BILL ANALYSIS                                                                                                                                                                                                    



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          SENATE THIRD READING
          SB 233 (Leno and Correa)
          As Amended May 15, 2013
          Majority vote 

           SENATE VOTE  :36-0  
           
           JUDICIARY           9-0         BANKING & FINANCE   10-0        
           
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          |Ayes:|Wieckowski, Wagner,       |Ayes:|Dickinson, Morrell,       |
          |     |Alejo, Chau, Dickinson,   |     |Achadjian, Blumenfield,   |
          |     |Garcia, Maienschein,      |     |Bonta, Chau, Gatto,       |
          |     |Muratsuchi, Stone         |     |Linder, Perea, Weber      |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           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.








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          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  
            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 c) 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  








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            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.

           FISCAL EFFECT  :  None
           
          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.  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 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  
          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, April 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.  








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           Furthermore, 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.

          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.  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  








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          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.

          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  
          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.

          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  








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          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  
          statutes of limitations.
           
           
           Analysis Prepared by  :   Anthony Lew / JUD. / (916) 319-2334 


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