BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
SB 233 (Leno and Correa)
As Amended April 22, 2013
Hearing Date: May 7, 2013
Fiscal: No
Urgency: No
BCP
SUBJECT
Debt Buyers
DESCRIPTION
This bill, the Fair Debt Buying Practices Act, would regulate
the activities of a person or entity (debt buyer) that has
bought charged-off consumer loans for collection purposes.
Specifically, this bill would:
prohibit a debt buyer from making any written statement in an
attempt to collect a consumer debt unless the debt buyer
possesses specified information;
require the debt buyer to make that information available to
the debtor, without charge, upon receipt of a request, within
15 days;
require all settlement agreements between a debt buyer and a
debtor to be documented in open court or otherwise in writing;
require a debt buyer who receives a payment on a debt to
provide a receipt or statement containing certain information;
prohibit a debt buyer from initiating a suit to collect a debt
if the statute of limitations on the cause of action has
expired;
require a debt buyer bringing an action on consumer debt to
include certain information in his or her complaint; and
prohibit an entry of judgment in favor of a plaintiff debt
buyer unless business records, authenticated through a sworn
declaration and proving ownership of the debt, are submitted
by the debt buyer to the court.
This bill would provide that a debt buyer who violates the
provisions of this bill is liable for specified damages,
including costs and reasonable attorney's fees, but permits a
(more)
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debt buyer to avoid liability for unintentional bona fide
errors.
This bill would also require a claim of exemption, and related
financial statement form, to be provided to a judgment debtor by
a levying officer, as specified.
BACKGROUND
Debt buyers are companies that purchase delinquent or
charged-off debts from a creditor for a fraction of the face
value of the debt. Those companies have become subject to
increased scrutiny due to numerous complaints on behalf of
consumers. The Federal Trade Commission (FTC) issued a report
in July 2010 examining debt collection litigation and
arbitration proceedings that concluded the "system for resolving
consumer debt collection disputes is broken" and recommended
significant reforms. (Repairing a Broken System (July 2010)
Federal Trade Commission [as of May 3, 2013] at
p. i.) The FTC further noted that:
The report finds very few consumers defend or otherwise
participate in debt collection litigation. The Commission
therefore recommends state and local governments consider
making a variety of reforms to service of process, pleading,
and court rules and practices to increase the ability of
consumers to defend or otherwise participate in debt
collection litigation. The report also finds
complaints and attachments in debt collection cases often do
not provide adequate information for consumers to answer
complaints or for judges to rule on motions for default
judgment. The FTC therefore recommends that courts more
rigorously apply existing rules to require that collectors
provide adequate information and that jurisdictions consider
adopting rules mandating the information which must be
included in or attached to the complaint. The report
additionally finds that state statutes of limitations on
filing actions to recover on debt are sometimes variable and
complex, and generally not understood by consumers. The
Commission suggests that states consider modifying their
laws to make it simpler to determine the applicable statute
of limitations, and to require that collectors provide
consumers with important information about
their legal rights when collecting debt they know or should
know is time-barred. (Id. at p. 2.)
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Additionally, on October 24, 2012, the federal Consumer
Financial Protection Bureau (CFPB) published a rule to allow the
agency to federally supervise the larger consumer debt
collectors. The CFPB noted that:
Approximately 30 million Americans have, on average, $1,500
of debt subject to collection. Debt collectors often report
consumers' collection status to the credit bureaus. If they
get the information wrong, this can be the difference
between getting approved or denied for such financial
products as a mortgage or a car loan.
The consumer debt collection market covered by the rule
includes three main types of debt collection: first, firms
that may buy defaulted debt and collect the proceeds for
themselves; second, firms that may collect defaulted debt
owned by another company in return for a fee; and third,
there are debt collection attorneys that collect through
litigation. A single company may be involved in any or all
of these activities. By expanding the supervision program
to oversee the nonbanks that are larger participants in the
consumer debt collection market, the Bureau will now have a
window into every stage of the process - from the
origination of credit to debt collection.
