BILL ANALYSIS Ó
SB 641
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Date of Hearing: July 6, 2015
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
SB
641 (Wieckowski) - As Introduced February 27, 2015
SENATE VOTE: 29-10
SUBJECT: Debt buying: default judgment.
SUMMARY: Adds a new provision to the California Fair Debt
Buying Practices Act (FDBPA). Specifically, this bill:
1)Provides if a service of summons has not resulted in actual
notice to a debtor in time to defend an action brought by a
third party debt buyer and a default or default judgment has
been entered against the debtor, the debtor may serve and file
a notice of motion and motion to set aside the default or
default judgment and for leave to defend the action within 180
days of the first actual notice of the action.
2)Provides that a notice of motion to set aside a default or
default judgment and for leave to defend the action shall
designate as the time for making the motion a date prescribed
under existing law, and it shall be accompanied by an
affidavit showing under oath that the party's lack of actual
notice in time to defend the action was not caused by his or
her avoidance of service or inexcusable neglect. The party
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shall serve and file with the notice a copy of the answer,
motion, or other pleading proposed to be filed in the action.
3)Provides upon a finding by the court that the motion was made
within the period permitted by subdivision (a) and that
debtor's lack of actual notice in time to defend the action
was not caused by his or her avoidance of service or
inexcusable neglect, the court may set aside the default or
default judgment on whatever terms as may be just and allow
the party to defend the action.
4)Specifies that these provisions shall not be limited by the
time period in Civil Code, Section 1788.50 (which limits the
applicability of the FDBPA to debt buyers with respect to all
consumer debt sold or resold on or after January 1, 2014) and
shall be applied to debt buyers with respect to all consumer
debt, regardless of the date it was sold.
EXISTING STATE LAW:
1)Establishes the FDBPA which regulates the activities of a
person or entity that has bought charged-off consumer loans
for collection purposes. The FDBPA is limited to debt buyers
with respect to all consumer debt sold or resold on or after
January 1, 2014. (Civil Code, Sections 1788.50 et seq.)
2)Provides that a debt buyer shall not bring suit or initiate an
arbitration or other legal proceeding to collect a consumer
debt if the applicable statute of limitations on the debt
buyer's claim has expired.
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3)Requires that in an action brought by a debt buyer on consumer
debt, certain facts must be alleged in the complaint,
including, among others:
a) The date of default or the date of the last payment;
b) The name and an address of the charge-off creditor at
the time of charge off and the charge-off creditor's
account number associated with the debt. The charge-off
creditor's name and address shall be in sufficient form so
as to reasonably identify the charge-off creditor;
c) The name and last known address of the debtor as they
appeared in the charge-off creditor's records prior to the
sale of the debt. If the debt was sold prior to January 1,
2014, the debtor's name and last known address as they
appeared in the debt owner's records on December 31, 2013,
shall be sufficient; and,
d) The names and addresses of all persons or entities that
purchased the debt after charge off, including the
plaintiff debt buyer. The names and addresses shall be in
sufficient form so as to reasonably identify each such
purchaser.
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4)Provides that in an action initiated by a debt buyer, no
default or other judgment may be entered against a debtor
unless business records, authenticated through a sworn
declaration, are submitted by the debt buyer to the court to
establish the specific facts required to be alleged, above.
Existing law further provides that no default or other
judgment may be entered against a debtor unless a copy of the
contract or other document described, as specified,
authenticated through a sworn declaration, has been submitted
by the debt buyer to the court.
5)Provides that in any action on a consumer debt, if a debt
buyer plaintiff seeks a default judgment and has not complied
with the requirements of the FDBPA, the court shall not enter
a default judgment for the plaintiff and may, in its
discretion, dismiss the action.
6)Provides that, except as provided in the FDBPA, the above
default judgment provisions are not intended to modify or
otherwise amend existing procedures established under Section
585 of the Code of Civil Procedure (which provides a procedure
for judgment to be had if a defendant fails to answer or
otherwise respond to a complaint).
7)Provides that when service of a summons has not resulted in
actual notice to a party in time to defend the action and a
default or default judgment has been entered against him or
her in the action, he or she may serve and file a notice of
motion to set aside the default or default judgment and for
leave to defend the action. Existing law requires that the
notice of motion be served and filed within a reasonable time,
but in no event exceeding the earlier of: (1) two years after
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entry of a default judgment against him or her; or (2) 180
days after service on him or her of a written notice that the
default or default judgment has been entered. (Code of Civil
Procedure, Section 473.5 et. seq.)
