Tuesday, May 27, 2014

Why The CFPB's Position On Time-Barred Debt Is Bad For Consumers

            Does a consumer need to be “protected” from repaying his own debts?  Can a consumer be “harmed” if he voluntarily makes a payment on a debt that he admittedly owes?  The CFPB apparently believes that sometimes the answer is “yes.” 

            The CFPB and the FTC have forcefully argued that debt collectors should make an affirmative disclosure to consumers when they are seeking to collect debts that cannot be judicially enforced, and that the failure to make this disclosure may violate the FDCPA.  This is necessary, according to the CFPB and FTC, because consumers are usually unfamiliar with the statute of limitations that apply to their debts, and a collector’s failure to disclose that the debt is no longer judicially enforceable could have “adverse consequences” to a consumer.  In other words, the consumer might actually pay the debt he owes, unless the collector “protects” him by affirmatively advising him that the collector cannot sue to collect it. 

            The CFPB wants seriously delinquent consumers to know their debts are no longer judicially enforceable so they can make an informed decision to not repay them.  But does this make for good “consumer protection” policy?  Not really.  If the CFPB discourages delinquent consumers from paying debts they admittedly owe, this raises the cost of credit for all consumers, and it may eliminate the availability of credit to low and moderate income consumers who need it the most.  And if consumers stop paying on seriously delinquent accounts, this will force creditors and collectors to file even more lawsuits, so the creditor can be sure to collect before the limitations period has run. 

            But wait a minute, you say, why would the CFPB take this position?  I thought it was important for consumers to repay their debts. And I thought that debt collection was critically important to the economy, because it helps to keep the cost of credit lower, and helps keep credit widely available for all consumers. When people repay the debts they owe, this makes credit more available and more affordable, and all consumers benefit, right? 

            You are right on all these points.  Indeed, the FTC and CFPB have repeatedly told us that you are right.  For example, in the February 2009 report issued by the FTC entitled “Collecting Consumer Debts: The Challenges Of Change” the FTC reminded us: “Consumer credit is a critical component of today’s economy. Credit allows consumers to purchase goods and services for which they are unable or unwilling to pay the entire cost at the time of purchase. By extending credit, however, creditors take the risk that consumers will not repay all or part of the amount they owe. If consumers do not pay their debts, creditors may become less willing to lend money to consumers, or may increase the cost of borrowing money.”  See Executive Summary, pp. ii-iii.

            The FTC was even more forceful on this point in its report in July 2010 entitled “Repairing A Broken System: Protecting Consumers In Debt Collection Litigation And Arbitration” where it stated:  “Credit benefits consumers by allowing them to obtain goods and services without paying the entire cost at the time of purchase. . . . Because consumers sometimes fail to pay their creditors, debt collection plays a vitally important role in the consumer credit system. Debt collection benefits individual creditors, of course, who are repaid money they are owed. More importantly, however, by providing compensation to creditors when consumers do not repay their debts, the debt collection system helps keep credit prices low and helps ensure that consumer credit remains widely available.”  See Executive Summary, p. i.

            These same points were echoed by the CFPB on March 20, 2013 in its Annual Report To Congress on the Fair Debt Collection Practices Act, where it stated: “Consumer debt collection is critical to the functioning of the consumer credit market. By collecting delinquent debt, collectors reduce creditors’ losses from non-repayment and thereby help to keep consumer credit available and potentially more affordable to consumersAvailable and affordable credit is vital to millions of consumers because it makes it possible for them to purchase goods and services that they could not afford if they had to pay the entire cost at the time of purchase.” See CFPB’s Report To Congress, p. 9.

            Thus, CFPB and FTC have publicly stated that when delinquent consumers repay the debts they actually owe, all consumers benefit.  And of course the economic benefit that comes from repayment of a debt does not magically evaporate when the statute of limitations on the debt expires.  Why, then, has the CFPB so adamantly insisted that consumers must be advised by collectors when the statute of limitations has expired.  What exactly is the “consumer protection” goal that is being met here?  The answer is not clear.

            Through its Amicus Program, the CFPB has been an active supporter of consumer class action attorneys who have sued collectors alleging that an offer to “settle” a time-barred debt is a misleading and deceptive practice that violates the FDCPA.  For example, the CFPB filed an amicus brief in support of the consumer in the Seventh Circuit Court of Appeals in Delgado v. Capital Management Services, LP, No. 13-2030, where the CFPB argued that “actual or threatened litigation is not a necessary predicate for an FDCPA violation in the context of time-barred debt . . . Depending on the circumstances, a time-limited settlement offer could plausibly mislead an unsophisticated consumer to believe a debt is enforceable in court even if the offer is unaccompanied by any clearly implied threat of litigation.” See CFPB’s Delgado Brief at p.2. The CFPB acknowledged in its brief that: “[i]n most states, the expiration of the statute of limitations on a debt does not extinguish the debt.”  Despite the fact that time-barred debts are not extinguished, however, the CFPB argued that “The running of the statute [] works to the benefit of consumers who owe debts that become stale.”  Id. at p. 12-13. In other words, the seriously delinquent consumer will “benefit” if the statute of limitations runs, because the creditor can no longer sue that consumer to collect it.  But do the rest of us consumers also “benefit” if that consumer does not repay the money they owe?  Not so much.

