BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Lou Correa, Chair
2013-2014 Regular Session
SB 233 (Leno and Correa) Hearing Date: April 17, 2013
As Amended: April 1, 2013
Fiscal: No
Urgency: No
SUMMARY Would enact the Fair Debt Buyers Practices Act, to
further regulate the activities of persons and entities that
purchase delinquent or charged-off consumer debt, as specified.
DESCRIPTION
1. Would define a debt buyer, for purposes of the bill, as a
person or entity that is regularly engaged in the business
of purchasing 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 for collection
litigation.
2. A debt buyer would also include any parent, subsidiary, or
other affiliate that exercises direct control over a person
or entity that meets the definition of a debt buyer in
Number 1, immediately above.
3. Would prohibit a debt buyer from making any written
statement to a debtor in an attempt to collect a consumer
debt, unless it possesses the following information:
a. That the debt buyer is the sole owner of the debt at
issue or otherwise has authority to assert the rights of
all owners of the debt.
b. The debt balance at charge off and an explanation of
the amount, nature, and reason for all post-charge off
fees and charges imposed by the charge-off creditor or
any subsequent purchasers of the debt.
c. The date of default or the date of the last payment
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233 (Leno and Correa), Page 2
by the debtor.
d. The name and an address of the charge-off creditor
at the time of charge off, and the charge-off creditor's
account number associated with the debt.
e. The name and last known address of the debtor as
they appeared in the charge-off creditor's records prior
to the sale of the debt.
f. The names and addresses of all persons or entities
that purchased the debt after charge off.
4. Would prohibit a debt buyer from making any written
statement to a debtor in an attempt to collect a consumer
debt, unless it has access to a copy of the contract or
other document evidencing the debtor's agreement to the
debt.
5. Would require a debt buyer to include a statement with its
first written communication to a debtor, informing the
debtor that he or she is eligible to request all of the
information listed in Numbers 3 and 4 above, and would
require the debt buyer to provide that information to a
debtor, without charge, within 15 calendar days of receiving
a debtor's written request for it. Any debt buyer who is
unable to provide the information to a debtor within 15
calendar days must cease all attempts to collect the debt,
until that debt buyer is able to provide the information.
6. Would provide that, if a language other than English is
principally used by a debt buyer in its initial oral contact
with a debtor, the debt buyer must provide the statement
described in Number 5 above to that debtor in that language,
as specified.
7. Would require all settlement agreements between a debt
buyer and a debtor to be documented in open court or
otherwise reduced to writing, and would require a debt buyer
to ensure that a copy of the written agreement is provided
to the debtor.
8. Would require debt buyers who receive payment on a debt to
provide a written receipt or monthly statement reflecting
that payment (or a final statement reflecting that payment,
if the payment is accepted as payment in full or as a final
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233 (Leno and Correa), Page 3
compromise of the debt) to the debtor within 30 calendar
days.
9. Would prohibit a debt buyer from bringing suit or
initiating an arbitration or other legal proceeding to
collect a consumer debt if the applicable statute of
limitations on the debt buyer's claim has expired.
10. Except as necessary to protect confidential personal,
financial, or medical information, would require the
complaint in any action brought by a debt buyer on a
consumer debt to allege the nature of the underlying debt
and the consumer transaction or transactions from which it
is derived, and to include all of the information listed in
Number 3 above, along with a statement that the debt buyer
complied with the provisions of the bill described in
Numbers 3 through 6 above. Would further require each
complaint to contain a copy of the contract or other
document evidencing the debtor's agreement to the debt as an
attachment to the complaint.
11. Would provide that no default or other judgment may be
entered against a debtor, unless business records,
authenticated through a sworn declaration, are submitted by
the debt buyer to the court to establish the information
that is alleged in the complaint, and unless a copy of the
contract or other document evidencing the debtor's agreement
to the debt, authenticated through a sworn declaration, has
been submitted by the debt buyer to the court.