The CFPB's supervision authority over these entities will
begin when the rule takes effect on January 2, 2013. Under
the rule, any firm that has more than $10 million in annual
receipts from consumer debt collection activities will be
subject to the CFPB's supervisory authority. This authority
will extend to about 175 debt collectors, which account for
over 60 percent of the industry's annual receipts in the
consumer debt collection market. (Consumer Financial
Protection Bureau to oversee debt collectors (Oct. 24, 2012)
Consumer Financial Protection Bureau
[as of May 1, 2013].)
In further response to the above issues, this bill, sponsored by
Attorney General Kamala Harris, seeks to make numerous changes
relating to debt buyers, including prohibiting a debt buyer from
making a written statement to collect a consumer debt without
possessing specific information, requiring a complaint in an
action to collect on a consumer debt to include specific
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allegations, and prohibiting a debt buyer from bringing suit if
the applicable statute of limitations has expired.
This bill was approved by the Senate Committee on Banking &
Financial Institutions on April 17, 2013, by a vote of 8-0, and
is similar to SB 890 (Leno, 2011), which was approved by this
Committee but failed passage in the Assembly Committee on
Banking & Finance.
CHANGES TO EXISTING LAW
1. Existing federal law generally 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.
Existing state law , 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 collectors to debtors and others. (Civ.
Code Sec. 1788 et seq.)
This bill would establish the Fair Debt Buying Practices Act
and prohibit a debt buyer from making any written statement to
a debtor in an attempt to collect a consumer debt unless the
debt buyer possesses the following information:
the debt buyer is the sole owner of the debt or has
authority to assert the rights of all owners of the debt;
the debt balance at charge off and an explanation for
all post-charge-off interest rates and fees, if any,
imposed by charge-off creditor or any subsequent purchasers
of the debt;
the date of default or date of the last payment;
the name and address of the charge-off creditor at the
time of charge off, and the charge-off creditor's account
number associated with the debt;
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; and
the names and addresses of all persons or entities that
purchased the debt after charge off, including the debt
buyer making the written statement;
This bill would prohibit a debt buyer from making any written
statement to a debtor in an attempt to collect a consumer debt
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unless the debt buyer has access to a copy of the contract or
other document evidencing the debtor's agreement to the debt.
If the claim is based on debt for which no signed contract or
agreement exists, the debt buyer shall have access to a copy
of a document provided to the debtor while the account was
active, demonstrating that the debt was incurred by the
debtor.
This bill would require a debt buyer to provide the
information or documents identified above 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 debt. If the debt buyer cannot provide the
information or documents within 15 calendar days, the debt
buyer shall cease all collection of the debt until the debt
buyer provides the information or documents. A debt buyer
must provide an active postal address to which these requests
can be sent, and may provide an active email address to which
these requests can be sent and through which information and
documents can be delivered.
This bill would require a debt buyer to include a prominent
statutory notice with its first written communication with the
debtor that is in no smaller than 12-point type, as specified.
This bill would provide that when a debt buyer attempts to
collect on a time-barred debt where the debt is not past the
date for obsolescence, the buyer must provide the following
notice: "The law limits how long you can be sued on a debt.
Because of the age of your debt, we will not sue you for it.
If you do not pay the debt, [insert name of debt buyer] may
[continue to] report it to the credit reporting agencies as
unpaid for as long as the law permits this reporting." If the
debt is both time-barred and past the date for obsolescence,
the debtor shall provide the following notice: "The law
limits how long you can be sued on a debt. Because of the age
of your debt, we will not sue you for it, and we will not
report it to any credit reporting agency."
This bill would state that if a language other than English is
principally used by the debt buyer in the initial oral contact
with the debtor, the above-required notices shall be provided
to the debtor in that language within five working days.
