CA’s New Debt Collection Licensing Act and What it Means for CUs

kathy bray
Katherine Bray of Moore Brewer Wolfe Jones Tyler & North.

In September 2020, California enacted Senate Bill 908, known as the Debt Collection Licensing Act, which is set to take effect on January 1, 2022.  In a nutshell, the new Debt Collection Licensing Act (Act) creates a new category of “licensees” subject to Department of Financial Protection and Innovation (DFPI) oversight and rulemaking, and expands the DFPI’s enforcement authority over both new and existing licensees.

The Act applies to the collection of consumer debt and consumer debt buying, requiring anyone who falls under the definition of “debt collector” or “debt buyer” and who collects consumer debt to be licensed with the DFPI.  (Note- commercial debt collectors will not be subject to the new Act.)  The Act applies to both debt collectors located in California and those located outside of California seeking to collect consumer debt from California residents.  Depository institutions, defined to include both state and federal credit unions, are exempt from the new licensing requirements and the vast majority of the Act’s provisions. However, they are subject to DFPI enforcement authority with regard to violations of the California Rosenthal Fair Debt Collection Practices Act (California FDCPA).

To become licensed, a person must, among other things, complete an application, pay an application fee, sign the application under penalty of perjury, and submit to a criminal background check by the Department of Justice.  The Act also requires a licensee to comply with reporting, examination, and other oversight by the DFPI, as well as to maintain a surety bond.  

The Debt Collection Licensing Act both amends portions of the California FDCPA to further restrict what debt collectors can do and say, and enacts new sections of the California Financial Code to provide the DFPI with its new licensing, rulemaking and enforcement authority over debt collectors and debt buyers. the Act does expand the DFPI’s enforcement authority over credit unions collecting their own debt. 

By way of brief background, credit unions collecting debts in California are subject to the California FDCPA, as the California FDCPA applies not only to those collecting the debt of others but also those collecting their own debt.  Much of the Federal Fair Debt Collection Practices Act (Federal FDCPA) is incorporated into the California FDCPA.  So, while credit unions collecting their own debt are defined as “creditors” under the Federal FDCPA and as such would not be subject to its restrictions, because the California FDCPA incorporates the Federal FDCPA, credit unions collecting in California are also subject to most of the provisions of the Federal FDCPA anyway.  As a result, credit unions collecting in California need to be aware of the various rules and restrictions on how debt can be collected to avoid a consumer claim (or class claim) under the California FDCPA or, more generally, a claim for unlawful business practices. 

However, under the new Debt Collection Licensing Act, the DFPI will now have policing authority over “depository institutions” (e.g., credit unions) for violations of the California FDCPA.  Pursuant to the new Act, if in the opinion of the Commissioner of the DFPI a credit union has committed violations of the California FDCPA (or the Fair Debt Buying Practices Act), the DFPI can issue cease-and-desist orders against the credit union and order the credit union to pay “ancillary relief,” which can include refunds, restitution, disgorgement, and payment of damages on behalf of the person injured by the conduct or practice of the credit union that violated the California FDCPA. 

In addressing the DFPI’s new enforcement authority over “depository institutions,” the new Act relies on the definition of a “depository institution” found in section 1420 of the California Financial Code, which includes any insured credit union (as defined under the Federal Credit Union Act) and thus includes both state and federal credit unions in the exemption. However, it relies on that same definition to carve out its new enforcement authority, creating the implication that it could extend to federal credit unions as well. However, as the DFPI only licenses and regulates California state-chartered credit unions (and the NCUA regulates federal credit unions), such an interpretation would be inconsistent with both California and federal credit union law.

In addition to the new enforcement powers of the DFPI directly applicable to credit unions under the Debt Collection Licensing Act, because credit unions often work with and hire debt collectors and debt collection agencies to collect credit union debt, credit unions should also familiarize themselves with the new licensing requirements with respect to who will require a license and other changes to the California FDCPA.  In terms of who will now need to be licensed to collect debt in California, it seems almost all third parties with whom credit unions may work/contract to assist with debt collection will now need to be licensed with the State.  (Note- the Act exempts from the licensing requirement, among others, those licensed under the Residential Mortgage Lending Act and trustees performing acts in connection with a nonjudicial foreclosure.)  That means that credit unions will need to follow up with all third parties with whom they work to assist with collections (including any attorneys credit unions work with who assist with collections) to confirm they are aware of the upcoming licensing requirements and will ensure that all their individual debt collectors will be licensed (if required) by January 1, 2022.  Credit unions will also want to make sure any agreement with third-party collectors and collection agencies going forward address the new licensing requirements and adequately protect the credit union from the collector’s violations of the Debt Collection Licensing Act.  Credit unions should also consider executing amendments to existing collections agreements to ensure licensing will be addressed by the collector as required by the new Act so that the credit union is protected under its existing contractual relationships.

Even with contractual protections in place, credit unions also need to familiarize themselves with the changes the Debt Collection Licensing Act will have on the California FDCPA.  For example, the Debt Collection Licensing Act will amend the California FDCPA to prohibit debt collectors who must be licensed from placing a telephone call without disclosing the caller’s identity and from sending digital or written communications that do not display the license number of the debt collector in at least 12-point type.  Credit unions should make sure to ask their third-party collectors for copies of written communications going out to members or debtors to ensure those collectors are strictly complying with this requirement. 

The Debt Collection Licensing Act also authorizes the DFPI to promulgate regulations implementing the Act.  Just recently, the DFPI released its Notice of Rulemaking Action wherein it proposed regulations and opened a 45-day public comment period set to expire on June 8, 2021.  These proposed regulations mainly focus on the license application procedures and process, such as adopting the license application forms, requirements to obtain a license as a debt collector, and other requirements related to licensure.  The proposed regulations require applicants to apply for a license and maintain the license through the Nationwide Multistate Licensing System and Registry (“NMLS”) and identify the California-specific documents and information that must be filed with NMLS and the timeframes for filing the information. 

Be on the lookout for more regulations from the DFPI in 2022 and remember the licensing requirements and changes to the California FDPCA and the Financial Code (including the new policing authority of the DFPI over credit unions for violations of California FDCPA) are set to take effect January 1, 2022.

Article by Katherine Bray of Moore Brewer Wolfe Jones Tyler & North.

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