12. Would provide that, if a debt buyer plaintiff seeks a
default judgment and has not complied with the provisions of
the bill, the court may not enter a default judgment for the
plaintiff and may, in its discretion, dismiss the action.
13. Would provide for all of the following, to enforce the
provisions of this bill:
a. A debt buyer who violates the provisions of the bill
with respect to a person is liable to that person for
actual damages, as specified, plus statutory damages
between $100 and $1000 per violation, plus reasonable
attorneys' fees and costs, as determined by the court.
b. In the case of a class action, a debt buyer who
violates the provisions of the bill with respect to a
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233 (Leno and Correa), Page 4
class is liable for statutory damages of between $100 and
$1000 per violation for each named plaintiff, plus
reasonable attorneys' fees and costs, as determined by
the court.
c. If, as part of a class action, a court finds that
the debt buyer engaged in a pattern and practice of
violating the bill, the court may award additional
damages to the class in an amount not to exceed the
lesser of $500,000 or 1% of the net worth of the debt
buyer.
d. Courts are authorized to award reasonable attorneys'
fees and costs to a prevailing debt buyer, upon a finding
by the court that the plaintiff's prosecution of the
action was not in good faith.
e. A debt buyer has no civil liability under the
provisions of the bill if it shows, by a preponderance of
the evidence, that its violation was not intentional,
resulted from a bona fide error, and occurred
notwithstanding the maintenance of procedures reasonably
adopted to avoid any such error.
f. Would require that any action brought to enforce the
provisions of the bill be brought within one year from
the date of the last alleged violation by the debt buyer.
g. Would provide that recovery in an action brought
under the Rosenthal Fair Debt Collection Practices Act or
the federal Fair Debt Collection Practices Act precludes
recovery for the same acts in an action brought under the
provisions of this bill.
14. Would provide that any waiver of the provisions of this
bill is contrary to public policy, and is void and
unenforceable.
15. Would amend the Code of Civil Procedure to align the
additional information requirements of this bill with the
requirements that levying officers, process servicers, and
employers must follow in connection with wage garnishment.
EXISTING FEDERAL LAW
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233 (Leno and Correa), Page 5
16. Provides for the Fair Debt Collection Practices Act (FDCPA;
15 USC Section 1692), whose stated purposes are to eliminate
abusive practices in the collection of consumer debts,
promote fair debt collection, and provide consumers with an
avenue for disputing and obtaining validation of debt
information in order to ensure the information's accuracy.
The Act creates guidelines under which debt collectors may
conduct business, defines rights of consumers involved with
debt collectors, and prescribes penalties and remedies for
violations of the Act. Responsibility for enforcing the
FDCPA was transferred from the Federal Trade Commission to
the federal Consumer Financial Protection Bureau through the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
EXISTING STATE LAW
1. Provides for the Rosenthal Fair Debt Collection Practices
Act (Civil Code Section 1788 et seq.), whose stated purposes
are to prohibit debt collectors from engaging in unfair or
deceptive acts or practices in the collection of consumer
debts and to require debtors to act fairly in entering into
and honoring such debts. The Act 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.
COMMENTS
1. Purpose: This bill is intended to provide better
documentation of alleged debts to consumers who are
contacted by debt collectors, and to reduce the occurrence
of debt collection activities directed toward time-barred
debt, or to the wrong person, or both. It does so by
establishing clear, enforceable standards governing the
documentation required to support the collection of
purchased delinquent or charged-off debt, particularly in
collection litigation.
According to the author's office, the debt buying industry has
become a significant focus of public concern, related, in
part, to the inadequacy of documentation maintained by the
industry in support of its debt collection activities and
litigation. There have been widespread accounts of debt
buyer collection efforts, including collection litigation,
against the wrong person, or targeting debt that is
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233 (Leno and Correa), Page 6
time-barred or has already been paid. Collection efforts
have become increasingly misdirected, as consumer debt is
sold and resold, repeatedly, without reliable documentation
evidencing its origin. This bill is a response to these
concerns.
