Oct. 4, 2012, marked a landmark decision for the debt collection industry in New York. Judge Eric Vitaliano, of the U.S. District Court for the Eastern District of New York, issued a long-awaited decision striking down a portion of a 2009 New York City Law that expanded the city’s oversight of debt collection activities.1
Local Law 15, enacted in 2009, expanded the definition of debt collection agency to include attorneys who engage in collection proceedings, as well as debt buyers, or companies that buy delinquent consumer debt and typically contract with traditional collection agencies or law firms to pursue collection of the debt in their behalf.2 The law mandated, in pertinent part, that those meeting the definition of debt collection agencies obtain licenses and register with the Department of Consumer Affairs (DCA).3
Such licensing subjected these “agencies” to the DCA’s investigatory and sanctioning authority, meaning that the DCA’s commissioner had the authority to conduct hearings and award restitution to consumers for violations of the DCA’s rules and regulations.4 As of the date of Vitaliano’s decision, the DCA reported that there were 1,847 licensed debt collection agencies in the city of New York, an unknown percentage of which are attorneys,5 all of whom were previously subject to the DCA’s authority.
Shortly after Local Law 15 was signed into law on March 18, 2009, a lawsuit was filed in the Eastern District of New York against the city of New York, the New York City Council, the DCA, and Jonathan Mintz in his official capacity as DCA commissioner. The plaintiffs in the action were two prominent New York consumer collection law firms, Eric M. Berman, P.C. and Lacy Katzen, LLP, along with DBA Asset Holdings Corp. (DBA), a buyer of consumer debt and Delaware Corporation that enters into contracts with law firms and debt collectors to recover on its behalf.6
The complaint challenged Local Law 15 under New York state law and the U.S. Constitution. Specifically, the plaintiffs argued that giving the DCA authority to regulate the professional conduct of attorneys violated New York’s Judiciary Law, “which puts the judiciary in charge of admitting, supervising and regulating attorneys.”7 In opposition, the defendants argued that the city could regulate lawyers when they were engaged in non-legal activities such as debt collection.8
The court apparently disagreed, stating that the law “would directly regulate core aspects of the practice of law.”9 Vitaliano reasoned that under Local Law 15, no attorney may regularly represent creditors seeking to collect debts without first obtaining a DCA license and complying with its requirements. These requirements, however, include limitations on activities that are commonplace functions of attorneys such as communicating with adverse parties and seeking to vindicate clients’ contractual rights.”10 Ultimately, the judge granted summary judgment in favor of the plaintiffs on this point, holding that Local Law 15 creates an “impermissible interference with an attorney’s right to practice law” and that the DCA simply can have no role as “gatekeeper” with regard to attorneys authorized by the state to practice in New York courts.11
The complaint further alleged that Local Law 15 was preempted under New York’s General Business Law and that it also violated the Contract Clause of the Constitution by interfering with existing contracts between debt buyers and law firms, third party collectors, and the original creditors. However, these claims were dismissed by the court.12
According to the Oct. 3, 2012, Memorandum and Order, the only unresolved issue remaining for trial is whether Local Law 15 violates the U.S. Constitution’s Commerce Clause by imposing New York law on debt buying companies in other states, such as plaintiff DBA, a Delaware Corporation. Vitaliano stated, “to the extent that Local Law 15 regulated contracts formed entirely outside the state, it violated the U.S. Constitution.”13 However the court found that there was a genuine issue of fact as to whether the contracts at issue in this particular case were legally formed outside of the state.14 The parties were directed by Vitaliano to prepare for trial on this issue.
In response to this weighty decision, Gabe Taussig of the DCA’s law department has been quoted as saying “this is an extensive decision that we are carefully studying and will consider our options.”15 It remains to be seen how the DCA will respond to this decision, but for now, it is an important victory for debt collection attorneys and for all New York attorneys.
