The New York Department of Financial Services (DFS) recently issued revised proposed debt collection regulations, which have important implications concerning charged-off and time-barred debt, for third-party debt collectors and debt buyers. The DFS issued its initial proposed regulations almost one year ago. The CFPB is working on its own debt collection rule,  and we expect that certain provisions of the DFS’ proposed regulations could be adopted by the CFPB.

The DFS noted that the majority of the comments were “generally supportive” of its initial proposal, but that the industry warned that “the regulations would increase the cost of collecting valid debts.” The latest version revises numerous provisions of the initial proposed regulations, including:

  • Defining a “charge-off” as “the accounting action taken by an original creditor to remove a debt obligation from its financial statements by treating it as a loss or expense.” The initial regulations did not define this term. The DFS determined that defining charge-off was necessary given that certain disclosures are tied to the date of charge-off.
  • Eliminating the definition for “collection efforts.” In doing so, the DFS noted that this term is no longer used in the revised regulation.
  • Excluding certain collectors from the definition of “debt collector,” including persons involved in a collection action related to or during litigation. The litigation-related collector’s exemption was adopted at the urging of the Commercial Lawyers Conference of New York and clarifies “that the proposed rules are intended to target abusive and deceptive non-litigation consumer debt collection practices.”
  • Exempting the debt collector from providing required disclosures if the consumer satisfies the debt within five days of the initial communication.
  • Requiring the debt collector to maintain “reasonable procedures for determining the statute of limitations applicable to a debt it is collecting and whether a debt is expired.” The debt collector must also warn the consumer before accepting payment on a time-barred debt that filing a collection lawsuit on a time-barred debt is a violation of the Fair Debt Collection Practice Act (FDCPA).
  • Removing the requirement that the statute of limitations notice warn the consumer that a failure to pay a time-barred debt may adversely affect one’s credit history, credit score, and ability to obtain credit.
  • Requiring the debt collector to substantiate consumer disputes for “charged-off” debts. The initial proposal required the debt collector to only substantiate “defaulted debts” disputed by the consumer. Further, the collector now has 60 days to provide written substantiation.

The regulations will become effective 90 days after publication of notice of adoption in the state register. While there is first an additional 30-day comment period, we do not anticipate significant changes to the revised regulations. It is important that third-party debt collectors and debt buyers review their compliance processes regarding charged-off and time-barred debt, as these are clear areas of emphasis in the DFS regulations. The New York Attorney General has brought enforcement actions against debt buyers for filing collection lawsuits and obtaining default judgments against consumers on time-barred debts.

The new proposed regulations would bolster the ability of the Attorney General and DFS to bring similar enforcement actions in the future. Further, while the DFS proposal would exempt attorney litigation activity, courts have held that collection activity by attorneys (including litigation activity) is subject to the FDCPA, and debt collection attorneys continue to find themselves in the crosshairs of the CFPB.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). Our attorneys, including the attorneys who joined us from the New York City litigation firm Stillman & Friedman, P.C., to form Ballard Spahr Stillman & Friedman LLP, have substantial experience in handling litigation with DFS and the New York Attorney General.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, or Marjorie J. Peerce at 212.223.0200 x8039 or peercem@bssfny.com.


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