2. Background: According to the federal Consumer Financial
Protection Bureau (CFPB), debt collection is a multi-billion
dollar industry. During 2012, approximately 30 million
individuals nationwide (14% of American adults who have
credit reports) had debt that was subject to the collections
process. The average amount of consumer debt held by these
consumers was $1,500.
In a rule released by the CFPB in October 2012 (see discussion
below), CFPB described the importance of regulating the
consumer debt collection industry. It noted that consumer
debt collection is important to the functioning of the
consumer credit markets. By collecting consumer debt,
collectors reduce creditors' losses from non-repayment and
help keep credit accessible and more affordable to
consumers.
However, debt collection performed in illegal ways has the
potential to cause consumers substantial harm. If
collectors falsely represent amounts owed, consumers may pay
debts they do not owe, either to stop collection efforts or
because they are unsure how much they owe. Consumers may
also unintentionally yield their rights, by waiving the
statute of limitations on debt claims for which the relevant
limit periods have expired. "Whether or not consumers owe
and are liable for the debts collectors are attempting to
recover, unlawful collection practices can cause significant
reputational damage, invade personal privacy, and inflict
emotional distress. Among the possible consequences, a
collector's inappropriate interference with a consumer's
employment relationships can also impair the consumer's
ability to repay debts."
Although federal and state laws already exist to protect
consumers from such harms, several interested parties,
including the Federal Trade Commission and this bill's
sponsor, believe that existing law is inadequate, and that
more needs to be done to protect consumers.
3. Discussion:
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233 (Leno and Correa), Page 7
a. Relation to SB 890: The provisions of this bill are
substantially similar to provisions of SB 890 (Leno), a
bill that was extensively debated during the 2011-12
Legislative Session, and which was ultimately amended to
reflect a compromise between the author, sponsor, debt
buyer, and debt collector industries. SB 890 ultimately
failed passage in the Assembly Banking & Finance
Committee, due to opposition from the California Bankers
Association.
SB 233 builds on the compromise reached last year with the
debt buyer and debt collector industries. Although
complete consensus on the bill has not yet been reached
with the California Bankers Association, the two sides
are much closer than they were last year, and have
tentatively agreed to a new definition of "debt buyer."
That agreement is summarized below in the Amendments
section.
b. Recent Federal Action: The Dodd-Frank Wall Street
Reform and Consumer Protection Act granted CFPB authority
to supervise certain nonbank persons for compliance with
federal consumer financial law and for other purposes.
CFPB has the authority to supervise nonbank covered
persons of all sizes in the residential mortgage, private
education lending, and payday lending markets. It has
the authority to supervise nonbank "larger participants"
in markets of other consumer financial products or
services, as the Bureau defines by rule. Since SB 890
failed passage on July 2, 2012, the CFPB has taken two
actions related to the debt collection industry.
In October 2012, the CFPB published a Final Consumer Debt
Collection Rule, defining larger participants in the
context of consumer debt collection, and giving CFPB
authority to undertake supervisory activities with
respect to those consumer debt collectors, effective
January 2, 2013. In its rule (codified as 12 CFR Part
1090.105), CFPB defined "consumer debt collection,"
"creditor," and "debt collector," and defined a larger
participant in the context of consumer debt collection as
one whose annual receipts resulting from consumer debt
collection are more than $10 million.
Consistent with its new supervisory authority over larger
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233 (Leno and Correa), Page 8
consumer debt collectors, the CFPB issued a manual of
examination procedures in October 2012, for use by CFPB
examiners in reviewing the activities of those
collectors. That examination manual does not impose any
new rules for larger consumer debt collectors; instead,
it provides checklists for use by CFPB examiners in
evaluating whether larger consumer debt collectors are
complying with existing federal law in this area.
