BILL ANALYSIS                                                                                                                                                                                                    



                                                                  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  








                                                                  SB 233
                                                                  Page  2

          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  








                                                                  SB 233
                                                                  Page  3

            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.









                                                                  SB 233
                                                                  Page  4

           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  








                                                                  SB 233
                                                                  Page  5

          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  








                                                                  SB 233
                                                                  Page  6

          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  








                                                                  SB 233
                                                                  Page  7

          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  








                                                                  SB 233
                                                                  Page  8

          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  








                                                                  SB 233
                                                                  Page  9

          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 








                                                                  SB 233
                                                                  Page  10

          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