Every so often, the extent of state laws providing for the licensing of collection agencies needs to be re-examined. As every state, including two of the most prominent states, California and New York, historically had not licensed collection agencies,1 the state licensing of collection agencies has not been given as much attention as has been given to the state licensing of other consumer finance activities. This changed in September 2020, when the California legislature, shortly before adjournment, enacted Senate Bill 908 to license debt collectors under a new law called the Debt Collection Licensing Act (the “DCLA”).2
Although the DCLA was enacted in 2020, the licensing obligation did not take effect the first of this new year, as is often the case with new laws enacted in a legislature’s session. Pursuant to this California legislation, the debt collector licensing obligation and the enforcement authority of the Commissioner of the Department of Financial Protection and Innovation (the “DFPI”)3 over debt collectors engaging in collection activities in California do not take effect until January 1, 2022.4
The DCLA does not grant a grace period for a debt collector to operate without a license after January 1, 2022. The DCLA, however, expressly provides that the Commissioner of the DFPI “shall allow any debt collector that submits an application prior to January 1, 2022, to operate pending approval or denial of the application.”5 Given this provision of the DCLA, non-exempt entities engaged in collection activity in California should closely monitor the progress of state regulators in creating and publicly posting an application for a debt collector license, as submitting an application to the DFPI before January 1, 2022, would ensure the entity’s continued authorization to perform California debt collection activity beyond the effective date of the January 1, 2022 licensing obligation if the issuance of the debt collector license is delayed or the application raises unexpected scrutiny for the applicant.
The DCLA imposes a new licensing obligation in California on debt collectors,6 with the term “collection agency” defined as “a business entity through which a debt collector or an association of debt collectors engage “in debt collection.”7 The term “debt collector” under the DCLA is broadly defined to reach “any person who, in the ordinary course of business, regularly, on the person’s own behalf or on behalf of others, engage in debt collection.”8 The term “debt collection” means “any act or practice in connection with the collection of consumer debt.”9 The term “consumer debt” or “consumer credit” means “money, property, or their equivalent, due or owing, or alleged to be due or owing, from a natural person by reason of a consumer credit transaction.”10 The term “consumer credit transaction” means “a transaction between a natural person and another person in which property, services, or money is acquired on credit by that natural person from the other person primarily for personal, family of household purposes.”11 Further, the term “consumer debt” includes “charged-off consumer debt” as defined in Section 1788.50 of the California Civil Code.12 The term “charged-off consumer debt” under the California Civil Code means “a consumer debt that has been removed from a creditor’s books as an asset and treated as a loss or expense.”13 As the DCLA expressly applies to collecting on charged-off consumer debt or consumer credit, the DCLA would not impose a licensing obligation on those collecting on commercial debt, as the collection agency licensing laws in many other states do.14
Further, the DCLA expressly provides that “the term consumer debt includes a mortgage debt.15 Although defining consumer debt to reach mortgage debt greatly broadens the reach of the DCLA, the overall licensing obligations in California are not significantly broadened, as California has long licensed those who service residential mortgage loans under the California Residential Mortgage Lending Act (“CRMLA”) and the California Real Estate Law (“REL”), with such licensees being exempt from the DCLA. Specifically, subject to certain exceptions involving violations of the state’s Rosenthal Fair Debt Collection Practices Act (the “Rosenthal FDCPA”), the DCLA provides for certain exemptions from the entire DCLA, as the text of the DCLA states that “this division [which is Division 25, providing for the DCLA] shall not apply to,” among others, a depository institution as defined in section 1420 of the California Finance Code, and (i) a license under the California Financing Law (“CFL”), (ii) a licensee under the CRMLA, or (iii) a licensee under the REL.16
As a CRMLA or REL licensee has the authority to service residential mortgage loans, whether such loans are performing or delinquent, and a CFL licensee can service the loans it makes, such licensees would be exempt from needing a collection agency license under the DCLA to collect on delinquent residential mortgage loans. Based on the plain text of the DCLA, it also would appear that such licensees are exempt from the entire DCLA and therefore would not need a collection agency license under the DCLA to collect on charged-off non-mortgage consumer loans.
We do not see a basis by which DFPI regulators can limit the reach of this exemption for such licensees under the DCLA. However, we do not know whether DFPI regulators can limit the reach of this exemption under some other California law that they administer. As we have not examined the full authority of the DFPI outside the DCLA, the reach of this exemption from the DCLA is not 100 percent clear. DFPI regulators should address the exemption from the licensing obligation of the DCLA afforded a licensee under each of these three other California licensing laws.