            In another case that is now pending before the Sixth Circuit Court of Appeals, Buchanan v. Northland Group Inc., No. 13-2523, the CFPB filed another amicus brief in support of the FDCPA class action attorneys who lost that case at the district court level.  There, the CFPB reiterated the FTC’s position that “consumers do not expect” that a partial payment “will have the serious, adverse consequence of starting a new statute of limitations” and that collectors may violate the FDCPA if they fail to disclose “clearly and prominently to consumers prior to requesting or accepting such payments that (1) the collector cannot sue to collect the debt and (2) providing a partial payment would revive the collector’s ability to sue to collect the balance.”       See CFPB’s Buchanan Brief at pages 17-18.  Again, the “serious, adverse consequence” to the delinquent consumer in this example is that they actually may have to pay a debt that they owe.  But if these consumers refuse to pay because they are advised that the statute of limitations has run, what about the “adverse consequences” to the rest of us, the paying consumers, who the CFPB is also supposed to protect?

            Surely the courts will continue to recognize that there is nothing wrong with offering to settle a time-barred debt, so long as the collector does not threaten sue, right?  Nope.  In a setback for paying consumers everywhere, the Seventh Circuit recently adopted the position urged by the CFPB in McMahon v. LVNV Funding, 744 F.3d 1010 (7th Cir. 2014), which held that a letter offering to “settle” a debt violated section 1692e and 1692f of the FDCPA, because the limitations period had expired.  Relying in part on the “well-reasoned position put forth by the FTC and CFPB” in their amicus brief (the Delgado case was combined with McMahon on appeal), the Court held that the running of the limitations period a “central fact” about the “legal status” of a debt, and therefore will be important for a consumer to know if the limitations period has run.  “The proposition that a debt collector violates the FDCPA when it misleads an unsophisticated consumer to believe a time-barred debt is legally enforceable, regardless of whether litigation is threatened, is straightforward under the statute. Section 1692e(2)(A) specifically prohibits the false representation of the character or legal status of any debt. Whether a debt is legally enforceable is a central fact about the character and legal status of that debt.  A misrepresentation about that fact thus violates the FDCPA.  Matters may be even worse if the debt collector adds a threat of litigation, see 15 U.S.C. § 1692e(5), but such a threat is not a necessary element of a claim.” Id. at 1020.

            In light of McMahon and in view of the CFPB’s position on the subject, can collectors safely collect on time-barred accounts?  It will not be easy, since any offer to “settle” those accounts could lead to a class action lawsuit alleging that the collector implied the account is legally enforceable.  If creditors know they are unlikely to collect on their accounts once the limitations period has expired, the only sensible approach is to sue every consumer before the statute expires.  Is increased litigation the best way to protect consumers?  Or should creditors simply stop collecting all their accounts once the limitations period expires and then raise the cost of credit for the rest of us?

            One basic economic point that has been made by the CFPB and the FTC in their reports cannot be disputed: the repayment of legitimate debts is good for consumers.  This issue was discussed at length at the 2013 NARCA Legal Symposium by a panel of economists and regulators, who pointed out the cruel irony of how low and moderate income consumers are the more likely to be harmed by the increasing cost of credit, and restricted availability of credit, which results when consumer debts are not repaid.


            All consumers deserve the CFPB’s protection, not just the seriously delinquent ones.  The CFPB should consider the unintended consequences of its position, which will encourage seriously delinquent consumers to avoid payment of time-barred debts, and will increase the cost and reduce the availability of credit for the rest of us. 

Tuesday, May 6, 2014

Is The CFBP's Position On Credit Reporting Statements Consistent With The Case Law?


     The CFPB does not want debt collectors to tell consumers that paying their debts might help them to improve their credit score.  Nor does the CFPB want collectors to encourage consumers to pay by informing them that their failure to do so might harm their credit.  The Bureau made this point crystal clear in the Bulletin that it issued in July 2013 entitled “Representations Regarding Effect of Debt Payments on Credit Reports and Scores” where it claimed that making such statements might amount to a deceptive act or practice in violation of the FDCPA and the Dodd-Frank Act.  But is the CFPB’s position on this point consistent with case law on this subject?  Not really.  It turns out that courts from around the country have repeatedly recognized that collectors can, and perhaps should, seek to encourage consumers to pay their debts by informing of them of the potential impact on their credit.

             Before diving in to the discussion, consider some context on credit reporting provided to us by Congress. As part of the Fair Credit Reporting Act, Congress mandates that certain furnishers of information must provide consumers with a “clear and conspicuous” written notice that negative information is being reported about them to the consumer reporting agencies.  See 15 U.S.C. §§ 1681s-2(a)(7)(A)(i), 1681s-2(a)(7)(C)(ii).  In fact, the CFPB is responsible for formulating a model disclosure that furnishers can use to provide the notice of negative credit reporting.  Id. at § 1681s-2(a)(7)(D). Thus, Congress has already determined that it is important for consumers to be informed about negative information that is being furnished about them, and the CFPB is in charge of crafting a model notice so furnishers can get the word out to consumers.

            In its Bulletin issued in July 2013, the CFPB took the position that creditors, debt buyers and third-party collectors often make representations to consumers about credit-related issues in order to persuade them to pay.  These include statements suggesting that paying their debts might improve their credit report, their credit score, or their creditworthiness, or that payments may increase the likelihood that the consumer will receive credit or more favorable credit terms.  The Bureau pointed out that consumers often “view credit reporting as an important determinant of their future access to credit and other opportunities” and that representations made by collectors about credit “may be deceptive under the FDCPA, the Dodd-Frank Act, or both.”  According to the CFPB, “in light of the numerous factors that influence an individual consumer’s credit score” payments made to a collector or creditor “may not improve the credit score of the consumer to whom the representation is being made.”  In addition, given the “variety of sources of information to assess the creditworthiness of prospective borrowers,” the Bureau asserted that “debt collectors may well deceive consumers if they make representations about the nature or extent of improved creditworthiness that result from paying debts in collection.”  For these reasons, the CFPB outlined its expectation that “debt collectors should take steps to ensure that any claims that they make about the effect of paying debts in collection on consumers’ credit reports, credit scores, and creditworthiness are not deceptive” and the Bureau made it clear that it would be looking at these issues closely in connection with its supervision activities and enforcement investigations.

