Last month, the California Department of Financial Protection and Innovation (the "DFPI") published a notice inviting comments for its second rulemaking regarding the rules that will be promulgated under the new California Debt Collection Licensing Act (the "DCLA"). The DCLA was enacted pursuant to Senate Bill 908, and will become operative on January 1, 2022. Although the DFPI has not yet promulgated rules for the DCLA, the DFPI has started to accept applications for a debt collector license.
With California joining the other 30+ states that license debt collectors or collection agencies, and with the New York legislature considering collection agency licensing legislation, it will not be long before all states licensing collection agencies. We, therefore, wanted to bring this invitation to submit comments to the DFPI regarding the DCLA, so you will have an opportunity to make your views known to the DFPI in the newest licensing state before the rulemaking gets underway. The invitation to submit comments is attached. Below we highlight a couple of significant provisions of the DCLA. If you would prefer to remain anonymous in submitting comments to the DFPI, we can prepare comments to address issues of concern to you, and submit them to the DFPI on a client anonymous basis.
The invitation for comments begins by asking if the DCLA sufficiently defines certain terms including "debt," "debt collection," "person," "consumer credit transaction," "debt collector," and "debt buyer," or if those terms are unclear. The term "person" includes a natural person, and any other form of legal organization. See Cal. Fin. Code sec. 100002(p). 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 or household purposes." See id. sec.100002 (e).
The DCLA defines the term "debt collector" to mean any person who, in the ordinary course of business, regularly, on the person's own behalf or on behalf of others, engages in debt collection." Cal. Fin. Code sec. 100002(j). The term "debt collection" is defined as "any act or practice in connection with the collection of consumer debt." Id. sec. 100002(i). The term "consumer debt" is defined broadly to also include "consumer credit," which term is further defined to mean money, property, or their equivalent, due or owning, or alleged to be due or owning, from a natural person by reason of a consumer credit transaction. Id. sec. 100002(f). The term "consumer debt" also includes "charged-off consumer debt," as defined in Section 1788.50 of the Civil Code." See. id. Section 1788.50 of the California Civil Code is part of the state's Rosenthal Fair Debt Collection Practices Act (the "Rosenthal FDCPA").1 Section 1788.50 of the Cal. Civil Code defines "charged-off consumer debt" to mean "a consumer debt that has been removed from the creditor's books as an asset and treated as a loss or expense." Cal. Civ. Code sec. 1788.50.
The term “debt buyer” is not expressly defined in the DCLA, but rather the DCLA defines a “debt collector" to include a "debt buyer" as defined in Section 1788.50 of the Rosenthal FDCPA. As the DCLA defines debt collector to include a debt buyer, the DCLA will regulate the collection activities of debt buyers, as will the Rosenthal FDCPA. The term "debt buyer" under the Rosenthal FDCPA 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." Id. sec. 1788.50. The term "debt buyer" under this statutory provision "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." Id. As the term debt buyer extends to one who is regularly engaged in the business of purchasing charged-off consumer debt for collection purposes, a debt buyer under the DCLA should not include a person who (i) makes an occasional purchase of such charged-off debt, (ii) purchases such debt for investment purposes, or (iii) purchases performing loans.
The term "regularly," which, in part, defines a debt collector, and "regularly engaged," which, in part, defines a debt buyer, are not defined in the DCLA, but should be defined in any regulations, as they are each an integral part of when a licensing obligation arises under the DCLA. We, therefore, urge the DFPI (i) to define "regularly" and "regularly engaged" so there is less confusion as to when a debt collector license is needed, and (ii) to identify when a person can purchase loans or debt without becoming a debt buyer.
"The term consumer debt expressly includes a mortgage debt." Cal. Fin. Code sec. 100002(f). As the term mortgage debt is not defined, it could be applied to any residential mortgage loans or to commercial real estate secured loans made to a natural person, or to other mortgage loan-related products. Given that the types of transactions subject to the DCLA are those involving services or money acquired on credit primarily for personal, family, or household purposes, it is reasonable that the DCLA should not apply to credit used for a commercial purposes, such as commercial mortgage loans. The DCLA does not specifically state as much. As the term mortgage debt is not defined, then to avoid uncertainty, we believe it would be best if the regulations expressly provide that the DCLA does not apply to those collecting on credit that was extended for a commercial purpose.
The DCLA provides for certain exemptions, including that: "this division [being the DCLA] shall not apply to, a person licensed pursuant to Division 9 (commencing with Section 22000) or Division 20, (commencing with section 50000), a person licensed pursuant to Part 1 (commencing with Section 10000) of Division 4 of the Business and Professions Code...." Id. sec. 100001(b)(1) Division 9, commencing with Section 22000 is the California Financing Law (the "CFL"). Division 20, commencing with section 50000, is the California Residential Mortgage Lending Act ("CRMLA"). A person licensed pursuant to Part 1, commencing with Section 10000, of Division 4 of the Business and Professions Code) reaches an entity licensed as a real estate broker under the California Real Estate Law (the "REL"). Given these exemption provisions, an entity licensed under the CFL, CRMLA or the REL is exempt from the entire DCLA. As the DCLA provides an exemption for a CFL, CRMLA or REL licensee, it appears that the intent of legislature is to better ensure that residential mortgage loan servicers are licensed under the CFL, CRMLA or the REL, which for years have licensed, among others, the servicers of residential mortgage loans. An entity licensed as a debt collector under the DCLA is not exempt from licensing of the CFL, CRMLA or the REL, when collecting on mortgage loans, so defining a consumer debt to include a mortgage debt serves to no practical licensing purpose, as those persons collecting on delinquent residential mortgage loans would still need a licensed under the CFL, CRMLA or the REL.
Section 100001(b)(1) of the DCLA also provides for certain other exemptions from the DCLA. Among others, the DCLA provides that "except as provided in paragraph 2, this division shall "not apply to a depository institution, as defined in section 1420." Cal. Fin. Code sec. 100001(b) (1). The term "depository institution" under section 1420 of the California Financial Code includes certain state and federally chartered depository institutions, such as an insured bank, a mutual savings bank, a savings bank, or a credit union, but does not includes their operating subsidiaries, (see id.) which would be conducting servicing activities under the same rules and requirements that apply to the parent depository institution.
Despite the exemptions under section 100001(b)(1) set out above, the Commissioner of the DFPI still has discretion to take certain actions against certain exempt entities set out in section 100001(b)(1). See Cal. Fin. Code sec. 100001(b) (2) and 10005(b). It is unclear how person exempt from the entire DCLA could violate the DCLA. The DFPI should clarify the basis under which the Commissioner may take action against an exempt entity for violating the DCLA.
With the DCLA going into effect in less than three months, it is unlikely that (i) regulations will be adopted and (ii) there is sufficient time to review license applications and issue any debt collector licenses. As we understand, the DFPI will allow those debt collectors who have submitted a license application by the effective operating date of the DCLA, January 1, 2022, to continue with their debt collection activities while their license application is being processed. This practice has been utilized by other states when new licensing laws were enacted with a small window before the licensing statute took effect. This practice of the DFPI will allow for a smoother transition for debt collectors to license status without any interruption in their California collection activities for their clients.
As mentioned in the introduction above, if you want to submit comments to the PDFPI regarding the rules to be adopted under the DCLA, but want to remain anonymous, call on us, as we can help.
1 Certain sections of the Rosenthal FDCPA dealing with debt buyers also were amended by Senate Bill 908. For this Client Alert, we have not researched any issues under the Rosenthal FDCPA.
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.
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