BILL ANALYSIS                                                                                                                                                                                                    



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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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