            The CFPB’s position, however, appears to be directly at odds with decisions issued over the past few decades by courts from around the country.  Courts at both the circuit court level and the district court level have repeatedly recognized that when consumers pay their debts, this is likely to improve their credit.  The courts have also held that collectors can, and probably should, remind consumers of this fact in order to encourage them to pay.  

             For example, the Ninth Circuit recognized that a collector could “properly” notify a consumer that nonpayment of a debt “could adversely affect her credit reputation” in Wade v. Regional Credit Ass’n., 87 F.3d 1098 (9th Cir. 1996).  There, the collector sent a letter stating “if not paid TODAY, it may STOP YOU FROM OBTAINING credit TOMORROW.  PROTECT YOUR CREDIT REPUTATION.  SEND PAYMENT TODAY . . . DO NOT DISREGARD THIS NOTICE.  YOUR CREDIT REPUTATION MAY BE ADVERSELY EFFECTED.”  Id. at 1099.  The Ninth Circuit rejected the consumer’s claim that the letter violated sections 1692e, 1692e(5) and 1692e(10) of the FDCPA, noting that: “The body of the notice was informational, notifying Wade that failure to pay could adversely affect her credit reputation… .The least sophisticated debtor would construe the notice as a prudential reminder, not as a threat to take action. . .The notice told Wade correctly that she had an unpaid debt, and properly informed her that failure to pay might adversely affect her credit reputation.” Id. at 1100.

             Similarly, the Seventh Circuit observed that it was entirely proper for the collector to “encourage debtors to pay their debts by informing them of the possible negative consequences of failing to pay” in Durkin v. Equifax Check Services, Inc., 406 F.3d 410, 418 (7th Cir. 2005).  There, the collector’s letter told the consumer that “CONTINUED REFUSAL TO HONOR THIS RETURNED CHECK WILL RESULT IN YOUR CREDIT FILE BEING IMPACTED WITH A NEGATIVE REFERENCE WHICH MAY IMPACT FUTURE CREDIT GRANTING DECISIONS.”  Id. at 425.  The Court rejected the consumer’s FDCPA claim, stating that such language would not only “promote payment of valid debts” it also “promotes disclosing genuine claims of invalid debts . . . . Undeniably, one way to encourage someone with a true dispute to come forward and resolve that dispute is to inform him of the possible negative consequences of his continued inaction.  Promoting final resolution of such matters, either way, is inherently beneficial.”  Id. at 418, n. 7.

             More recently, the Fifth Circuit embraced the reasoning of Durkin in the case of McMurray v. ProCollect, Inc., 687 F.3d 665 (5th Cir. 2012).  There, the collector’s letter warned the consumer of the negative consequence of nonpayment as follows: “ It is important that you pay your debt as failure to timely validate the referenced amount due will cause us to report your account to the credit reporting agencies.  The negative mark can remain on your credit for up to seven (7) years, and may among other things significantly affect your ability to: (1) OBTAIN CREDIT; (2) OBTAIN EMPLOYMENT; (3) PURCHASE HOME OR CAR; OR (4) QUALIFY FOR APARTMENT RENTAL.”  Id. at 667.  The Fifth Circuit rejected the consumer’s argument that this language amounted to a “threat” that overshadowed the validation notice in violation of section 1692g of the FDCPA: “The supposed threat falls in the category of letters that encourage debtors to pay their debts by informing them of the possible negative consequences of failing to pay, words that do not overshadow the required notice language. . . The letter in this case essentially provided such warnings and nothing more.  Thus, the notice language in ProCollect's letter is not overshadowed by the letter's bad-credit warnings.”  Id. at 671 (citations and quotation marks omitted).

             During the past three decades, district courts from around the country have repeatedly held that collectors may properly inform consumers about adverse credit consequences resulting from their failure to pay.  See, e.g., Wright v. Credit Bureau of Georgia, 555 F. Supp. 1005 (N.D. Ga. 1983) (“If the defendants' letters contain any threat to a consumer's credit rating, the threat is at most a statement that the results of the defendants' collection efforts may some day affect the debtor's credit rating.  Thus the letters convey no specific threat greater than the well-known fact, recognized by all consumers, regardless of the degree of their sophistication, that a failure to pay one's bills will affect his ability to obtain credit in the future. Such a threat does not violate the FDCPA.”); White v. Financial Credit Corp., 2001 WL 1665386, at *5 (N.D. Ill. Dec. 27, 2001) (letter offering to “amend your credit report” did not violate section 1692e of the FDCPA); Hogan v. MKM Acquisitions, LLC, 241 F. Supp. 2d 896 (N.D. Ill. 2003)(letter offering to “improve” the consumer’s credit rating did not violate the FDCPA:  “Even an unsophisticated debtor should realize that the fewer delinquent notices on one's credit report, the better one's credit rating will be.”); Jones v. CBE Group, Inc., 215 F.R.D. 558, 566 (D. Minn. 2003) (“Adverse credit reporting is one the debt collector's most important inducements to prompt payment.  But the opportunity to avoid a negative credit report is also a significant benefit to debtors.”); Hapin v. Arrow Financial Services, 428 F. Supp. 2d 1057 (N.D. Cal. 2006) (letter “correctly informed” debtors that “paying their obligations might ‘help regain [their] financial future’” and did not violate FDCPA); Kimmel v. Cavalry Portfolio Services, LLC, 2011 WL 3204841 (E.D. Pa. July 28, 2011) (letter stating that payment would help debtor get back on the road to financial recovery did not violate FDCPA:  “…Defendant's comments about improving Plaintiff's financial situation merely underscored the fact that if Plaintiff accepted Defendant's settlement offer, the debt associated with his Bank of America account would be eliminated. There is nothing deceptive about this statement.”); Hartley v. Suburban Radiologic, 295 F.R.D. 357 (D. Minn. 2013) (letter stating that the alternatives available to the collector  “should you not clear this obligation may include damage to your credit rating” was an “an accurate statement of the possible outcomes of failing to respond” to the letter); Erickson v. Performant Recovery, Inc., 2013 WL 3223367 (D. Minn. June 25, 2013) (statement that debtor’s credit “was so ruined by this debt that” the debtor “couldn't even buy an apple” not actionable under the FDCPA: “Simply expressing an opinion about someone's credit score as a consequence of unpaid debts is not material to the collection of the debt.”).

