Proposed California Debt Collection Licensing Regulations Raise Scope Concerns

Last month, the Department of Financial Protection and Innovation (DFPI) published proposed regulations under the Debt Collection Licensing Act (DCLA). The regulations largely address procedural matters related to obtaining a license. However, the DFPI's proposed regulations also appear to implicitly address the scope of the license requirement, potentially expanding the category of licensees beyond what the statutory text contemplates.

The DCLA requires all persons who "engage in the business of debt collection" in California to be licensed. Cal. Fin. Code § 100001(a) (emphasis added). The proposed regulations, however, appear to contemplate that any "debt collector" must be licensed. See proposed Cal. Code Regs. tit. 10, §§ 1850.7, 1850.61(a). The DFPI's "Initial Statement of Reasons" contemplates the same:

The proposed rulemaking would adopt . . . requirements to obtain a license as a debt collector. . . Prior to enactment of the Act, debt collectors were not required to be licensed in California. Their activities were subject to California's Rosenthal Fair Debt Collection Practices Act . . . and the Fair Debt Buying Practices Act. . . These laws, however, do not provide for government oversight of debt collection practices. The Act authorizes the Commissioner to enforce the requirements of the Rosenthal Fair Debt Collection Practices Act and the Fair Debt Buying Practices Act.

The distinction between "engag[ing] in the business of debt collection" and acting in the capacity of a debt collector could be meaningful. The DCLA's definition of "debt collector" is very broad. If the California Legislature intended to require all debt collectors to be licensed under the DCLA, and not just those who engage in the business of debt collection, it could have easily provided that all debt collectors must be licensed. For example, there are other California laws that prohibit both engaging in certain businesses and acting in a certain capacity. California's contractor law prohibits either engaging in the business of a contractor or acting in the capacity of a contractor when not licensed.  Cal. Bus. & Prof. Code § 7028. And, California's Real Estate Law prohibits a person from, without a license, engaging in the business of a real estate broker or sales person, or acting in the capacity of a real estate broker or sales person. Cal. Bus. & Prof. Code § 10130. The plain language of the DCLA only prohibits engaging in the business of debt collection without a license.

This would mean there may be instances where a party is a debt collector for purposes of the Rosenthal Fair Debt Collection Practices Act's (RFDCPA) substantive provisions, but not engaging in the business of debt collection for purposes of the DCLA's licensing provisions. Notwithstanding the DCLA's exemptions for certain licensed lenders and other parties, there will be individuals who regularly—in the conduct of their business—collect debts owed to themselves, but in a manner that is ancillary or tertiary to their primary business. For example, merchants who extend credit to their customers under retail installment contracts or entities that acquire certain types of current obligations and only seek to collect delinquent amounts owed themselves, might not be engaging in the business of debt collection. These entities may very well be subject to the RFDCPA's substantive provisions as well as the new California Consumer Financial Protection Law, but without further guidance from the DFPI, it is not clear they are engaging in the business of debt collection.

We are hopeful that the DFPI will clarify the scope of the DCLA's license requirement before final rules are promulgated. Note that the comment period for these proposed regulations is still open and ends on June 8, 2021.