BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 890
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          Date of Hearing:   July 2, 2012

                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE
                                   Mike Eng, Chair
                      SB 890 (Leno) - As Amended:  June 27, 2012

           SENATE VOTE  :   22-14
           
          SUBJECT  :   Debt buyers.

           SUMMARY  :  Enacts the Fair Debt Buyers Practices Act, imposing 
          various requirements on practices that may be used to collect on 
          purchased consumer debt.  Specifically,  this bill  :    

          1)Defines "debt buyer" to mean a person or entity that is 
            regularly engaged in the business of purchasing delinquent or 
            charged-off consumer loans, consumer credit accounts, or other 
            delinquent consumer debt for collection purposes, whether it 
            collects the debt itself, hires a third party for collection, 
            or hires an attorney-at-law for collection litigation.

          2)Prohibits a debt buyer from making any written statement in an 
            attempt to collect a consumer debt unless the debt buyer 
            possesses certain information, including, among other things: 
            (a) the debt balance; (b) the name and address of the debt 
            buyer and all persons or entities that purchased the debt 
            after charge off; and (c) a statement that the buyer is the 
            sole owner of the debt or has authority to assert the rights 
            of all owners of the debt. 

          3)Prohibits a debt buyer from making any written statement to a 
            debtor in an attempt to collect a consumer debt unless the 
            debt buyer has access to a copy of a contract or other 
            document evidencing the debtor's agreement to the debt or if 
            no signed contract exists, demonstrating that the debt was 
            incurred by the debtor.

          4)Requires a debt buyer to provide all of the above information 
            or document to the debtor without charge within 15 calendar 
            days of receipt of a debtor's written request for information 
            regarding the debt or proof of the debt, or to cease all 
            collection of the debt until the debt buyer provides the 
            information or documents to the debtor.

          5)Requires the debt buyer to provide a specified written notice 







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            with its initial written communication to the debtor that, 
            among other things, informs the debtor of his or her right to 
            request records from the debt buyer showing information that 
            the debt buyer is required to possess as a condition of 
            collecting on the debt.

          6)Prohibits a debt buyer from bringing suit, initiating another 
            proceeding, or taking any other action to collect a consumer 
            debt if the applicable statute of limitations on the cause of 
            action has expired.  

          7)Requires specific information regarding the underlying debt, 
            the debt buyer, the debtor, and charge-off creditors to be so 
            stated in any action brought by a debt buyer on a consumer 
            debt. 

          8)Provides that in an action initiated by a debt buyer, no 
            default of other judgment may be entered against a debtor 
            unless the following authenticated documents have been 
            submitted by the debt buyer to the court:

             a)   Business records establishing facts about the debt, 
               debtor, and charge-off creditors that are required by this 
               act to be alleged in the complaint; and

             b)   A copy of a contract or other document evidencing the 
               debtor's agreement to the debt, or if no signed contract 
               exists, demonstrating that the debt was incurred by the 
               debtor.

          9)Provides that a debt buyer who violates any provision of this 
            act with respect to any person is liable to the person in an 
            amount equal to the sum of the following: (a) actual damages 
            sustained as a result of the violation; (b) statutory damages, 
            as specified for an individual or class action; and (3) costs 
            of the action and reasonable attorney's fees.

          10)Relieves a debt buyer from any liability under this act if 
            the debt buyer shows by a preponderance of the evidence that 
            the violation was not intentional and resulted from a bona 
            fide error notwithstanding the maintenance of procedures 
            reasonably designed to avoid any such error.

          11)Provides that these requirements shall only apply to debt 
            buyers with respect to all debt sold or resold on or after 







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            July 1, 2013.

          12)Requires a claim of exemption and related financial statement 
            form to be provided to a judgment debtor by the levying 
            officer whenever a writ of execution or an earnings 
            withholding order is served upon the judgment debtor or the 
            debtor's employer, as specified.

           EXISTING FEDERAL LAW:

           1)Regulates the collection of debt through, among other things, 
            the Fair Debt Collection Practices Act; Fair Credit Reporting 
            Act; and the Gramm-Leach-Bliley Act.  