             Would the CFPB approve of the use of the letters that each of these courts has found to be lawful?  It is hard to say.  We know that Congress believes it is important for consumers to know when negative information has been reported about them to the consumer reporting agencies.  It is difficult to reconcile the CFPB’s stern warnings in its July 2013 Bulletin with the reasoning employed by the courts that have held that debt collectors can and should inform consumers that their failure to pay their debts could impact their credit. 

Sunday, March 2, 2014

Can Recent Enforcement Actions Provide Guidance On The CFPB’s Position On UDAAPs?



           The Dodd-Frank Act gave the Consumer Financial Protection Bureau (“CFPB”) sweeping authority to prohibit the use of “unfair, deceptive or abusive” acts or practices (“UDAAPs”) in connection with the collection of consumer debts.  These terms are broadly defined to provide the CFPB with maximum flexibility when carrying out its consumer protection mission.  But how can a collector know exactly what the CFPB will consider to be an “unfair” or “deceptive” or “abusive” collection practice?   The CFPB has provided some guidance on UDAAPs in the bulletin it released in July 2013 and in the Examination Manual that it published in 2012.  Beyond this, debt buyers and other collectors can read the UDAAP tea leaves by examining the recent enforcement activity of the CFPB and other regulators.


            First, we should start with the UDAAP definitions.  An act or practice will be considered “unfair” if the CFPB finds that it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers” and “such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”  See 12 U.S.C. § 5531(c)(1).  To determine if an act or practice is “unfair” the CFPB “may consider established public policies” but they “may not serve as a primary basis for such determination.”  Id. at § 5531(c)(2).


            An act or practice will be considered “abusive” if the CFPB finds that it “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service” or it “takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service” or “the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service” or “the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”  Id. at § 5531(d).


            An act or practice will be deemed “deceptive” if the CFPB find that it “(1) misleads or is likely to mislead the consumer; (2) the consumer’s interpretation is reasonable under the circumstances; and (3) the misleading act or practice is material.”  See CFPB Bulletin 2013-07, July 10, 2013, Prohibition of Unfair, Deceptive, or Abusive Acts or Practices In The Collection Of Consumer Debts, at p. 3.  The CFBP will consider “the totality of the circumstances” when determining if an act or practice has actually misled or is likely to mislead a consumer, and it will look at implied representations as well as omissions.  Id.  The standard for “deceptive” used by the CFPB under the Dodd-Frank Act will be “informed by the standards for the same terms under Section 5 of the FTC Act.”  Id. at n.16.  If a representation conveys more than one reasonable meaning to consumers, one of which is false, then it may be misleading.  Id. at p. 4. “Material” information is that which is “likely important to consumers” and that “is likely to affect a consumer’s choice of, or conduct regarding, the product or service.” Id. 


             With definitions this broad, it can be difficult for collectors to anticipate what conduct might be considered to be a UDAAP.  One method for identifying areas of potential concern, however, is to analyze the recent enforcement actions by the CFPB and other regulators filed against debt buyers and original creditors.  


             The most comprehensive enforcement action against a debt buyer in recent years was brought by the FTC, not the CFPB.  On January 30, 2012, the FTC entered into a Consent Decree with Asset Acceptance, LLC (“Asset”) relating to its allegedly false, deceptive and misleading debt collection and credit reporting practices. 


             A major focus of the Asset Consent Decree was the concern over the accuracy and reliability of the data underlying Asset’s accounts.  Asset agreed that it would not to make any material representation that a consumer owed any debt unless it had a reasonable basis for making the representation.  Asset agreed that it could reasonably rely on the information provided by original creditors, unless there was a “reasonable indication” – after taking into account the reliability and source of the information – that the information is incomplete, inaccurate, unreliable or that it does not substantiate the claim.  Should Asset discover that the information regarding a specific portfolio of accounts may be unreliable or inaccurate or missing material information, it agreed to terminate collection efforts on the entire portfolio until it conducts a reasonable investigation.  Factors that may call into question the accuracy of a portfolio of accounts include a disproportionately high rate of consumer disputes, lack of availability of documentation, a disproportionately high rate of missing data relating to the accounts in the portfolio, or any other information learned about the credit originator or its methods of doing business that calls into question the accuracy or completeness of the account data.


             Consumer complaints were also a major focus of the Asset Consent Decree.  If a consumer, at any time, questions, disputes or challenges the accuracy or completeness of the information that Asset is relying on, Asset agreed either to close the account permanently and request deletion of the tradeline, or to report the account as disputed and conduct a complete and reasonable investigation into the dispute. 


             The Asset Consent Decree also reflects the FTC’s hostility to collecting time-barred debts.  If Asset knows or should know the debt has passed the applicable statute of limitations for litigation, it agreed to provide the consumer with a new notice stating:  “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, we may continue to report it to the credit reporting agencies as unpaid.”  If the obsolescence period for reporting the debt to consumer reporting agencies has also expired, Asset will provide a notice stating:  “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.”  In addition to these notices, Asset agreed to provide consumers with a lengthy new notice on each written communication that summarizes their rights under the FDCPA.  Finally, the Consent Decree provides that Asset will pay a civil penalty of $2.5 million to the FTC.


