BILL ANALYSIS Ó
SB 233
Page 1
Date of Hearing: June 18, 2013
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
SB 233 (Leno and Correa) - As Amended: May 15, 2013
SENATE VOTE : 36-0
SUBJECT : FAIR DEBT BUYING PRACTICES ACT
KEY ISSUE : SHOULD DEBT BUYERS BE REQUIRED TO SUBSTANTIATE
CERTAIN BASIC INFORMATION ABOUT AN ALLEGED DEBT TO PROVE THAT A
CONSUMER ACTUALLY OWES THE DEBT BEFORE THE DEBT BUYER CAN FILE A
LAWSUIT OR OTHERWISE TAKE ACTION TO COLLECT THE DEBT?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
According to proponents, California's courts are swamped with
debt collection lawsuits at a time when our judicial system is
facing unprecedented budget challenges, and debt buyers--
companies that purchase delinquent or charged-off debts from a
creditor for a certain fraction of the face value of the
debt--are largely driving this crisis by filing thousands of
lawsuits against consumers each month to collect their purchased
debts. Proponents further contend that many of these lawsuits
are simply unsubstantiated by facts necessary to determine,
among other things, that the debt buyer actually owns the debt
at issue, that the defendant is the person who owes the debt, or
that the debt is not time-barred.
This important bill, sponsored by the Attorney General, seeks to
enact the Fair Debt Buyer Practices Act. Among other things,
this bill: (1) prohibits written statements to collect consumer
debt unless the debt buyer has sufficient information to justify
his collection efforts; (2) clarifies the allegations required
in a lawsuit filed by a debt buyer and the evidence required of
a debt buyer to obtain a judgment in a collection suit; (3)
prohibits collection suits where the statute of limitations has
already run; and (4) provides a private right of action against
a debt buyer who violates any provision of this act. By
requiring greater documentation and substantiation of debt
claims as a condition of filing a collection lawsuit, this bill
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may help conserve judicial resources that might otherwise be
spent processing large numbers of unsubstantiated lawsuits. The
bill is supported by a range of consumer advocates, legal aid
providers, civil rights advocates, and labor groups. There is
no known opposition, and the bill did not receive any "No" votes
in the Senate. This bill is double-referred to the Assembly
Banking and Finance Committee.
SUMMARY : Enacts the Fair Debt Buyers Practices Act, imposing
various requirements on practices that may be used to collect on
purchased consumer debt. Specifically, this bill :
1)Prohibits a debt buyer from making any written statement in an
attempt to collect a consumer debt unless the debt buyer
possesses certain information, including, among other things:
(a) the debt balance at charge off; (b) the date of default or
last payment; (c) the name and address of the charge-off
creditor at the time of charge off, and all persons or
entities that purchased the debt after charge off; and (d) a
statement that the buyer is the sole owner of the debt or has
authority to assert the rights of all owners of the debt.
2)Prohibits a debt buyer from making any written statement to a
debtor in an attempt to collect a consumer debt unless the
debt buyer has access to a copy of a contract or other
document evidencing the debtor's agreement to the debt, or if
no signed contract exists, demonstrating that the debt was
incurred by the debtor.
3)Requires a debt buyer to provide all of the above information
or documents 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 the debt, or to cease all
collection of the debt until the debt buyer provides the
information or documents to the debtor.
4)Requires the debt buyer to provide a specified written notice
with its initial written communication to the debtor that,
among other things, informs the debtor of his or her right to
request records from the debt buyer showing information that
the debt buyer is required to possess as a condition of
collecting on the debt.
5)Prohibits a debt buyer from bringing suit, initiating another
proceeding, or taking any other action to collect a consumer
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debt if the applicable statute of limitations on the cause of
action has expired.
6)Requires specific information regarding the underlying debt,
the debt buyer, the debtor, and charge-off creditors to be so
stated in any action brought by a debt buyer on a consumer
debt.
