The NY Department of Financial Services (DFS) and the NY Unified Court System (UCS) have both recently proposed new laws and regulations that would impose more control over debt collection attorneys and the industry within NY State.
Scott E. Wortman, Esq., Partner with Mel S. Harris and Associates, LLC, and author of the NL white paper on NY State Debt Collection Laws, told NL, “There is definitely a link between the UCS’s attempts to promote positive and realistic change, and the efforts undertaken by the DFS to govern this already hyper-regulated and scrutinized industry, based entirely on unsubstantiated embellishments in support of a false narrative.”
Department of Financial Services
According to Mr. Wortman, “Within the DFS proposed rulemaking, there are inherent contradictions and misuses of various already fully conceptualized terms and concepts that unfortunately demonstrate a lack of clarity and understanding of this industry and of the complexities related to a heavily enforced regulatory framework already in place.”
Announced on July 25th, the proposed DFS regulations are currently in review. Comment letters have been submitted including one from a NYC group of attorneys, and also from various trade groups. The DFS is seriously considering some of the proposed amendments to the rules from the industry. Mr. Wortman believes that broad exceptions are required. He personally takes exception to many of the following regulations in the proposed rulemaking, including but not limited to:
- Regulating terms in settlement agreements, which is not only inconsistent with judicial independence and basic freedom of contract principles, but it also potentially infringes on a lawyer’s duty-bound responsibility to zealously advocate for a respective client. This includes shaping agreements beyond basic monetary provisions.
- Providing the consumer with confusing written information about the possibility of litigation, even if the settlement takes place after the filing of a lawsuit.
- Misapplying the term “default” by broadening and equivocating the term to include a number of possible dates, including that of charge-off.
- Ambiguously requiring an itemized accounting of the debt in all circumstances without providing the necessary dates for such calculation and without taking into account contradictory existing regulations under the National Banking Act and the Truth in Lending Act.
- Imposing an immediate and unprecedented regulatory effect (thereby creating retroactive requirements on existing cases) irrespective of the fact that many of the proposed regulations are a considerable and substantive departure from prior federal, state and municipal regulations.
- Misinterpreting years of jurisprudence by confusing the 30-day period for a consumer to request validation prescribed by the FDCPA, under 15 U.S.C. § 1692g, to instead stand for the proposition that comprehensive validation must be provided within 30 days or all collection activity must cease, irrespective of account disposition. This seemingly includes active litigation, which is inherently incompatible with the disclosure standards under Article 31 of the CPLR.
The DFS reforms are proposed via the first use of the DFS’s “gap authority.” This “gap authority,” which was included in the law that Governor Cuomo signed in 2011 creating the DFS, gives the DFS the ability to regulate and enforce rules against previously unregulated providers of financial products and services that could otherwise fall through the cracks and hurt consumers.
However, a precedent in favor of attorneys was set by the federal law suit, Eric M. Berman, P.C. v. City of New York. “New York courts have recognized that…. attorneys are officers of the court, and ‘their professional conduct is subject to the supervisory and corrective powers’ of the state judiciary. Consequently, the regulation of attorneys’ conduct is not within the police power of municipalities. Rather, when an attorney contacts a debtor on behalf of a client, she acts as an officer of the court, and is subject to the supervision and control of the New York judiciary. With respect to attorneys authorized by state law to practice in the courts of New York, the DCA (of which the DFS is a part) can have no role as gatekeeper.”
The Berman decision, which is being appealed, goes on to state, “While the Court agrees with defendants that there may well be some activities, like driving a taxi cab or operating a fruit stand, that are so unrelated to the practice of law that they may be regulated by municipalities, even if performed by an attorney, there can be no material factual dispute that the activities Local Law 15 seeks to regulate lie far from this line.” In other words, administrative rulemaking from a governmental agency having nothing to do with the judiciary does not have the right to regulate attorneys in their practice of law.
Mr. Wortman adds, “In addition to all the heavily enforced laws already regulating this industry, NYS attorneys are governed by the NYS Judiciary Law, the Appellate Divisions of State Supreme Court and the Disciplinary and Grievance Committees. Additionally, under the Professional Rules of Conduct, a lawyer is responsible for the conduct of a non-lawyer (including staff) employed or retained by or associated with the lawyer. Accordingly, these proposed regulations are unwarranted, excessive and without merit.”
Unified Court System
The reforms officially released Sept. 30th by the UCS could more realistically regulate attorney conduct. The UCS is the proper governing body, going through appropriate methods to propose these reforms. The state legislature typically takes these proposals very seriously. Drawn up by the Advisory Committee on Civil Practice, they recommend amendments to the Uniform Rules for the New York City Civil Court and Uniform Civil Rules for Courts outside New York City, relating to adoption of statewide forms for use in consumer credit action seeking award of a default judgment.
Mr. Wortman says, “The proposed amendments, which expand upon CPLR § 3215, are comprehensive, and although they will at first be difficult to comply with, they provide uniformity and consistency throughout the court system by promoting positive changes while balancing the rights of all parties involved in a consumer credit transaction. As opposed to the DFS proposal, UCS seems to recognize that this is a credit and market based economy, rather than a political one, and is realistic in protecting consumers while at the same time treating charged off debts that are subsequently sold as an asset with value.”
Both the DFS and the UCS are trying to regulate NY debt collection attorney behavior. Mr. Wortman believes, and the Berman case seems to support, that the UCS is doing it in a proper way. Still, DFS already responded to the UCS proposed amendments by stating “The proposed rules could go much further to address the significant debt collection litigation abuses that have a profound impact on New Yorkers and the state court system.” According to DFS, UCS should require further regulations, including: (1) require pre-complaint notification prior to commencing a collection lawsuit; (2) demonstrate proof of service when a debt collector moves for a default judgment; (3) provide consumers an opportunity to vacate a default judgment if a debt collector violates the Court’s rules; and (4) require important information about debts in an affidavit.
Mr. Wortman believes “that the vitriolic statements by DFS against this industry are unjustifiable and the allegations of abuses are without any factual merit.” He adds that “(1) the FDCPA already requires notification under 15 U.S.C. § 1692g; (2) CPLR § 3215(f) requires proof of service on an application for a default judgment; (3) consumers have various procedural vehicles to vacate a judgment on default that is not properly entered; and (4) in regards to an affidavit of merit, the CPLR already requires the creditor to provide proof of the facts constituting the claim.”
We applaud Mr. Wortman for “staying on top” of recent developments in debt collection regulation in the City and State of NY and for sharing his opinions with The National List. We urge all NL Members to do the same in their respective states.
By Marti Lythgoe, NL Editor, and Scott E. Wortman, Esq., Partner, Mel S. Harris and Associates, LLC