8)Requires that a notice of motion to set aside a default or
default judgment and for leave to defend the action designate
as the time for making the motion a date prescribed under a
specified provision (which sets forth the statutory timelines
for filing and serving specified noticed motions, opposing
papers, and reply papers), and that the notice be accompanied
by an affidavit showing under oath that the party's lack of
actual notice in time to defend the action was not caused by
his or her avoidance of service or inexcusable neglect. The
party shall serve and file with the notice a copy of the
answer, motion, or other pleading proposed to be filed in the
action.
9)Provides that upon a finding by the court that the motion was
made within the period permitted by subdivision (a), above,
and that his or her lack of actual notice in time to defend
the action was not caused by his or her avoidance of service
or inexcusable neglect, it may set aside the default or
default judgment on whatever terms as may be just and allow
the party to defend the action.
10)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.)
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EXISTING FEDERAL LAW 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.
FISCAL EFFECT: Unknown
COMMENTS:
SB 641 would allow a consumer, in limited circumstances, to file
a motion to set aside a default judgment that is more than 2
years old so the consumer may challenge the validity of the debt
in court and try the case on the merits. The measure is limited
to cases brought by debt buyers.
Simply stated, debt buyers are companies that purchase
delinquent charged-off debts from a creditor for a fraction of
the face value of the debt.
FDBPA
The FDBPA was established through legislation SB 233 (Leno)
which went into effect on January 1, 2014. The FDBPA regulates
the practice of buying charged-off consumer debt, sold or resold
on or after January 1, 2014 for collection purposes and
prescribes the circumstances pursuant to which the debt buyer
may bring suit. The FDBPA prohibits a court from entering a
default or other judgment in an action initiated by a debt buyer
against a debtor unless business records, authenticated through
a sworn declaration are submitted by the debt buyer to the court
to establish the facts.
The California Code of Civil Procedure, section 473.5 permits a
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party to ask a court to set aside a default judgment that has
been entered against him or her so that he or she may defend the
case on the merits only if:
1) The original service of summons did not result in actual
notice to the party in time to defend the action;
2) The default judgment is not more than two years old;
and,
3) 180 days has not passed since the party was served with
actual written notice of the default judgment.
Need for the bill:
According to the author:
"There are far more default judgments in collection cases
brought by debt buyers against consumers than there are in
any other type of case. Yet despite increased education and
media attention around this issue, the number of default
judgments in collection cases remains very high in
California. For example, in Sacramento County Superior
Court, collections cases resulted in default judgments in 74%
of cases filed in 2013 and 79.3% for cases filed in the first
5 months of 2014.
The Federal Trade Commission, among others, has called for
state legislation to deal with the frequency of default
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judgments and lack of notice provided to defendants in debt
collection lawsuits brought by debt buyers.
Prior to the passage of FDBPA in 2013, debt buyers were not
required to provide the Court with any evidence that the
Defendant being sued actually owed the debt. The now famous
story of Senator Lou Correa receiving a notice of wage
garnishment for a debt owed by a different person is not an
anomaly. For many consumers with default judgments entered
against them, the first time they are made aware they have
been sued on a debt is when they are served post-judgment
with a notice of wage garnishment.
Although the FDBPA has made great strides in reforming debt
collection litigation, it has no effect on default judgments
entered before January 1, 2014. It's these default
judgments-ones obtained before the FDBPA was signed into
law-that SB 641 will affect.
Currently, it is enormously difficult to set aside a default
judgment that is more than two years old, and like Senator
Correa, most Californians who have faced unjust wage
garnishment cannot make use of the current exceptions.
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Moreover, it now appears that at least certain debt buyers
are purposely waiting for the two-year mark to pass after
having obtained a default judgment and only then seeking a
garnishment order, leaving consumers no recourse to challenge
the validity of the debt."
A consumer example provided by the author (name has been changed
to preserve confidentiality):
"Ms. Rivera came to East Bay Community Law Center
with a notice of wage garnishment based on a default
judgment obtained in 2002 by a debt buyer for a
credit card she had never applied for or received.
She had never lived at the address on the credit card
statements, and was allegedly "personally served"
with the lawsuit at an address she had vacated 6
months earlier. The first she heard of the default
judgment was when her wages were garnished 12 years
later. The proceeding was disastrous for Ms. Rivers;
she fell behind in her rent and risks being evicted
because 25% of her wages are being garnished for a
debt that is not and never was hers."
Background:
Existing law requires that a defendant to an action against whom
a default judgment has been entered bring any motion to set
aside the default judgment within the shorter of two time
periods: (1) two years after the date of entry of a default
judgment against him or her; or (2) 180 days after service on
him or her of a written notice that the default or default
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judgment has been entered. This remedy is available only where
service of a summons has not resulted in actual notice to the
defendant in time to defend the action and the defendant's lack
of actual notice was not caused by his or her avoidance of
service or inexcusable neglect.
SB 641 creates a separate default judgment rule that potentially
extends the amount of time a consumer defendant in a debt buying
action has to bring a motion to set aside a default judgment.
Specifically, the bill would permit a debtor to serve and file a
notice of motion and motion to set aside the default or default
judgment and for leave to defend the action within 180 days of
the first actual notice of the action. This 180-day time limit
could fall after the two year limit otherwise prescribed under
existing law. The bill does not, however, alter the limited
availability of this remedy (to set aside a default judgment) to
only those situations where: (1) service of a summons has not
resulted in actual notice to the defendant in time to defend the
action; and (2) the defendant's lack of actual notice was not
caused by his or her avoidance of service or inexcusable
neglect. As with existing law, the notice must be accompanied
with an affidavit showing under oath that the defendant's (here,
the debtor) lack of actual notice in time to defend the action
was not caused by his or her avoidance of service or inexcusable
neglect. Likewise, as with existing law, the court would not be
permitted to set aside the default judgment unless it finds that
the motion was made within the appropriate time limit and that
the defendant's lack of notice in time to defend the action was
not caused by his or her avoidance of service or inexcusable
neglect.
Process of a Debt Buyer for nonpayment of debt:
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Debt buyers sue for the nonpayment of debt- the lawsuit
starts with a complaint
The lawsuit starts when the debt buyer, files a "complaint"
(sometimes called a "petition") with the court. The complaint
will list consumer as a defendant, and perhaps someone else too
(like a spouse or someone who cosigned the loan or account). It
will also state why the debt buyer is suing, and what the debt
buyer wants - usually, the debt buyer wants reimbursement for
the money consumer owes, plus interest, and sometimes attorneys'
fees and court costs.
Service of the Summons and Complaint
The debt buyer must "serve" the consumer with a copy of the
complaint, along with a "summons." The summons notifies the
consumer that the consumer is being sued, and usually provides
additional information such as when the consumer needs to file a
formal response in court.
Most courts require the debt buyer to "serve" the documents by
handing them to the consumer personally. Debt buyers most often
hire a professional process server or a local sheriff to "serve"
the consumer. If the server can't find the consumer, often he
or she can leave the summons and complaint with another adult at
the consumer's house or business and then mail a copy to the
consumer.
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Often, courts allow debt buyers to mail the consumer the summons
and complaint, along with a form for the consumer to sign
acknowledging that the consumer received the papers. If the
consumer signs and returns the form, the consumer will have been
deemed "served."
Where Will the Creditor File the Lawsuit?
The debt buyer may sue the consumer in state civil court (these
courts can have many types of names: municipal court, superior
court, justice court, county court, to name just a few), or, if
the consumer owes money to the federal government, in federal
court.
Responding to the Lawsuit
Usually, a consumer has about 20 to 30 days to file a written
response to the lawsuit. The document filed is often called the
"answer." A consumer prepares the answer and determines whether
or not to hire an attorney.
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What happens if a consumer does not respond?
If a consumer does not meet the filing deadline, the debt buyer
will likely ask the court to enter a default judgment.
Sometimes, the court will award the amount the debt buyer
requests in the default judgment, some courts will review the
papers carefully to make sure the amount is justified, and still
others might require the debt buyer to present evidence before
awarding any money.
California Courts:
California courts have a long standing policy of trying cases on
the merits when at all possible. "The policy of law is to have
every litigated case tried on its merits and court looks with
disfavor on party attempting to take advantage of his
adversary's mistake, surprise, inadvertence or neglect by
procuring default judgment, regardless of merits of such party's
case." Denke v. Bowes (App. 1947) 77 Cal. App. 2d 642.
Federal Trade Commission (FTC)
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In January 2013, the FTC released a study titled, "The
Structures and Practices of the Debt Buying Industry." The
study found the following:
This was the most extensive empirical study of the debt buying
industry. The FTC examined 90 million consumer accounts
purchased by nine of the largest debt buyers. The accounts
had a face value of $143 billion and the debt buyers spend
nearly $6.5 billion to acquire them.
Debt buyers received documentation for accounts purchased for
a small percentage of the debts. Only 12% of the sample
accounts studied by the FTC of accounts purchased by debt
buyers came with any account documents. When considering all
of the accounts purchased during the study period, an
estimated 6% of accounts debt buyers purchased came with any
sorts of documentation.
Debt buyers rarely obtained information about collection
history or dispute history for the accounts they
purchase-information that the FTC concluded is very relevant
to debt buyers in assisting them in determining whether
consumer actually owe the debts, whether they are attempting
to collect from the right person, and whether the amounts are
accurate.
Debt buyers have some information about the account but fail
to share it with the consumer. Information that would help
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the consumer understand the origins of the debt, including the
name of the original creditor, account number and date of last
payment is available to the debt buyer but generally not
included in validation letters.
Debt buyers verified disputed debts aged 6 years or more only
36% of the time compared with a 58% verification rate for
debts 3 or fewer years old. It makes sense that for older
accounts, debt buyers did not verify disputed debt as
frequently- the information necessary to verify a debt is less
likely to be available, particularly if the debt has been sold
and resold many times. In Oregon, the statute of limitations
for cases like one brought by debt buyers is 6 years.
The Commission reiterated its concern over the risk of default
judgments on debt beyond the statute of limitations- " As the
Commission has noted, because 90% or more of the consumers
sued in these actions do not appear in court to defend, filing
these actions creates a risk that consumers will be subject to
a default judgment on a time-barred debt."
These findings raise serious concerns about lawsuits brought
by debt buyers to collect on the accounts they purchase. Debt
buyers are bringing suits and obtaining default judgments in
state court at an alarmingly high rate. However, based on
some of the findings from this 2013 report, there are valid
questions as to whether debt buyers can prove ownership of the
debt, the alleged debtor, and the accuracy of the amount
claimed to be owed.
The FTC reiterated its findings from its 2010 report that
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"debt collection complaints often do not contain sufficient
information to allow consumers to admit or deny the allegation
and assert affirmative defenses." This finding, among others,
led the FTC to conclude in 2010 that "the system for resolving
consumer debt disputes through litigation is seriously
flawed." In its most recent report, the FTC did not let debt
buyers off the hook as they claim- "the sufficiently and
accuracy of the information used in the collection of debts
remains a significant consumer protection concern."
Consumer Financial Protection Bureau (CFPB)
On October 24, 2012, the CFPB published a rule to allow the
agency to federally supervise the larger consumer debt
collectors. (CFPB, Consumer Financial Protection Bureau to
Oversee Debt Collectors (Oct. 24, 2012)
[as of Apr. 9, 2015].)
The CFPB noted that, "[a]pproximately 30 million Americans
have, on average, $1,500 of debt subject to collection. Debt
collectors often report consumers' collection status to the
credit bureaus. If they get the information wrong, this can be
the difference between getting approved or denied for such
financial products as a mortgage or a car loan."
Arguments in support:
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SB 641 puts important due process protections in place by
permitting consumers to move to set aside default judgments
obtained by debt buyers within 180 days after the first actual
notice of lawsuit. This important protection would ensure
that consumers can defend themselves in situations where they
received no initial notice of a lawsuit through no fault of
their own. SB 641, like section 473.5 of the Code of Civil
Procedure, requires a consumer to swear, under penalty of
perjury, that her lack of actual notice in time to defend the
action was not caused by avoidance of service or inexcusable
neglect.
