Working with New York's Latest Debt Collection Regulations

Don Maurice

New York’s Department of Financial Services published regulations on Dec. 3, 2014, which would require debt collectors to make additional disclosures to consumers following initial communications, provide consumers who dispute charged-off debt with certain information, adopt procedures concerning the applicability of statutes of limitations, maintain certain records and provide written confirmation of settlements, among other things.

The regulations (available here) are applicable to third-party debt collectors (those who collect debts owed to others) and debt-buyers.

On Jan. 15, I’ll be discussing the regulations in a DBA International webinar Working with New York’s Latest Debt Collection Regulations. In the meantime, here is a closer look at the regulations.

Who is Covered?

Though the definition of debt collector is similar to the federal Fair Debt Collection Practices Act’s, it is not the same. Like the FDCPA, the regulations cover “any person engaged in a business the principal purpose of which is the collection of debts,” or any persons who regularly engage in collecting, either directly or indirectly, debts owed to another. It expressly includes “a buyer of debt” within its definition of debt collector. You are subject to the regulations if you are located in New York or engage in collection activity in New York. It also exempts many of the same persons exempted from the FDCPA, like officers and employees of creditors while collecting the creditor’s debts in the creditor’s name. The regulations do not define a “creditor.” Instead they only define “original creditors” as persons who extend credit. The use of “creditor” appears to be an oversight.

Litigation Exemption

The regulations differ from the FDCPA in that they contain an exception for debt collection litigation activity. They exclude:

any person with respect to (i) serving, filing, or conveying formal legal pleadings, discovery requests, judgments or other documents pursuant to the applicable rules of civil procedure; (ii) communicating in, or at the direction of, a court of law or in depositions or settlement conferences or other communications in connection with a pending legal action to collect a debt on behalf of a client; or (iii) collecting on or enforcing a money judgment.

Time will tell whether this exclusion is broad enough to cover all debt collection activity by attorneys when solely using civil legal actions to collect debt. The exclusion should avoid conflicts between the professional responsibilities of attorneys, court rules, rules of evidence and procedures and these non-judicial regulations. Such conflicts remain a significant defect in the FDCPA which is exemplified by the infamous “Greco Disclaimer” borne from the lunacy of the court legislated “meaningful involvement” standard. Notably, some of the first “meaningful involvement” cases arose from New York. The regulations avoid these problems.

Problems for New York Based Debt Collectors

The regulations do not limit themselves to only New York “consumers.” This means they can be read to adhere to the activities of a New York debt collector collecting debt from persons who are not New York residents. Some have told me this was not intended.

Types of Debt Subject to the Regulations

The regulations are applicable to obligations or “alleged obligations” for the payment of “money or its equivalent” where credit has been extended to a consumer for money, property or a service. Unlike the FDCPA, the regulations do not expressly mention “insurance” as the subject of the credit transaction. It is unclear whether credit incurred by a consumer for insurance would be covered by the regulations.

Similar to the FDCPA, the credit must be extended “primarily” for “personal, family or household purposes.”

Unlike the FDCPA, a debt under the regulations does not include credit “provided by a seller of goods or services directly to a consumer.” However, the seller’s extension of credit must be “exclusively” for the purpose of enabling the consumer to purchase the goods and services “directly from the seller.” This provision particularly assists small businesses who provide credit for consumer purchases and often use small or local collection agencies to collect their debt. It also benefits many medical providers.

Two Forms of Initial Disclosures

If the debt being collected is subject to the regulations, debt collectors are required to use at least one and possibly two types of “initial disclosures.” Like the FDCPA, these disclosures are to be made to consumers within five days of your initial communication in connection with collection of a debt. One disclosure is applicable to all covered debts, while the other only must be made if the debt is “charged-off.” The regulation defines a charged-off debt as an “accounting action taken by an original creditor to remove a debt obligation from its financial statements by treating it as a loss or expense.” When collecting charged-off debt, both of the disclosures must be provided. Like the FDCPA, the disclosures can be provided in the initial communication. Unlike the FDCPA, the disclosures must be provided in writing.

Disclosures Applicable to All Debt

Debt collectors must disclose:

• That the FDCPA prohibits them from engaging in abusive, deceptive and unfair practices, “including, but not limited to (i) the use or threat of violence; (ii) the use of obscene or profane language; and (iii) repeated phone calls made with the intent to annoy, abuse, or harass.”
• And the following notice:

If a creditor or debt collector receives a money judgment against you in court, state and federal laws may prevent the following types of income from being taken to pay the debt:

1. Supplemental security income, (SSI);
2. Social security;
3. Public assistance (welfare);
4. Spousal support, maintenance (alimony) or child support;
5. Unemployment benefits;
6. Disability benefits;
7. Workers’ compensation benefits;
8. Public or private pensions;
9. Veterans’ benefits;
10. Federal student loans, federal student grants, and federal work study funds; and
11. Ninety percent of your wages or salary earned in the last sixty days.

