DFS-34-13-00002-RP Debt Collection by Third-Party Debt Collectors and Debt Buyers

7/16/14 N.Y. St. Reg. DFS-34-13-00002-RP

NEW YORK STATE REGISTER

VOLUME XXXVI, ISSUE 28

July 16, 2014

RULE MAKING ACTIVITIES

DEPARTMENT OF FINANCIAL SERVICES

REVISED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. DFS-34-13-00002-RP

Debt Collection by Third-Party Debt Collectors and Debt Buyers

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following revised rule:

Proposed Action:

Addition of Part 1 to Title 23 NYCRR.

Statutory authority:

Financial Services Law, sections 202, 302 and 408

Subject:

Debt collection by third-party debt collectors and debt buyers.

Purpose:

Establishes the oversight of debt collectors and sets basic rules for debt collection in New York.

Substance of revised rule:

This rule sets forth rules for the third-party debt collectors and debt buyers collecting certain debts from New York consumers.

Section 1.1 provides definitions applicable to the rule.

Section 1.2 describes disclosures debt collectors must provide to consumers when the debt collector initially communicates with a consumer. The section also describes additional disclosures that must be provided when the debt collector is communicating with a consumer regarding a charged-off debt.

Section 1.3 requires debt collectors to disclose to consumers when the statute of limitations on a debt has expired. The section outlines specific information that must be disclosed and offers debt collectors optional model language that can be used to comply with this section.

Section 1.4 outlines a process where consumers can request additional documentation from a debt collector proving the validity of the charged-off debt and the debt collector’s right to collect the charged-off debt. This section provides processes debt collectors should use to determine if a request for such substantiation of the debt is requested and the timing in which to respond to such requests.

Section 1.5 requires debt collectors to provide consumers written confirmation of debt settlement agreements and regular accounting of the debt while the consumer is paying off a debt pursuant to a settlement agreement. Debt collectors must also provide consumers with important disclosures of their rights when settling a debt.

Section 1.6 allows debt collectors to correspond with consumers by electronic mail in limited circumstances.

Section 1.7 sets the effective dates of the rules.

Revised rule compared with proposed rule:

Substantive revisions were made in sections 1.1-1.7.

Text of revised proposed rule and any required statements and analyses may be obtained from

Max Dubin, Department of Financial Services, One State Street, New York, NY 10004-1511, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

30 days after publication of this notice.

Revised Regulatory Impact Statement

No new Regulatory Impact Statement is needed. The Revised Rule is substantively similar and addresses the same debt collection practices. The amendments clarify the Proposed Rule. The Revised Rule addresses the same legislative objectives and should have similar impacts to costs and paperwork.

Revised Regulatory Flexibility Analysis

No new Regulatory Flexibility Analysis for Small Businesses and Local Governments is needed. The Revised Rule is substantively similar and addresses the same debt collection practices. The amendments clarify the Proposed Rule. For small businesses, the amendments make clear that some small businesses that mistakenly thought they may be subject to the Proposed Rule were not.

Revised Rural Area Flexibility Analysis

No new Rural Area Flexibility Analysis is needed. The Revised Rule is substantively similar and addresses the same debt collection practices. The amendments clarify the Proposed Rule.

Revised Job Impact Statement

No new Job Impact Statement Analysis is needed. The Revised Rule is substantively similar and addresses the same debt collection practices. The amendments clarify the Proposed Rule. Any job impact should be the same.

Assessment of Public Comment

The New York State Department of Financial Services (the “Department”) received many comments on proposed rule 23 NYCRR 1. The following report summarizes the comments and describes the substantive revisions to the proposed rule.

Organizations Commenting

During the public comment period, the Department received written comments from a wide variety of commenters, including bar associations, law schools, professors, legal service providers, industry associations, law firms, investors, medical providers, debt collection firms, consumer advocacy groups, and regulators.

Summary of Comments

The comments were generally supportive of the Department’s regulation of the collection of debt arising from consumer credit transactions. The comments focused primarily on how the rules could be improved to better correspond to the structure of the collection industry. Another major request was for the Department to clarify the meaning of certain provisions. Further, commenters proposed improvements to consumer disclosures. However, some comments criticized the rules outright for being unnecessary or overly burdensome to debt collectors and asserted that the regulations would increase the cost of collecting valid debts. The summary of comments is organized by section.

