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TESTIMONY OF LIZ FIGUEROA Former California State Senator and Member of the Public Citizen Board of Directors The Consumer-Protection Implications of A.B. 2606 Before the Committee on Public Safety of the California Assembly April 1, 2008 Thank you Chairman Solorio, and members of the Committee, for the opportunity to testify here today about the serious consumer-protection implications of A.B. 2606. My name is Liz Figueroa. From 1999 to 2006, I served in the California State Senate, where I represented the 10th District and was Chair of both the Committee on Business and Professions and the Joint Committee on Boards, Commissions, and Consumer Protection. Before that, I was a member of this Assembly for two terms. Defending consumer rights has been one of my top priorities throughout my career in public service. I championed consumer privacy measures; fought for reform in the insurance industry; wrote the landmark law that gave California patients the right to sue negligent HMO’s; helped create the Healthy Families Program, which has provided health care to more than 500,000 California children; and authored the legislation that created California’s “Do Not Call List,” which prompted the creation of the national “Do Not Call” program. I am appearing here today on behalf of the national, non-profit consumer advocacy organization Public Citizen, in my capacity as a member of Public Citizen’s board of directors. * * * Public Citizen strongly opposes A.B. 2606 because it would legitimize the abusive collection practices of so-called “check diversion” companies—practices that have recently been the subject of critical coverage in the Los Angeles Times, the San Jose Mercury-News, the San Francisco Chronicle, and the Santa Rosa Press-Democrat.1 These practices should be restrained, not encouraged. What are check diversion companies? Check diversion companies are private, for-profit debt collectors. Using statutory authority that was originally intended to permit the diversion of real criminal cases, these companies rent out the name and authority of California prosecutors. They use the prosecutor’s name to collect on debt owed to merchants that have received bounced checks. No review by a prosecutor. Participating businesses refer the checks directly to the private company for collection. Upon receiving the checks—and without any review by a prosecutor or a determination that any crime has been committed—the private company mails out a series of collection demands on official prosecutor letterhead, making escalating threats of arrest, prosecution, and jail to coerce payment. Steep collection fees. These companies demand payment of not only the check amount, but of steep collection fees. A low-income California consumer who mistakenly writes a dishonored check for $10 to the local grocery store may be faced with a collection demand for as much as $200. The company keeps the lion’s share of these fees for itself and gives a cut to the prosecutors in exchange for the use of their name and authority. Deceptive conduct. All communication between the programs and consumers occurs through the private company and its commission-earning collection employees. Consumers who telephone the program believe they are speaking with neutral government employees. They are not told that they are speaking with employees of a private company, or that no prosecutor has actually reviewed their case. Consumers who explain that a check was returned because of mistake by the consumer or the bank are told they must pay nonetheless. A.B. 2606 would harm consumers by placing the Legislature’s stamp of approval on these abusive collection practices and eliminate important protections in current law. The bill would also directly interfere with pending federal-court litigation, in which Public Citizen represents a class of California consumers that have been unfairly targeted by the largest check diversion company—American Corrective Counseling Services (ACCS). 1. This bill would encourage private companies to falsely threaten innocent consumers with jail to coerce them into paying collection fees. First, this bill would undermine the existing probable-cause requirement, permit private companies to make prosecutorial decisions, and contribute to the illegitimate criminalization of civil debt collection. 