New York Attorney General Eric T. Schneiderman announced settlements last week with two major debt buyers, Portfolio Recovery Associates, LLC (PRA) and Sherman Financial Group, LLC (Sherman), resolving allegations that PRA and Sherman filed lawsuits after the expiration of the applicable statute of limitations (SOL) and continued to collect on judgments they wrongfully obtained. The companies will: (i) pay a combined $475,000 in penalties, (ii) vacate and stop collections on approximately $16 million in judgments, and (iii) make various disclosures regarding the SOL and credit reporting to consumers. Two aspects of the settlements deserve significant attention, and if they not already part of your compliance management system, should be considered for inclusion immediately.
The settlements underscore the importance of using the correct statute of limitations when collecting and suing on delinquent accounts. The “correct” statute of limitations not only refers to ensuring you have appropriately characterized the debt (e.g., is it the sale of goods and thus governed by the Uniform Commercial Code’s SOL), but also whether another state’s SOL applies. It was the latter issue that led Mr. Schneiderman to pursue PRA and Sherman.
PRA and Sherman brought suits against New York consumers believing they were timely filed under New York’s six-year statute of limitations because the consumers resided in New York. New York, like many states, however, has a “borrowing statute”, which requires that lawsuits filed in New York be timely filed within the SOL of the statein which the cause of action accrued, in addition to the applicable New York SOL. Determining the state in which the cause of action accrued is a state-by-state issue and can depend on many factors, including where payments were supposed to be sent, where the consumer resided when the consumer breached the contract or where the original creditor was located/headquartered at the time of the breach.
Mr. Schneiderman’s actions underscore the importance of investing resources to ensure that your compliance management system includes appropriate policies, procedures and workflows reflecting the correct handling, treatment and updating of the statutes of limitation. The resources would include an exhaustive review of the type of accounts you are collecting, the causes of action you are filing, the states in which you are filing suit and whether any of the agreements you claim to have been breached include a provision requiring application of a certain state’s statute of limitations or substantive law. And, because many states now require companies to disclose to consumers that they are collecting an account for which the SOL has expired (and at least one appellate court has held that the failure to do so states a claim under the Fair Debt Collection Practices Act), companies that only collect and do not file suit on delinquent debt should review their policies and procedures as well.
The second aspect of the settlements requiring more attention is the credit reporting disclosure Mr. Schneiderman imposed on PRA and Sherman. Both PRA and Sherman agreed to disclose in any written or oral communication with a consumer about a debt that is outside the date for reporting under the Fair Credit Reporting Act that, because of the age of the debt, the company will not furnish the debt to the any credit reporting agency. In other words, if PRA or Sherman believes a delinquent account is too old to be furnished to a consumer reporting agency, it must disclose this fact in all communications about the debt with the consumer.
This general disclosure first appeared in a 2012 Federal Trade Commission consent decree entered into with a debt buyer and California’s Fair Debt Buying Practices Act also requires that the initial written communication to the consumer include the disclosure. By requiring the disclosure in all communications, Mr. Schneiderman apparently feels that it would be “material” for the consumer to know that her account is too old to be credit reported. This begs the question of whether the failure to give the disclosure when collecting a debt will be considered an unfair, deceptive or abusive act or practice under state or federal law, or a violation of the FDCPA. The latter issue could very well make its way through the court system and companies should consider making the appropriate disclosures in all states to ensure that they are not a defendant in one of those cases.