Massachusetts First State to Require Creditors to Validate Consumer Debts

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David Bizar

On March 2, 2012, the Massachusetts Attorney General published onerous new consumer debt collection practice regulations, deeming their violation to be an unfair trade practice. These regulations, which became effective upon publication, purport to govern every business and person nationwide who engages in collecting a consumer debt (defined as any debt resulting from a purchase, lease or loan of goods, services or real or personal property or for a loan of money obtained for personal, family or household purposes, whether or not reduced to a judgment) from a person located within Massachusetts.

A copy of the regulations is available here.

The rules are extraordinary in that, among other things, they impose validation and verification requirements on creditors collecting their own debts, rather than just on third party debt collectors or purchasers of defaulted debt as under the federal Fair Debt Collection Practices Act (FDCPA).

Specifically, 940 CMR 7.08 requires that during or within 5 days of its initial communication with a Massachusetts debtor in connection with the collection of a consumer debt that has become more than 30 days past due (unless a different period is agreed to by the debtor), the creditor (defined to mean any person or entity and their agents, servants, employees or attorneys, or a buyer of a delinquent debt who hires a third party or an attorney to collect it) must provide the debtor with (a) the amount of the debt; (b) the name of the creditor to whom the debt is owed; (c) a statement that unless the debtor, within 30 days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the creditor; and (d) a statement that if the debtor notifies the creditor in writing within 30 days after receipt of this notice that the debt, or any portion thereof is disputed, the creditor will obtain verification of the debt and provide the debtor, or an attorney for the debtor, additional materials.

If the debtor or the debtor’s attorney notifies the creditor in writing within the 30-day period that the debt is disputed, the creditor must cease collection of the debt until the creditor verifies the debt and provides the debtor or any attorney for the debtor with copies of: (a) all documents, including electronic records or images, which bear the signature of the debtor and which concern the debt being collected; (b) a ledger, account card, account statement copy, or similar record, whether paper or electronic, which reflects the date and amount of payments, credits, balances, and charges concerning the debt, including but not limited to interest, fees, charges or expenses incidental to the principal obligation which the creditor is expressly authorized to collect by the agreement creating the debt or permitted to collect by law; (c) the name and address of the original creditor, if different from the collecting creditor; and (d) a copy of any judgment against the debtor. If the creditor does not possess, have custody of, or control these materials, the creditor must cease collection of the debt until the creditor has made reasonable efforts to obtain them and provide them to the debtor.

The validation requirement poses substantial compliance challenges. Although “conduct which is not the collection of debts” is excluded from coverage (940 CMR 7.02), the regulations do not define what conduct constitutes or does not constitute the collection of debts. For example, is the validation requirement triggered when a creditor sends a monthly billing statement which requests payment to a Massachusetts debtor on a past due account? Does a creditor commit an unfair trade practice when it fails to provide a validation notice after a debtor’s initiation of the initial communication in connection with the collection of a past due debt with any one of the creditor’s employees, agents or attorneys?

Also, among other requirements and prohibitions, the regulations limit the number or telephone calls or text messages that a creditor may send to a Massachusetts consumer to two communications in each 7 day period for each debt, and to the hours of 8:00 a.m. and 9:00 p.m. Eastern. 940 CMR 7.04(f) & (g). They deem a creditor’s stating that it will take any action, including legal action, that it does not actually take or attempt to take to be an unfair trade practice, unless an additional payment or new agreement to pay has occurred within the stated time period. 940 CMR 7.04(m). They provide that it is an unfair trade practice to fail to disclose the telephone number and office hours of the creditor or his agents on all written communications with the debtor. 940 CMR 7.07(22). They impose a number of limitations regarding contact with other persons living in the debtor’s home and third parties. 940 CMR 7.05, 7.06. And they prohibit a creditor from collecting or attempting to collect from any person payment of a debt that the creditor knows or has reason to know is time-barred, or from seeking or obtaining from any person an admission, affirmation, acknowledgement of a new promise to pay, or any waiver of legal rights or defenses with respect to such a debt, unless the creditor discloses in a prescribed format that the debt may be unenforceable through a lawsuit because the time for filing suit may have expired, and that the debtor is not required by law to do what the creditor is requesting. 940 CMR 7.07(24).

David M. Bizar is a partner in the Boston office of Seyfarth Shaw LLP.  Mr. Bizar represents national and federal savings banks, financial services companies and other businesses in high-stakes consumer financial services disputes in the courts and before government authorities challenging the legality of their products and services, corporate practices and regulatory adherence.

 

Continuing the Discussion

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  • avatar Adam Parks says:

    Maybe if they make Massachusetts more restrictive they can push out the rest of the businesses that still reside there… Having grown up in MA I can’t even count how many business left the state for New Hampshire because of the restrictions the state government put on their businesses.

  • avatar jmapes says:

    I was kind of hoping they’d go all the way with their restrictions. I think a state needs to make a mistake and really get “spanked” by their businesses and residents losing their ability to gain credit to teach them a lesson. Shut down creditors methods to collect then you shut down credit or significantly increase the price for it to those that are honest borrowers. I saw similar odd things in other states and they either learn or they lose. It’s sad but justice is blind and legislation can sometimes be down right drunk. Take California for instance… “Smoking is a mortal sin but who said lighting up a joint was ever a bad thing…” — That’s a perfect example of legislation that’s been smoking something…

    I met a former Obama member working up in Maryland. They told me they moved into private after being disheartened by working with the banks under the Obama administration to try to keep people in their homes. The subject came up because he worked with one of my former employers. I asked him what the government was offering to encourage/assist the lenders in helping people stay in their homes. His response was, “Well, nothing really. We were there to help them do the right thing.” This type of expectation of gifts from the business industry is really prohibitive to the competitive of our American businesses in a global world.

  • avatar DONALD DALY says:

    I worked in Mass for two years, and left. The organizations that can ‘adjust’ their pricing to cover the state restrictions will survive quite well. The legisatures will pat each other’s backs while the consumers pay through their noses for the privilege of living in a state that condones and seemingly encourages the complete lack of responsibilty to honor a contract. Perhaps this is how to encouage people with less than good intentions to move there. What is truly amazing is that this is the birth place of TAXATION WITHOUT REPRESENTATION, but I guess if it’s called the cost of doing business it’s o.k.

  • avatar Lavy says:

    I speechless ans stunned but I remember blogging about this a year ago, if we don’t police ourselves, looks like someone else will.

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