This bill would require all settlement agreements between a
debt buyer and a debtor to be documented in open court or
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otherwise reduced to writing, and, the debt buyer shall ensure
that a copy of the written agreement is provided to the
debtor.
This bill would require a debt buyer that receives payment on
a debt to provide, within 30 calendar days, a receipt or
monthly statement to the debtor, as specified. A debt buyer
that accepts a payment as payment in full, or as a full and
final compromise of the debt, shall provide, within 30
calendar days, a final statement to the debtor. A debt buyer
shall not sell an interest in a resolved debt or any personal
or financial information related to the resolved debt.
This bill 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.
This bill would provide that in an action brought by a debt
buyer on a consumer debt, the complaint shall allege all of
the following:
that the plaintiff is a debt buyer;
the nature of the underlying debt and the consumer
transaction or transactions from which it is derived, in a
short and plain statement;
that the debt buyer is the sole owner of the debt at
issue, or has authority to assert the rights of all owners
of the debt;
the debt balance at charge off and an explanation of the
amount, nature, and reason for all post-charge-off interest
and fees, as specified;
the date of default or date of the last payment;
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;
the names and addresses of all persons or entities that
purchased the debt after charge off; and
that the debt buyer has complied with specified
requirements of this bill.
This bill would require a copy of the contract or other
document that evidences the debtor's agreement to the debt to
be attached to the complaint.
This bill would provide that the above requirements shall not
be deemed to require the disclosure in public records of
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personal, financial, or medical information, the
confidentiality of which is protected by any state or federal
law.
This bill would provide that in an action initiated by a debt
buyer, 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 specified facts required to be alleged in the
complaint.
This bill would prohibit a default or other judgment from
being entered against a debtor unless a copy of the contract
or other document, as specified, authenticated through a sworn
declaration, has been submitted by the debt buyer to the
court.
This bill would provide that in any action on a consumer debt,
if a debt buyer plaintiff seeks a default judgment and has not
complied with the above requirements, the court shall not
enter a default judgment for the plaintiff and may, in its
discretion, dismiss the action.
This bill would provide that in the case of an action brought
by an individual or individuals, a debt buyer that violates
any provision above with respect to any person shall be liable
to that person in an amount equal to a sum of: (1) actual
damages; and (2) statutory damages, which shall not be less
than $100 nor greater than $1,000.
This bill would provide that, in the case of a class action, a
debt buyer that violates any of the above provisions shall be
liable for statutory damages for each plaintiff, and, if the
court finds that the debt buyer engages in a pattern and
practice of violating any provision of this bill, the court
may award additional damages to the class in an amount not to
exceed the lesser of $500,000 or one percent of the net worth
of the debt buyer.
This bill would provide that, in the case of any successful
action to enforce liability under this bill, the court shall
award the costs of the action, together with reasonable
attorney's fees as determined by the court.
This bill would allow reasonable attorney's fees to be awarded
to a prevailing debt buyer upon a finding by the court that
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the plaintiff's prosecution of the action was not in good
faith. This bill would also provide that a debt buyer shall
have no civil liability if the debt buyer shows by a
preponderance of evidence that the violation was not
intentional and resulted from a bona fide error, and occurred
notwithstanding the maintenance of procedures reasonably
adopted to avoid any error.
This bill would require an action to enforce any liability
created by this bill to be brought within one year from the
date of the last violation. This bill would further state
that recovery in an action brought under the Rosenthal Fair
Debt Collection Practices Act shall preclude recovery for the
same acts in an action brought under this bill.
This bill would further provide that in a case involving
consumer debt, as regulated by this bill, if the defendant
debtor appears for trial on the scheduled trial date, and the
plaintiff debt buyer either fails to appear or is not prepared
to proceed to trial, and the court does not find a good cause
for continuance, the court may, in its discretion, dismiss the
action with or without prejudice. The court may also award
the defendant debtor's costs of preparing for trial,
including, but not limited to, lost wages and transportation
expenses.
