BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 890 (Leno)
As Amended March 24, 2011
Hearing Date: May 10, 2011
Fiscal: No
Urgency: No
BCP
SUBJECT
Debt Buyers
DESCRIPTION
This bill, the Fair Debt Buyers Practices Act, would impose
various restrictions on debt buyers who seek to take steps to
collect purchased debt, including:
Prohibiting the collection of a debt without valid
documentation;
Requiring a debt buyer who receives payment to provide a
receipt;
Prohibiting suit or other action to collect a consumer
debt if the statute of limitations has expired;
Requiring specified documentation of the debt to be
attached to a complaint;
Requiring a dismissal of the action, with prejudice, if
a debt buyer seeks a default judgment without complying
with specified requirements.
This bill would provide that a debt buyer who violates the
provisions of this bill is liable for specified damages,
including costs and reasonable attorneys fees, but permits a
debt buyer to avoid liability for unintentional bona fide
errors.
This bill would also require a claim of exemption, and related
financial statement form, to be provided to a judgment debtor by
a levying officer, as specified.
BACKGROUND
(more)
SB 890 (Leno)
Page 2 of ?
Debt buyers are companies that purchase delinquent or
charged-off debts from a creditor for a certain fraction of the
face value of the debt. Those companies have become subject to
increased scrutiny due to numerous complaints on behalf of
consumers. Last July, the Federal Trade Commission (FTC)
issued a report examining debt collection litigation and
arbitration proceedings that concluded the "system for resolving
consumer debt collection disputes is broken" and recommended
significant reforms. The FTC further noted that:
The report finds very few consumers defend or otherwise
participate in debt collection litigation. The Commission
therefore recommends state and local governments consider
making a variety of reforms to service of process, pleading,
and court rules and practices to increase the ability of
consumers to defend or otherwise participate in debt
collection litigation. The report also finds
complaints and attachments in debt collection cases often do
not provide adequate information for consumers to answer
complaints or for judges to rule on motions for default
judgment. The FTC therefore recommends that courts more
rigorously apply existing rules to require that collectors
provide adequate information and that jurisdictions consider
adopting rules mandating the information which must be
included in or attached to the complaint. The report
additionally finds that state statutes of limitations on
filing actions to recover on debt are sometimes variable and
complex, and generally not understood by consumers. The
Commission suggests that states consider modifying their
laws to make it simpler to determine the applicable statute
of limitations, and to require that collectors provide
consumers with important information about
their legal rights when collecting debt they know or should
know is time-barred.
Responding to those issues, this bill, sponsored by Attorney
General Kamala Harris, seeks to make numerous changes relating
to debt buyers, including prohibiting the filing of an action if
the statute of limitations has run, and requiring a debt buyer
to attach copies of specified documents to any filed complaint.
CHANGES TO EXISTING LAW
1. Existing 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.
SB 890 (Leno)
Page 3 of ?
Existing state law , 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 collectors to debtors and others. (Civ.
Code Sec. 1788 et seq.)
This bill would enact the Fair Debt Buyers Practices Act,
whose requirements and remedies are cumulative to those in the
Rosenthal Fair Debt Collection Practices Act as well as any
other law.
This bill would prohibit a debt buyer from making any written
statement in an attempt to collect a consumer debt, including
bringing suit or initiating another type of proceeding, unless
the debt buyer possesses valid documentation that the buyer is
the sole owner of the debt and reasonable verification of the
amount of the debt allegedly owed by the debtor. Reasonable
verification shall include documentation of the name of the
original creditor, the name and address of the debtor as it
appeared on the contract or other document evidencing the
agreement to the debt, and an itemized accounting of the
amount claimed to be owed, including all fees and charges.
Upon a request from the debtor to whom the debt purportedly
applies, the debt buyer shall make this information available,
without charge, to the debtor within five business days.
This bill would require a debt buyer who receives payment on a
debt to provide an original receipt, or an exact copy, to the
individual from whom payment is received within 10 days of
payment, as specified.
This bill would prohibit 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.
This bill would require the following with respect to an
action brought by a debt buyer on a consumer debt:
Plaintiff shall disclose clearly and conspicuously on
the face of the complaint that he or she is a debt buyer;
All of the following are attached: (1) copy of the
contract or other writing evidencing the original debt and
agreement of the debtor to be responsible for the debt, and
establishing that each defendant debtor is, in fact,
SB 890 (Leno)
Page 4 of ?
responsible for the original account; (2) copy of the
writing establishing that the debt buyer is the sole
current owner of the debt, as specified; and
A statement of calculation of liability that separately
states the amount of the original debt, each fee and charge
added to the debt, and each payment credited to the debt
after the earliest charge off or the delinquency closest in
time to the sale of the debt.
This bill would provide that for purposes of the above
provisions, the only evidence sufficient to establish the
amount and nature of the debt shall be properly authenticated
business records that satisfy the requirements of the Evidence
Code, as specified, and include the following items: (1) copy
of the contract or other writing evidencing the original debt;
(2) original account number; (3) name of the original
creditor; (4) original charge-off balance; (5) itemization of
charges and fees claimed to be owed; (6) itemization of post
charge-off additions, if applicable; (7) date of last payment;
and (8) amount of interest claims and the basis for the
interest charged.
This bill would provide that if a plaintiff who is a debt
buyer seeks a default judgment and has not complied with the
above requirements, the court shall not enter a default
judgment for the plaintiff and shall dismiss the action with
prejudice.
This bill would, except as specified, provide that a debt
buyer who violates any provision of this bill with respect to
any person is liable to the person in an amount equaling the
sum of the following: (1) actual damage sustained; (2)
damages, as specified in an individual or class action; and
(3) costs of the action and reasonable attorney's fees.
This bill would provide that a debt buyer shall not be liable
in any action brought under this bill, 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
adapted to avoid any such error.
This bill would provide that an action to enforce any
liability created by this title may be brought within two
years from the date of discovery of the violation.
SB 890 (Leno)
Page 5 of ?
This bill would provide that in a case involving consumer
debt, as defined and regulated under the Rosenthal Fair Debt
Collection Practices Act, if the defendant debtor appears for
trial on the scheduled date and the plaintiff debt buyer
either fails to appear or is not prepared to proceed to trial,
and the court does not find a good cause for continuance,
judgment shall be entered for the debtor. Notwithstanding any
other law, in that instance, the court may award the defendant
debtor's costs of preparing for trial, including, but not
limited to, lost wages and transportation expenses.
2. Existing law establishes a process for the enforcement of
money judgments and requires a levying officer to provide
certain documents and information to a judgment debtor and to
a designated employer in connection with wage garnishment.
Existing law permits a process server also to serve an
earnings withholding order on an employer and requires that
the process server also serve certain documents at this time.
Existing law requires an employer who is served with an
earnings withholding order to provide certain documents to an
employee who is a judgment debtor. (Code Civ. Proc Secs.
700.010; 706.103; 706.104; 706.108; 706.122.)
This bill would require, in the circumstances described above,
that a copy of the form that the judgment debtor may use to
make a claim of exemption and a copy of the form used to
provide a financial statement also be provided.
3. This bill would provide that its provisions are severable.
If any provision of this section or its application is held
invalid, that invalidity shall not affect other provisions or
applications that can be given effect without the invalid
provision or application.
SB 890 (Leno)
Page 6 of ?
COMMENT
1. Stated need for the bill
The author states:
According to the Federal Trade Commission, �t]he system for
resolving disputes about consumer debts is broken, and has
urged states to pass legislation to provide adequate
protection for consumers. The system is broken because
courts have been swamped with debt collection law suits
driven by the growth of an industry that buys and sells
bundled portfolios of consumer debt, and misuses the courts
to leverage their collection efforts.
The industry's practices echo the scandal surrounding the
processing of delinquent mortgages. Here, debt buyers use
"robo signers" who sign affidavits averring that they have
reviewed and verified debtors' records, when they have only
reviewed basic, and often incomplete, account statements
records or spreadsheets on a computer screen. Moreover,
because consumer debt is being bought and sold so
frequently, and over a period of years, companies are
frequently pursuing the wrong person, or the filing claims
that have no lawful basis.
Frequently, these debt collection actions are filed by debt
buyers without proof that the debt ever existed. Yet
actions proceed to judgment because ninety-five percent of
consumers do not respond to these lawsuits-many because they
do not receive notice-allowing the debt collector to take a
default judgment against the consumer and levy against the
consumer's personnel accounts.
The author maintains that this bill, "The Fair Debt Buyers
Act�,] would reform the debt collection litigation process in
a number of ways to aid consumers and unburden the courts from
costly, unmeritorious litigation. "
2. Implementing the FTC's recommendations
As noted above, the FTC released a comprehensive report last
year entitled Repairing A Broken System: Protecting Consumers
in Debt Collection Litigation and Arbitration that contained
recommendations for reforms similar to those proposed by this
bill.
SB 890 (Leno)
Page 7 of ?
a. Complaints must include detailed information
The FTC found that complaints filed by debt collectors to
initiate collection actions against debtors were lacking.
The FTC's report noted that "�t]he function of debt
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 . . . Based
on the evidence gathered in connection with these
proceedings, the FTC believes that many debt collection
complaints do not provide this information to consumers."
To address that issue, this bill would, among other things,
enhance the complaint so that the debtor has more complete
information regarding the debt at issue, and, in turn, is
able to respond appropriately to the complaint.
Specifically, the bill would require the debt buyer to
clearly and conspicuously disclose on the face of the
complaint that he or she is a debt buyer and attach a copy
of the following: (1) contract or other writing evidencing
the debt and agreement; (2) copy of the writing establishing
that the debtor is the sole current owner of the debt
(including original account number redacted to the last four
digits); and (3) a statement of calculation of liability.
Consumers Union (CU), in support, notes that attempting to
collect debts without proof is a documented problem and that
the proposed safeguards will prevent the courts from being
clogged with unsubstantiated lawsuits. Given the reported
abuses, the provision of that information would appear to
provide consumer with necessary information about the debt
for which collection is attempted, and in turn, allow those
consumers to file an appropriate answer to the complaint.
The California Association of Collectors (CAC), in
opposition, contends that this bill "confuses and blends the
concepts of debt verification and prove-up hearings. Debt
verification is the requirement on behalf of the debt owner
or collector to demonstrate that the debt is owed by the
consumer. Conversely, to obtain a judgment at trial or
prove-up hearing, the plaintiff must produce admissible
evidence satisfactory to the court that judgment is property
against the named defendants." Despite those contentions,
SB 890 (Leno)
Page 8 of ?
it is important to note that many of the complaints filed by
some debt buyers are simply form complaints that provide
little, if any, useful information to the consumer being
sued about the underlying debt. Regarding the filing
practices of some of those firms, the New York Times'
October 31, 2010 article entitled Debt Collectors Face a
Hazard: Writer's Cramp reported that:
In some instances, banks are selling account information
that is riddled with errors. More often, essential
background information simply is not acquired by debt
buyers, in large part because that data adds to the price
of each account. But court rules state that anyone
submitting an affidavit to a court against a debtor must
have proof of that claim - proper documentation of a
debt's origins, history and amount.
Without that information it is hard to imagine how any
company could meet the legal standard of due diligence,
particularly while churning out thousands and thousands
of affidavits a week. Analysts say that
affidavit-signers at debt-buying companies appear to have
little choice but to take at face value the few facts
typically provided to them - often little more than basic
account information on a computer screen.
From a policy standpoint, it is questionable why a debt
buyer should receive a judgment against a consumer if the
debt buyer doesn't even have basic information about the
underlying debt - that information is essential to
demonstrating the right to a judgment. Consumers Union
further notes a report done with the East Bay Community Law
Center found that "debt buyers frequently buy portfolios of
individual consumer debts with inadequate and inadequate
information, and frequently sue without any proof that they
own the debts or that the consumer owes them money."
b. Disclosure of information prior to judgments
To help provide courts (and consumers) with information
about the underlying debt, this bill would require debt
buyers to provide admissible information to establish the
amount and nature of the debt and identity of the debtor.
That evidence must consist of authenticated business
records, and include specified items, including the date of
last payment (which is important for purposes of the statute
SB 890 (Leno)
Page 9 of ?
of limitations). It should be noted that a large percentage
of debt collection actions reportedly result in default
judgments. Those judgments are entered in favor of the
plaintiff due to the failure of the defendant (consumer) to
file a timely response to the complaint.
When those consumers fail to respond, there is no advocate
to raise, on their behalf, applicable defenses or challenge
the assertions made by the debt buyer. The FTC's report
noted concern about the number of default judgments and
recommended steps to "increase consumer participation in
debt collection litigation to help decrease the prevalence
of default judgments," and noted that "�i]n an effort to
address this problem in another way, some court systems have
adopted measures to encourage judges to apply appropriate
and consistent standards - including legal standards and
court rules - in deciding whether to grant such judgments."
The requirements discussed above essentially provide a set
of consistent standards for a judge to use when granting a
default judgment.
This bill would also provide that if a debt buyer seeks a
default judgment and has not complied with the requirement
to provide the admissible information discussed above, the
court shall not enter a default judgment and shall dismiss
the action with prejudice. (A dismissal with prejudice
precludes the debt buyer from bringing a future action to
collect on that debt.) Although the penalty of a dismissal
with prejudice appears somewhat harsh for failing to comply
with specific requirements, it would provide a strong
incentive for the debt buyer to provide all necessary
information to the court prior to pursuing a default
judgment. The bill would similarly require judgment to be
entered in favor of the consumer if the consumer appears on
the trial date and the debt buyer either fails to appear or
is not ready, and the court does not find good cause for
continuance. In support of those two provisions, the author
states:
The model that the debt buying mills follow is to obtain
default judgments. The FTC has estimated that 95% of
these collection cases end in defaults. If a
debtor-defendant shows up for trial (having gone through
the trouble of preparing for trial, getting time off
work, etc.), the plaintiff-debt buyer simply dismisses
the case without prejudice. The claimed debt lives on,
SB 890 (Leno)
Page 10 of ?
and the debtor may face a suit in the future from the
same debt buyer or a different one years later. What
SB890 seeks to do is to change this abusive practice.
The provision . . . simply puts into the code the
unremarkable requirement that a party be ready for the
trial that it has noticed and sought.
The broader provision requiring dismissal for failure to
follow the bill's requirements when seeking a default
judgment is meant to serve as a fitting deterrent to the
same abusive practices. Most debtor-defendants will not
be able to expend the time and effort to file an action
seeking statutory damages under the bill. This would
provide a remedy tailored to the violation, and place the
burden on debt buyers rather than the courts to ensure
that the terms of the law are followed.
c. Statute of limitations
The FTC's report also expressed concern that certain
collectors "regularly sue consumers on time-barred debts."
That practice is exacerbated by the practical reality that
many consumers do not defend suits against them, even when
the action would be barred by the statute of limitations.
The FTC further asserted that "�b]ecause 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.
Indeed, some judges who participated in the roundtables
stated that, 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."
This bill would address those issues by, among other things,
prohibiting 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. CAC contends that the
proposal is unprecedented and that "CAC is not aware of any
other area of California law in which a plaintiff is
prevented from filing a lawsuit if the statute of
limitations has expired." CAC also notes that statutes of
SB 890 (Leno)
Page 11 of ?
limitations have numerous exceptions, and that the bill
would fundamentally change the nature of the affirmative
defense.
While CAC is correct that this bill would change the nature
of the affirmative defense by proactively prohibiting the
filing of those actions, some change is arguably necessary
to address the issue of courts granting default judgments
for debts that are technically unenforceable due to the
running of the statute of limitations. East Bay Community
Law Center further notes that this bill would "protect�]
consumers from litigation or threat of litigation on debts
they have no legal obligation to pay, including debts
resulting from identity theft, mistake, time-barred debts,
and debts they already paid."
