BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 233| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: SB 233 Author: Leno (D), et al. Amended: 5/15/13 Vote: 21 SENATE BANKING & FINANCIAL INSTITUTIONS COMM. : 8-0, 4/17/13 AYES: Correa, Berryhill, Beall, Calderon, Corbett, Hill, Hueso, Roth NO VOTE RECORDED: Walters SENATE JUDICIARY COMMITTEE : 6-0, 5/7/13 AYES: Evans, Anderson, Corbett, Jackson, Leno, Monning NO VOTE RECORDED: Walters SUBJECT : Debt buying SOURCE : Attorney General Kamala Harris DIGEST : This bill enacts the Fair Debt Buying Practices Act, to further regulate the activities of persons and entities that purchase charged-off consumer debt, as defined. Senate Floor Amendments of 5/15/13 add coauthors, define "charged-off consumer debt," and add intent language. ANALYSIS : Existing federal law provides for the Fair Debt Collection Practices Act (FDCPA), 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 CONTINUED SB 233 Page 2 information in order to ensure the information's accuracy. The FDCPA 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 FDCPA. Responsibility for enforcing the FDCPA was transferred from the Federal Trade Commission (FTC) to the federal Consumer Financial Protection Bureau through the Dodd-Frank Wall Street Reform and Consumer Protection Act. Existing state law provides for the Rosenthal Fair Debt Collection Practices Act, 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. This bill: 1. Establishes the Fair Debt Buying Practices Act to regulate the activities of a person or entity (debt buyer) that has bought charged-off consumer debt for collection purposes. 2. Defines the following terms: A. "Debt buyer," as 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 for collection litigation. It does not mean a person or entity that acquires a charged-off consumer debt incidental to the purchase of a portfolio predominantly consisting of consumer debt that has not been charged off. B. "Charged-off consumer debt" as a consumer debt that has been removed from a creditor's books as an asset and treated as a loss or expense. 3. Applies the provisions of this bill to consumer debt sold or resold on or after January 1, 2014. 4. Prohibits a debt buyer from making any written statement to CONTINUED SB 233 Page 3 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 interest and fees, if any, imposed by the charge-off creditor or any subsequent purchasers of the debt. A specific itemization is not required, but the explanation shall identify separately the charge-off balance, the total of any post-charge-off interest, and the total of any post-charge-off fees. C. The date of default or the date of the last payment 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, including the debt buyer making the written statement. 1. Prohibits 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. 2. Requires a debt buyer to include a statement with its first written communication to a debtor in no smaller than 12-point type, a separate prominent notice informing the debtor that he/she is eligible to request all of the information listed in #4 and #5 above, and requires 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 CONTINUED SB 233 Page 4 debtor within 15 calendar days must cease all attempts to collect the debt, until that debt buyer is able to provide the information. 3. Provides 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 #6 above to that debtor in that language, as specified. 4. Requires all settlement agreements between a debt buyer and a debtor to be documented in open court or otherwise reduced to writing, and requires a debt buyer to ensure that a copy of the written agreement is provided to the debtor. 5. Requires 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 compromise of the debt) to the debtor within 30 calendar days. 6. Prohibits 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. 7. Except as necessary to protect confidential personal, financial, or medical information, requires the complaint in an action brought by a debt buyer on a consumer debt to allege the nature of the underlying debt and the consumer transaction(s) from which it is derived, and to include all of the information listed in #4 above, along with a statement that the debt buyer complied with the provisions of the bill described in #4 through #7 above. Requires 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. 8. Provides 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 CONTINUED SB 233 Page 5 document evidencing the debtor's agreement to the debt, authenticated through a sworn declaration, has been submitted by the debt buyer to the court. 9. Provides 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. 10.Provides for all of the following, to enforce the provisions of this bill: A. In the case of an action brought by an individual(s), 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 $1,000, 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 class is liable for statutory damages of between $100 and $1,000 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 this 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. Requires that any action brought to enforce the CONTINUED SB 233 Page 6 provisions of the bill be brought within one year from the date of the last violation by the debt buyer. G. Provides that recovery in an action brought under the Rosenthal Fair Debt Collection Practices Act or the FDCPA precludes recovery for the same acts in an action brought under the provisions of this bill. 1. Provides that any waiver of the provisions of this bill is contrary to public policy, and is void and unenforceable. 2. Amends 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. 3. States legislative findings, declarations, and intent relating to the collection and litigation of consumer debt. Background 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. 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. 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)) In a rule released by the federal Consumer Financial Protection Bureau (CFPB) in October 2012, 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. CONTINUED SB 233 Page 7 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 FTC and this bill's sponsor, believe that existing law is inadequate, and that more needs to be done to protect consumers. Comments 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 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 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. CONTINUED SB 233 Page 8 FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: No SUPPORT : (Verified 5/9/13) Attorney General Kamala Harris (source) AARP California State Council of the SEIU Center for Responsible Lending Consumers Union East Bay Community Law Center Encore Capital Group Public Law Center of Orange County ARGUMENTS IN SUPPORT : 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. Consumers Union and the Center for Responsible Lending write that this bill 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, some debt buyers have little more than a robo-signed affidavit to back up their claims in court." This bill 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, this bill requires 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. MW:nk 5/16/13 Senate Floor Analyses CONTINUED SB 233 Page 9 SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED