New York State Consumer Credit Collection Case

In response to the housing crisis in 2008, the New York State courts issued a series of rules designed to limit the ability of lenders, servicers and other financial institutions from obtaining default judgments of foreclosure on real property. Sensing a new crisis may be in the offing – creditors or debt collection agencies obtaining default judgments in consumer credit situations – by Administrative Order of the Chief Administrative Judge of the New York State Unified Court System dated September 15, 2014, the New York State courts have adopted reforms effective October 1, 2014 (with exceptions noted herein) in consumer credit collection cases to prevent unwarranted default judgments and ensure a fair legal process. Specifically, the reforms include: (1) requiring creditors to submit affidavits based on personal knowledge that meets the substantive and evidentiary standards for entry of a default judgment under New York law; (2) requiring that an additional notice of a consumer credit action be mailed to debtor-defendants located outside New York City; and (3) providing unrepresented debtor-defendants with additional resources and assistance.

The amended rules apply to the Uniform Civil Rules for the Supreme Court and the County Court, Uniform Civil Rules for the New York City Civil Court, Uniform Civil Rules for the City Courts Outside the City of New York, and the Uniform Civil Rules for the District Courts.¹

The amended rules require creditors to submit certain form affidavits when seeking a default judgment in a consumer credit transaction, defined as “a revolving or open-end credit transaction wherein credit is extended by a financial institution, which is in the business of extending credit, to an individual primarily for personal, family or household purposes, the terms of which include periodic payment provisions, late charges and interest accrual.” Specifically excluded are debts incurred in connection with medical services, student loans, auto loans or retail installment contracts.

These amendments are intended to eliminate the practice of “robosigning” affidavits and to ensure that default judgments are based on non-hearsay allegations and personal review of debtor files. Creditors are now required to submit specific documentation, such as the original credit agreement,² in support of default judgment applications to ensure that there is legally sufficient proof of the validity and ownership of the debt at issue.

The amended rules contemplate two types of lawsuits – suit by the original creditor³ and suit by the debt buyer.⁴ Together with any other affidavits required under New York law, the following affidavits would be required.

A. Original Creditor Actions

1) Affidavit of Facts by Original Creditor.

• a) Facts constituting the asserted cause of action: name of debtor, last four digits of account, date and terms of original agreement, date and amount of last payment;
• b) If the complaint asserts an account stated cause of action, a statement indicating that an accounting was sent to the debtor and the debtor retained the accounting without objection;
• c) Summary of amount debtor allegedly owes, including an itemization of how the amount was calculated based on principal, interest and fees and charges; and
• d) An accurate copy of the original agreement governing the account upon which the action is based, and any amendments thereto; the bill of sale or written assignment of the account (where applicable); and relevant business records of the original creditor that set forth the name of the defendant, the last four digits of the account number, the date and amount of the charge-off balance, the date and amount of the last payment, the amounts of any post-charge-off interest and post-charge-off fees and charges, less any post-charge-off credits or payments made by or on behalf of the defendant, and the balance due at the time of sale or assignment.

2) Affidavit of Non-Expiration of Statute of Limitations. An affidavit from plaintiff or plaintiff’s counsel setting forth where and when the cause of action accrued, the statute of limitations for New York and any other jurisdiction where the cause of action accrued, and stating that after reasonable inquiry the plaintiff has reason to believe that the statute of limitations has not expired.

B. Debt Buyer Actions

1) Affidavit of Facts and Sale of Account by Original Creditor. An affidavit based on personal knowledge from the original creditor setting forth:

• a) Facts constituting the asserted cause of action;
• b) If the complaint asserts an account stated cause of action, a statement indicating that an accounting was sent to the debtor and the debtor retained the accounting without objection;
• c) Statement that the debt was assigned to the debt buyer (or intermediary debt buyer) and date of assignment;
• d) Statement that records specific to the debt at issue were created and maintained in the ordinary course of the original creditor’s business and subsequently transferred to the debt buyer (or intermediary debt buyer);
• e) Statement of the amount owed to the original creditor at the time of assignment; and
• f) An accurate copy of the original agreement governing the account upon which the action is based, and any amendments thereto; the bill of sale or written assignment of the account (where applicable); and relevant business records of the original creditor that set forth the name of the defendant, the last four digits of the account number, the date and amount of the charge-off balance, the date and amount of the last payment, the amounts of any post-charge-off interest and post-charge-off fees and charges, less any post-charge-off credits or payments made by or on behalf of the defendant, and the balance due at the time of sale or assignment.