          2)Defines "debt collector" as any person who uses any 
            instrumentality of interstate commerce or mails in any 
            business the principal purpose of which is the collection of 
            any debts, or who regularly collects or attempts to collect, 
            directly or indirectly, debts owed or due or asserted to be 
            owed or due another.  The term includes any creditor who, in 
            the process of collecting his own debts, uses any name other 
            than his own which would indicate that a third person is 
            collecting or attempting to collect such debts.

             a)   Exempts:  any officer or employee of a creditor while, 
               in the name of the creditor, collecting debts for such 
               creditor; any person while acting as a debt collector for 
               another person, both of whom are related by common 
               ownership or affiliated by corporate control, if the person 
               acting as a debt collector does so only for persons to whom 
               it is so related or affiliated and if the principal 
               business of such person is not the collection of debts; any 
               officer or employee of the United States or any State to 
               the extent that collecting or attempting to collect any 
               debt is in the performance of his official duties; any 
               person while serving or attempting to serve legal process 
               on any other person in connection with the judicial 
               enforcement of any debt; any nonprofit organization which, 
               at the request of consumers, performs bona fide consumer 
               credit counseling and assists consumers in the liquidation 
               of their debts by receiving payments from such consumers 
               and distributing such amounts to creditors; and any person 
               collecting or attempting to collect any debt owed or due or 
               asserted to be owed or due another to the extent such 
               activity (i) is incidental to a bona fide fiduciary 







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               obligation or a bona fide escrow arrangement; (ii) concerns 
               a debt which was originated by such person; (iii) concerns 
               a debt which was not in default at the time it was obtained 
               by such person; or (iv) concerns a debt obtained by such 
               person as a secured party in a commercial credit 
               transaction involving the creditor.  Ý15 USC 1692a]

           EXISTING STATE LAW  :  

          1)Provides the Rosenthal Fair Debt Collection Practices Act, 
            generally prohibits deceptive, dishonest, unfair and 
            unreasonable debt collection practices by debt collectors, and 
            regulates the form and content of communications by debt 
            collectors to debtors and others.  ÝTitle 1.6C of Part 4 of 
            Division 3 of the Civil Code, commencing with Section 1788.]

          2)Defines "debt collector" as any person who, in the ordinary 
            course of business, regularly, on behalf of himself or herself 
            or others, engages in debt collection. The term includes any 
            person who composes and sells, or offers to compose and sell, 
            forms, letters, and other collection media used or intended to 
            be used for debt collection, but does not include an attorney 
            or counselor at law.  ÝCivil Code, Section 1788.2]

           FISCAL EFFECT  :   None.

           COMMENTS  :   

          According to the sponsor, Attorney General Kamala Harris, "the 
          debt buying industry purchases large tranches of consumer debt 
          at deep discounts.  The industry has become a significant focus 
          of public concern, related, in part, to the inadequacy of 
          documentation maintained by the industry to support its debt 
          collection activities and litigation.  There are wide-spread 
          accounts of debt buyer collection efforts, including collection 
          litigation, against the wrong person, or targeting debt that is 
          time-barred or has already been paid.  Collection efforts become 
          increasingly misdirected as the consumer debt is repeatedly sold 
          and resold without reliable documentation evidencing its origin. 
           The more remote the debt buyer is from the original creditor, 
          the more likely it is that collection efforts will target stale 
          debt or the wrong person."

          According to the Department of Consumer Affairs (DCA), since 
          2004, the Federal Trade Commission (FTC) has received more than 







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          1.8 million inquiries nationwide about debt collectors.  In 
          2010, the FTC received more complaints about debt collection 
          than any other industry.  The complaints involved repeated and 
          harassing communications, collection of debt not owed or amounts 
          more than what was truly owed, inflated fees and interests, debt 
          collection on discharged or impermissible debt, and even 
          allegations of threats of life and liberty.  

          In 2010, debt collection was the number one consumer complaint 
          in California, according to the FTC.  Furthermore, the DCA goes 
          on to state, the owners of these debt portfolios sometimes do 
          not have sufficient documentation to substantiate the amount 
          owed or even the correct debtor.  Some debt buyers purchase the 
          debt portfolios and directly file court actions where they can 
          overwhelm the court system and almost always obtain a default 
          judgment against the consumers.  Armed with a default judgment, 
          the debt collection organization is able to attach wages and 
          garnish a consumer a consumer's bank account without ever 
          verifying that the consumer actually owned the money.  Current 
          law, under the federal Fair Debt Collection Practices Act and 
          California's Rosenthal Fair Debt Collection Practices Act does 
          not get to the heart of these issues but as drafted, SB 890 
          attempts to alleviate these concerns.  

          According to the Federal Reserve Bank of New York, Debt 
          collection is a large, multi-billion dollar industry that 
          directly affects many consumers. In 2011, approximately 30 
          million individuals, or 14 percent of American adults, had debt 
          that was subject to the collections process (averaging 
          approximately$1,400).
           
