New York City has expanded its definition of "debt collection agency" to include those who buy delinquent consumer debts, as well as collection attorneys. Other jurisdictions may take similar action, which appears to overstep federal bounds.

Amendments to the city's Administrative Code, effective July 17, 2009, require a buyer of delinquent consumer debts who hires attorneys or other third parties to collect such debts from New York City debtors to be licensed as a debt collection agency. Attorneys regularly engaged in traditional debt collection activities, other than litigation, on behalf of clients must be similarly licensed.

The amended definition covers "a buyer of delinquent debt who seeks to collect such debt either directly or through the services of another." Thus, a debt buyer who has no direct contact with consumers and only uses licensed debt collectors to conduct collection activities will need to have its own license. In addition, because the licensing requirement applies to purchasers of delinquent debts, even a purchaser directly engaged in collection activity who would not be treated as a debt collector under the federal Fair Debt Collection Practices Act and most state collection laws (because the debt was not in default at the time of purchase) may need to obtain a city license.

However, the city may have overstepped its bounds under federal law. Most significantly, the amended "debt collection agency" definition does not contain an exclusion for debt purchasers with no offices or employees in New York. Should the city attempt to apply the licensing requirement to such purchasers, there would be strong arguments that the requirement violates the Commerce Clause by imposing an undue burden on businesses engaged solely in interstate commerce. Also missing is an exclusion for federally chartered financial institutions and their operating subsidiaries, which would likely prevail if they challenged the requirement as preempted by federal law.

Moreover, given the existing statutory restrictions on debt collectors and attorneys, New York City may have likewise overstepped its bounds under state law.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its experience in federal, state, and local debt collection laws throughout the country. We regularly represent clients in defending against regulatory actions that hinder their proposed or existing business practices and in litigation with private parties concerning debt collection activities, including plaintiffs attempting to pursue class action lawsuits.  For further information, please contact Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com, or John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com.


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