On December 3, 2014, the New York Department of Financial Services (the “Department”) issued new regulations on consumer debt collection practices, to be codified at 23 NYCRR Part 1. Gov. Andrew Cuomo commented that the state is “rolling out tough new regulations to protect borrowers and help crack down on illegitimate debt collection practices.” Superintendent of Financial Services Benjamin Lawsky said that the debt collection industry “is filled with far too many unscrupulous actors willing to deceive and abuse consumers just to make a quick buck. These important reforms will provide significant, new protections for financially struggling New Yorkers from harassment and fraud, and help us root out these predatory practices.”
The following provides highlights of the new regulation:
- General Application: The new regulation only applies to consumer debt that is debt owed by a natural person that was incurred for personal, family, or household purposes. Commercial or business debt, including debt incurred by a natural person for his or her business, is not subject to the new regulation. Moreover, the new regulation “does not cover collection of a debt through litigation or when enforcing a money judgment.” See NYS Register, pg. 20 (Dec. 3, 2014).
- Key Exclusions: Similar to the federal Fair Debt Collection Practices Act (“FDCPA”), the new regulation provides several exclusions from the definition of a “debt collector.” These include, but are not limited to: officers or employees of a creditor collecting its own debts; collecting for an affiliate so long as the collecting entity is not principally engaged in debt collection; a process server; mortgage servicers; creditors collecting debt they originated; and assignees of debt if the debt was not in default at the time it was assigned.
- Required Initial Disclosures: The new regulation requires that when a debt collector first contacts a debtor, the debt collector must provide general information on the rights of debtors and, for charged-off debts, specific information about the debt that they are attempting to collect, the amount owed at charge-off, the total post-charge-off interest, charges, and fees. 23 NYCRR § 1.2(b). These disclosures, which go beyond the requirements of the federal FDCPA, must be provided within five days after the initial communication with the consumer. 23 NYCRR § 1.2(a).
- Debts Where the Statute of Limitations Has Expired: The new regulation requires debt collectors to “maintain reasonable procedures for determining the statute of limitations applicable to a debt it is collecting and whether such statute of limitations has expired.” 23 NYCRR § 1.3(a). If a debt collector attempts to collect on a debt for which the statute of limitations has expired, the collector, prior to accepting payment, must provide notice that it believes that the statute of limitations may be expired and that, if the consumer is sued on such a debt, the consumer may be able to prevent a judgment by informing the court that the statute of limitations has expired, and that if the consumer makes a payment on a debt for which the statute of limitations has expired, or admits, affirms, acknowledges, or promises to pay such debt, the statute of limitations may restart. These debt collection Miranda warnings are designed to address what the Department calls “Zombie Debts.” This issue was also addressed at length in the 2012 Annual Report on the Fair Debt Collection Practices Act of the Consumer Financial Protection Bureau (“CFPB”), and has been the subject of significant supervisory attention by both the CFPB and the Federal Trade Commission. Moreover, the CFPB’s examination manual on debt collections requires examiners to determine whether the debt collector is attempting to collect on time-barred debt.
- Substantiation of Consumer Debts: Currently, consumers may dispute a debt in writing and request verification within 30 days of the first collection attempt. Under the new regulations, a consumer can request “substantiation” of the debt at any time during the collection process. Once the debt collector receives a request for substantiation, it must cease collection and provide documentation proving the validity of the debt and the creditor’s right to collect the debt within 60 days. 23 NYCRR § 1.4.
- Debt Payment Procedures: The new regulation requires that within five business days of agreeing to a debt payment schedule, or other agreement to settle a debt, the debt collector must provide the consumer with a written confirmation of the debt payment schedule or other agreement to settle the debt, and a notice of certain sources of income that are immune from garnishment under federal and state laws, e.g., Social Security payments, public assistance, spousal and child support, disability and workers’ compensation benefits, among others. 23 NYCRR § 1.5.
- Email Communications: Following the required initial disclosures, the debt collector may communicate with the consumer via email where the consumer has voluntarily provided an email account that is not an account furnished or owned by the consumer’s employer, and the consumer has consented to receive such email correspondence from the debt collector. 23 NYCRR § 1.6
The effective date of the new regulation is March 3, 2015, except for section 1.2(b) (relating to disclosure requirements), and section 1.4 (relating to substantiation of debts). In the preamble to the final rulemaking, published in the New York Register, the Department confirmed that the new regulation does not create a private right of action – i.e., consumers cannot sue debt collectors for failing to comply with the rule – but the rule may be enforced by the Department, “and may be enforceable by other regulators and prosecutors.” The new regulation does not supplant other New York State fair debt collection laws, unfair or deceptive acts or practices (“UDAP”) laws, or local debt collection ordinances. Moreover, even if consumers do not have an explicit private right of action under the new regulation, debt collectors should be mindful that the failure to adhere to the standards set forth in the regulation may support a UDAP violation claim. See, e.g., FDIC Compliance Manual, pg. VII-1.5 (June 2014) (noting that while the federal FDCPA does not apply to creditors, the failure to observe its standards may support a UDAP claim).
Travis P. Nelson is a member of Reed Smith’s Financial Services Regulatory Group, and a co-leader of the firm’s Financial Institutions Enforcement and Investigations Task Force, resident in the New York and Princeton offices. Travis is formerly an Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, and regularly represents clients in government enforcement actions. Travis is also adjunct faculty at Villanova Law School, where he teaches Financial Institutions Regulation, and is the editor-in-chief of the ABA’s Banking Law Committee Journal.