3. Additional limitations
This bill would additionally prohibit a debt buyer from
attempting to collect a consumer debt unless the buyer has
specific documentation regarding the debt. The debt buyer
must make that information available, without charge, to the
debtor within five business days. CAC, in opposition,
contends that five days is too short and that "�m]ail can be
slow and delays may be caused by vacations, holidays,
disability or illness." Although the time frame is relatively
short, the timeframe would arguably require the debt buyer to
have that information in an easily accessible format so that
it may respond within that five-business day window. It
should be noted that since the bill uses "business days," it
would essentially provide an entire week for the debt buyer to
respond to the inquiry. The following amendment is suggested
to clarify that the five-day window commences at the receipt
of the request, thus, avoiding a situation where the request
is made by mail several days before the debt buyer receives
it:
Clarifying amendment:
On page 3, line 26, after "Upon" insert: receipt of
4. Remedies
To provide specific penalties for failure to comply with the
bill's requirements, SB 890 would provide that a debt buyer
who violates the above requirements shall be liable to the
consumer in an amount equal to the (actual damage) plus
SB 890 (Leno)
Page 12 of ?
(additional damages (between $500 and $5000 per violation per
person)) plus (costs of the action and reasonable attorneys
fees). CAC objects allowing for additional damages of up to
$5,000 and contends that "many legitimate businesses that
commit an inadvertent error will be shut down and employees
will lose their jobs." Despite those concerns, it should be
noted that this bill would also limit the liability of debt
buyers under the above provision if the buyer shows that the
violation was not intentional and resulted from a bona fide
error. That safe harbor provision would appear to act to
shield debt buyers from liability in cases where the error was
truly inadvertent.
5. Claim of exemption
Under existing law, a judgment debtor can claim that debtor's
property or money is exempt from collection efforts. Those
claims may be filed with the levying officer within 10 days
after the date the notice of levy was served on the judgment
debtor, and must include a financial statement. (Code Civ.
Proc. Secs. 703.520, 703.530.) To facilitate exemptions, this
bill would require the levying officer enforcing a money
judgment to also provide a copy of the forms that the judgment
debtor may use to make a claim of exemption and the financial
statement, as specified.
CAC, in opposition, notes that judgment debtors may already
file a Claim of Exemption but contends that this bill would
"require judgment creditors who are debt buyers to advise
judgment debtors how to defeat the awful collection of a
judgment." It should be noted that the bill merely
facilitates the use of a form that is already available to
consumers, and does not change the underlying ability to claim
any applicable exemption.
6. Opposition's remaining concerns
The CAC further contends that debtors have the existing right
to make an offer to compromise, and to seek damages for
frivolous lawsuits, and to sue for malicious prosecution.
DBA International, in opposition, contends that the bill "sets
unprecedented obligations on the entire collection industry in
the judicial system, proposes requirements which go beyond
SB 890 (Leno)
Page 13 of ?
what is required or even available by the original creditors,
and generally, creates more ambiguity than solves perceived
problems." DBA's attached position paper notes that ownership
is established for most purchases by a Bill of Sale and argues
that: (1) the bill would eviscerate a judge's right to
evaluate the trustworthiness of the evidence before them; (2)
the itemization requirement is not even imposed upon
originating banks by federal law; (3) the bill approaches the
problem from the wrong perspective since it is the original
creditor that has the information; (4) the FDCPA already
imposes requirements on debt collectors; and (5) the bill will
cause unnecessary filings of excess documents.
The California Creditors Bar Association (CCBA) expresses
concern that the bill proposes "extensive regulations for only
one type of debt ownership," would flip the burden of proof
regarding the statute of limitations, "imposes wildly
unreasonable requirements for documentation," and contends
that the liability imposed would be punitive.
Support : California Reinvestment Coalition; Consumers Union;
East Bay Community Law Center
Opposition : California Association of Collectors; California
Creditors Bar Association; DBA International
HISTORY
Source : Attorney General Kamala Harris
Related Pending Legislation : SB 708 (Corbett), would enact the
Debt Settlement Consumer Protection Act.
Prior Legislation : None Known
**************
SB 890 (Leno)
Page 14 of ?