           California's courts are swamped with debt collection lawsuits at 
          a time that could not be worse given recent court closures and 
          the fiscal crisis facing our judicial system.  A recent New York 
          Times article reported that collection lawsuits across 
          California have increased by 20% over the past five years, with 
          an estimated 96,000 consumer debt collection cases filed in 
          three Bay Area counties in 2009 alone, up from 53,700 cases in 
          2007.  ("Some Lawyers Want to Keep Debt Collection Out of the 
          Courts," NY Times, 4/22/2010.)  
           
           This bill provides a private right of action against a debt 
          buyer who violates any provision of this act.  Under this bill, 
          a debt buyer is liable to the person bringing the action in an 
          amount equal to the sum of the following: (a) actual damages 







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          sustained as a result of the violation; (b) statutory damages, 
          as specified for an individual or class action; and (3) costs of 
          the action and reasonable attorney's fees.  However, a debt 
          buyer is relieved from any liability under this bill if he shows 
          by a preponderance of the evidence that the violation was not 
          intentional and resulted from a bona fide error, and occurred 
          notwithstanding the maintenance of procedures reasonably 
          designed to avoid any such error.  These provisions appear 
          similar to the private right of action under the Rosenthal Fair 
          Debt Collection Practices Act (Civil Code Section 1788 et seq.)  
          It should be noted that even with this private right of action, 
          there is no known opposition from the debt buyer industry to 
          this bill as proposed to be amended.  
           
           Federal Fair Debt Collection Practices Act (FDCPA)
           
          In 1977, the federal government established the FDCPA, to 
          prohibit abusive practices by debt collectors.  The FDCPA was 
          established to provide more regulation on the act of debt 
          collecting from a consumer but only applies to those whose 
          primary business is to collect debts.  This act does not apply 
          to original creditors so only to professional collection 
          agencies.  SB 980 provides additional protection for the act of 
          debt buying and if anything provides additional protection not 
          provided in the FDCPA.  The FDCPA does explicitly state " this 
          title does not annul, alter, or affect, or exempt any person 
          subject to the provisions of this title from complying with the 
          laws of any State with respect to debt collection practices, 
          except to the extent that those laws are inconsistent with any 
          provision of this title, and then only to the extent of the 
          inconsistency. For purposes of this section, a State law is not 
          inconsistent with this title if the protection such law affords 
          any consumer is greater than the protection provided by this 
          title."  The FDCPA was enforced administratively by the FTC 
          until recently.  Now, Under the Dodd-Frank Act, the Consumer 
          Financial Protection Bureau (CFPB) has primary government 
          responsibility for administering the FDCPA.

          Today's collection industry is different from the industry 
          contemplated by the FDCPA 35 years ago.  Key new economic 
          players-debt buyers and collection law firms-have entered the 
          industry since its inception. Additionally, the industry has 
          seen dramatic technological advances. 

          Forty years ago, collection activities depended on typewritten 







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          collection notices and local phone calls. Collection firms may 
          now use sophisticated analytics to identify the specific debtors 
          to target. Predictive dialers and internet telephony have 
          lowered the cost of contacting consumers so that a small 
          collections firm economically can reach out to hundreds of 
          thousands of consumers.  Database improvements have facilitated 
          the sale of debt and created a new sub-industry of debt buyers. 
          But, even as the industry has changed, abuses remain an issue. 
          The collection industry continues to be a top source of 
          complaints to the FTC.


           Rosenthal Fair Debt Collection Practices Act (RFDCPA)
           
          Established in 1977, California created an Act similar to the 
          FDCPA.  SB 980 does not conflict with either of these acts but 
          rather adds more protection to consumers and those involved in 
          the act of debt buying.  The FDCPA and the RFDCPA focuses more 
          on the behavior of those collecting debt and the means that 
          should be used to collect debt through mailers, phone calls, 
          etc.  Nothing in these Acts provides that the debt collector 
          prove they have the right to collect the debt.  Commercial debt 
          is excluded from the statute. Enforcement of this act is only 
          through private civil actions.  SB 980 provides added 
          protections by having debt buyers show that they do in fact own 
          the debt they are trying to collect on and the person they are 
          calling does in fact owe the debt trying to be collected.  

          22 states including California do not currently license or have 
          bonding requirements for collection agencies.  30 States do have 
          a license or bond requirement for debt collection companies.  