             Enforcement actions filed against original creditors can also provide guidance to debt buyers and other collectors about areas of CFPB concern.  For example, service provider practices were a major focus of the July 18, 2012 Stipulation and Consent Order between the CFPB and Capital One Bank, (USA) N.A. (“CapOne”) which related to allegedly deceptive practices in the sale of payment protection and credit monitoring products made by CapOne’s service providers during the card activation process.  The CFPB charged that CapOne violated section 5536 of the Dodd-Frank Act when call center representatives employed by CapOne’s service providers deviated from the call scripts, or misinterpreted them, while explaining the products to consumers, and that ‘ineffective oversight” by CapOne had resulted in the failure to detect and prevent these improper sales practices.  Among other things, CapOne agreed to implement a new “Bank Service Provider Management Policy” which, at a minimum, will require: 1) that CapOne assess, before entering into any contract, whether a service provider has the capacity to comply with all consumer protection laws, 2) that CapOne have contracts that require service providers to train their employees on CapOne’s policies and applicable consumer protection laws, and that allow CapOne to terminate the agreement for noncompliance, and 3) that CapOne conduct periodic onsite reviews of the service providers’ controls, performance and information systems.  CapOne agreed to reimburse approximately $140 million to its customers and to pay a $25 million penalty to the CFPB.


             Credit reporting practices, service provider oversight and time-barred debts were a focus of the October 2012 Consent Order between the CFPB and American Express Centurion Bank, Salt Lake City, Utah and American Express Bank, FSB (“Amex”) which related to allegedly unfair, deceptive and abusive practices engaged in by Amex in violation of sections 5531 and 5536 of the Dodd-Frank Act.  The CFPB claimed that Amex had misrepresented to certain consumers that the payment of their debts could improve their credit scores, despite the fact that Amex was not reporting those debts to the consumer reporting agencies.  Amex also allegedly failed to report certain consumer disputes to the consumer reporting agencies.  The CFPB claimed that Amex had failed to implement an effective employee training program regarding applicable consumer protection laws, and had failed to adequately monitor consumer complaints.  According to the CFPB, Amex had failed to properly manage its service providers, who had committed the alleged violations.


             Amex agreed to “continue to provide disclosures concerning the expiration of the Bank's litigation rights when collecting debt that is barred by applicable state statutes of limitations.”  In addition, when collecting on obsolete debt, Amex agreed to provide a new disclosure which states: “The law limits how long a debt can be reported to a consumer reporting agency.  Because of the age of your debt, we cannot report it to a consumer reporting agency.  Payment or non-payment of this debt will not affect your credit score.”  If Amex sells any time-barred or obsolete debt, it must require the buyer to provide consumers with the same disclosures.  Amex agreed to pay $85 million of restitution to cardholders, $14.1 million of civil penalties to the CFPB, and to substantially revise its Compliance Risk Management Program. 


             Telephone harassment, consumer disputes and voice mail messages were a focus of the July 9, 2013 Stipulated Order For Permanent Injunction and Monetary Judgment between the FTC and Expert Global Solutions, Inc., f/k/a NCO Group, Inc. (“NCO”).  NCO agreed that there would be a rebuttable presumption that it intended to annoy, abuse or harass a person if it placed more than one call to any person about a debt after that person had notified NCO “either orally or in writing” that the person refused to pay or wanted NCO to cease further communication.  NCO also agreed not place calls to any telephone number about a particular account if NCO had already been informed by anyone at that number that the debtor cannot be reached at that number or the person does not have location information about the debtor.


             If at any time any person “denies, disputes or challenges” NCO’s claim that they owe a debt, NCO must, within fourteen (14) days, report the debt as disputed to the consumer reporting agencies, or request deletion of the reporting concerning the account.  In addition, following any such dispute, NCO must commence and complete an investigation within thirty (30) days.  If NCO concludes that the consumer owes the debt, it must within fifteen (15) days provide the consumer with verification of the debt, and inform the consumer of NCO’s conclusion and the basis for it.  If NCO concludes that the consumer does not owe the debt, it must within fifteen (15) days inform the consumer of this conclusion, request deletion of the tradeline, cease collection efforts and not sell or transfer the debt.


             Regarding voicemails, NCO agreed that it would not leave any voicemail message that states the first or last name of the debtor and that NCO is a debt collector attempting to collect a debt, or that the debtor owes any debt, unless 1) the greeting on the voicemail includes a first and last name that is the same as the debtor, or 2) NCO has already spoken to the debtor using the phone number associated with voicemail.


             NCO also agreed to provide a new notice to consumers on each written communication sent to collect a debt, as follows: “Federal and state law prohibit certain methods of debt collection, and require that we treat you fairly.  If you have a complaint about the way we are collecting your debt, please visit our website at www.ncogroup.com or contact the FTC online at www.FTC.gov; by phone at 1-877-FTC-HELP; or by mail at 600 Pennsylvania Ave, NW, Washington, DC 20580.  If you want information about your rights when you are contacted by a debt collector, please contact the FTC online at www.ftc.gov.”  NCO also agreed to judgment for a civil penalty totaling $3.2 million.


