BILL ANALYSIS Ó
SB 233
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Date of Hearing: June 24, 2013
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
SB 233 (Leno and Correa) - As Amended: May 15, 2013
SENATE VOTE : 36-0
SUBJECT : Debt buying.
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)Defines "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.
2)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.
3)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.
4)Requires a debt buyer to provide all of the above information
or document 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.
5)Requires the debt buyer to provide a specified written notice
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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.
6)Prohibits a debt buyer from bringing suit, initiating another
proceeding, or taking any other action to collect a consumer
debt if the applicable statute of limitations on the cause of
action has expired.
7)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.
8)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.
9)Provides that 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 (c) costs
of the action and reasonable attorney's fees.
10)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 notwithstanding the maintenance of procedures
reasonably designed to avoid any such error.
11)Provides that these requirements shall only apply to debt
buyers with respect to all debt sold or resold on or after
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January 1, 2014.
12)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.
EXISTING FEDERAL LAW:
1)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)Defines "debt collector" as any person who uses any
instrumentality of interstate commerce or mails in any
business the principal purpose of which is the collection of
any debts, or who regularly collects or attempts to collect,
directly or indirectly, debts owed or due or asserted to be
owed or due another. The term includes any creditor who, in
the process of collecting his own debts, uses any name other
than his own which would indicate that a third person is
collecting or attempting to collect such debts.
a) Exempts: any officer or employee of a creditor while,
in the name of the creditor, collecting debts for such
creditor; any person while acting as a debt collector for
another person, both of whom are related by common
ownership or affiliated by corporate control, if the person
acting as a debt collector does so only for persons to whom
it is so related or affiliated and if the principal
business of such person is not the collection of debts; any
officer or employee of the United States or any State to
the extent that collecting or attempting to collect any
debt is in the performance of his official duties; any
person while serving or attempting to serve legal process
on any other person in connection with the judicial
enforcement of any debt; any nonprofit organization which,
at the request of consumers, performs bona fide consumer
credit counseling and assists consumers in the liquidation
of their debts by receiving payments from such consumers
and distributing such amounts to creditors; and any person
collecting or attempting to collect any debt owed or due or
asserted to be owed or due another to the extent such
activity (a) is incidental to a bona fide fiduciary
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obligation or a bona fide escrow arrangement; (b) concerns
a debt which was originated by such person; (c) concerns a
debt which was not in default at the time it was obtained
by such person; or (d) concerns a debt obtained by such
person as a secured party in a commercial credit
transaction involving the creditor. [15 USC 1692a]
EXISTING STATE LAW :
1)Provides 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.]
2)Defines "debt collector" as any person who, in the ordinary
course of business, regularly, on behalf of himself or herself
or others, engages in debt collection. The term includes any
person who composes and sells, or offers to compose and sell,
forms, letters, and other collection media used or intended to
be used for debt collection, but does not include an attorney
or counselor at law. [Civil Code, Section 1788.2]
FISCAL EFFECT : None.
COMMENTS :
According to the sponsor, Attorney General Kamala Harris, "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."
According to the Department of Consumer Affairs (DCA), since
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2004, the Federal Trade Commission (FTC) has received more than
1.8 million inquiries nationwide about debt collectors. In
2010, the FTC received more complaints about debt collection
than any other industry. The complaints involved repeated and
harassing communications, collection of debt not owed or amounts
more than what was truly owed, inflated fees and interests, debt
collection on discharged or impermissible debt, and even
allegations of threats of life and liberty.
In 2010, debt collection was the number one consumer complaint
in California, according to the FTC. Furthermore, the DCA goes
on to state, the owners of these debt portfolios sometimes do
not have sufficient documentation to substantiate the amount
owed or even the correct debtor. Some debt buyers purchase the
debt portfolios and directly file court actions where they can
overwhelm the court system and almost always obtain a default
judgment against the consumers. Armed with a default judgment,
the debt collection organization is able to attach wages and
garnish a consumer a consumer's bank account without ever
verifying that the consumer actually owned the money. Current
law, under the federal Fair Debt Collection Practices Act and
California's Rosenthal Fair Debt Collection Practices Act does
not get to the heart of these issues but as drafted, SB 890
attempts to alleviate these concerns.
According to the Federal Reserve Bank of New York, Debt
collection is a large, multi-billion dollar industry that
directly affects many consumers. In 2011, approximately 30
million individuals, or 14% of American adults, had debt that
was subject to the collections process (averaging
approximately$1,400).
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 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.)
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
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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 (c) 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 from the debt buyer industry to
this bill as proposed to be amended.
Federal Fair Debt Collection Practices Act (FDCPA)
In 1977, the federal government established the FDCPA, to
prohibit abusive practices by debt collectors. The FDCPA was
established to provide more regulation on the act of debt
collecting from a consumer but only applies to those whose
primary business is to collect debts. This act does not apply
to original creditors so only to professional collection
agencies. SB 980 provides additional protection for the act of
debt buying and if anything provides additional protection not
provided in the FDCPA. The FDCPA does explicitly state " this
title does not annul, alter, or affect, or exempt any person
subject to the provisions of this title from complying with the
laws of any State with respect to debt collection practices,
except to the extent that those laws are inconsistent with any
provision of this title, and then only to the extent of the
inconsistency. For purposes of this section, a State law is not
inconsistent with this title if the protection such law affords
any consumer is greater than the protection provided by this
title." The FDCPA was enforced administratively by the FTC
until recently. Now, Under the Dodd-Frank Act, the Consumer
Financial Protection Bureau (CFPB) has primary government
responsibility for administering the FDCPA.
