California DFPI Issues Proposed Rulemaking on the Debt Collection Licensing Act

The California Department of Financial Protection and Innovation (DFPI) recently issued an invitation for comments on a proposed second rulemaking to implement aspects of California's Debt Collection Licensing Act (DCLA) along with a draft text of the proposed rule. The DFPI's rulemaking would amend its existing regulations implementing the DCLA (Cal. Fin. Code §§ 100000 et seq.) to add sections addressing the scope, annual report, and bond amount increase provisions of the DCLA. The DFPI is soliciting public comments on the proposed rule until Monday, August 29, 2022.

The enactment of the DCLA marked the first time that California debt collectors were required to obtain a license from the DFPI. The California Legislature enacted the DCLA in September of 2020, and the statute became operative on January 1, 2022. In addition to the authority to enforce the Rosenthal Fair Debt Collection Practices Act (Rosenthal Act) and the Fair Debt Buying Practices Act (FDBPA), the DCLA grants the DFPI the authority to license and supervise debt collectors. The DPFI has completed one rulemaking to implement the DCLA's debt collector license application requirements, and its current proposed rule builds on that foundation.

Proposed Scope of the Licensing Requirement

The text of the DCLA gave many the impression that the statute's scope would mirror that of the Rosenthal Act, which, among others, covers both third-party debt collectors and creditors collecting their own debts. If that were to be the case, then the DCLA's licensing requirement would apply to activities that may only be covered by licensing in a small number of other jurisdictions.

The proposed rule clarifies that "a person engages in the business of debt collection and is required to be licensed" of the DCLA "if the person (A) engages in debt collection for a profit or gain, and (B) the activity is of a regular, frequent, or continuous nature. Advertising or otherwise offering the service of debt collection for remuneration constitutes engaging in the business of debt collection."

The DFPI's proposed rule contains several provisions limiting the scope of the DCLA licensing requirement. The proposed rule would exempt the listed entities below (the exemption does not apply to parent entities, subsidiaries or to affiliates):

1. Original creditors seeking repayment, in its own name, of consumer debts originated by it, unless:
   1. 5% or more of the creditor's annual profits during over the prior twelve months were derived from fees or charges added to the original consumer credit transaction that created the debt,
   2. An average of 10% or more of the creditor's inventory was repossessed at least once over the prior twelve months, or
   3. The creditor has a monthly average of 25% or more of the gross amount of the creditor's accounts receivables being ninety or more days past due of the prior twelve months.
2. A person solely servicing "debts not in default" on behalf of an original creditor is not engaged in the business of debt collection for purposes of licensure under the DCLA. As proposed, "default" means "more than 90 days past due, unless the contract governing the transaction or another law provides otherwise."
3. Healthcare providers, healthcare facilities, and hospitals collecting debts on its own behalf incurred which were incurred in connection with payments for medical or other services or products it provided.
4. Creditors whose debt collection activity is limited only to student loan collection activity regulated by California's Student Loan Servicing Act (Cal. Fin. Code §§ 28100 et seq.).
5. Governmental entities, including local, state, or federal government bodies collecting debt owed to them and public utilities when acting within the scope of their authority.

Furthermore, the proposed rule would add a definitional section affecting the scope of what is considered a "consumer debt" to the DFPI's debt collector licensing regulations. The proposed rule states that neither residential rental debt nor debt owed to a Homeowners' Association, as specified, constitutes consumer debt under the DCLA.

Annual Reports and Record Retention

In addition to the substantive clarifications discussed above, the DFPI's proposed rulemaking would amend its regulations to include new sections addressing annual report and record retention requirements applicable to DCLA licensees. The proposed rule's sections discussing licensees' annual reports would require each licensee's report to include total numbers and dollar amounts from the preceding year related to California debtor accounts collected and attempted to be collected on, California debtor accounts purchased, a licensee's portfolio of California debtor accounts.

The proposed sections amending document retention rules would require licensees to maintain records of all contacts or attempts at contacts with anyone associated with a debtor account, including contacts initiated by the debtor and associated parties. A licensee would also need to maintain information related to the licensee's business and employees, complaints against the licensee, and showing that the licensee is not attempting to collect on settled debts. This information would need to be maintained for at least seven (7) years after the later of:

• The account being settled such that the debtor no longer owes anything;
• The licensee returning the account to the creditor; or
• The account is sold to another party or an end to all collection attempts.

CA Debt Collector Licensee and Applicant Information

Per the DCLA some applicants are allowed to do business while they are waiting to be denied or approved. Information about applicants and licensees is available at https://dfpi.ca.gov/debt-collection-licensee/debt-collectors/.