Protection Against Robocalls
On Feb. 15, 2012, the Federal Communications Commission (FCC) accepted changes to the Telephone Consumer Protection Act of 1991 (TCPA), mandating that telemarketers must now obtain “prior express written consent” from consumers prior to placing an autodialed or prerecorded marketing call, commonly referred to as “robocall,” to both residential landlines and wireless phone numbers.16
When the FCC first released its proposed changes to the TCPA back in 2010, industry insiders feared that they could potentially “set collection efforts back decades,” prompting industry advocates such as the ACA International, to gear up for a fight.17 Among the concerns was that “the communication habits of young adults have made it harder for account receivable management professionals to correctly identify and contact Generation Y consumers. Debt collectors would like nothing more than to be allowed to freely use new communications platforms—such as cell phones, text messages and social networks—to contact the younger demographic.”18 The initial proposal, if enacted, would have effectively crippled the consumer collection industry.
However, upon release of the FCC’s accepted changes this past February, it appears that for the most part the collection industry has emerged unscathed. Under FCC 12-21, telephone calls placed to consumers for the purposes of debt collection, assuming they do not include telemarketing messages, will still be permitted to residential landlines.19 Collection calls to wireless numbers will still require prior express consent.20 However, as under the prior iteration of the TCPA, the consent need not necessarily be written. Consent may be obtained on paper or through electronic means, such as website forms, a telephone keypress, or a recording of an individual’s oral consent. Moreover, the FCC has explicitly stated that where a consumer provided a wireless phone number on a credit application, then the consumer has consented to being contacted on that wireless number by the creditor’s collection agents.21
FCC 12-21 further restricts telemarketers from making “robocalls” or sending texts to individuals based entirely on an “established business relationship” with individual consumers.22 The elimination of this “Established Business Relationship Exemption” will have a significant impact on telemarketing practices. Telemarketers must also provide an automated, interactive opt-out mechanism during each automated or prerecorded call made to the consumer.23
The new TCPA rules went into effect on June 11, 2012, after approval by the Office of Management and Budget and publication in the Federal Register. For the most part, the implementation guidelines contained in FCC 12-21 provide for a gradual phasing out period for the existing rules, which will become absolute 12 months from the June 2012 effective date.24 However, some of the new policies were given only a three-month phase-out period. For instance, the mandated automated interactive opt-out mechanism for telemarketing robocalls became effective as of September 2012.25
At least for the time being, the consumer debt collection industry, which has been a lightning rod for legislative reform in 2012 due to consumer backlash and widespread public criticism of collection practices, has managed to dodge the FCC’s proverbial bullet.
Student Loan Debt Collection
Amid growing concern over the current debt burden of approximately $1 trillion in outstanding student loans, which reportedly now exceeds credit card debt in this county,26 Congress is considering a major overhaul of debt collection practices concerning such loans. New legislation, proposed by Wisconsin Republican Tom Petri, which may be introduced as early as December of this year, would create a system resembling those presently used in Britain, Australia and New Zealand.27
The current system, which creates the need for the U.S. government to hire private debt collection companies, would be replaced with a system of automatic withdrawals from borrowers’ paychecks, tied to their income. Features of the plan would include a cap on interest owed, limiting it to 50 percent of the loan’s face value at time of graduation and automatically deducted payments that would be capped at 15 percent of the borrower’s income after basic living expenses.28 However, in order to offset the cost of capping interest, a desirable part of the proposed plan, the legislation would also need to eliminate some of the student loan subsidies currently offered to low income borrowers and their families.29 For instance, low income borrowers would no longer be excused from accruing interest while they are attending college. Additionally, loan forgiveness programs currently available to low income borrowers and those entering public service careers would be eliminated entirely.30 However, should this new bill eventually be signed into law, it will only apply to new student loans, but not existing loans.31
As reported by Bloomberg News, according to Sandy Baum, a senior fellow at the George Washington University School of Education, “[w]hile Petri’s bill makes sense, the elimination of the low-income subsidies and forgiveness could face opposition from Democrats.”32 On the other hand, Baum commented that “Republicans may be concerned that taxpayers won’t be repaid if more borrowers join the income-based program.”33 In fact, the reality is that income-based student loan repayment options are currently available to borrowers in the United States, but very few avail themselves of these opportunities because they don’t know they exist.34
Indeed, the strongest opposition may come from the debt collection industry for which student loan collection has seemingly replaced credit card collections as their most lucrative enterprise. During the last fiscal year, the Education Department paid more than $1.4 billion to private collection agencies to locate and collect from borrowers who have defaulted on student loans.35 This proposed new legislation would effectively eliminate the need for government-contracted private debt collectors.