           Major Problems:   A recent article, from the American Banker, 
          dated March 29, 2012, titled, Bank of America Sold Card Debts to 
          Collectors Despite Faulty Records, found that "in the "as is" 
          documents Bank of America has drawn up for such sales, it warned 
          that it would initially provide no records to support the 
          amounts it said are owed and might be unable to produce them.  
          It also stated that some of the claims it sold might already 
          have been extinguished in bankruptcy court.  Bank of America has 
          additionally cautioned that it might be selling loans whose 
          balances are "approximate" or that consumers have already paid 
          back in full.  Maryland resident was a victim of s such a sale, 
          which resulted in a three-year legal battle."  








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          The article goes on to state, as the originators of credit card 
          loans, banks are the headwaters of the river of bad debt that 
          flow into the collections industry.  Over the last two years, 
          Bank of America has charged off $20 billion in delinquent card 
          debt.  The bank settles or collects a portion of that itself and 
          retires other accounts when borrowers go bankrupt or die.  An 
          undisclosed portion of the delinquent debts get passed along to 
          collectors.  Once sold, rights to such accounts are often resold 
          within the industry multiple times over the several years.  

          The U.S Office of Comptroller of the Currency investigated 
          JPMorgan Chase's handling of credit card debt records.  The 
          American Banker article states, "a group of current and former 
          employees described at the time how the bank had sold card 
          accounts previously deemed "toxic waste" and which suffered from 
          errors in the amounts being claimed."  JPMorgan Chase had a 
          similar problem as Bank of America where Chase sold debt to debt 
          buyers that had been long been considered unreliable and lacked 
          documentation.  

          Lastly, the article states, "According to the trade organization 
          for the collections industry, much of the criticism of 
          collectors' records stems from banks' failure to provide 
          adequate documentation of debts.  "We're not getting what we 
          need from the seller," says Mark Schiffman, a spokesman for the 
          American Collections Association, which wants to see better 
          recordkeeping and more documentation included in debt sales. 
          "Consumer groups want to see original contracts and original 
          documentation.  That would make a lot of these debts disappear 
          because a lot of that documentation may not exist.""

          In an article from the New York Times, dated April 2, 2012, 
          titled "Why People Hate Banks," Karen Petrou, the managing 
          partner of Federal Financial Analytics, stated, banks are 
          outsourcing their dirty work and then washing their hands as the 
          debt collectors harass and sue and make people miserable, often 
          without proof that the debt is owed.  Banks, she said, should 
          not be allowed to "avert their gaze" so easily.   
           
           CFPB
           
          The CFPB is looking into debt collection practices and have gone 
          on record stating, "We take seriously any reports that debt is 
          being bought or sold for collection without adequate 
          documentation that money is owed at all or in what amount."  In 







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          March, 2012, the CFPB submitted to Congress its first annual 
          report summarizing its activities to administer the Fair Debt 
          Collection Practices Act. These activities represent the CFPBs 
          inaugural effort to curtail deceptive, unfair, and abusive debt 
          collection practices in the marketplace. Illegal collection 
          practices cause substantial harm to consumers, who may pay 
          amounts not owed, unintentionally waive their rights, suffer 
          emotional distress, and experience invasions of privacy. Such 
          practices can even place consumers deeper in debt.  

           PREVIOUS LEGISLATION 

           AB 350 (Lieu, 2009 Legislative Session) Failed passage in Senate 
          Judiciary.  This bill would have enacted the Debt Settlement 
          Service Act for the purpose of licensing debt settlement service 
          providers.  That Act would, among other things:

           prohibit the offering of debt settlement services unless that 
            provider is licensed by the Department of Corporations, as 
            specified;

           exempt a person or entity licensed as a debt settlement 
            services provider from the Check Sellers, Bill Payers, and 
            Proraters Law, as specified;

           provide specific requirements that a provider must comply with 
            in offering debt settlement services, including the 
            preparation of a written financial analysis, and a good faith 
            estimate on the length of time it will take to complete the 
            program, prior to entering into an agreement with a consumer; 
            and

           Provide that an agreement is void if the provider is not 
            licensed by the Act.

          While the financial industry did receive an exemption in the 
          bill, this language is not statute since the measure failed 
          passage.  The language stated, " This division shall not apply 
          to the following persons or their employees when the person or 
          the employee is engaged in the regular course of the person's 
          business or profession: (b) A bank or bank holding company, or 
          the subsidiary, agent, or affiliate of either, or a credit union 
          or other financial institution licensed under state or federal 
          law."