7)Provides that in an action initiated by a debt buyer, no
default of other judgment may be entered against a debtor
unless the following authenticated documents have been
submitted by the debt buyer to the court:
a) Business records establishing facts about the debt,
debtor, and charge-off creditors that are required by this
act to be alleged in the complaint; and
b) A copy of a contract or other document evidencing the
debtor's agreement to the debt, or if no signed contract
exists, demonstrating that the debt was incurred by the
debtor.
8)Provides that, in an action brought by an individual, a debt
buyer who violates any provision of this act with respect to
any person is liable to the person in an amount equal to the
sum of the following: (a) actual damages sustained as a result
of the violation; (b) statutory damages, as specified for an
individual or class action; and (3) costs of the action and
reasonable attorney's fees.
9)Relieves a debt buyer from any liability under this act if the
debt buyer shows by a preponderance of the evidence that the
violation was not intentional and resulted from a bona fide
error, and occurred notwithstanding the maintenance of
procedures reasonably designed to avoid any such error.
10)Provides that these requirements shall only apply to debt
buyers with respect to all consumer debt sold or resold on or
after January 1, 2014.
11)Requires a claim of exemption and related financial statement
form to be provided to a judgment debtor by the levying
officer whenever a writ of execution or an earnings
withholding order is served upon the judgment debtor or the
debtor's employer, as specified.
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EXISTING LAW :
1)Pursuant to 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.
2)Pursuant to 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 debt
collectors to debtors and others. (Title 1.6C of Part 4 of
Division 3 of the Civil Code, commencing with Section 1788.)
COMMENTS : This bill, sponsored by Attorney General Kamala
Harris, seeks to enact the Fair Debt Buyer Practices Act, a
comprehensive approach to address problems that, according to
bill proponents, are largely traceable to the inadequacy of
documentation maintained by the debt buying industry to support
its debt collection activities and litigation. According to the
author:
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
become increasingly misdirected as consumer debt is
repeatedly sold and resold without reliable documentation
evidencing its origin. The more remote the debt buyer is
from the original creditor, the more likely it is that
collection efforts will target stale debt or the wrong
person. This bill establishes a number of reforms to
ensure that the documentation used to support the
collection of purchased debt is sufficient. This will help
ensure that collection efforts target the correct
individuals, avoid litigation over time-barred debt, and
that the amount of the debt is calculated accurately.
In addition to protecting consumers, this bill will help relieve
the overwhelming burden placed on our courts by thousands of
debt collection lawsuits, many of them unsubstantiated.
According to proponents, California's courts are swamped with
debt collection lawsuits at a time that could not be worse given
recent court closures and the fiscal crisis facing our judicial
system. A recent New York Times article reported that
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collection lawsuits across California have increased by 20% over
the past five years, with an estimated 96,000 consumer debt
collection cases filed in three Bay Area counties in 2009 alone,
up from 53,700 cases in 2007. ("Some Lawyers Want to Keep Debt
Collection Out of the Courts," NY Times, 4/22/2010.) Proponents
contend that many of these lawsuits are simply unsubstantiated
by facts necessary to determine, among other things, that the
plaintiff owns the debt at issue, that the defendant is the
person who truly owes the debt, or that the debt is not
time-barred. They note that the cost of unsubstantiated debt
litigation falls upon courts that must expend resources
processing collection claims, and taxpayers who subsidize the
time and resources spent by the courts. By requiring greater
documentation and substantiation of debt claims as a condition
of filing collection lawsuits, this bill could potentially
reduce the amount of debt buyer litigation by weeding out
"meritless" suits before they are filed. Supporters of the bill
contend that anecdotal evidence indicates this is exactly what
has happened in North Carolina since passage of a law there
similar to this bill.