This bill would additionally define "debt buyer," apply the
above provisions to consumer debt sold or resold on or after
January 1, 2014, and make related findings and declarations.
2. Existing law establishes a process for the enforcement of
money judgments and requires a levying officer to provide
certain documents and information to a judgment debtor and to
a designated employer in connection with wage garnishment.
Existing law permits a process server also to serve an
earnings withholding order on an employer and requires that
the process server also serve certain documents at this time.
Existing law requires an employer who is served with an
earnings withholding order to provide certain documents to an
employee who is a judgment debtor. (Code Civ. Proc Secs.
700.010; 706.103; 706.104; 706.108; 706.122.)
This bill would require, in the circumstances described above,
that a copy of the form that the judgment debtor may use to
make a claim of exemption and a copy of the form used to
provide a financial statement also be provided.
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COMMENT
1. Stated need for the bill
According to the author:
[T]he Federal Trade Commission [(FTC) has stated that],
[t]he system for resolving disputes about consumer debts is
broken, and has urged states to pass legislation to provide
adequate protection for consumers.
The system is broken because courts have been swamped with
debt collection law suits driven by the growth of an
industry that buys and sells bundled portfolios of consumer
debt, and misuses the courts to leverage their collection
efforts.
The industry's practices echo the scandal surrounding the
processing of delinquent mortgages. Here, debt buyers use
"robo signers" who sign affidavits averring that they have
reviewed and verified debtors' records, when they have only
reviewed basic, and often incomplete, account statements
records or spreadsheets on a computer screen. Moreover,
because consumer debt is being bought and sold so
frequently, and over a period of years, companies are
frequently pursuing the wrong person, or the filing claims
that have no lawful basis.
Frequently, these debt collection actions are filed by debt
buyers without proof that the debt ever existed. Yet
actions proceed to judgment because ninety-five percent of
consumers do not respond to these lawsuits-many because they
do not receive notice-allowing the debt collector to take a
default judgment against the consumer and levy against the
consumer's personnel accounts.
. . .
The Fair Debt Buyers Act would reform the debt collection
litigation process in a number of ways to aid consumers and
unburden the courts from costly, unmeritorious litigation.
2. Implementing the FTC's recommendations
As noted above, the FTC recently released a comprehensive
report entitled Repairing A Broken System: Protecting
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Consumers in Debt Collection Litigation and Arbitration that
contained recommendations for reforms similar to those
proposed by this bill.
a. Complaints must include detailed information
The FTC found that complaints filed by debt collectors to
initiate collection actions against debtors were lacking.
The FTC's report noted that "[t]he function of debt
collection complaints in a notice pleading system is to
provide sufficient information so that: (1) consumers can
determine whether to admit or deny the complaint allegations
and assert affirmative defenses in their answers; and (2)
judges can determine whether to grant a motion for a more
definite statement or enter a default judgment . . . Based
on the evidence gathered in connection with these
proceedings, the FTC believes that many debt collection
complaints do not provide this information to consumers."
To address that issue, this bill would, among other things,
enhance the complaint so that the debtor has more complete
information regarding the debt at issue, and, in turn, is
able to respond appropriately to the complaint.
Specifically, the bill would provide that in an action
brought by a debt buyer on a consumer debt, the complaint
must allege: (1) that the plaintiff is a debt buyer; (2)
the nature of the underlying debt and the transaction from
which it is derived; (3) that the debt buyer is the sole
owner or has authority to assert the owners rights; (4) the
debt balance at charge off and the reason for all
post-charge-off interest and fees; (5) the date of the last
payment; (6) the name and address of the charge-off
creditor, and the creditor's account number; (7) the name
and last known address of the debtor as they appear in the
charge-off creditor's records; and (8) the names and
addresses of all entities that purchased the debt after
charge off. The complaint must also allege that the debt
buyer complied with this bill's requirement for debt buyers
to possess specific information before making a written
statement to a debtor in an attempt to collect the debt.