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          That amendment was taken because banks do not act as debt 
          settlement companies.  Debt settlement companies work on a 
          consumer's behalf with the consumer's creditors to reduce their 
          overall debts.  Consumers who contract with a debt settlement 
          company are typically instructed to put money aside in a bank 
          account, and add to that account each month.  The debt 
          settlement company then negotiates with the consumer's creditors 
          to reach a settlement on the debt that the consumer then pays 
          with funds that were set aside in the bank account.  Debt 
          settlement companies work on behalf of the consumer, debt 
          buyer's work on behalf of the company trying to collect the debt 
          from the consumer.  

           Arguments in Support

           The Public Law Center states the need for SB 890, "low-income 
          and formerly middle-class Californians are routinely the victims 
                                      of unscrupulous debt buyer practices, including people who were 
          illegally sued on debts past the statute of limitations; people 
          sued for debts by companies they had never heard of; and people 
          sued in cases for which a debt buyer could not provide one iota 
          of proof of the debt, or that the debt buyer had a right to 
          collect it. Passage of SB 890 will stop the flow of meritless 
          debt buyer suits as similar legislation did when it passed in 
          North Carolina."

          According to the California Labor Federation, SB 890 simply 
          requires adequate documentation behind efforts to collect 
          purchased debts.  For example, SB 890 requires debt buyers to 
          prove sole ownership of a given debt prior to bringing a 
          collection lawsuit.  Another common sense reform requires 
          written settlement agreements between debt buyers and debtors, 
          and the bill also prohibits suits on debt barred by an 
          applicable statute of limitations.  

           Arguments in Opposition

           According to the California Bankers Association, this bill's 
          definition of debt buyer is so broad that it can apply to a bank 
          that acquires another bank or purchases a portfolio of consumer 
          credit that has past due accounts.  This type of acquisition can 
          make a bank a debt buyer under the bill's definition causing 
          bank acquisitions to be much more problematic, and the 
          purchasing of consumer credit accounts cost prohibitive.  








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          According to the Civil Justice Association of California, "this 
          bill imposes a host of detailed new requirements on debt buyers 
          creating new obligations enforceable through lawsuits.  The 
          bill's definition of debt buyer would broadly encompass 
          financial institutions and would apply even in the cases where 
          one bank acquires another has overdue consumer credit accounts."

          Amendment #4 below should eliminate any concerns the oppositions 
          has remaining.  The amendment being proposed by the author and 
          sponsor states, "Neither the acquisition, by a depository 
          institution chartered under state or federal law, of consumer 
          debt incidental to a corporate acquisition, corporate debt 
          restructuring, or other similar transaction, nor the purchase by 
          such an institution of consumer accounts for servicing purposes, 
          is a purchase of delinquent consumer debt under this Act."

           AMENDMENTS:
                
          1)On page 10, line 36, delete "an" and add "such"

          2)On page 10, between line 28 & 29  add:
           
          (d) Except as provided herein, this section is not intended to 
          modify or otherwise amend the procedures established by section 
          585 of the Code of Civil Procedure.

          3)On page 10, line 10, strike "privacy" and insert 
            "confidentiality"

          4)On page 4, line 27 insert : (d). Neither the acquisition, by a 
            depository institution chartered under state or federal law, 
            of consumer debt incidental to a corporate acquisition, 
            corporate debt restructuring, or other similar transaction, 
            nor the purchase by such an institution of consumer accounts 
            for servicing purposes, is a purchase of delinquent consumer 
            debt under this Act.

          5)On page 4 line 28, change (d) to (e) 

          6)On page 4, line 31, change (e) to (f)

          7)On page 7, line 38, delete "contract" and replace with 
            "contact"

           REGISTERED SUPPORT / OPPOSITION  :







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           Support 
           
          Attorney General Kamala Harris (sponsor)
          Alexander Community Law Center 
          American Federation of State, County and Municipal Employees 
          California Consumer Affairs Association
          California Labor Federation 
          California Public Interest Research Group
          California Reinvestment Coalition 
          Consumer Federation of California 
          Consumers Union 
          East Bay Community Law Center 
          Housing and Economic Rights Advocates 
          Lawyers' Committee for Civil Rights of the San Francisco Bay 
          Area 
          Mexican American Legal Defense and Educational Fund 
          Professor Scott Maurer, Santa Clara University School of Law 
          Public Counsel 
          Public Law Center
          Service Employees International Union
          Several individuals
           
          Opposition 
           
          California Bankers Association (CBA)
          Civil Justice Association of California (CJAC)

           Analysis Prepared by  :    Kathleen O'Malley / B. & F. / (916) 
          319-3081