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California Debt Collection Licensing Act Deep Dive

  • Written by Steel Rose

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. To read more click here