The reforms in SB 641 are sorely needed. Many Californians
are not aware that a debt buyer has filed a lawsuit against
them until their wages are garnished or their bank accounts
are levied. Under the current law, if more than two years
have passed since the entry of a default judgment, a consumer
may have no way to stop a garnishment or levy short of
bringing an entirely new action- even if she never knew about
the lawsuit or the supposed debt in question.
Default judgments entered against consumers by debt buyers
come at a great cost to consumers, courts, and county
sheriffs' offices. Numerous reports have documents the rise
in the use of litigation by debt buyers as a mechanism to
collect debt from consumers. With this increased litigation
has come a concomitant rise in certain debt buyers engaging in
unfair practices that echo the worst excesses of the debt
collection industry, such as hiring process servers known to
falsify proofs of service in order to obtain default judgments
against consumers without providing notice.
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Only consumers who lack actual knowledge of debt buyer suits
will have recourse under the new law. They will have to act
within a reasonable time after learning about the lawsuit. In
addition, they will have to submit an affidavit sworn under
penalty of perjury that their lack of notice did not result
from avoidance of service or inexcusable neglect, and then
will have to defend the action on the merits. This new bill
is no free ticket out of debt.
Arguments in opposition:
No time limitation- the bill could conceivably allow a
consumer to claim they did not receive "actual notice" at any
point in time in the future. This would require companies to
maintain documents, including those containing personally
identifiable information in perpetuity, despite public policy
to destroy such information at the earliest possible date.
Retroactive application-The bill would ask those who
successfully argued their case before a court to reproduce
evidence already provided and folded into the judgment.
Depending on the age of the judgment, many of the supporting
documents and evidence may have been legally destroyed
pursuant to corporate and government mandated document
retention and destruction policies. If a policy change of
this significance is adopted, it should only be applied
prospectively so as to allow for compliance.
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The stated problem and the bill's proposed resolution are
misaligned- the stated problem involves the process serving
profession whereas the bill's solution focuses on the client-
but only for one industry. Since debt buying company's
contract with the same process services used by other
companies, industries, government agencies, and members of the
public, any failure to process would be systematic in nature
and not limited to one industry. The Judicial Council's Form
POS-010 requires a process server to swear under the penalty
of perjury that they have served the correct individual. SB
641 requires the individual seeking to vacate a judgment to
submit an affidavit indicating under oath that they lacked
actual notice of service. Both individuals are swearing they
are telling the truth and yet the facts would suggest
otherwise. What is notable is that neither individual is a
debt buying company.
The legislation would restrict the availability of affordable
credit. Research by the Federal Reserve Bank of Philadelphia
has established that laws making it harder to collect on
delinquent debt lead to higher interest rates and less credit
available to consumers in the state.
Previous Legislation:
SB 233 (Leno, Chapter 64, Statutes of 2013) Enacted the FDBPA
imposing various requirements on practices that may be used to
collect on purchased consumer debt.
SB 890 (Leno, 2012 Legislative Session) Failed passage in
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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.
Double-referral:
Should this measure pass out of the Assembly Banking and Finance
Committee it will move on to the Assembly Judiciary Committee.
Recommended Amendments:
After a number of meetings and discussions with the opposition
and supporters of the measure, the committee believes a number
of issues need to be addressed.
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1)Retroactive application
The committee is recommending that the measure not be
retroactive indefinitely and proposes a date of January 1, 2010.
Therefore all judgments entered on or after this date would
fall under the measure.
2)2 Year Period to Set Aside
The committee believes the 2 year period for a consumer to set
aside a default judgment should be extended to 6 years for
actions brought by debt buyers.
Technical Amendment:
On page 2, line 5, delete "third party"
REGISTERED SUPPORT / OPPOSITION:
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Support
East Bay Community Law Center (EBCLC) - Sponsor
American Civil Liberties Union (ACLU)
Bay Area Legal Aid (BayLegal)
California Reinvestment Coalition (CRC)
Center for Responsible Lending (CRL)
Consumer Federation of California (CFC)
Consumers for Auto Reliability and Safety (CARS)
Consumers Union
National Employment Law Project (NELP)
Public Counsel
Western Center on Law and Proverty
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1 Individual
Opposition
California Association of Collectors (CAC)
California Bankers Association (CBA)
California Creditors Bar Association (CCBA)
DBA International (DBA)
Encore Capitol Group
Analysis Prepared by:Kathleen O'Malley / B. & F. / (916)
319-3081