know their rights and how to deal with it.”

Attorneys general in at least five other states are getting complaints about National Credit Solutions. Last week, Kansas Attorney General Derek Schmidt issued a news release to warn about “a possible new scam.”

Protect yourself

On Jan. 26, Montana sued NCS, charging the company with using “unfair and deceptive business practices.”

“Our investigation so far has uncovered about 12,300 Montanans who may have been affected by this,” says Attorney General Steve Bullock. “That’s more than 1 percent of Montana’s population.”

Some of these people could owe money to Hollywood Video or Movie Gallery. But Bullock is troubled by the lack of notice and the $75 collection fee, which his lawsuit calls “exorbitant, unreasonable and unconscionable.”

“Any creditor has the right to lawfully collect a legitimate debt,” Bullock says. “But in doing so the agency can’t demand unlawful collection fees and must give that consumer fair notice of the claimed debt and a chance to pay it or dispute it. None of that happened here.”

Tom Huff, a retired University of Montana professor, found out about the NCS collection notice in his credit file when he and his wife went to refinance their home in Missoula. The banker said there was a problem with one of their credit reports.

It turned out to be a claim for $117 for late fees from two Hollywood Video rentals. When Huff challenged the charge, the NCS representative on the phone asked if he could prove he had returned the DVDs?

“Nobody has proof,” he said. “You drop them in the slot.”

As Huff explained to me, the two videos had been rented months apart. Like Piccoli, he knew no video store lets you rent a second video without paying any late fees on the first one.

Huff thought the whole thing “smelled like a scam,” so he didn’t pay. He disputed the charge with the credit bureau and filed a complaint with the AG’s office.

What’s all the fuss about?
Brett Evans of National Credit Solutions says he runs a good company and “abides by the laws.” He has a hard time understanding why so many people are upset with the way he’s handled this.

Evans insists that when people ask for the documentation of the debt, NCS sends them a validation notice (as required by law) with the specific video titles and late fees.

So why weren’t customers notified about this before it hit their credit files? Evans says Hollywood Video and Movie Gallery told him they had contacted their customers who owed money. So he felt free to send collection letters and place collection notices in credit files. He figures they “dropped” collection notices in about 500,000 credit files.

Evans tells me he was “surprised” by the Montana lawsuit because they did not a have a single complaint from anyone in that state.

He says he doesn’t see anything wrong with the way his company does business. He has agreed to remove the negative information from all of those 500,000 credit files. He calls it “a courtesy.” But he plans to mail collection notices to everyone on his list.

Last week, the Better Business Bureau revoked National Credit Solutions’ accreditation due to “engaging in activities reflecting poorly on the BBB or its members.” 

What can you do?
Collection laws vary from state to state. A few require notification before a company can put negative information in someone’s credit file. I was surprised to learn federal law is very limited in this area. The Fair Credit Reporting Act does not require a collection agency to notify you before it puts a bad mark (collection notice) in your credit file, unless the debt collection is for a financial institution.

If you believe you were mistreated in some way by National Credit Solutions, you should file a complaint with your state attorney general or consumer protection agency. You should also complain to the Federal Trade Commission.

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