By Ilan Fuchs, Ph.D.
Faculty Member, Legal Studies
Consumer debt in the U.S. is huge. The collection of this debt has created a large industry that is intertwined with the service economy. However, the way this industry operates may soon be changing.
Last month, New York passed major legislation that will directly affect the debt collection industry when New York Governor Kathy Hochul signed the Consumer Credit Fairness Act (S.153/A.2382) into law.
The new law is aimed at limiting debt-collection practices and puts significant restrictions on the tools collection agencies can use during the collection process. The legislation was sponsored by Senator Kevin Thomas (D-Levittown), who chairs the Senate Committee on Consumer Protection, and assembly member Helene Weinstein (D-Brooklyn). This law might serve as a marker for other states to follow suit.
Changes in Debt Collection Legal Proceeding and Interest Rates
The Consumer Credit Fairness Act (CCFA) created several steps to increase transparency and make life easier for consumers, most of whom are not represented by attorneys.
First, the law added a new requirement for a notice to be mailed to the defendants in a legal action that includes consumer debt. Once the new law comes into effect next May, the clerk of the court where the lawsuit is brought will need to ensure that court filings include more information than previously required about the alleged debt.
For example, the complaint will need to include a copy of the contract, charge-off details or any other written instrument that created the debt in question. Debt collectors will also need to inform consumers – in each initial communication – that written communications are available in large-print format.
Another major change applies to interest rates. The recent session of the New York State Assembly also ordered an interest rate reduction for judgments of consumer debt from 9% to 2%. This will reduce the efficacy of debt collectors in negotiations. A 9% interest rate is high compared to other market interest rates, and interest accumulates from the time the judgment is entered by the court. The new 2% interest rate is less daunting and threatening for those attempting to repay their debts.
Statute of Limitations
Another major change found in the CCFA relates to the statute of limitations (SOL). This legal term refers to actions that are barred from legal action once a certain time period has passed from the infringement or crime in question. In each state, there is an SOL concerning consumer debt, some states have a six-year limit – including New York until the new law takes force when the SOL will become three years.
By limiting the SOL to three years, the new law drastically changes industry norms. With a three-year time-limit, service providers will likely become much more aggressive with their collection efforts. A business will need to file a legal action, and ensure its attorney starts work on the complaint, long before the three-year deadline expires. The new law also limits the ability of debt buyers to bring suit for an expired or “old” debt.
The ACA, the leading association of debt collectors, added in a comment to the new law that it will likely make other states follow suit: “In addition to New York, efforts to shorten a state’s statute of limitations have been a major issue in five other states considering legislative proposals: Arkansas, Colorado, Illinois, Maine and Virginia.”
With the new law, a debt collector’s only option after the SOL expires will be to file a report with the credit bureau – where the SOL is much longer – so debtors are wise to keep SOLs in mind when negotiating with debt collectors.
Comments to the New Law
The new law garnered several comments. One of the sponsors of this bill, Senator Kevin Thomas said:
“Abusive and exploitative debt collection lawsuits have become an epidemic across New York State. The consequences of these lawsuits—which often prey on the elderly, disabled, and low- and moderate-income New Yorkers—are devastating, especially at a time when New Yorkers are already suffering financial difficulties as a result of COVID-19. The Consumer Credit Fairness Act will stop these abusive and often illegal debt collection practices in their tracks. I want to thank Assembly member Weinstein and our hardworking consumer advocates for their partnership, and Governor Hochul for standing up for New York consumers by signing the CCFA into law.”
It is worthwhile noting that these consumer protection laws may result in some unforeseen effects. For example, service providers may change their accounting practices by enforcing shorter payment periods for customers and faster transfers of unpaid invoices to collections agencies.
This new law, in one of the largest economies in the U.S., may have ramifications in other states, and it is important to pay attention to the way things unfold in New York when the law takes force in six months’ time.
Author’s Note: This is an informative article and does not constitute legal advice. Contact an attorney to discuss these issues.