California regulator proposes licensing rules for debt collectors

Months after the California Debt Collection Licensing Act (DCLA) took effect and required covered individuals to submit applications for licenses, the Department of Financial Protection and Innovation (DFPI) has proposed settlement which, if adopted, will help clarify who can be covered and therefore who needs to apply.

The DCLA was signed into law in September 2020 and went into effect on January 1, 2022. Persons subject to licensing under the DCLA generally had to have applications on file by December 31, 2021.

Some of the terms used in the DCLA suggest that its scope could be similar to that of the Rosenthal Fair Debt Collection Practices Act (RFDCPA). The RFDCPA applies to third party debt collectors, but also applies to a creditor collecting its own debts. As a result, retailers and others contacting their customers about late payments did not know whether they now needed to obtain licenses under the DCLA in order to engage in this day-to-day activity.

The proposed regulations are intended to clarify the scope of the DCLA in several useful ways. Among several important clarifications, the by-law, if adopted as proposed:

  • Provide that a creditor requesting, in his own name, the reimbursement of a consumer debt resulting from a credit granted by the creditor is not “engaged in the business of debt collection” for purposes of obtaining a license under the DCLA unless one or more of the three criteria are met, which criteria should not apply to most retailers.
  • Provide that a person solely servicing non-defaulted debts on behalf of such creditor shall also not engage in debt collection activity for the purposes of obtaining a license under the DCLA . It should be noted that the proposed regulations expressly define default under the DCLA as meaning “more than 90 days past due, unless the contract governing the transaction or other law provides otherwise.” Creditors and direct collectors should therefore carefully consider how the relevant contracts define default when assessing the applicability of the DCLA.
  • Of interest to our healthcare customers, a healthcare provider, healthcare facility or hospital is not engaged in debt collection for the purpose of obtaining a license if the only debt he collects is in his own name and is payment for medical or other services or products he has provided.

As discussed in the Call for comments, comments should be received no later than August 29, 2022. Retailers and others who are not otherwise clearly exempt from coverage can see ways to further improve the proposed rules. However, it is also possible that some advocacy groups will submit comments strongly opposing the proposal and insisting that even creditors collecting their own debts be certified under the DCLA. Therefore, it is essential that those who find the proposed regulations useful submit comments that support and possibly enhance DFPI’s efforts to provide much-needed clarity regarding the scope of the DCLA.

Please contact one of the authors to discuss the proposed rules and the opportunity to submit comments.

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