One of the country's largest debt buyers has agreed to overhaul its collection practices and pay the state of Minnesota $500,000 in a settlement that reflects heightened scrutiny of the growing industry.

Midland Funding LLC, owned by debt-buying giant Encore Capital Group Inc. in San Diego, faced allegations that it robo-signed paperwork in collection lawsuits without verifying, or in some cases even including, basic facts and signatures.

Minnesota Attorney General Lori Swanson, who announced the agreement Wednesday at a news conference, said the problems discovered with Midland are prevalent in the rapidly growing debt-buying industry. The lawsuit that led to the settlement is believed to be the first government suit against one of the firms.

"This is a real problem area," Swanson told reporters. "I hope others will take a look at this."

Midland signed the consent judgment without admitting wrongdoing.

The relatively young debt-buying industry is made up of companies that buy electronic portfolios of old consumer debt from credit card and telecom companies, for instance, for pennies on the dollar and then try to collect on the bills.

Swanson sued Midland last year in Hennepin County District Court after a yearlong Star Tribune investigation in 2010 exposed suspect practices in the collection industry. The investigation showed that Midland was Minnesota's most litigious debt buyer, obtaining nearly $38 million in court judgments against debtors in Minnesota from 2005 through 2009.

The company issued a statement Wednesday saying that Swanson's lawsuit centered largely on affidavit procedures that Midland substantially redesigned in 2009. It said it is committed to treating customers with respect and it created the industry's first consumer bill of rights codifying its policies to play a positive role in customers' financial recovery.

"After significant effort examining our company, Midland confirmed to the Minnesota Attorney General that no systemic issues were found with our current affidavit process," Encore general counsel Greg Call said in a written statement. "In addition, we confirmed that the underlying consumer debts are valid and that our current affidavit process accurately describes those debts."

Several Minnesotans at Swanson's news conference, however, related tales about Midland pursuing them more recently for money they didn't owe.

Ka Yang, 32, of St. Paul, said she finally managed to get back the $9,000 Midland took from her bank account over someone else's Visa credit card debt, but only after paying $2,000 to hire a lawyer.

Yang said she was speaking out in hopes of preventing others from facing the same thing. "I'm really angry," she said.

Consumer advocates applauded the settlement.

"I think what it does, it shines a very bright spotlight on the problems that the federal regulators and states across the country have been seeing with respect to debt buying and this zombie debt kind of stuff," said Ron Elwood, supervising attorney at the Legal Services Advocacy Project, which represents the interests of low-income Minnesotans.

Elwood said the problem has been under scrutiny by various states, as well as agencies such as the Federal Trade Commission, but that the settlement could help prompt a national solution.

Midland's parent, San Diego-based Encore Capital Group Inc., is a publicly traded debt buyer and collector that reported profits last year of $61 million. Encore has been on Fortune magazine's "100 Fastest Growing Companies" list for the past two years.

The agreement requires Midland to verify the debt it's trying to collect and the identity of who owes it, and show that information to people before the company sues them to collect.

As part of the package of the agreed changes, Midland also will resolve all outstanding and future consumer complaints made to the attorney general's office, ensure that it isn't trying to collect old "zombie debt" that's beyond the statute of limitations and change the way it serves lawsuits to ensure people know they are being sued.

Swanson said her office has a number of pending investigations into other collection operations that will likely result in more enforcement actions. She said she plans to urge lawmakers to strengthen the state's consumer protections regarding debt collection. "Minnesota has some of the most lopsided creditor laws in the country when it comes to collecting debts," she said.

St. Paul resident Andrew Martin explained Wednesday how Midland last year mistook him for a man with the same name and pursued him over a Citibank debt he didn't owe. It was stressful, he said, and he wasn't even aware a judgment as filed against him. "Luckily it never hit my credit report," he said.

Willie Harris, an 80-year-old retiree, said in an interview that he still hasn't resolved a case of mistaken identity with Midland. His is one of hundreds of complaints against Midland with the attorney general and that Midland has agreed to resolve.

Harris, of Big Lake, said Midland started sending threatening letters and repeatedly calling him last year over about $1,800 owed on a Capital One credit card. Trouble is, he said, he's never had a credit card in his life.

Harris said he tried to explain that again and again, to no avail. "They just kept it up," he said.

Jennifer Bjorhus • 612-673-4683