Regarding the necessity of requiring additional information
from debt buyers when they seek to collect upon debt,
Consumers Union (CU), in support, contends that "[t]ens 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
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memory or records. The debt may even be owed by someone
else or the result of identity theft. Yet some debt
buyer[s] have little more than a robo-signed affidavit to
back up their claims in court." To address the reported
abuses, the detailed complaint requirements would appear to
provide consumers with necessary information about the debt
for which collection is attempted, and in turn, allow those
consumers to file an appropriate answer to the complaint.
It is important to note that many of the complaints
currently filed by some debt buyers are simply form
complaints that provide little, if any, useful information
to the consumer being sued about the underlying debt.
Regarding the filing practices of some of those firms, the
New York Times' October 31, 2010 article entitled Debt
Collectors Face a Hazard: Writer's Cramp reported that:
In some instances, banks are selling account information
that is riddled with errors. More often, essential
background information simply is not acquired by debt
buyers, in large part because that data adds to the price
of each account. But court rules state that anyone
submitting an affidavit to a court against a debtor must
have proof of that claim - proper documentation of a
debt's origins, history and amount.
Without that information it is hard to imagine how any
company could meet the legal standard of due diligence,
particularly while churning out thousands and thousands
of affidavits a week. Analysts say that
affidavit-signers at debt-buying companies appear to have
little choice but to take at face value the few facts
typically provided to them - often little more than basic
account information on a computer screen. (Segal, Debt
Collectors Face a Hazard: Writer's Cramp (Oct. 31, 2010)
New York Times [as of May 3, 2013].)
b. Disclosure of information prior to judgments
To ensure that the court has sufficient information about the
underlying debt, this bill would prohibit a default or other
judgment from being entered against a debtor until the debt
buyer submits business records that have been authenticated
through sworn declaration and establish specified facts
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regarding the debt. Specifically, those records must show
proper ownership of the debt, the debt balance and reason for
any post-charge-off fees, date of default or last payment, and
the name and address of the charge-off creditor, debtor, and
all persons or entities who purchased the debt after
charge-off. Furthermore, the debt buyer must also provide a
copy of the contract or other document evidencing the debtor's
agreement to the debt, authenticated through sworn
declaration, prior to entering a default or other judgment
against a debtor. As a result, the proposed requirements
would appear to ensure that the court has relatively detailed
information about the nature and history of the debt.
It should be noted that a large percentage of debt collection
actions reportedly result in default judgments. Those
judgments are entered in favor of the plaintiff (debt buyer)
due to the failure of the defendant (consumer) to file a
timely response to the complaint.
When those consumers fail to respond, there is no advocate
to raise, on their behalf, applicable defenses or challenge
the assertions made by the debt buyer. The FTC's report
noted concern about the number of default judgments and
recommended steps to "increase consumer participation in
debt collection litigation to help decrease the prevalence
of default judgments," and noted that "[i]n an effort to
address this problem in another way, some court systems have
adopted measures to encourage judges to apply appropriate
and consistent standards - including legal standards and
court rules - in deciding whether to grant such judgments."
(Repairing a Broken System (July 2010) Federal Trade
Commission
[as of May 3, 2013] at p. 20.) The requirements discussed
above essentially provide a set of consistent standards for
a judge to use when granting a default judgment.
This bill would also provide that if a debt buyer seeks a
default judgment and has not complied with the requirement of
this bill, the court shall not enter a default judgment and
may dismiss the action. Similarly, if a defendant debtor
appears for trial and the plaintiff debt buyer fails to appear
or is not prepared to proceed (and there is no good cause for
continuance), the court may dismiss the action and award the
defendant debtor's costs for preparing for trial.
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c. Statute of limitations
The FTC's report also expressed concern that certain
collectors "regularly sue consumers on time-barred debts."