The DCLA further provides that the term “debt collector” “includes a debt buyer as defined in section 1788.50 of the California Civil Code.”17 Under this section of the California Civil Code, the term “debt buyer” means “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-at-law for collection litigation.”18 Section 1788.50 of the California Civil Code further provides that “debt buyer” does not mean a person or entity that acquires a charged-off consumer debt incidental to the purchase of a portfolio predominantly consisting of consumer debt that has not been charged off.19 Under this section of the California Civil Code, the term “charged-off consumer debt” is defined as set out above in the DCLA.20 With California licensing debt buyers under the DCLA, California has adopted the view held by other states that debt buyers should be licensed.21
The DCLA does not provide a clear sense of whether a debt collector licensing obligation will arise if an entity contracts to purchase performing obligations, but some of the obligations become charged off before the purchase is completed. Arguably, as the DCLA expressly provides that it does not apply to the acquisition of charged-off consumer debt incidental to the purchase of a portfolio of performing debt, the DCLA should not apply to a person or entity that contracts to purchase performing obligations, but some of the obligations are charged off before the purchase is consummated. Moreover, as the definition of debt buyer is based on a person or entity that is regularly engaged in the business of purchasing charged-off debt, an occasional purchase of charged-off consumer or mortgage debt should not require a collection agency license.
However, the licensing obligation under the DCLA applies to collecting on consumer debt of others or for one’s self. Therefore, although the purchase of charged-off debt would not trigger a licensing obligation if the purchase of such charged-off debt (i) was incidental to the purchase of performing obligations or (iii) was not conducted regularly, collecting on the charged-off debt held in portfolio would appear to still require a collection agency license under the DCLA. DFPI regulators should be strongly encouraged to address this inherent inconsistency in the DCLA in any regulations that will be promulgated.
The DCLA does not provide that it would recognize an entity licensed as a collection agency under the collection agency law of another state under some reciprocity principle honored by other states. Unlike the collection agency licensing laws of most other states, California will not allow other jurisdictions in the state to enact debt collector licensing laws, as the DCLA expressly provides that “[n]o county, city, or other political subdivision within this state shall require a debt collector to be licensed or to register as a debt collector.”22 However, licensed debt collectors doing business in California will still need to conform their practices to another California law(s).
Prior to this requirement for licensing, California has long regulated the practices of debt collectors under the Rosenthal FDCPA.23 Many of the requirements and restrictions of the Rosenthal FDCPA are similar to those imposed under the federal Fair Debt Collection Practices Act. The legislation creating the DCLA did not repeal the Rosenthal FDCPA, but rather, amended the Rosenthal FDCPA to further restrict the manner in which debt collectors can go about their business, as it imposes certain additional practice obligations on debt collectors and “debt buyers.” Among other things, Senate Bill 908 amends the Rosenthal FDCPA to (i) further regulate the manner in which debt collectors can collect or attempt to collect a consumer debt, (ii) dictate the manner and content in which debt buyers can communicate with consumers in collecting a consumer debt, and (iii) authorize the Commissioner of the DFPI to use the authority to issue orders and claims for relief in connection with violations of the Rosenthal FDCPA.24
Further, as you may have read in one of our Client Alerts, in 2020, California also enacted the California Consumer Financial Protection Law (“CCFPL”).25 An entity licensed as a debt collector under the DCLA will be subject to the CCFPL, but such a DCLA licensee will not need to separately register under the CCFPL.26
As we have indicated above, when the DCLA goes into effect on January 1, 2022, it would extend the collection agency licensing obligation to collecting on charged-off consumer loans or mortgage loans. Over the course of 2021, DFPI regulators are expected to provide guidance on the application and other information that will need to be filed to obtain a license as a California debt collector. Indeed, the DCLA expressly requires the Commissioner to take all necessary actions to be able to commence licensing by January 1, 2022.27 Among other requirements, those entities seeking a debt collector license will need to submit an application and pay an application and an investigation fee.28 The regulations that will be issued should set forth all of the requirements that will need to be met to obtain a debt collector license.
The DFPI has indicted publicly that it expects to publish proposed rules for comment in the first quarter of 2021, and begin accepting applications for debt collector licenses in the late summer or early fall of 2021, so as to be in a position to issue licenses by the end of 2021.29 Some, if not all, of the license application filings likely will be made through the Nationwide Multistate Licensing System and Registry (“NMLSR”), as the DCLA provides that the Commissioner “may require an applicant for a license to make some or all of the filings through the NMLSR.”30 For those entities licensed through the NMLSR, it should help expedite the California debt collector license application process, but DFPI regulators may impose additional requirements that an entity licensed through the NMLSR may not have had to fulfill. You may want to review the new California DCLA to more fully understand its licensing obligations and the extent of its practice provision.
