Debt Collection Compliance and State Chain of Title Requirements

Towards the end of 2011 — were we ever so young? — insideARM.com joined forces with Interactive Intelligence and Latitude Software and harnessed the thought leadership of ten industry experts about the future of compliance in the debt collection industry. We turned those insights into a white paper which you can download by clicking here:

The Future of Compliance for the Debt Collection Industry

Excerpted below is a piece by our good friend Katrina Christakis, who wrote about state chain of title requirements.

“Look out, it’s a trap!” State chain of title requirements

–Katrina Christakis, Grady Pilgrims Christakis Bell LLP

Let’s say you’re a debt buyer with its principal place of business in Nevada. You buy a portfolio of charged-off consumer accounts from a creditor based in Delaware. The accounts are then assigned for collection to a subsidiary agency, also based in Nevada and your assignment documents comply with Nevada state laws. The collection agency then files suit against a consumer in New York, which contains the relevant consumer information and the necessary facts in support of the agency’s standing to sue.

Now let’s say the same Nevada-based debt buyer has acquired accounts from an upstream owner located in Virginia, a couple times removed from the original creditor in Delaware.

It assigns the accounts for collection to a subsidiary agency, which then proceeds to file suit against the consumer in Illinois. The assignment, valid in Nevada – even valid in New York – may not be valid in Illinois. Why? Because in Illinois a collection agency cannot initiate litigation in the absence of an assignment that states (1) the date of the assignment, (2) the consideration paid, and (3) identifying information for the account being transferred. And what’s more, the agency must have in its possession conforming assignments for each link in the chain of title beginning with the original creditor. The fact that the assignments complied with the laws of Nevada, Delaware or Virginia is irrelevant.

Obviously, state chain of title requirements are designed to ensure that collectors who file suit have a legal right to enforce the obligation. It’s probably also safe to say that it’s going to be a big issue going into 2012. No one wants to pay off a debt only to have the true owner come forward to demand payment at a later date. Mindful of these concerns, legislators, regulators and judges are augmenting the burden of verification, which can result in some fairly substantial obstacles for debt buyers and possibly unduly interfere with interstate commerce.

How? By requiring assignments to take a particular “form” before an assignee can file suit to collect a debt against a consumer essentially imposes a particular state’s requirements on all accounts assigned, regardless of where the assignor and assignee formed their contract, and regardless of where the consumer resides at the time. Debt collectors are required to file suit in the district either where the consumer signed the contract or where the consumer resides at the commencement of the action.

Thus, a debt buyer could obtain assignments that comply with Nevada law, for a consumer residing in Nevada at the time of the assignment, but then the consumer relocates to Illinois and the assignment, valid under Nevada law at the time it was executed, may not now be in the form specified by Illinois law at the time the suit is filed. Such an imposition could have the effect of voiding those contracts altogether and is precisely the kind of improper regulation of interstate commerce that the Federal Commerce Clause prohibits. In other words, if every state imposed its own “form” of written instrument for accounts assigned for collection, this could overly burden the collection industry by forcing contracting parties to inquire into every state’s regulations, first when they enter into those assignments and then again at the time they commence litigation.

With a new year coming up, this is something to keep an eye on.

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