That practice is exacerbated by the practical reality that
many consumers do not defend themselves against these suits,
even when the action would be barred by the statute of
limitations. The FTC further asserted that "[b]ecause an
expired statute of limitations is an affirmative defense in
most states, collectors have no obligation to allege in the
complaint that the debt is not time-barred, and many
collectors do not include this information. If consumers do
not defend, there is no one to raise the defense that the
debt is time-barred. Indeed, some judges who participated
in the roundtables stated that, even if a debt collection
action appears to be time-barred, it would be improper for
courts to consider affirmative defenses that no party had
raised. As a result, some courts appear to be granting
default judgments on time-barred debt." (Repairing a Broken
System (July 2010) Federal Trade Commission
[as of May 3, 2013] at p. 30.)
This bill would address those issues by, among other things,
prohibiting 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 has expired, and
requiring a debt buyer to notify a debtor if a debt is
time-barred. Regarding the need to address the issue of
time-barred debts, the Attorney General, sponsor, asserts:
Industry practices have become a significant focus of
public concern due to collection efforts being directed
to the wrong consumer, or seeking the collection of debt
that is time barred or has been paid. These concerns are
compounded because a very high percentage of debt
collection litigation results in default judgments where
consumers do not appear to present whatever defenses may
be available to them.
3. Additional limitations on debt collection
This bill would additionally prohibit a debt buyer from making
a written statement to a debtor in an attempt to collect a
consumer debt unless the debt buyer possesses specific
documentation regarding the debt. The debt buyer must make
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that information available, without charge, to the debtor
within 15 calendar days of receipt of a request. If the debt
buyer cannot provide the information within that time frame,
the debt buyer must cease all collection of the debt until the
information is provided.
In support of the documentation requirements, AARP notes that
"[t]he elderly are disproportionately victims of identity
theft and are thus often targeted with lawsuits for debts they
never obtained or authorized. . . . This legislation will
provide crucial protections to ensure that the senior will not
be subjected to this type of unwarranted harassment, requiring
that debt buyers have essential information about a debt
before they try to collect the debt and that the information
be shared with the consumer on request. . . ."
4. Remedies
This bill would provide specific penalties and damages against
a debt buyer who violates the above requirements.
Specifically, the debt buyer would be liable to the consumer
in an amount equal to the actual damages plus statutory
damages (between $100 and $1000 per violation per person), and
also would allow a prevailing debtor to receive reasonable
attorney's fees and costs. This bill would also provide that
in any class action where a court finds that the debt buyer
engaged in a pattern and practice of violating this bill, the
court may award additional damages in an amount not to exceed
the lesser of $500,000 or one percent of the net worth of the
debt buyer.
It should be noted that this bill would also limit the
liability of debt buyers if the buyer shows that the violation
was not intentional and resulted from a bona fide error, and
occurred notwithstanding the maintenance of procedures
reasonably adopted to avoid any error. That safe harbor
provision would appear to shield debt buyers from liability in
cases where the error was truly inadvertent.
5. Claim of exemption
Under existing law, a judgment debtor can claim that his or her
property or money is exempt from collection efforts. Those
claims may be filed with the levying officer within 10 days
after the date the notice of levy was served on the judgment
debtor, and must include a financial statement. (Code Civ.
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Proc. Secs. 703.520, 703.530.) To facilitate exemptions, this
bill would require the levying officer enforcing a money
judgment to also provide a copy of the forms that the judgment
debtor may use to make a claim of exemption and provide a
financial statement, as specified.
Support : AARP; Center for Responsible Lending; Consumers Union;
East Bay Community Law Center; Encore Capital Group; Public Law
Center
Opposition : None Known
HISTORY
Source : Attorney General Kamala Harris
Related Pending Legislation : SB 702 (Anderson) would require
applications for default judgment to contain specified
information. This bill is set for hearing in this Committee on
May 7, 2013.
Prior Legislation : SB 890 (Leno, 2011) See Background.
Prior Vote : Senate Committee on Banking & Financial
Institutions (Ayes 8, Noes 0)
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