BILL ANALYSIS �
SB 890
Page 1
Date of Hearing: June 26, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 890 (Leno) - As Amended: June 18, 2012
As Proposed to Be Amended
SENATE VOTE : 22-14
SUBJECT : FAIR DEBT BUYERS PRACTICES ACT
KEY ISSUE : SHOULD DEBT BUYERS BE REQUIRED TO SUBSTANTIATE
CERTAIN BASIC INFORMATION ABOUT AN ALLEGED DEBT TO PROVE THAT A
CONSUMER ACTUALLY OWES THE DEBT BEFORE THE DEBT BUYER CAN FILE A
LAWSUIT OR OTHERWISE TAKE ACTION TO COLLECT THE DEBT?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
According to proponents, California's courts are swamped with
debt collection lawsuits at a time when our judicial system is
facing unprecedented budget challenges, and debt buyers--
companies that purchase delinquent or charged-off debts from a
creditor for a certain fraction of the face value of the
debt--are largely driving this crisis by filing thousands of
lawsuits against consumers each month to collect their purchased
debts. Proponents further contend that many of these lawsuits
are simply unsubstantiated by facts necessary to determine,
among other things, that the debt buyer actually owns the debt
at issue, that the defendant is the person who owes the debt, or
that the debt is not time-barred.
This important bill, sponsored by the Attorney General, seeks to
enact the Fair Debt Buyer Practices Act. As proposed to be
amended, this bill, among other things: (1) prohibits written
statements to collect consumer debt unless the debt buyer has
sufficient information to justify his collection efforts; (2)
clarifies the allegations required in a lawsuit filed by a debt
buyer and the evidence required of a debt buyer to obtain a
judgment in a collection suit; (3) prohibits collection suits
where the statute of limitations has already run; and (4)
provides a private right of action against a debt buyer who
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violates any provision of this act. By requiring greater
documentation and substantiation of debt claims as a condition
of filing a collection lawsuit, this bill may help conserve
judicial resources that might otherwise be spent processing
large numbers of unsubstantiated lawsuits.
The bill is supported by a range of consumer advocates, legal
aid providers, civil rights advocates, and labor groups. As
proposed to be amended, all known opposition from members of the
debt buyer industry has been removed. Bankers and the Civil
Justice Association of California continue to oppose the bill
unless amended to narrow the definition of "debt buyer" so that
banks are not regulated by the bill, in addition to other
concerns. This bill is double-referred to the Assembly Banking
and Finance Committee.
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" to mean a person or entity that is
regularly engaged in the business of purchasing delinquent or
charged-off consumer loans, consumer credit accounts, or other
delinquent consumer debt for collection purposes, whether it
collects the debt itself, hires a third party for collection,
or hires an attorney-at-law 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; (b) the name and address of the debt
buyer and all persons or entities that purchased the debt
after charge off; and (c) 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 documents to the debtor without charge within 15 calendar
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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
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 (3) 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
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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
July 1, 2013.
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 LAW :
1)Pursuant to 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.
2)Pursuant to 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.)
COMMENTS : This bill, sponsored by the Attorney General, seeks
to enact the Fair Debt Buyer Practices Act, a comprehensive
approach to address problems that, according to the author, 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. 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
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collection efforts target the correct individuals, avoid
litigation over time-barred debt, and that the amount of the
debt is calculated accurately.
In addition to protecting consumers, this bill will help relieve
the overwhelming burden placed on our courts by thousands of
debt collection lawsuits, many of them unsubstantiated.
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, 4/22/2010.) 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. They note that the cost of unsubstantiated debt
litigation falls upon courts that must expend resources
processing collection claims, and taxpayers who subsidize the
time and resources spent by the courts. By requiring greater
documentation and substantiation of debt claims as a condition
of filing collection lawsuits, this bill could potentially
reduce the amount of debt buyer litigation by weeding out
"meritless" suits before they are filed. Supporters of the bill
contend that anecdotal evidence indicates this is exactly what
has happened in North Carolina since passage of a law there
similar to this bill.
As proposed to be amended, this bill prohibits written
statements to collect consumer debt unless the debt buyer has
sufficient information to justify collection efforts. 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
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Practices and the Debt Buying Industry Need Reform Now ,
Consumers Union, January 2011.)
As proposed to be amended, 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, 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. When
considered in whole, these requirements appear 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.
As proposed to be amended, this bill clarifies requirements for
collection suits filed by debt buyers. 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. The FTC's
report explained that "the 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." (FTC, "Repairing A Broken System: Protecting
Consumers in Debt Collection Litigation and Arbitration", July
2010.)
As proposed to be amended, this bill seeks to address this
problem by clarifying 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 from which it is derived, and that
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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 written
contact with the debtor, as discussed above. According to the
author, many of the complaints filed by some debt buyers are
form complaints containing little information useful to the
person being sued. This bill helps ensure that the complaint
provides essential information about the underlying debt at
issue to not only the consumer being sued, but the court itself,
which needs reliable information if it is to enter a judgment
for either party.
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." As proposed to be amended, 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 provides 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
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with adequate information.
This bill prohibits collection suits where the statute of
limitations has already run. 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 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.
Private right of action against a debt buyer for violations of
this act. 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 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 (3)
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
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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.
ARGUMENTS IN OPPOSITION : The California Bankers Association
(CBA) opposes this bill unless amended to: (1) more narrowly
apply the definition of debt buyer; (2) exempt depository
institutions; and (3) more appropriately define the date of
default. CBA contends that the date of default is so broad that
it can apply to a bank that acquires another bank or purchases a
portfolio of consumer credit that has past due accounts, thus
possibly bringing the bank under the reach of the bill and
creating problems for banking acquisitions and other account
purchases. CBA also contends that banks should be exempt from
the bill because "banks are creditors and not debt buyers that
necessitate regulation under this bill."
The Civil Justice Association of California (CJAC) also opposes
the bill unless amended to narrow the definition of debt buyer,
citing similar reasons as CBA.
REGISTERED SUPPORT / OPPOSITION :
Support
Attorney General Kamala Harris (sponsor)
Alexander Community Law Center
American Federation of State, County and Municipal Employees
California Consumer Affairs Association
California Labor Federation
California Public Interest Research Group
California Reinvestment Coalition
Consumer Federation of California
Consumers Union
East Bay Community Law Center
Housing and Economic Rights Advocates
Lawyers' Committee for Civil Rights of the San Francisco Bay
Area
Mexican American Legal Defense and Educational Fund
Professor Scott Maurer, Santa Clara University School of Law
Public Counsel
Public Law Center
Service Employees International Union
Several individuals
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Opposition (unless further amended)
California Bankers Association (CBA)
Civil Justice Association of California (CJAC)
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334