Number 11 of the required disclosure references the New York Exempt Income Protection Act.

Disclosures Applicable to Charged-Off Debt

If you are collecting charged-off debt, these additional disclosures must also be made within the five-day period, unless it is contained in the initial communication:

• The name of the original creditor; and
• An itemized accounting of the debt, including:
  • the total amount of the debt due as of charge-off;
  • the total amount of interest accrued since charge-off;
  • the total amount of non-interest charges or fees accrued since charge-off; and,
  • the total amount of payments made on the debt since charge-off.

Some debts are placed pre-charge-off and are later charged-off while in debt collection. The regulations do not address whether the “charged-off” debt disclosure must then be made.

Time-Barred Debt Disclosure

If a debt may be subject to an expired limitations period, you’ll have to make another set of disclosures before accepting a payment. These disclosures apply to all debts, whether or not they have been charged-off. The regulations include the following safe-harbor disclosure:

We are required by regulation of the New York State Department of Financial Services to notify you of the following information. This information is NOT legal advice:

Your creditor or debt collector believes that the legal time limit (statute of limitations) for suing you to collect this debt may have expired. It is a violation of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq., to sue to collect on a debt for which the statute of limitations has expired. However, if the creditor sues you to collect on this debt, you may be able to prevent the creditor from obtaining a judgment against you. To do so, you must tell the court that the statute of limitations has expired. Even if the statute of limitations has expired, you may choose to make payments on the debt. However, be aware: if you make a payment on the debt, admit to owing the debt, promise to pay the debt, or waive the statute of limitations on the debt, the time period in which the debt is enforceable in court may start again. If you would like to learn more about your legal rights and options, you can consult an attorney or a legal assistance or legal aid organization.

One sentence from the safe-harbor disclosure might be cause for concern under the FDCPA. It reads: “However, if the creditor sues you to collect on this debt, you may be able to prevent the creditor from obtaining a judgment against you. To do so, you must tell the court that the statute of limitations has expired.” You are not required to use the safe-harbor disclosure and can fashion your own addressing the specific items earmarked by the regulations for disclosure.

Time-barred Debt Policies and Procedures

In addition to making disclosures when collecting debt which may be subject to an expired limitations period, debt collectors must have policies in place to determine the statute of limitations applicable to the debts they are collecting and to allow them to determine whether the limitations period applicable to these debts has expired. Determining the applicable statute of limitations is no easy task given the countless borrowing statutes, contract choice of law provisions and state common law treatment of foreign limitations periods. Therefore, the limitations period may not be always determined by New York law.

Having such policies and procedures in place will assist in reducing risks associated with collecting debt subject to the defense of an expired limitations period.

“Substantiation” of Disputed, Charged-Off Debt

The substantiation requirements are a bit confusing. They apply only when collecting charged-off debt. And, it is important to understand that the process may require only making a disclosure to the consumer of how to request substantiation, rather than requiring the provision of “substantiation” itself. And what information constitutes “substantiation” goes beyond the type of information many courts have held satisfies the FDCPA’s “verification” requirements and has the potential to expose consumers’ non-public, financial information.

What Constitutes “Substantiation”?

Substantiation means:

• A copy of a judgment, or
• All of the following:

(1) (a)”the signed contract or application that created the debt” or, if neither “exists” a copy of (b) a document which demonstrates the debt was incurred by the “debtor” and only if this document was provided to the “alleged debtor” while the account was “active,” or (c) for a “revolving credit account” the “most recent monthly account statement recording a purchase transaction, payment or balance transfer…;”

(2) “the charge-off account statement” or its equivalent, “issued by the original creditor to the consumer;”

(3) “a statement describing the complete chain of title from the original creditor to the present creditor, including the date of each assignment, sale, and transfer; and”

(4) records that “reflect the amount and date of any prior settlement” made under the regulations’ Debt Payment Procedures.

Similarities and Differences With FDCPA

The substantiation process is not the same as “verification” under the FDCPA, but it shares a few similarities.

• Unlike the FDCPA, substantiation can be requested at anytime. But a debt collector need only provide it once.
• Like the FDCPA verification process, once substantiation is requested, all debt collection activity must cease until it is provided.
• Unlike the FDCPA, both oral and written disputes can trigger the process, and the time and manner in which the debt collector responds to them differs.
• Unlike the FDCPA, the regulations place a specific time period in which the debt collector must provide verification — 60 days from receiving the request for substantiation.

Oral vs. Written Disputes and Substantiation

There are some intricate timing requirements that differ for oral and written consumer disputes as noted above.

