A proposal by the New York Department of Financial Services (DFS) would substantially drive up the costs of bringing consumer debt collection actions in the state. The DFS is seeking stronger court rules for obtaining default judgments in debt collection actions than those recently proposed by the state’s Advisory Committee on Civil Practice. The proposal, which would amend the Uniform Rules applicable to New York City Civil Court and courts outside the City, would establish five forms of standard affidavits for use by plaintiffs requesting entry of default judgments in such actions. Comments are due by December 4, 2013.

While applauding the proposed rules as “a positive first step” in its comment letter on the proposal, the DFS stated that “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.” Among other things, the DFS urged the Advisory Committee to adopt the following measures to protect consumers in collection lawsuits:

• Mandatory pre-suit notice that advises the consumer of impending collection litigation and discloses basic information on the debt and the consumer’s rights

• Stronger affidavits to prevent robo-signing, including requiring the affiant not only to attest to “personal knowledge” of the plaintiff’s books and records, but to personal knowledge of the debtor’s records, including the date of charge-off and date of last payment

• “Demonstrable proof of service” by the plaintiff before the entry of a default judgment, such as a global positioning system (GPS) report or time-stamped pictures

• The provision of an “adequate opportunity” to consumers to vacate a default judgment upon a violation of the court’s rules

The DFS claimed that stronger measures are needed because debt buyers allegedly consistently fail to obtain records verifying ownership and the balance owed before obtaining a default judgment. In fact, the DFS claimed that “the collection industry’s litigation strategy… relies on consumers failing to appear in court, or if they do appear, being unrepresented by counsel.” Lastly, the DFS noted that stronger rules governing debt collection litigation would complement the pre-litigation debt collection rules proposed by the DFS in July 2013. (The DFS proposal would impose significant disclosure and other requirements on persons engaged in the collection of consumer debts. For a summary of the proposal, see our prior legal alert).

The DFS’ proposed measures would significantly increase the costs of bringing collection actions in New York. For example, requiring an affiant to have personal knowledge of the individual debtor’s loan records is unprecedented and marks a departure from the traditional business records exception to the hearsay rule.

If New York were to adopt the proposal, creditors and debt collectors could be forced to hire additional staff, since a debtor’s attorney would likely challenge an affidavit executed by an employee who repeatedly signs affidavits in collection cases. Further, the DFS or Attorney General could bring an enforcement proceeding against a debt collector or creditor that repeatedly used the same affiant in collection cases.

Additionally, a requirement of “demonstrative proof of service” in collection cases is particularly burdensome. If the rule were to explicitly set forth what constitutes “demonstrative proof of service,” then creditors and debt collectors would have to incur the additional cost to obtain such proof. Alternatively, if the statute did not define “demonstrative proof of service,” then the issue could be litigated on a case-by-case basis.