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).