However, the question remains, if the federal government, unlike private lenders, recoups 80 percent on the dollar, whereas the majority of other lenders collect an average of 20 percent on the dollar,36 why revamp the system? Legislators will be faced with balancing the goal of repayment of outstanding student loans to the U.S. government so that the burden does not fall on taxpayers, and providing a much-needed financial break to struggling students and graduates.
David M. Barshay is a member of Baker Sanders, in Garden City. Jennifer L. Zeidner, a senior associate with the firm, assisted in the preparation of this article.
1. See Jessica Dye, NYC “Consumer agency can’t regulate lawyer conduct: court,” Thomson Reuters News & Insight (Oct. 4, 2012) available at http://newsandinsight.thomsonreuters.com/New_York/News/2012/10_-_October/NYC_consumer_agency_can_t_regulate_lawyer_conduct__court/ (last visited Dec. 5, 2012); see generally, Eric M. Berman v. City of New York, U.S. District Court for the Eastern District of New York, Case 1:09-cv-03017-ENV-CLP (2012).
2. See N.Y. City Admin. Code §20-489 (2009).
4. See id.; see also Eric M. Berman v. City of New York, supra. at p.5.
5. See Dye, supra.
6. Eric M. Berman v. City of New York, supra. at p.10.
7. Dye, supra.
8. See Id.
9. See Id.
10. Eric M. Berman v. City of New York, supra. at p.23-24.
11. Id. at p. 21, 24.
12. See id. at p. 74.
13. Id. at p. 52.
14. See id. at p. 74.
15. Dye, supra.
16. See Federal Communications Commission, FCC Strengthens Consumer Protections Against Telemarketing Robocalls. (Released Feb. 15, 2012) available at http://www.fcc.gov/document/fcc-strengthens-consumer-protections-against-telemarketing-robocalls-0 (last visited Dec. 4, 2012).
17. See Cynthia Wilson, “Proposed FCC Change to TCPA would Negatively Impact ARM Industry,” Inside ARM (Feb. 4, 2010) available at http://www.insidearm.com/daily/debt-collection-news/debt-collection/proposed-fcc-change-to-tcpa-would-negatively-impact-arm-industry/ (last visited Dec. 4, 2012).
19. See FCC 12-21, Section III, A(1), ¶28 (2012).
21. See FCC 12-21, Appendix C, Section B, ¶7 (2012).
22. See Federal Communications Commission, supra.
24. See FCC 12-21. Section III, D (2012).
26. See John Hechinger, “Student-Loan Collection Targeted for Overhaul in Congress,” Bloomberg News (Dec. 4, 2012) available at http://www.bloomberg.com/news/2012-12-04/student-loan-collection-targeted-for-overhaul-in-congress.html (last visited Dec. 6, 2012); Abby Rogers, A new Proposal Would Force Student Debt Collectors to Back of Struggling Graduates, Business Insiders (Dec. 5, 2012) available at http://www.businessinsider.com/rep-tom-petris-loan-repayment-plan-2012-12 (last visited Dec. 6, 2012).
35. See Andrew Martin, “Debt Collectors Cashing In on Student Loans,” The New York Times (Sept. 8, 2012) available at http://www.nytimes.com/2012/09/09/business/once-a-student-now-dogged-by-collection-agencies.html?pagewanted=all&_r=0 (Last Visited Dec. 6, 2012).
36. See Id.