Section 1.1 Definitions:

• Expand the definition of “debt” beyond an obligation that arises out of a transaction wherein credit has been offered or extended to a consumer. Commenters suggested including credit offered by the seller of a product or service and non-credit debts, such as rental arrears. Further, debt collectors explained that limiting the regulations to debts arising from the extension of credit is an artificial distinction that will be difficult to track. Other comments point out that this definition parallels language in the New York Financial Services Law.

• Clarify and/or change to the definition of “debt collector.” Some comments suggested that the rules exempt attorneys and debt collection law firms while others urged that the definition of “debt collector” explicitly include attorneys and debt collection law firms. Commenters inquired as to whether the definition of “debt collector” includes original (in-house) creditors, debt servicers and continuing care service providers. Commenters suggested including exemptions from the federal Fair Debt Collection Practices Act (15 U.S.C. § 1692 et seq.) (the “FDCPA”) to make clear that, for the purposes of this regulation, “debt collector” is limited to any person engaged in a business the principal purpose of which is the collection of any debts, or any person who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

• Clarify or replace the definition of “default,” since there is no standard definition of when a debt is in default. Some comments suggested using “charge-off” as a more uniform demarcation of the status of a debt.

Section 1.2 Required initial disclosures by debt collectors:

• Require the disclosure of additional information concerning consumers’ rights under the FDCPA, including the right request that collectors cease communication. Debt collection industry commenters suggested including a link to a Department website where consumers could find this information.

• Simplify or amend the exempt income disclosure to make it more helpful to consumers, or remove it completely. Some debt collectors argued that providing this disclosure could be considered a threat to sue the consumer regardless of whether the collector had the intent to do so.

• Disclosures should require only post-charge-off itemization because credit card issuers generally do not maintain pre-charge-off account information.

• Some commenters were concerned that disclosures would be overly burdensome to collectors and overwhelm consumers. Further, mailing this information could endanger consumers’ privacy.

• Some debt collectors requested that they not be required to send the initial disclosures if the consumer pays off the debt within five days of the initial communication since subsequent disclosures would be unnecessary and confusing. Others suggest that these disclosures are not needed because consumers know what debts they owe and to whom.

Section 1.3 Disclosures for debts in which the statute of limitations may be expired:

• Simplify the statute of limitations disclosure requirements. Commenters felt that the disclosure explaining that the expiration of the statute of limitations is an affirmative defense to suit in New York was overly complicated. Further, commenters felt that this language suggested to consumers that it is legal to sue on a time-barred debt. Debt collectors suggested a shortened disclosure with a link to a Department website where consumers could find additional information.

• Include this disclosure in every communication to consumers after the statute of limitations has passed.

• Inform consumers that suing past the statute of limitations is a violation of the FDCPA.

• Include a clear standard to determine when a debt collector has actual or constructive knowledge that a debt is time-barred.

• Both consumer advocates and the collection industry urged the Department to exclude the warning that non-payment of a time-barred debt may impact one’s credit score, since this may not always be true and could be interpreted as a prohibited threat of suit under the FDCPA.

Section 1.4 Verification of debts:

• Make clear that a consumer should be notified of his or her rights under this section regardless of whether a dispute of a debt is made orally or in writing. Debt collectors, however, were concerned that it would be difficult to identify which oral requests would trigger the disclosure requirements in this section.

• Require creditors to maintain records of prior requests for verification.

• Consumer advocates requested that the Department require additional documentation to verify a debt since a final account statement is not always sufficient. However, debt collectors argued that the proposed requirements may be overly burdensome, adding that all the required documentation may not be necessary in every dispute or may be too difficult or expensive to obtain.

• Debt collectors also suggested that a judgment should suffice to verify of a debt.

• The disclosure of account numbers could endanger consumer privacy, since often these numbers contain personal information such as Social Security numbers.

Section 1.5 Debt payment procedures:

• Require debt collectors to furnish a written debt settlement agreement within five days of reaching an agreement. Debt collectors explained that the requirement to furnish a written settlement agreement before accepting payment would frustrate the settlement process as a consumer may wish to make a payment at the time that an agreement is reached.

• Require that a written settlement agreement include only the “material” provisions agreed to in the settlement negotiation, since many boilerplate terms would never be discussed during a negotiation.

• Include a “grace period” where a consumer who was late on a settlement payment could cure the delinquency without penalty.

• Debt collectors expressed concern that the disclosure of consumer rights under the Exempt Income Protection Act is not appropriate here.

• Include a Department approved model agreement.