             Collection litigation practices were the focus of the September 18, 2013 Consent Order between the Office of the Comptroller of the Currency (“OCC”) and JPMorgan Chase Bank, N.A., JPMorgan Bank and Trust Company, N.A., and Chase Bank USA, N.A. (“Chase”).  The OCC alleged that Chase had engaged in “unsafe or unsound banking practices” by, among other things, 1) filing affidavits where the affiant made claims that were not based upon personal knowledge or a review of relevant business records, 2) obtaining judgments based on false affidavits with financial errors in favor of Chase, 3) filing documents that were not properly notarized, and 4) failing to implement policies and procedures to properly oversee internal and external collection litigation processes.  Chase agreed to implement a new Collections Litigation Plan to address the deficiencies in the Bank’s internal collection litigation practices.  When using any third party providers in connection with collection litigation, including law firms, Chase agreed to implement policies and procedures to ensure that the third parties comply with all legal requirements and OCC guidance.  In addition, when selling debt, Chase agreed to ensure that it complies with the OCC’s guidance on debt sales, including conducting due diligence on all debt buyers to evaluate their past and future performance in complying with consumer protection and debt collection laws.


             Robo-signing was a focus of the November 20, 2013 Consent Order between the CFPB and Cash America International, Inc. (“Cash America”).  The Consent Order related in part to the allegedly unfair, deceptive or abusive debt collection practices in violation of section 5531 and 5536 of the Dodd-Frank Act by its Ohio-based subsidiary, Cashland Financial Services, Inc. (“Cashland”).  According to the CFPB, between January 2008 and September 2012, legal assistants employed by Cashland were manually stamping the signatures of managers or attorneys on debt collection affidavits or pleadings without prior review of those affidavits or pleadings by the manager or attorney.  In addition, legal assistants were allegedly notarizing certain debt collection documents without following the procedures required by applicable notary law.  The CFPB found these practices were “unfair” because they “could potentially cause consumers to pay incorrect debts or legal costs and court fees to defend against invalid or excessive claims” and that they were “deceptive” because they were likely to mislead consumers “into believing that the affidavits or other court filings were reviewed, executed, and notarized in compliance with applicable law and this information was material to consumers subject to debt collection litigation.”  According to the CFPB, Cash America had failed to conduct adequate internal compliance audits and had therefore failed to prevent or detect the improper conduct in a timely manner.  Cash America paid $8 million to affected consumers, a $5 million civil penalty to the CFPB, and agreed to implement a comprehensive Compliance Plan designed to ensure compliance with applicable consumer financial laws.


             While it is impossible to predict what the CFPB might consider to be a UDAAP in the future, these recent enforcement actions – which have focused on data integrity, consumer disputes, service provider oversight, time-barred and obsolete debt, telephone harassment, voice mail messages and robo-signing practices – can provide guidance on areas of potential concern. 

Monday, August 19, 2013

When Is A Lawyer Or Law Firm "Regularly" Collecting Debts Under The FDCPA?

Beginning in 1995, when the Supreme Court issued Heintz v. Jenkins, 514 U.S. 291 (1995), lawyers have known that if they seek to collect consumer debts for clients – even when doing so through litigation – they might qualify as a "debt collector" under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et. seq. ("FDCPA). But how often must a lawyer or a law firm engage in consumer debt collection activities before they are subject to the Act? This question has taken on increasing importance in recent years as more law firms have integrated collection work into their existing practices. Unfortunately for practitioners, there are no bright line rules establishing when a lawyer or a law firm has "regularly" engaged in debt collection. As confirmed by a recent decision from the Tenth Circuit, James v. Wadas, _ F.3d _, 2013 WL 3928631 (10th Cir. 2013), the outcome will turn on a case-by-case analysis of multiple factors relating to the practice of the attorney or the firm.

Step one, of course, is to confirm that the attorney or firm is collecting "debts" within the meaning of the FDCPA. Not every unpaid obligation qualifies. The Act defines a "debt" as "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment." 15 U.S.C. § 1692a(5). Click here for more information on what constitutes a "debt" under the FDCPA.

Assuming the lawyer or firm is collecting "debts" as defined by the FDCPA, how often must they do so in order to qualify as a "debt collector" under the Act. Again, the starting place is with the definitions of the statute. Subject to certain limitations, a "debt collector" is defined as "any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another." 15 U.S.C. §1692a(6) (emphasis added).

 
If the "principal purpose" of your firm or your law practice is collecting consumer debts, then you probably know this already, and you know that you are a "debt collector" under the statute. See, e.g., Scott v. Jones, 964 F.2d 314, 316 (4th Cir. 1992) (where 70-80% of attorney’s fees were generated from collection work and attorney filed approximately 4000 collection cases per year during a four year period, the "principal purpose" of his practice was debt collection). The more difficult issue is determining when a lawyer or a firm or firm with a relatively small collection practice is still "regularly" collecting consumer debts. What exactly does "regularly" mean?

The issue was easily resolved in favor of the defendant in James v. Wadas, where the defendant only had one debt collection client in her entire legal career, that client had referred just 6-8 collection cases during the past ten years, and defendant had earned only $1700 in fees on collection matters during the prior year. See 2013 WL 3928631, at *4. As part of its analysis, the Wadas Court considered the Black’s Law definition of the terms "regularly" – which means "[a]t fixed and certain intervals, regular in point in time. In accordance with some consistent or periodical rule or practice" – as well as the term "regular" – which means "steady or uniform in course, practice or occurrence . . . usual, customary, normal or general." Id. at *3. The Court also considered the legislative history surrounding the FDCPA and concluded that it offered "little guidance" on what constitutes "regular" collection by an attorney, other than "such collection cannot be isolated or incidental but must, to varying degrees, be a significant aspect of the attorney’s business."