Key definitions and scope of the bill. This bill would enact
the Fair Debt Buying Practices Act, and as expressed in its
Legislative findings, is intended to address the fact that state
law does not currently prescribe the specific nature of
documentation that a debt buyer must maintain and produce in a
legal action on the debt. Under this bill, the term "debt
buyer" is defined to mean a person or entity that is regularly
engaged in the business of purchasing delinquent or 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 bill also
clarifies that "debt buyer" 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, and that "charged-off
consumer debt" means a consumer debt that has been removed from
a creditor's books as an asset and treated as a loss or expense.
The Legislative findings further clarify that this bill is not
intended to affect the legal enforceability, or collectability,
of a charged-off consumer debt, but is intended to impose
enforceable standards upon the collection and litigation of
consumer debt that has been purchased by a debt buyer following
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the consumer debt's charge off by a creditor. The author has
worked with the debt buyer and banking industries to negotiate
the definition of these key terms, and as a result of amendments
taken in the Senate, the bill currently has no known opposition.
This bill prohibits written statements to collect consumer debt
unless the debt buyer has sufficient information to justify
collection efforts. According to the author, many consumers
report being the subject of collection lawsuits where there is
insufficient evidence of the consumer's underlying indebtedness,
or where not enough information is provided to the consumer
regarding the debt at issue to allow an appropriate answer to
the complaint. A recent report by Consumers Union and East Bay
Community Law Center (EBCLC) found that debt buyers frequently
buy portfolios of individual consumer debts with inadequate
information, and frequently sue without any proof that they own
the debts or that the consumer owes them money. ( Past Due: Why
Debt Collection Practices and the Debt Buying Industry Need
Reform Now , Consumers Union, January 2011.)
Accordingly, this bill prohibits a debt buyer from contacting a
debtor unless the debt buyer has access to a copy of a contract
or other document evidencing the debtor's agreement to the debt
or responsibility for incurring the debt, as well as other
specific factual information establishing the buyer's right to
collect. This essential factual information includes, among
other things, the debt balance at charge off, the date of
default or last payment, and the names and addresses of the
charge-off creditor, debt buyer, and debtor as they appear in
the records of the debt. The bill also requires the debt buyer
to provide the information or documents to the debtor without
charge within 15 days upon request of the debtor, and to include
a specified notice informing the debtor of this right. These
requirements seek to ensure that the consumer will at least have
basic information about the debt in question that is necessary
to determine a next step, including filing an answer if a
complaint has been served.
This bill clarifies requirements for collection suits filed by
debt buyers. In 2011, the Federal Trade Commission (FTC) issued
an extensive report in which it found that complaints filed by
debt collectors to initiate collection actions against debtors
do not provide sufficient information to the defendant-debtor or
the court about the underlying debt or the collector's right to
collect. The FTC's report explained that "the function of debt
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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." (FTC, "Repairing A
Broken System: Protecting Consumers in Debt Collection
Litigation and Arbitration", July 2010.)
To address these problems identified by the FTC, this bill
promotes greater transparency and clarity with respect to the
allegations required in a lawsuit filed by a debt buyer, as well
as the evidence required of a debt buyer to obtain a judgment in
a collection suit. First, the bill requires the complaint in
any collection suit to allege, among other things, the nature of
the underlying debt and the consumer transactions from which it
is derived, and that the debt buyer is the sole owner of the
debt at issue or has the right to collect the debt. The
complaint shall also allege the same specific factual
information about the debt that the debt buyer is required to
possess in order to initiate a written contact with the debtor,
as discussed above. According to the author, many of the
complaints filed by some debt buyers are form complaints
containing little information useful to the person being sued.
This bill helps ensure that the complaint provides essential
information about the underlying debt at issue to not only the
consumer being sued, but the court itself, which needs reliable
information if it is to enter a judgment for either party.
