With the new collection agency rule of the Consumer Financial Protection Bureau (“CFPB”) having taken effect on November 30, 2021,1 we thought we could help round out your understanding of the collection agency laws by providing an overview of the licensing of collection agencies by the states.
Every state does not license, register, issue permits, or require some kind of “approval-related filing” (herein, a “license”) for collection agencies. Thirty-four states now license collection agencies, with California being the newest state to license collection agencies, upon the California Debt Collection Licensing Act (the “DCLA”) having taken effect on January 1, 2020. Collection agencies doing collection work in California did not need to be licensed by January 1, 2020, but rather, for a collection agency to continue to have the authority to undertake collection efforts in California in 2022, it must submit an application for a collection agency license prior to January 1, 2022.2 California separately regulates collection agency practices under its Robbins-Rosenthal Fair Debt Collection Practices Act.
Of the states that do not license collection agencies, New York is the most significant, but the New York legislature is again considering the licensing of collection agencies, and may yet enact a licensing law in 2022. As of the date of this article, 16 other states do not license collection agencies. Some of the 16 other states that do not license collection agencies include: Alabama, Delaware, Georgia, Kansas, Mississippi, Montana, New Hampshire, Oklahoma, Pennsylvania, South Dakota, and Virginia. Some of the states that do not license collection agencies may regulate collection agencies, despite not requiring that collection agencies obtain a license. We are aware of a few cities that also license collection agencies, including Buffalo, Chicago, New York City, and Yonkers, New York. The District of Columbia does not license collection agencies.
In some of the states that license collection agencies, a licensing obligation is triggered not only by collecting on delinquent debt for others, but also may arise if the entity is purchasing delinquent debt. Among the states whose collection agency licensing obligation applies to license those purchasing delinquent debt are: Arkansas, Colorado, Connecticut, Maine, Maryland, and Washington. For example, under the Colorado Fair Debt Collection Practices Act, the term debt buyer means a person who engages in the business of purchasing delinquent debt or defaulted debt for collection purposes, whether it collects the debt itself, hires a third party for collection, or hires an attorney for litigation to collect the debt.3 In some states, including among others, Hawaii, Idaho, Indiana, Iowa, New Mexico, and North Dakota, a collection agency licensing obligation will apply to a purchaser of delinquent debt only when the purchaser directly collects on the debt purchased. Although New York State does not license collection agencies, Acting Superintendent of Financial Services Adrienne A. Harris has promulgated regulations under certain statutes she enforces that reach debt collectors and debt buyers.4
Banks are typically exempt from many, but not all, state collection agency licensing laws. Banks are exempt from collection agency licensing in certain states, including among other states: Alaska, Arkansas, Hawaii, Idaho, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, North Dakota, Rhode Island, Tennessee, Utah, Washington, and West Virginia. In some states, the exemption from collection agency licensing may apply to a state-chartered bank, as well as a national bank. In certain of these states, the exemption from collection agency licensing for a bank is based on satisfying one or more conditions, including, among other conditions, being FDIC-insured, or authorized to do business in the state.
The exemption from state collection agency licensing for a bank is not universal, as a few state collection agency licensing laws do not provide an express exemption from licensing for a bank. Indeed, in the last few years, a few states repealed an exemption from a collection agency licensing for a state-chartered bank, but not for a national bank as a national bank generally can preempt state licensing laws. Among the states whose collection agency licensing law does not provide an express exemption from licensing for any bank are the collection agency licensing laws of Colorado, Iowa, Louisiana, New Mexico, and Texas. Although the state collection agency licensing law does not provide an express exemption from licensing for a bank in these states, it merits an inquiry with the collection agency licensing regulator in those states to determine if a bank is considered exempt, as regulators in those states may have discretionary authority to exempt a bank from licensing as a collection agency.
Only a handful of states exempt a subsidiary or affiliate of bank from licensing as a collection agency. Among the few states whose collection agency law still provides an exemption from collection agency licensing for a subsidiary or affiliate of a bank are the collection agency licensing laws of Connecticut and Florida. Rhode Island’s Fair Debt Collection Practices Act expressly provides that a subsidiary or affiliate of a bank is not exempt from licensing. If the state mortgage finance licensing law does not exempt a subsidiary or affiliate of a bank from licensing as a mortgage lender or servicer, then it is likely that the state’s collection agency licensing law also will not exempt a subsidiary or affiliate of a bank from collection agency licensing.
Many of the states that license collection agencies also license residential mortgage loan servicers, and provide an exemption from collection agency licensing for an entity that is (i) licensed in the state as a residential mortgage loan servicer, (ii) licensed in the state with the authority to service residential mortgage loans, or (iii) servicing residential mortgage loans.
Connecticut is an example of one state that exempts a residential mortgage loan servicer from collection agency licensing. Connecticut licenses mortgage loan servicers under the Mortgage Servicing part of the Connecticut Code. Under the Mortgage Servicer Part of the Connecticut Code, the term mortgage servicer means (A) any person, wherever located, who, for such person or on behalf of the holder of a residential mortgage loan, receives payment of principal and interest in connection with a residential mortgage loan, records such payment on such person’s books and records and performs such other administrative functions as may be necessary to properly carry out the mortgage holder’s obligations under the mortgage agreement including, when applicable, the receipt of funds from the mortgagor to be held in escrow for the payment of real estate taxes and insurance premiums and the distribution of such funds to the taxing authority and insurance company, and (B) includes a person who make payments to borrower pursuant to the term of a home equity conversion mortgage or reverse mortgage.5 This exemption for an “account servicer” under the Connecticut Collection Act is recognized by Connecticut regulators to apply to a residential mortgage loan servicer. Some other state collection agency licensing laws that exempt from licensing a mortgage loan servicer, or simply a “servicer,” include the collection agency licensing laws of: Arkansas, Colorado, North Carolina, North Dakota, Rhode Island, Tennessee, Washington, and Wisconsin. In some of these states, the exemption from collection agency licensing for a mortgage loan servicer may be limited to the servicing of mortgage loans, and would not apply to collecting payments on other types of loans. Moreover, in some states, a filing may need to be made by a mortgage loan servicer to be considered exempt from the collection agency licensing law of that state. Every state that licenses collection agencies and also residential mortgage loan servicers, however, does not exempt a licensed residential mortgage loan servicer from collection agency licensing.
This Financial Services Alert should provide a sufficient overview of the state collection agency licensing obligation, and of some of the commonly available exemptions from licensing. Should you have any questions about any state’s collection agency licensing obligation, or the statute’s exemptions, we have reviewed the collection agency licensing laws of each state, and are available to answer question about the application of a state’s law to your Company’s activities.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
[1] Two CFPB collection agency rules took on November 30, 2021. One rule covers the Fair Debt Collection Practices Act’s (“FDCPA”) prohibitions on harassment and abuse, fair or misleading representations, and unfair practices by debt collectors when collecting consumer debts. The other rule clarifies the disclosures that debt collectors must provide to consumers, including the disclosure of the existence of debt before reporting such information to a consumer reporting agency.
[2] We wrote about the DCLA on September 14th, when the California Department of Financial Protection and Innovation invited interested parties to submit comments to the DFPI regarding the new DCLA. A copy of our article on the new DCLA can be sent to you upon request. We can help pull an application together for you if you want to have authority to act as a collection agency in California.
[3] See Colo. Rev. Stat. § 5-16-103 (8.5).
[4] See NYDFS proposed amendments to Part 1 of Title 23 of the Official Compilation of Codes, Rules and Regulations of the State of New York.
[5] See the Banking Law of Conn., Title 36a, § 36a-715(3).
[View source.]