Today's collection industry is different from the industry
contemplated by the FDCPA 35 years ago. Key new economic
players-debt buyers and collection law firms-have entered the
industry since its inception. Additionally, the industry has
seen dramatic technological advances.
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Forty years ago, collection activities depended on typewritten
collection notices and local phone calls. Collection firms may
now use sophisticated analytics to identify the specific debtors
to target. Predictive dialers and internet telephony have
lowered the cost of contacting consumers so that a small
collections firm economically can reach out to hundreds of
thousands of consumers. Database improvements have facilitated
the sale of debt and created a new sub-industry of debt buyers.
But, even as the industry has changed, abuses remain an issue.
The collection industry continues to be a top source of
complaints to the FTC.
Rosenthal Fair Debt Collection Practices Act (RFDCPA)
Established in 1977, California created an Act similar to the
FDCPA. SB 233 does not conflict with either of these acts but
rather adds more protection to consumers and those involved in
the act of debt buying. The FDCPA and the RFDCPA focuses more
on the behavior of those collecting debt and the means that
should be used to collect debt through mailers, phone calls,
etc. Nothing in these Acts provides that the debt collector
prove they have the right to collect the debt. Commercial debt
is excluded from the statute. Enforcement of this act is only
through private civil actions. SB 233 provides added
protections by having debt buyers show that they do in fact own
the debt they are trying to collect on and the person they are
calling does in fact owe the debt trying to be collected.
22 states including California do not currently license or have
bonding requirements for collection agencies. 30 States do have
a license or bond requirement for debt collection companies.
Major Problems: A recent article, from the American Banker,
dated March 29, 2012, titled, Bank of America Sold Card Debts to
Collectors Despite Faulty Records, found that "in the "as is"
documents Bank of America has drawn up for such sales, it warned
that it would initially provide no records to support the
amounts it said are owed and might be unable to produce them.
It also stated that some of the claims it sold might already
have been extinguished in bankruptcy court. Bank of America has
additionally cautioned that it might be selling loans whose
balances are "approximate" or that consumers have already paid
back in full. Maryland resident was a victim of s such a sale,
which resulted in a three-year legal battle."
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The article goes on to state, as the originators of credit card
loans, banks are the headwaters of the river of bad debt that
flow into the collections industry. Over the last two years,
Bank of America has charged off $20 billion in delinquent card
debt. The bank settles or collects a portion of that itself and
retires other accounts when borrowers go bankrupt or die. An
undisclosed portion of the delinquent debts get passed along to
collectors. Once sold, rights to such accounts are often resold
within the industry multiple times over the several years.
The U.S Office of Comptroller of the Currency investigated
JPMorgan Chase's handling of credit card debt records. The
American Banker article states, "a group of current and former
employees described at the time how the bank had sold card
accounts previously deemed "toxic waste" and which suffered from
errors in the amounts being claimed." JPMorgan Chase had a
similar problem as Bank of America where Chase sold debt to debt
buyers that had been long been considered unreliable and lacked
documentation.
Lastly, the article states, "According to the trade organization
for the collections industry, much of the criticism of
collectors' records stems from banks' failure to provide
adequate documentation of debts. "We're not getting what we
need from the seller," says Mark Schiffman, a spokesman for the
American Collections Association, which wants to see better
recordkeeping and more documentation included in debt sales.
"Consumer groups want to see original contracts and original
documentation. That would make a lot of these debts disappear
because a lot of that documentation may not exist.""
In an article from the New York Times, dated April 2, 2012,
titled "Why People Hate Banks," Karen Petrou, the managing
partner of Federal Financial Analytics, stated, banks are
outsourcing their dirty work and then washing their hands as the
debt collectors harass and sue and make people miserable, often
without proof that the debt is owed. Banks, she said, should
not be allowed to "avert their gaze" so easily.
CFPB
The CFPB is looking into debt collection practices and have gone
on record stating, "We take seriously any reports that debt is
being bought or sold for collection without adequate
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documentation that money is owed at all or in what amount." In
March, 2012, the CFPB submitted to Congress its first annual
report summarizing its activities to administer the Fair Debt
Collection Practices Act. These activities represent the CFPBs
inaugural effort to curtail deceptive, unfair, and abusive debt
collection practices in the marketplace. Illegal collection
practices cause substantial harm to consumers, who may pay
amounts not owed, unintentionally waive their rights, suffer
emotional distress, and experience invasions of privacy. Such
practices can even place consumers deeper in debt.
PREVIOUS LEGISLATION
SB 890 (Leno, 2012 Legislative Session) Failed passage in
Assembly Banking Committee. That bill contained provisions
substantially similar to this bill and was the author's attempt
last year to enact the Fair Debt Buying Practices Act. One
notable difference was the change of the definition of "debt
buyer." SB 233 has removed language that would have included
parent, subsidiary, and other affiliates in the definition.
AB 350 (Lieu, 2009 Legislative Session) Failed passage in Senate
Judiciary. This bill would have enacted the Debt Settlement
Service Act for the purpose of licensing debt settlement service
providers.
REGISTERED SUPPORT / OPPOSITION :
Support
Attorney General Kamala Harris (Sponsor)
East Bay Community Law Center (co-sponsor)
AARP
Center for Responsible Lending
Consumers Union
Encore Capital Group
Judicial Council of California
Public Law Center of Orange County
Service Employees International Union
Opposition
None on File
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
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