Section 1.6 Communication through electronic mail:

• Eliminate the requirement that an email address must be secure, since this is difficult to determine.

• Include an opt-out procedure in every electronic communication so that consumers may choose to revoke authorization to communicate by electronic mail.

Section 1.7 Effective date:

• Delay the effective date of the rule to allow additional time for compliance.

• Exempt from the rules all debts placed or sold for collection before the effective date of the rules.

Changes Made to Proposed Rule:

Following a review of the comments, the Department made the following changes to the proposed rule.

The rule was renamed to “Debt collection by third-party debt collectors and debt buyers.”

Section 1.1 Definitions:

• The definition for “charge-off” was added. The Department determined that some information that debt collectors must provide to consumers is inexorably tied to the date of charge-off, not default. Charge-off represents a uniform accounting action in the life of all consumer debts.

• The definition of “collection efforts” was removed, since the term is no longer used in the proposed rule.

• The Department modified the definition of “debt collector” in order to exempt entities that the Department never intended to be subject to the proposed rule. The definition includes any person in a business the principal purpose of which is the collection of any debts, including debt buyers and third-party debt collectors. However, exceptions, primarily taken directly from the FDCPA, were included to clarify the scope of this definition. Based on a recommendation from the Commercial Lawyers Conference of New York, the Department explicitly excludes from the definition of debt collector any person taking collection action relating to or during litigation. This revision makes clear that the proposed rules are intended to target abusive and deceptive non-litigation consumer debt collection practices.

Section 1.2 Required initial disclosures by debt collectors:

• If the consumer pays a debt in full within five days of the initial communication, a debt collector does not need provide a consumer the initial communications required by Section 1.2. Many comments stated that there is no need for such a mailing after a consumer satisfies the debt.

• At the request of consumer advocates and the debt collection industry, the exempt income disclosure was simplified.

• Some documentation must be provided only if the original creditor has charged-off the debt. The required documentation has been revised to reflect this change, such as requiring an itemization of each additional charge or fee accrued from the charge-off of the debt. This change was made to match industry customs of using charge-off as a uniform recordkeeping standard. Further, this will ensure that the information will not be overly burdensome for industry or consumers by excluding an itemization of charges and payments made prior to charge-off.

Section 1.3 Disclosures for debts in which the statute of limitations may be expired:

• This section was revised to more clearly explain to consumers that while the expiration of the statute of limitations on a debt is an affirmative defense, suing to collect on an expired debt violates the FDCPA.

• This section more clearly conveys that while the Department is requiring debt collectors to disclose certain information to consumers, debt collectors can choose to either use the proposed language or draft a disclosure that incorporates the required information.

• Both the industry and consumer advocates requested that the Department remove the warning regarding the potential impact of failure to pay an expired debt on a consumer’s credit score. The concern was that this warning would be threatening to consumers and could, in some cases, be misleading. This disclosure was removed.

Section 1.4 Verification of debts:

• This section was revised to address debt collectors’ concern that the procedures for “verification,” now renamed “substantiation,” left debt collectors unsure of when a consumer was requesting this additional proof of indebtedness. Debt collectors were also concerned that consumers could repeatedly request substantiation. As amended, the rule allows collectors of charged-off debts to treat any dispute as a request for substantiation or provide consumers clear instructions for how to request substantiation in writing. This change provides debt collectors with procedural options to ensure that the collector can definitively determine whether a consumer has made a triggering substantiation request. To prevent abuse, a debt collector must only provide a consumer substantiation of the debt one time pursuant to this Section.

• The revisions also clarify that substantiation must be provided within 60 days of a debt collector receiving a request.

Section 1.5 Debt payment procedures:

• This section was revised after learning that consumers who agree to a debt payment plan may wish to make an initial payment on the phone, and not wait five days before paying. The revision allows the debt collector to accept this first payment and provide the consumer their written contract within five days.

• At the request of consumer advocates and the debt collection industry, the exempt income disclosure was simplified.

Section 1.6 Communication through electronic mail:

• This section was amended to allow electronic communication only if the consumer affirms that the email provided is not an account furnished or owned by the consumer’s employer.

• An opt-out notice to stop electronic communications was not included because this option is required for all commercial electronic communication under federal law.

Section 1.7 Effective date:

• Most of the rules will be effective 90 days after publication in the State Register. Sections 1.2(b) and 1.4(a) will be effective 180 days after publication, to provide debt collectors time to comply.