Continuing a nationwide trend towards increased regulation of commercial financing, Governor Newsom has signed into law a bill extending the reach of California’s Rosenthal Fair Debt Collection Practices Act (the “Act”) to covered commercial debt (“SB 1286”). The requirements would apply to any debt entered into, renewed, sold, or assigned on or after July 1, 2025.
The Act prohibits debt collectors from engaging in certain unfair or deceptive acts or practices in the collection of consumer debts. It also incorporates by reference most of the requirements of the federal Fair Debt Collection Practices Act (“FDCPA”). Among other things, the Act requires debt collectors to identify themselves when contacting debtors, to refrain from making false representations regarding debts, and to refrain from communicating with certain third parties regarding debts. Notably, unlike the FDCPA and many analogous state laws, the Act applies to creditors when collecting debts on their own behalf in addition to persons collecting debts on behalf of third parties.
Covered commercial debt for purposes of SB 1286 generally means money owing by a natural person under commercial purpose transactions to the same lender, commercial financing provider, or debt buyer of not more than $500,000. A “debtor” includes a natural person who guarantees an obligation related to a covered commercial credit transaction. Accordingly, the Act will be applicable in connection with covered commercial credit extended to a natural person (i.e., a sole proprietor or partnership of individuals) or extended to an entity guaranteed by one or more natural persons.
Commercial financers operating in California will soon be required to comply with a whole host of legal requirements that previously applied only to the consumer space. It is imperative that companies collecting debts from commercial borrowers comprehensively review their collections policies and procedures and any borrower communications to account for the new law.
The scope of the California Debt Collection Licensing Act (the “DCLA”), which requires the licensing of certain persons engaged in the collection of consumer debt, is generally deemed to be the same as that of the Act, subject to proposed regulations that may narrow the scope of the DCLA. However, SB 1286 includes a clarifying provision stating that it is not intended “to create or impose an additional licensing requirement” under the DCLA with respect to covered commercial debt.
In the past few years, states have increasingly sought to regulate the commercial financing industry, most notably by passing disclosure and registration requirements applicable to commercial financing providers. California was a first mover with respect to many of these requirements, and other states followed suit shortly thereafter. Commercial financers and debt collectors operating nationwide may soon face an increasingly complicated regulatory landscape and would be well-advised to track these developments closely.
