BILL ANALYSIS Ó 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 SB 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 SB 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 SB 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 SB 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 SB 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: SB 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 SB 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, SB 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 SB 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