According to the FTC, about 95% of collection lawsuits end in
default judgments, which the author contends is the business
model for some debt buyers who file thousands of collection
lawsuits each year. The FTC's report noted concern about the
number of default judgments, and recommended that states take
steps to "increase consumer participation in debt collection
litigation to help decrease the prevalence of default
judgments." Accordingly, this bill would prohibit entry of a
default or other judgment against the debtor unless the debt
buyer submits to the court: (1) authenticated business records
establishing the factual information about the debt that the
debt buyer is required to possess and allege in the complaint;
and (2) a copy of a contract or other document evidencing the
debtor's agreement to the debt, or responsibility for incurring
the debt. In addition, if a debt buyer seeks a default judgment
but has not complied with the requirements of this bill, the
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bill would prohibit the court from entering a default judgment
for the debt buyer and allow the court, in its discretion, to
dismiss the action. This provision seeks to provide a strong
incentive for the debt buyer to provide all required information
to the court prior to pursuing a default judgment.
As a practical matter, it is expected that many consumers would
not be able to find an attorney to represent them in collection
matters, or cannot afford attorney fees. Proponents contend,
quite reasonably, that in collection suits where the debt buyer
cannot provide adequate information to prove that the consumer
actually owes the debt alleged, the consumer should not have a
default judgment entered against him simply because he is
unsophisticated or could not afford legal representation. This
bill seeks to end that basic unfairness in collection cases
where the debt buyer does not substantiate or support his claim
with adequate information.
This bill prohibits collection suits where the statute of
limitations has already run. The FTC's report also expressed
concern that certain collectors "regularly sue consumers on
time-barred debts." This practice is likely to continue as long
as many consumers do not defend suits against them, even when
the action would be barred by the statute of limitations,
because they do not know or realize that this is the case.
According to the FTC, "Because 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 . . . 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." (FTC Report,
July 2010.)
To address this concern, this bill expressly prohibits a debt
buyer from bringing suit or initiating arbitration or any other
legal proceeding to collect a consumer debt if the applicable
statute of limitations on the debt buyer's claim has expired.
This common-sense restriction helps protect consumers from
litigation on debts they have no legal obligation to pay, which
as EBCLC notes, may include debts resulting from identity theft,
mistake, and debts already paid, in addition to debts barred by
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statutes of limitations.
Private right of action against a debt buyer for violations of
this act. This bill provides a private right of action against
a debt buyer who violates any provision of this act. Under this
bill, a debt buyer is liable to the person bringing the action
in an amount equal to the sum of the following: (a) actual
damages sustained as a result of the violation; (b) statutory
damages in an amount as the court may allow for an individual
(between $100 and $1000) or in a class action (as specified);
and (3) costs of the action and reasonable attorney's fees.
However, a debt buyer is relieved from any liability under this
bill if he shows by a preponderance of the evidence that the
violation was not intentional and resulted from a bona fide
error, and occurred notwithstanding the maintenance of
procedures reasonably designed to avoid any such error. These
provisions appear similar to the private right of action under
the Rosenthal Fair Debt Collection Practices Act (Civil Code
Section 1788 et seq.) It should be noted that even with this
private right of action, there is no known opposition to the
bill, and it is supported by Encore Capital Group, headquartered
in San Diego and the nation's largest publicly traded debt
buyer.
Previous Related Legislation: SB 890 (Leno) of 2012 was the
author's attempt last year to enact the Fair Debt Buying
Practices Act. That bill contained provisions substantially
similar to this bill, but died in the Assembly Banking
Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Attorney General Kamala Harris (co-sponsor)
East Bay Community Law Center (co-sponsor)
AARP
Alexander Community Law Center
American Federation of State, County and Municipal Employees
California Consumer Affairs Association
California Labor Federation
California Public Interest Research Group
California Reinvestment Coalition
Center for Responsible Lending
Consumer Federation of California
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Consumers Union
Encore Capital Group
Housing and Economic Rights Advocates
Judicial Council of California
Lawyers' Committee for Civil Rights of the San Francisco Bay
Area
Mexican American Legal Defense and Educational Fund
Professor Scott Maurer, Santa Clara University School of Law
Public Counsel Law Center of Los Angeles
Public Law Center of Orange County
Service Employees International Union
Opposition
None on file
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334