Regulations came into effect in New York on March 3, 2015 (“New Regulations”), placing additional obligations on those who collect certain third‑party debt in the state. Promulgated by the New York State Department of Financial Services and codified at 23 N.Y.C.R.R.§§ 1.1‑1.7, the New Regulations increase notice obligations, and further regulate other communications with debtors. The New Regulations are available at http://www.dfs.ny.gov/legal/regulations/adoptions/dfsf23t.pdf.
The reach of the New Regulations is similar to the federal requirements under the Fair Debt Collection Practices Act (“FDCPA”), but not identical. While the FDCPA exempts creditors collecting on their own behalf, the New Regulations also carve out an exemption based on the nature of the debt. Thus, any company that collects consumer debt from New York residents will need to analyze both its portfolio and its collection practices to determine how to adapt to the New Regulations, along with those under the FDCPA.
The following is a summary of the obligations contained in the New Regulations.
NEW REQUIREMENTS FOR DEBT COLLECTORS
The New Regulations focus primarily on consumer education, and essentially require debt collectors to become the educators. Shortly after its initial communication with a consumer debtor, the debt collector must inform the consumer that it is “prohibited from engaging in abusive, deceptive, and unfair debt collection efforts,” including “threat[s] of violence,” “obscene or profane language,” or “repeated phone calls made with the intent to annoy, abuse, or harass.” 23 N.Y.C.R.R. § 1.2(a)(1) (West 2015). Simultaneously, the debt collector must provide written notice that even if a judgment is obtained against a debtor, portions of their income will not be subject to collection. Id. § 1.2(a)(2).
With regard to debt outside the statute of limitations, the New Regulations require detailed notice requirements. For instance, debt collectors will need to disclose when they believe that the statute of limitations on a debt has expired, and inform debtors that they may not be held liable in court if sued. Id. § 1.3(b). Though not banned from collecting time‑barred debts, debt collectors are now required to “maintain reasonable procedures for determining the statute of limitations applicable to a debt” and whether the statute has expired. Id. § 1.3(a). A debt collector that attempts to collect a time‑barred debt without providing the required notices cannot claim ignorance; rather, it may find itself in violation of two provisions of the New Regulations. Id. §§ 1.3 (a)‑(b).
Finally, if the consumer disputes the validity of a charged‑off debt, the debt collector is required to substantiate the debt.Id. § 1.4. Substantiation includes production of the contract which created the debt and a description of the chain of title between the creditor and collector. Id. § 1.4(c). Beyond merely demanding compliance, the New Regulations order a halt to collection activity until this substantiation is provided. Id. § 1.4(d).
While the FDCPA also requires debt collectors to inform consumers of certain statutory rights, the New Regulations expand this obligation. Thus, collectors cannot rely on standard FDCPA notices to satisfy their obligations under the New Regulations.
CERTAIN DEBTS AND CREDITORS EXEMPT
As with the FDCPA, the New Regulations exempt first‑party creditors. Unless its principal purpose is debt collection, a company collecting its own debts will not be subject to the New Regulations, an exclusion that would apply to most lenders and businesses who extend credit. Id. § 1.1(e). Again mirroring the FDCPA, the New Regulations apply only to consumer debt, that is, debt incurred for “personal, family or household purposes.” Id. § 1.1(d). Commercial lending is not subject to the New Regulations or the FDCPA.
Unlike the FDCPA, however, the New Regulations exempt debt arising from “credit . . . provided by a seller of goods or services directly to a consumer exclusively for the purpose of enabling that consumer to purchase such consumer goods or services directly from the seller.” Id. § 1.1(d). The exemption looks to the underlying transaction, not the relationship between debtor and collector. Therefore, even if a third party attempts to collect this type of debt, the New Regulations do not apply.
While this is a broad exemption, third‑party collectors should not assume that all their accounts will be covered because they are obtained directly from sellers of consumer goods and services. Care must be taken to ensure that each seller did, in fact, directly provide financing to the consumer. For instance, store‑branded credit cards, if financed by a bank rather than the retailer, would likely fall outside of the exemption.
The New Regulations do not create a private right of action, but violations will be prosecuted by New York State’s Department of Financial Services (“Department”). Fin. Servs. Law § 408(a) (McKinney 2015). Debt collectors in violation of the New Regulations could face civil penalties of up to $5,000. Id. §§ 408(a)(1)‑(2). Further, the Department is authorized to penalize debt collectors for violations of the FDCPA and other state and federal debtor‑protection laws, so an investigation triggered by violations of the New Regulations could lead to further liability.
Since the New Regulations may differentiate among debts held by the same party, no debt collector with activities in New York can safely ignore them. For any debt collector that believes it will be affected by the New Regulations, compliance can be achieved by utilizing counsel to ensure that it has properly established intake procedures for reviewing each debt, adopted standard language for initial communications, reviewed its policies for debtor contact, and increased training for employees.