1 A few of these articles are attached as appendix to this written testimony. No Intent to Defraud. Bouncing a check by mistake is not a criminal offense; it is a crime only if done “willfully, with intent to defraud” and with knowledge that insufficient funds are available. (Cal. Penal Code 476). People write dishonored checks for all kinds of reasons. Usually they are low-income consumers or senior citizens who maintain relatively small account balances and are living paycheck to paycheck. These people generally do not intend to defraud merchants but make mathematical mistakes, or errors in their checkbook, or fail to estimate the amount that they have on deposit. Use of Referral Criteria. A.B. 2606, however, would allow “any private entity conducting a diversion program” to determine whether to threaten these consumers with criminal prosecution by applying generic and unspecified “referral criteria,” without any independent review of individual cases by actual prosecutors. Unacceptable Risk of Abuse. This creates an unacceptable risk that the criminal intent requirement will be ignored. The commission-earning employees of private collection firms would be free to (and would have a direct financial incentive to) threaten innocent consumers with criminal prosecution to coerce the payment of steep collection fees. In the United States, we do not threaten to put people in prison simply because they have not paid a debt—whether on a credit card, a mortgage, or an unpaid check. 2. This bill would permit private companies to demand excessive collection fees. In particular, the bill would authorize so-called “class” fees—without limitation, without court involvement, and without regard for a consumer’s ability to pay. A second major problem with A.B. 2606 is that it authorizes increases in what are already excessive and unjustified collection fees. No Statutory Limit, No Hearing, and No Regard for Person’s Ability to Pay. In particular, this bill would allow private check diversion companies to demand, under threat of criminal prosecution, payment of educational “class” fees without any statutory limit whatsoever, and without regard for the person’s ability to pay. No hearing would be required to determine the fee and no court would be involved in making the determination. When the same change with respect to the class fee was proposed and rejected by the Senate in 2006 (A.B. 1022 (Bogh)), the Senate committee analysis concluded that conditioning diversion on the payment of unlimited fees regardless of the person’s ability to pay raised “profound policy implications” and would “create a situation that is ripe for abuse.” There are other problems with this bill as well. The ACLU has objected to the bill because it tramples on Californians’ civil liberties. The Privacy Rights Coalition has raised concerns about the use of consumers’ confidential bank records by these private companies. The AARP has raised concerns about the disproportionate impact on seniors. For all of these reasons, the Committee should reject this misguided bill in its entirety. October 29, 2007 / Page 1 Bad-check writers cite collector’s jail threats Lisa Johnston, of San Jose, poses with letters she received after writing a bad check in 2002. A class action lawsuit claims that the company that wrote the letters, ACCS, is masquerading as prosecutors and threatening people with criminal charges to not only get the checks paid, but to gouge them with exorbitant fees. Johnston is one of the lead plaintiffs in the case. She says the bad check of $41 she wrote was to Goodwill to pay for her kids’ clothes. By Howard Mintz Oct. 29--Short on money and trying to buy clothes for her four children, Lisa Johnston went to a San Jose Goodwill five years ago, writing a check for $41.74 that she hoped would clear her teetering bank account. The single mom’s check bounced. And Johnston, like tens of thousands of other Californians who float bad checks each year, wound up in a prosecutor-backed debt-collection program that has become the subject of a bare-knuckled legal battle in San Jose federal court and other courts around the country. By the time Johnston was done dealing with her bounced check, she'd been threatened with criminal prosecution, forced to pay more than $200 -- five times the original check -- and ordered to attend an eight-hour class designed to keep her from writing bad checks again. Her experience has made her one of the lead plaintiffs in a 6-year-old class-action lawsuit against American Corrective Counseling Services, a private San Clemente company that contracts with dozens of California district attorneys, including Santa Clara County’s, to collect on bad checks. The lawsuit claims the company poses as a local district attorney, intimidating people who've mistakenly bounced checks and making them believe they could go to jail when in most instances it would never happen. “It says they are going to prosecute you,” said Johnston, describing the warning letters she got from the company on official district attorney letterhead. “They really do scare you.” 1985 legislation The case raises questions about whether the company and district attorneys have run amok with a check-collection program that sprouted from 1985 state legislation aimed at ridding local court systems of a flood of small-time bad-check cases. Instead of charging people with misdemeanors or letting the proliferation of bounced checks go unpunished altogether, the state approved a way to get merchants their money back while bad-check writers clear their debts and avoid the courts. Prosecutors, who turned to private companies like American Corrective to handle the task, have a major stake in the outcome because they consider the program an effective tool.

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