For oral disputes:

• In the conversation where the debtor makes an oral dispute, debt collectors must take “reasonable efforts” to inform the consumer how to make a written request for substantiation.
• Within 14 days of the verbal dispute, the debt collector must “provide the consumer clear and conspicuous written instructions on how to request substantiation of the debt.” It is not clear whether “providing” the consumer is the same as “sending” it to the consumer. Some may read “provide” as meaning the consumer has to have the written instructions by the end of the 14 days.

For written

• “within 21 days of the debt collector receiving that writing, the debt collector must provide the consumer clear and conspicuous written instructions on how to request substantiation of the debt.”

Record Retention

Debt collectors must retain the consumer’s request for substantiation and all documents provided in response until the debt is sold, transferred or “discharged.”

Issues in Substantiation Process

Here are a few of the open issues with the process. I’ll cover more in the webinar:

• It is not clear whether any dispute or certain specific types of disputes trigger the process. The wording of the regulations can be read to limit disputes to those concerning the “validity of the charged-off debt” or the “right to collect” it.
• The process requires the debt collector to provide “clear and conspicuous written instructions on how to request substantiation of the debt,” but the regulations never specify what is to be contained in the instructions. This suggests the instructions are left to the debt collector’s sole discretion.
• It is unclear whether a debt collector can simply stop collecting the debt instead of providing the substantiation disclosure or the substantiation itself.
• Substantiation “must” be provided to the consumer within 60 days of the debt collector’s receipt of the substantiation request. It is possible to read this as meaning the regulations are violated if substantiation is not provided within the 60-day period.

Payment and Settlement Agreements

Payment arrangements (called “Debt Payment Procedures” by the regulations) must meet certain requirements at different stages of the collection process.

Requirements Applicable at Inception of Payment/Settlement Agreements

Within five business days of “agreeing to a debt payment schedule or other agreement to settle a debt,” debt collectors must provide consumers with:

• A “written confirmation” of the “payment schedule or other agreement to settle the debt” which includes “all material terms and conditions” of the agreed payments and schedule; and,
• A notice of which consumer funds are exempt, similar to the one required for all debts above.

While the regulations do not mandate that payment arrangements must be in writing, they do require debt collectors to provide debtors, within five days of the agreement, a “written confirmation of the debt payment schedule or other agreement.” The written confirmation must include the “material terms and conditions relating to the payments and schedule to which the consumer agreed.”

Quarterly Accounting

Debt collectors must provide the debt with at least a quarterly “accounting of the debt.” What constitutes an “accounting of the debt” is not specified.

Satisfaction of Debt

Within 20 days of a consumer satisfying a debt subject to the regulations’ debt payment procedures, the debt collector must send the consumer “written confirmation of the satisfaction of the debt that identifies the original creditor and the account number.” It is not clear whether the “account number” refers to the original creditor’s account number or, if purchased by a debt buyer, the debt buyer’s account number or the debt collector’s account number.

Email Communications

Email communications are restricted by the regulations. Debt collectors may only communicate with consumers if:

• The consumer has voluntarily “provided an electronic mail account to the debt collector.” I assume it means the consumer identified an email address where she can be reached — and;
• The consumer has “affirmed” that the email “account” is neither “furnished or owned by the consumer’s employer; and
• The consumer has “consented in writing” to receive email “in reference to a specific debt.” The regulations then go on to say that a “consumer’s electronic signature constitutes written consent . . .”

Under the federal E-Sign Act, there’s a difference between an “electronic signature” and an “electronic writing.” Having an electronic signature does not necessarily mean you have an electronic writing. Subsequent commentary by NYDFS indicates that the writing and the signature can both be electronic.

No Private Right of Action

The regulations, themselves, do not provide for a private right of action. Plaintiffs attorneys I’ve spoken with have indicated their belief that they could allege an FDCPA violation based on a violation of the regulations. Courts have held that violations of other regulations or laws are not per se violations of the FDCPA, but have also found that such violations can trigger FDCPA liability in certain circumstances.

Civil Monetary Penalties

New York regulators have indicated that civil monetary penalties, under N.Y. Financial Services Law 408, may be imposed for violation of the regulations. Financial Services Law 408 provides for civil monetary penalties of up to $5,000 “per offense.”

Effective Date

Most of the regulations become effective March 3, 2015. Sections 1.2(b) (initial disclosures pertaining only to “charged-off debt”) and 1.4 (substantiation of “charged-off” debt) become effective Aug. 30, 2015.

Jan. 15 Webinar

Join me along with attorney Irwin S. Kirschenbaum of Kirschenbaum & Phillips, P.C. on Jan. 15, from 12 noon to 1 p.m. EST, for our analysis of many more interesting twists and turns in the New York regulations. We will explore the operational issues, best practices and consider various scenarios under which the regulations may or may not apply.

The presentation is one hour and qualifies for one DBA International Continuing Education Credit. Register here now before the webinar sells out.