Ultimately, the Tenth Circuit in Wadas adopted the multi-factor test for determining when a lawyer "regularly" collects debts that had been established by the Second Circuit in Goldstein v. Hutton, Ingram, Yuzek, Gainen, Carroll & Bertolotti, 374 F.3d 56 (2d Cir. 2004). The court considered: "(1) the absolute number of debt collection communications issued, and/or collection-related litigation matters pursued, over the relevant period(s), (2) the frequency of such communications and/or litigation activity, including whether any patterns of such activity are discernible, (3) whether the entity has personnel specifically assigned to work on debt collection activity, (4) whether the entity has systems or contractors in place to facilitate such activity, and (5) whether the activity is undertaken in connection with ongoing client relationships with entities that have retained the lawyer or firm to assist in the collection of outstanding consumer debt obligations. Facts relating to the role debt collection work plays in the practice as a whole should also be considered to the extent they bear on the question of regularity of debt collection activity (debt collection constituting 1% of the overall work or revenues of a very large entity may, for instance, suggest regularity, whereas such work constituting 1% of an individual lawyer's practice might not). Whether the law practice seeks debt collection business by marketing itself as having debt collection expertise may also be an indicator of the regularity of collection as a part of the practice." See Wadas, 2013 WL 3928631, at *4 (quoting Goldstein, 374 F.3d at 62-63).

 Applying this multi-factor test, the Tenth Circuit had no trouble concluding that the defendant was not "regularly" collecting debts: "The record does not demonstrate that Wadas engages in debt collection with any sort of regularity; indeed, over the span of one decade Wadas engaged in only six to eight debt collection cases. Such debt collection activity is minimal. Although the fact that Wadas has an ongoing relationship with Shadakofsky is a factor that would weigh in favor of "debt collector" status, again, the volume of cases accepted from this client comprises only a small portion of Wadas's overall caseload. Other factors also weigh against a finding that Wadas is a "debt collector." For instance, Wadas has not issued debt collection communications, and she does not have any system or personnel to assist with debt collection activity." See Wadas, 2013 WL 3928631, at *5.

Similarly, the defendants were not "debt collectors" in Schroyer v. Frankel, 197 F.3d 1170 (6th Cir. 1999), where the law firm had handled just 50-75 collection cases annually, which represented less than 2% of the firm’s overall practice. Id. at 1173. The firm did not hire any paralegals nor did it use any computer programs for debt collection work. Id. The attorney defendant had only handled 29 collection cases during the year, which was just 7.4% of his practice, and these cases were referred by clients who sent him other matters not involving debt collection. Id. There was no evidence that the defendants handled collection matters for a major client on an ongoing basis, nor was there evidence as to the total fees recovered on collection matters. Id. The Court held that "to find that an attorney or law firm ‘regularly’ collects debts for purposes of the FDCPA, a plaintiff must show that the attorney or law firm collects debts as a matter of course for its clients or for some clients, or collects debts as a substantial, but not principal, part of his or its general law practice." Id. at 1176. The defendants’ collection practices, however, "were incidental to, and not relied upon or anticipated in, their practice of law, and that therefore they should not be held liable as ‘debt collectors’ under the FDCPA." Id. at 1177.

Other cases have been more challenging for defendants. For example, in Garrett v. Derbes, 110 F.3d 317 (5th Cir. 1997), evidence that a lawyer had sent 639 demand letters during a nine month period seeking to collect unpaid telephone bills on behalf of a single client was sufficient to prove he "regularly" collected debts. The district court had granted summary judgment in favor of the attorney, noting that "(1) Derbes' work for Bell South constituted less than 0.5 percent of his entire practice during the nine-month period his law firm represented Bell South, (2) there was no ongoing relationship between Derbes and Bell South, and (3) Derbes had not represented Bell South in other matters." Id. at 318. In reversing the district court, however, the Fifth Circuit noted that "a person may regularly render debt collection services, even if these services are not a principal purpose of his business. Indeed, if the volume of a person's debt collection services is great enough, it is irrelevant that these services only amount to a small fraction of his total business activity; the person still renders them ‘regularly.’" Id.

Similarly, in Goldstein, the law firm had prevailed in the district court on the grounds that it had not "regularly" collected debts, but the Second Circuit reversed. The firm emphasized that it had only derived $5,000 in revenues from collection work during the prior year, which was just 0.05% of its revenue for that period. See Goldstein, 374 F.3d at 61. The Court pointed out, however, that the firm had issued 145 collection notices within that 12-month period, with at least 10 notices sent during 7 of the months, and more than 15 notices sent during 3 of the months. Id. at 63. The firm also had an "ongoing relationship with apparently affiliated entities for which it repeatedly sent collection notices" and that fact "further indicates the regularity of collection work as part of the firm’s business." Id. In addition, the firm had a system in place for preparing and issuing the collection notices. Id.

In Reese v. Ellis, Painter, Ratteree & Adams, LLP, 678 F.3d 1211 (11th Cir. 2012), the Court held that a law firm that allegedly sent 500 letters in connection with foreclosure proceedings could be a "debt collector" under the FDCPA: "The complaint contains enough factual content to allow a reasonable inference that the Ellis law firm is a ‘debt collector’ because it regularly attempts to collect debts. The complaint alleges that the law firm is ‘engaged in the business of collecting debts owed to others incurred for personal, family[,] or household purposes.’ It also alleges that in the year before the complaint was filed the firm had sent to more than 500 people ‘dunning notice [s]’ containing ‘the same or substantially similar language’ to that found in the letter and documents attached to the complaint in this case. That's enough to constitute regular debt collection within the meaning of § 1692a(6)." Id. at 1218.

Thus, there is no magic number of consumer debt collection cases and no set percentage of firm revenues that will make an attorney or a firm into a "debt collector" under the FDCPA. Each of these cases will be decided based on a balancing of multiple factors relating to the nature of the practice of the attorney and the firm.

Saturday, July 20, 2013

Why California Fair Debt Buyer’s Act May Decrease Communication And Increase Litigation Between Debt Buyers And Consumers


            On July 11, 2013, California passed the FairDebt 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). 