Staff's review of the new federal rules and examination
guidelines did not identify any conflict with what is
being proposed in SB 233. There are, however,
differences in this bill's definition of a "debt buyer"
and the CFPB's definition of a "debt collector," which is
likely to mean that the new rules proposed by SB 233 will
fall on a somewhat different population than rules that
may be promulgated for large debt collectors in the
future by the CFPB.
4. Summary of Arguments in Support:
a. Attorney General Kamala Harris is sponsoring SB 233.
The Attorney General's interest in the area stems from
industry practices, which are causing collection efforts
to be directed toward the wrong consumer, or toward the
collection of debt that is time-barred or has been paid.
The Attorney General's concerns are compounded, because a
very high percentage of debt collection litigation result
in default judgments, where consumers do not appear to
present whatever defenses may be available to them.
SB 233 addresses these concerns in a number of ways, but
principally by ensuring that collection efforts on
purchased debt will be supported by adequate
documentation. By requiring all payments and agreements
associated with debt to be reduced to writing, the bill
will ensure that no judgment is entered on purchased debt
that is time barred or that lacks documentary evidence.
b. Consumers Union and the Center for Responsible
Lending write that SB 233 is sorely needed. "Tens of
thousands of Californians are contacted every year by
debt buyers they have never done business with, for debts
that may be old or in an amount that doesn't match the
consumer's memory or records. The debt may even be owed
by someone else or the result of identity theft. Yet,
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233 (Leno and Correa), Page 9
some debt buyers have little more than a robo-signed
affidavit to back up their claims in court." SB 233 will
help consumers and courts determine if the consumer is,
in fact, the person who incurred the debt. To ensure
fairness in all civil collections cases, the bill would
require debt buyers to show how the debt was calculated,
including the original amount and the nature and type of
post charge-off fees and charges. This is a protection
that does not currently exist for persons who are sued on
a debt.
c. The Public Law Center routinely sees cases in which
low-income and formerly middle-class Californians are
victims of unscrupulous debt buyer practices. It
observes that collection lawsuits have increased by 20%
statewide over the past five years. This marked workload
increase is coming during a fiscal crisis, when
California courts are closing their doors early and
cutting staff hours as a result of budget strain. When
legislation similar to SB 233 passed in North Carolina,
the result was a marked drop in the courts' civil
caseload.
5. Summary of Arguments in Opposition: None received.
6. Amendments: The author, sponsor, debt buyer, and debt
collector industries have agreed on a series of largely
technical amendments to the April 1st version of the bill,
which will be offered by the author in Committee. The three
most substantive changes to the bill's language that are
contained in those amendments include the following:
a. The definition of a debt buyer will now read as
follows: 1788.50 (a) "As used in this title, 'debt
buyer' means a person or entity that is regularly engaged
in the business of purchasing charged-off 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."
The definition of a debt buyer will no longer include "any
parent, subsidiary, or other affiliate that exercises
direct control over the person or entity described in
subdivision (a)."
A definition of what is meant by charged-off debt will be
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233 (Leno and Correa), Page 10
added to the bill. Language to reflect this definition
was not available at the time this Committee analysis was
prepared. Staff understands that this definition
represents the final point of contention between the
California Bankers Association and this bill's sponsor.
b. Language will be added, which applies the bill to
debt buyers with respect to all charged-off consumer debt
sold or resold on or after January 1, 2014.
c. The words "per violation" will be deleted from the
provision of the bill that authorizes courts to award
statutory damages to persons who prevail in an action
against a debt buyer for a violation of the bill. This
has the effect of awarding statutory damages of between
$100 and $100 per action, rather than per violation.
7. Prior and Related Legislation:
a. SB 890 (Leno), 2011-12 Legislative Session: The
final version of SB 890 is substantially similar to the
current version of SB 233. Failed passage in the
Assembly Banking & Finance Committee.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Attorney General Kamala Harris (sponsor)
AARP
Center for Responsible Lending
Consumers Union
Public Law Center
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102