New Debt Buyer Law May Decrease Communication, Increase Litigation Between ARM Firms and Consumers

Tomio Narita

A couple weeks ago, California passed the Fair Debt Buying Practices Act, California Civil Code section 1788.50 et. seq., in response to criticism that debt buyers did not have adequate documentation to support the collection lawsuits they were filing against California consumers.  The Act imposes a series of costly new requirements on debt buyers that start before any collection letter is sent to a consumer, and that continue throughout the collection process, including during any collection litigation.

Although the Act was designed to protect consumers and increase the information available to them, a likely result of the Act’s new requirements will be to decrease the level of communication between debt buyers and consumers, while increasing the amount of collection litigation.  Debt buyers are not required to call or write to consumers before filing suit, but they often prefer to, so they can offer settlements and identify legitimate consumer disputes.  Under the new Act, however, if a debt buyer wants to send a letter to a consumer, it must already have possession of, or access to, all the documents and information it will need to obtain a default judgment against the consumer.  Given the costs associated with obtaining the required media, debt buyers may become less flexible in their pre-suit settlement offers with consumers.  In addition, some debt buyers may conclude that it is more cost-effective to avoid the pre-suit notice and validation requirements of the Act and to proceed directly to litigation on a larger number of accounts.

Thus, the Act may have the unfortunate effect of decreasing the level of communication between consumers and debt buyers, thereby reducing the chance that consumer will be offered a chance to settle the debt, or dispute it, before a lawsuit is filed.

Scope Of The Act

The Act only applies to debt buyers: it does not apply to creditors, collection agencies or collection attorneys.  A “debt buyer” is defined as “a person or entity that is regularly engaged in the business of purchasing charged-off 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.” See Cal. Civ. Code § 1788.50(a)(1).  The term “charged-off consumer debt” means “a consumer debt that has been removed from a creditor’s books as an asset and treated as a loss or expense.”  Id. at § 1788.50(a)(2).  The term “debt buyer” does not include “a person or entity that acquires a charged-off consumer debt incidental to the purchase of a portfolio predominantly consisting of consumer debt that has not been charged off.  Id. at § 1788.50(a)(1).  The Act only applies to consumer debts that are sold or resold on or after January 1, 2014.  Id. at § 1788.50(d).

Information Required Before Writing To Consumers

The Act regulates information that a debt buyer must possess, and documentation that the debt buyer must have access to, before the debt buyer makes “any written statement to the debtor in an attempt to collect a consumer debt.”  See Cal. Civ. Code § 1788.52.  Note, however, that these requirements only apply if a “debt buyer” as defined by the Act is writing to the consumer, and they would not apply to any collection agency or lawyer retained by the debt buyer.  Id.

If the debt buyer decides to write to a consumer, the debt buyer must “possess” the following six items of information at the time of the writing:

“(1) That the debt buyer is the sole owner of the debt at issue or has authority to assert the rights of all owners of the debt.

(2) The debt balance at charge off and an explanation of the amount, nature, and reason for all post-charge-off interest and fees, if any, imposed by the charge-off creditor or any subsequent purchasers of the debt. This paragraph shall not be deemed to require a specific itemization, but the explanation shall identify separately the charge-off balance, the total of any post-charge-off interest, and the total of any post-charge-off fees.

(3) The date of default or the date of the last payment.

(4) 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.

(5) 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 name and last known address of the debtor as they appeared in the debt owner’s records on December 31, 2013, shall be sufficient.

(6) The names and addresses of all persons or entities that purchased the debt after charge off, including the debt buyer making the written statement. The names and addresses shall be in sufficient form so as to reasonably identify each such purchaser.”

Id. at § 1788.52(a).

If the debt buyer decides to write to a consumer, the debt must also “have access to” the following documentation:  “a copy of a contract or other document evidencing the debtor’s agreement to the debt. If the claim is based on debt for which no signed contract or agreement exists, the debt buyer shall have access to a copy of a document provided to the debtor while the account was active, demonstrating that the debt was incurred by the debtor. For a revolving credit account, the most recent monthly statement recording a purchase transaction, last payment, or balance transfer shall be deemed sufficient to satisfy this requirement.”  Id. at § 1788.52(b).

Validation Requirements

If the debtor makes a written request to the debt buyer “for information regarding the debt or proof of the debt” then the debt buyer must provide the debtor, within 15 calendar days and without charge, all of the information or documents required by sections 1788.52(a) and (b) of the Act.  See Cal. Civ. Code § 1788.52(c).  If the debt buyer cannot provide the documents or information within 15 calendar days, then it must cease further collection efforts until it does provide the documents and information.  Id.

The debtor’s request for this information, however, must be made “consistent with the validation requirements of section 1692g of Title 15 of the United States Code.”  In other words, the consumer’s request must be made in writing and within 30 days of the receipt of the debt buyer’s validation notice sent under section 1692g of the FDCPA.  See id.  As a result, any verbal requests for validation, or written requests made outside of the 30-day validation period, would not require any response, and if a debt buyer does write to consumers, then it would not be subject to this provision of the Act.

New Notices To Consumers

If the debt buyer decides to write to the debtor, then the first letter to the debtor must include “a separate prominent notice” in no smaller than 12-point type that states:  “You may request records showing the following: (1) that [insert name of debt buyer] has the right to seek collection of the debt; (2) the debt balance, including an explanation of any interest charges and additional fees; (3) the date of default or the date of the last payment; (4) the name of the charge-off creditor and the account number associated with the debt; (5) the name and last known address of the debtor as it appeared in the charge-off creditor’s or debt buyer’s records prior to the sale of the debt, as appropriate; and (6) the names of all persons or entities that have purchased the debt. You may also request from us a copy of the contract or other document evidencing your agreement to the debt. A request for these records may be addressed to: [insert debt buyer’s active mailing address and email address, if applicable].”  See Cal. Civ. Code § 1788.52(d)(1).

In addition, if the debt buyer is writing to the consumer about a “time-barred debt” where the obsolescence period of the Fair Credit Reporting Act has not yet expired, the debt buyer must also include the following notice in no less than 12-point font: “ The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it. If you do not pay the debt, [insert name of debt buyer] may [continue to] report it to the credit reporting agencies as unpaid for as long as the law permits this reporting.”  Id. at §1788.52(d)(2).  The term “time-barred debt” is not defined by the Act, but it is safe to assume that the term refers to a debt where the applicable statute of limitations for suit has expired.

If the debt buyer is not furnishing information to the consumer reporting agencies about the debt, however, a consumer might argue that sending this notice falsely implies that the debt buyer is doing so.  A debt buyer who is not a furnisher should be able to omit this notice in order to avoid potential liability under the FDCPA.  This reading is consistent the provision of the Act provides that “In the event of a conflict between the requirements of subdivision (d) and federal law, so that it is impracticable to comply with both, the requirements of federal law shall prevail.”  See Cal. Civ. Code §1788.52(f).

If the debt buyer is writing to a consumer about a time-barred debt and the obsolescence period of the Fair Credit Reporting Act has also run, the debt buyer must also include the following notice in no less than 12-point font: “The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it, and we will not report it to any credit reporting agency.”  See Cal. Civ. Code § 1788.52(d)(3).