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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                 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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              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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                 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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           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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              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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                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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                 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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                 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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                 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