Evaluating Debt Collection Regulation

BACKGROUND

Since at least 2015, judicial bodies have been actively researching how to better administer debt collection on their civil dockets. By then it had become clear that the majority of the civil docket was being taken up with these cases, and that they were particularly vulnerable to default judgments. In 2016 the Conference of Chief Justices and the Conference of State Court Administrators of the Civil Justice Improvement Committee (CJI) endorsed the recommendations of a research group formed by the National Center for State Courts, the Institute for the Advancement of the American Legal System (IAALS) at the University of Denver. The findings show a “piecemeal” approach to debt collection regulation and adjudication that most often benefit debt collectors in getting default judgments.

Part of the administrative challenge state courts face in this area is balancing their roles as impartial facilitators of legal arguments with the one-sided debt collection cases. According to Pew, over the last decade 70 percent of debt collection cases end with a default judgment. The courts’ system is predicated on defendants asserting any legally valid objections to claims, but this fails in regards to debt collection due to notification problems and lack of engagement among defendants. Under common law, objections like lack of standing, time-barred debt, or due process claims need to be affirmatively raised by defendants. Thus, default judgments are common, and courts do little to vet the legality of debt collection claims. In part, the CJI recommends essential process steps that courts undertake to protect the interests of justice without biasing it against plaintiffs, such as verification of service of process, requirements for supporting proof of claims including standing, and affirmation that the claim was filed within the statute of limitations.

Under the Commerce Clause, Congress passed the Fair Debt Collection Practices Act (FDCPA) in 1978 to regulate this area of commercial activity. The FTC was originally tasked with administrative enforcement, but this passed to the Consumer Financial Protection Bureau (CFPB) when the agency was created by the Dodd-Frank Act in 2010. CFPB has issued Regulation F, which took effect Nov. 30 2021, that in part barred debt collectors suing time-barred debts. Confusingly, this regulation does NOT require debt collectors to disclose to debtors that their debt is time barred. Debt collection companies have not changed their practices since the issuance of this rule, and likely continue to exploit the lack of a disclosure rule in hopes that debtors acknowledge or make partial payment, thus reactivating it.

California has also implemented reforms that reflect CJI recommendations. California Civil Code section 1788.60(a), (b) requires that records used in debt collection have “sworn declarations” attached that prove their chain of ownership. Section 1788.56 states no suit or arbitration may be filed if the statue of limitations has expired. Also, according to the National Center for State Courts (NCSC), Los Angeles County Superior Court has a checklist that is used prior to the entry of judgment for defaults in civil cases like debt collections, that are supposed to help screen out non-conforming cases.

Lastly, debt collection rules were temporarily changed by states and the federal government in a variety of ways during the pandemic. These rules are being gradually relaxed, particularly in regard to rents and student loans, which could create a large volume of additional claims by primary and secondary debt claimants.

RESEARCH

Using public filings available from the Los Angeles Circuit Court system, we are to evaluate the effect of California’s implementation of requirements for proof of service, chain of ownership documentation and disallowing time-barred debts from civil suits.