Documenting Settlements And Payments

            The Act requires that all settlement agreements between a debt buyer and a debtor must be “documented in open court or otherwise reduced to writing” and that a debt buyer must ensure  the debtor is provided with a written copy of the agreement.  See Cal. Civ. Code § 1788.54(a).  Whenever a debt buyer receives a payment on a debt, it must within 30 calendar days provide a receipt or monthly statement to the debtor that “shall clearly and conspicuously show the amount and date paid, the name of the entity paid, the current account number, the name of the charge-off creditor, the account number issued by the charge-off creditor, and the remaining balance owing, if any.”  Id. at § 1788.54(b).  The receipt or statement can be provided electronically if the parties agree.  Id.  If the debt buyer accepts a payment as a payment in full, or as a full and final compromise of the debt, the debt buyer must also provide a similar written statement or receipt to the debtor.  Id. at § 1788.54(c).  A debt buyer may not “sell an interest in a resolved debt, or any personal or financial information related to the resolved debt.”  Id.

Requirements For Complaints Filed In Collection Litigation

            The Act prohibits a debt buyer from filing suit or initiating an arbitration or other legal proceedings to collect a consumer debt if the applicable statute of limitations on the debt buyer’s claim has expired.  See Cal. Civ. Code § 1788.56.  When a debt buyer does file suit, the Act includes nine specific requirements that must be included in the allegations of the complaint, as follows:

“(1) That the plaintiff is a debt buyer.

(2) The nature of the underlying debt and the consumer transaction or transactions from which it is derived, in a short and plain statement.

(3) 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.

(4) 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.

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

(6) 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.

(7) 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.

(8) 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.

(9) That the debt buyer has complied with Section 1788.52.”

See Cal. Civ. Code 1788.58(a).  In addition, a copy of the contract or document described in section 1788.52(b) must be attached to the complaint.  Id. at § 1788.58(b).  The debt buyer must ensure, however, that it does not disclose with the complaint any “personal, financial, or medical information, the confidentiality of which is protected by any state or federal law.”  Id. at § 1788.58 (c). 

Requirements For Defaults In Collection Litigation

            The Act also governs the requirements for a debt buyer to obtain a default judgment.  Specifically, it provides that no default may be entered for a debt buyer “unless business records, authenticated through a sworn declaration, are submitted by the debt buyer to the court to establish the facts required to be alleged by paragraphs (3) to (8), inclusive, of subdivision (a) of Section 1788.58" and the debt buyer submits a copy of the contract or other document required by section 1788.52(b) of the Act, also authenticated through a sworn declaration.  See Cal. Civ. Code §§ 1788.60(a), (b). 

             If this information is not provided by the debt buyer, then the court shall not enter a default judgment and it may, in its discretion, dismiss the action.  Id. at § 1788.60 (c).  If the debt buyer does submit this information, however, there can be no dispute that the requirements for entering a default judgment have been met, and judgment should be entered for the debt buyer as a matter of course.  One of the purposes of the Act, after all, was to provide “enforceable standards” for the litigation of charged-off debt and to “provide needed clarity to courts” about debt buyer litigation.  See Cal. Civ. Code § 1788.50 (Legislative Findings, sections (b), (e) and (f).

             In the event an action brought by a debt buyer proceeds to trial and the debtor appears for trial, but the debt buyer does not appear or is not prepared to proceed, if the court does not find good cause for continuance, it may, in its discretion, dismiss the action with our without prejudice.  The court may also award the debtor’s costs of preparing for trial, including any lost wages and transportation expenses.  See Cal. Code Civ. Proc. § 581.5.

 Remedies For Violating The Act

             The Act provides if a debt buyer violates the Act with respect to any person, it shall be liable to that person in an amount equal to the sum of: 

 “(1) Any actual damages sustained by that person as a result of the violation, including, but not limited to, the amount of any judgment obtained by the debt buyer as a result of a time-barred suit to collect a debt from that person.

 (2) Statutory damages in an amount as the court may allow, which shall not be less than one hundred dollars ($100) nor greater than one thousand dollars ($1,000).

See Cal. Civ. Code § 1788.62(a)(1), (2).  In the case of a successful action to enforce the Act, the court shall also award costs and reasonable attorney’s fees to the debtor.  Id. at § 1788.62(c)(1).

            In the case of a class action, the debt buyer shall be liable to any named plaintiff for any statutory damages of not less than $100 nor more than $1000.  Id. at 1788.62(b).  Class members do not get these statutory damages, but if the Court finds that debt buyer “engaged in a pattern and practice of violating any provision” of the Act, then the Court may award “additional damages to the class in an amount not to exceed the lesser of five hundred thousand dollars ($500,000) or 1 percent of the net worth of the debt buyer.”  Id.  These additional damages are not automatically awarded in a class action.  Rather, when determining whether to award any additional damages, the Court will use the same set of factors set forth in the FDCPA, which include “among other relevant factors, the frequency and persistence of noncompliance by the debt buyer, the nature of the noncompliance, the resources of the debt buyer, and the number of persons adversely affected.”  Id. at § 1788.62(d). 

            Debt buyers are entitled to raise the “bona fide error” defense, and they will have no liability for a violation if they demonstrate “by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error, and occurred notwithstanding the maintenance of procedures reasonably adopted to avoid any error.”  Id. at § 1788.62(e).  In addition, if the debt buyer can prove that the debtor’s “prosecution of the action was not in good faith” the debt buyer is entitled to recover its reasonable attorney’s fees.  Id. at § 1788.62(c)(2).

            Significantly, the remedies provided in the Act are not cumulative of the FDCPA and Rosenthal Act.  The Act specifically provides that if a debtor recovers in an action brought under the Rosenthal Act or the FDCPA this “shall preclude recovery for the same acts in an action brought under this title.”  See Cal. Civ. Code § 1788.62(g).