Stay tuned to further Client Alerts from our Firm as regulations are proposed. We intend to submit comments to the DFPI once proposed regulations are published to point out certain of the issues we raised in this Client Alert. If you have additional questions, need any help navigating the DCLA, its licensing obligation or practice provisions, or if you would have us raise any issues with the DFPI on your behalf, please call on us, as we are sure that we can provide some guidance. However, if you prefer, should we not know the answer, we can also pose your question to the DFPI on a client anonymous basis.
1 Approximately two-thirds of the states and a few cities license collection agencies. Delaware, Georgia, and Pennsylvania, among other states in addition to New York, still do not license collection agencies.
2 In each of the last few years, legislation has been introduced in New York to license collection agencies, but for one reason or another, the New York legislature has not seen its way clear to license collection agencies. Entities engaged in collection activities in New York, however, are not “home free,” as the cities of Buffalo, Yonkers, and New York City license collection agencies. With California having enacted the DCLA, New York regulators are expected to move forward with a new push in 2021 to provide for the statewide licensing of collection agencies doing business in New York.
3 The name of the Department of Business Oversight (“DBO”) was changed to the Department of Financial Protection and Innovation with the September 2020 enactment of Assembly Bill 1864, the California Consumer Financial Protection Law, creating the California Financial Protection Bureau. The DBO was formerly named the Department of Corporations. This DFPI “houses” both the California Residential Mortgage Lenders Act and the California Financing Law.
4 Cal. Fin. Code § 100000.5(a).
5 Id. § 100000.5(c). As the DCLA does not clarify how complete the application must be to allow the applicant to operate pending the approval or denial of the application, Department regulators must clarify what constitutes an application for purposes of this provision.
6 Id. § 100001(a).
7 Id. § 100002(c).
8 Id. § 100002(j).
9 Id. § 100002(i).
10 Id. § 100002(f).
11 Id. § 100002(e).
12 Id. § 100002(f).
13 Cal. Civil Code § 1788.50(2).
14 Of the states that license collection agencies, a surprisingly large number apply the licensing obligation to those that collect on commercial debt obligations. Indeed, Florida has a separate commercial debt collection agency licensing law in addition to its consumer debt collection agency licensing law.
15 Cal. Fin. Code § 100002(f). Unlike most state collection agency licensing laws, the DCLA expressly provides that it applies to mortgage debt, which would include such debt that is charged off as further defined in the DCLA. While the collection agency laws of many other states are applied to reach those collecting on delinquent or defaulted residential mortgage loans, the collection agency licensing laws of other states do not typically define consumer debt to expressly include mortgage debt.
16 Id. § 100001(b)(1).
17 Id. § 100002(j). Most state collection agency licensing laws were enacted years before the enactment of the DCLA and do not seek to license those who purchase delinquent debt. However, over the last few years, one or two states each year amend their collection agency licensing law to license those who purchase delinquent debt. A few states that now license debt buyers under their collection agency licensing law include Connecticut, North Carolina, Illinois, and Washington.
18 Cal. Civil Code § 1788.50(1).
20 Id. § 1788.50(1), (2).
21 In addition to California, a few other states that license debt buyers as collection agencies include Arkansas, Illinois, and North Carolina.
22 Cal. Fin. Code § 100000.7. As indicated above in endnote 2, Buffalo, New York; New York City; and Yonkers, New York license collection agencies operating within their borders. Chicago, Illinois also licenses collection agencies.
23 California regulates debt collectors and their practices under the Rosenthal FDCPA (see Cal. Civ. Code, tit. 1.6C §§ 1788 et seq.), but the Rosenthal FDCPA does not provide for the licensing of debt collectors, and it was not amended to add a licensing component. The Rosenthal FDCPA will continue to exist and regulate the practices of debt collectors in California. In addition to the Rosenthal FDCPA, California also has a Fair Debt Buying Practices Act. Cal. Civ. Code, tit. 1.6C.5.
24 Cal. Civ. Code §§ 1788.11, 11788.52, amended by Senate Bill 908.
25 See our Client Alerts of (i) October 13, 2020, in which we discussed the new CCFPL and (ii) November 6, 2020, in which we discussed certain exemptions from the CCFPL.
26 See the December posting from the California DFPI at https://dfpi.ca.gov/ccfpl-for-businesses/ (viewed 1/5/2021)
27 Cal. Fin. Code § 100000.5(b).
28 Cal. Fin. Code §§ 100007–100009.
29 See the December posting from the California DFPI at https://dfpi.ca.gov/ccfpl-for-businesses/ (viewed 1/5/2021)
30 Id. § 100006.3(a).
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