What You Need to Know About NY’s Proposed Debt Collection Regulations

Financial Services Law

On December 15, 2021, the New York State Department of Financial Services published proposed amendments to the state’s debt collection regulations (the Amendments). The Amendments would broaden the scope of the existing rules and therefore are likely to have a significant impact on entities that have not previously considered themselves to be debt collectors. The rules, if amended as proposed, would be more restrictive than the Chopra-led Consumer Financial Protection Bureau’s (CFPB) recently adopted Regulation F with respect to electronic communications with consumers. All the same, they are described generically as simply relating to “Debt Collection by Third-Party Debt Collectors and Debt Buyers.” Comments to the proposed regulations must be submitted by February 14, 2022.

What Happened

The Amendments, if adopted as proposed, create new definitions of various terms, including “creditor,” “debt” and “debt collector,” or expand existing definitions, and impose new substantive conduct restrictions on debt collectors.

Significantly, the Amendments will expand the scope of who is a debt collector to include anyone collecting on even noncredit transactions, judgment-collection providers and anyone collecting on contingent obligations, such as Income Share Agreements or litigation funding companies, by redefining the term “debt” to include contingent obligations, obligations that have been reduced to judgment and all consumer “transactions” rather than just consumer credit transactions.

Substantively, the Amendments impose restrictions that, in some instances, go far beyond the restrictions imposed in the CFPB’s recently adopted Regulation F, including a requirement that a validation notice expressly state “the applicable statute of limitations for the debt” and prohibiting the use of electronic communications without express and revocable consumer consent. The Amendments also limit debt collectors to no more than one telephone call and three attempted telephone calls per seven-day period per alleged debt, and, in response to consumer validation demands received within the 30-day validation period, the Amendments require the debt collector to provide “documents sufficient to establish the complete chain of title . . . including documents sufficient to establish the specific dates on which the debt was assigned, sold or transferred and names of each previous owner of the account from the creditor to which the debt was originally owed or alleged to be owed to the current owner.”

Why It Matters

The expanded definition of “debt” to include contingent obligations is likely aimed directly at various forms of contingent financial obligations, such as Income Share Agreements and litigation finance. Given that the current definition of “debt” likely includes these obligations, the inclusion of contingent obligations may be a strategic effort to undo via regulation the numerous decisions of New York courts at all levels, affirming that contingent obligations are not a form of credit.

Additionally, the requirement to disclose the applicable statute of limitations can sometimes be extremely difficult for creditors and debt collectors, particularly in light of the expanded definition of the term “debt,” as not all debts fall neatly and obviously into existing categories and because statutes of limitations can often be governed by extensive bodies of case law. Likewise, oral promises to pay and partial payments can restart the relevant limitations period, possibly requiring the debt collector to review each and every communication with the creditor and each and every debt collector who may have worked on the account. Finally, statutes of limitations can vary by state, meaning that debt collectors may have to engage in an extensive choice of law analysis in connection with each debt. We are concerned that the end result may harm consumers, in that debt collectors who are unsure about the applicable limitations period may choose to file a collection lawsuit against consumers rather than risk violating this requirement.

Finally, imposing the vague requirement that validation of a debt include “documents sufficient to establish the complete chain of title” seems likely to generate significant confusion and possibly litigation around the sufficiency of any documents provided by the debt collector, inasmuch as the debt sales are typically documented by including a list of accounts as an exhibit to a purchase and sale agreement, which, of course, cannot be shared under the Fair Debt Collection Practices Act (FDCPA) or the very New York regulations that the Amendments are meant to update.

If you have any questions about complying with potentially applicable debt collection laws or are interested in preparing comments to the proposed regulations, please reach out to any of the authors or the Manatt professional with whom you work.

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