2) Affidavit of Purchase and Sale of Account by Debt Seller. An affidavit based on personal knowledge from any debt seller who owned the debt prior to the plaintiff, setting forth:

• a) Date that debt seller purchased the account and from whom it was purchased;
• b) Date that debt seller sold the account and to whom it was sold;
• c) Amount owed by the debtor at the time of sale, itemized by the amount owed at time of purchase, plus post-purchase interest, fees and charges, less post-purchase payments by the debtor; and
• d) Statement that records pertaining to the debt were maintained in the ordinary course of the debt seller’s business and such records were subsequently transferred along with the debt to the debt buyer.

3) Affidavit of Facts and Purchase of Account by Debt Buyer Plaintiff. An affidavit based on personal knowledge from plaintiff’s representative setting forth:

• a) Facts constituting the asserted cause of action;
• b) Date that debt buyer purchased the account and from whom it was purchased;
• c) Summary of the complete chain of title of the debt;
• d) Summary of the amount allegedly owed to the debt buyer, itemized by the amount owed at the time of purchase, plus post-purchase interest, fees and charges, less post-purchase payments by the debtor; and
• e) Accurate copies of all written assignments of the account shall be attached.

4) Affidavit of Non-Expiration of Statute of Limitations. An affidavit from plaintiff or plaintiff’s counsel setting forth where and when the cause of action accrued, the statute of limitations for New York and any other jurisdiction where the cause of action accrued, and stating that after reasonable inquiry the plaintiff has reason to believe that the statute of limitations has not expired.

The amended rules were effective October 1, 2014, with one major exception: the affidavits listed in debt buyer actions, where the debt was purchased from an original creditor before October 1, 2014, will not be required on default judgment applications until July 1, 2015. However, effective July 1, 2015, the affidavits required in debt buyer actions will be required in all such actions notwithstanding that the debt was purchased from an original creditor before October 1, 2014. This delay in implementation of the rules is to allow the creditor community time to gather its files and ensure the proper paper trail showing chain of title from the inception of the incurrence of the consumer debt is in place, so that default judgment can be obtained against a consumer debtor. It is therefore incumbent on the original creditor, the debt buyer and any intermediary buyer of the debt to both generate and maintain copies of the original credit agreement, all statements issued to the consumer, all charge-off letters, and all assignments of the loan.

The new rules require that a complete and accurate chain of title be established by a creditor suing to recover on a consumer debt. To accomplish this, original documentation may be required by the court. A single missing link in the chain of title, or the inability to produce the original debt agreement or assignments, can adversely affect attempts to collect on the consumer debt in question. It is therefore incumbent upon the creditor community to ensure that it maintains complete and accurate records of consumer credit transactions, as the burden of proof in New York has been elevated. For original creditors, this requires complete documentation of the transaction and maintenance of the related files in a central repository. For debt buyers, this requires insistence on reviewing the complete transaction file before purchasing any consumer debt from an original creditor. Failure to perform these tasks will undermine, or perhaps preclude, collection on a delinquent or defaulted consumer debt.

For More Information

If you have any questions regarding this Client Alert, please contact Constantine D. Pourakis at 212.537.0409 or the Stevens & Lee attorney with whom you normally consult.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.

¹ 22 NYCRR Part 202, 22 NYCRR Part 208, 22 NYCRR Part 210 and 22 NYCRR Part 212, respectively.
² “Credit Agreement” is defined as the “contract or other document governing the account provided to the defendants evidencing the defendant’s agreement to the debt, the amount due on the account, the name of the original creditor, the account number, and the name and address of the defendant. The charge-off statement or the monthly statement recording the most recent purchase transaction, payment or balance transfer shall be deemed sufficient evidence of a credit agreement.”
³ An “original creditor” is defined as the “financial institution that owned the consumer credit account at the time the account was charged off, even if that financial institution did not originate the account. Charged-off consumer debt means a consumer debt that has been removed from an original creditor’s books as an asset and treated as a loss or expense.”
⁴ A “debt buyer” is defined as a “person or entity that is regularly engaged in the business of purchasing charged-off consumer debt for collection purposes, whether it collects the debt itself, hires a third party for collection, or hires an attorney for collection litigation.”