REBROADCAST: The New Frontier in Debt Collection Laws

California's Fair Debt Collection Practices Act has long been a critical framework for protecting consumers from abusive or unfair debt collection practices. Recently, however, Governor Gavin Newsom signed into law SB 1286 on September 24, 2024, expanding these protections to certain commercial debts. This significant legislative change has considerable implications for lenders, financial advisors, attorneys, and debt collectors.

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About the authors:
Justin T. Bradley
Scott J. Hyman, CIPP (US/E), CIPM, CIPT

Transcript

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California's Fair Debt Collection Practices Act has long been a critical framework for protecting consumers from abusive or unfair debt collection practices. Recently, however, Governor Gavin Newsom signed into law SB 1286 on September 24, 2024, expanding these protections to certain commercial debts. This significant legislative change has considerable implications for lenders, financial advisors, attorneys, and debt collectors.

The California Rosenthal Fair Debt Collection Practices Act is designed to protect consumers from unfair, deceptive, or abusive practices in the collection of consumer debts. It mirrors the Federal Fair Debt Collection Practices Act but adds additional state-specific provisions.

Historically, California's Act applied exclusively to consumer debts. However, with the signing of SB-1286, its scope now extends to include certain commercial debts, marking a significant shift in the regulatory landscape.

This shift reflects a growing recognition of the need to protect smaller commercial entities from potentially predatory or unfair debt collection practices, aligning commercial debt collection more closely with consumer debt collection standards.

One of the most significant changes under this law is the inclusion of certain commercial financial products within the scope of the California Fair Debt Collection Practices Act. This expansion means that some commercial debts will now be subject to the same procedural and substantive servicing obligations that apply to consumer debts.

The legislation introduces specific terminology, defining a "covered commercial debt" as money owed by a natural person to a lender or commercial financing provider. This definition is crucial as it delineates the types of commercial debts that fall under the new regulatory framework.

It also amends the terminology used in the previous version of the Act, substituting "consumer" debt with "covered" debt. This seemingly minor change has a significant impact, effectively extending consumer protections to qualified commercial debts.

For a commercial debt to be considered "covered," it must involve transactions under $500,000. This threshold is designed to protect smaller commercial entities while exempting larger, more complex financial arrangements.

In addition, the legislation includes specific exemptions for aggregate commercial debts exceeding $500,000. For example, if a debtor owes $400,000 on one loan and $200,000 on another from the same lender, the cumulative debt exceeds the threshold and is therefore exempt from California's Fair Debt Collection Practices Act.

Non-delinquent accounts may remain exempt from the provisions of the California Act. According to a 2022 opinion by the California Attorney General, the Act does not apply unless the obligation is "due and owing," meaning that current, non-delinquent credit obligations are not subject to the same regulatory requirements.

Critically, SB-1286 does not impose any new licensing requirements under the Debt Collection Licensing Act. This provision alleviates concerns about additional regulatory burdens for debt collectors and lenders.

Lenders, servicers, and attorneys involved in the collection of commercial debts will now face new obligations under the expanded California Fair Debt Collection Practices Act. These include adhering to communication restrictions, avoiding harassment or abusive practices, and providing clear validation and notification letters.

Attorneys collecting commercial debts were previously exempt from the Rosenthal Act. However, SB-1286 brings them under the purview of the California Fair Debt Collection Practices Act, necessitating a thorough review of their debt collection practices.

Debt collectors engaged in the collection of covered commercial debts must now comply with the same protections and restrictions that apply to consumer debts. This includes avoiding misleading representations, unfair practices, and unnecessary communication with third parties.

Debt collectors must also adhere to stringent communication restrictions, including avoiding contact with employers or third parties without proper authorization. Additionally, harassment, abuse, or misleading practices are strictly prohibited.

To ensure compliance with the new regulations, lenders and servicers should adopt several best practices. They'll need to update their policies and procedures to reflect the expanded scope of the updated Act, and conducting training sessions for staff is essential to ensure they understand the new requirements and their implications. 

Creating and enforcing robust monitoring systems is crucial to ensure that all communications comply with the regulatory requirements. It's also important to familiarize oneself with the identity theft provisions and ensure appropriate handling of such cases. Additionally, careful attention must be paid to the rules governing time-barred debts to avoid potential legal pitfalls.

The expansion of the California Fair Debt Collection Practices Act to include certain commercial debts represents a significant milestone in debt collection regulation. By extending consumer-like protections to smaller commercial entities, SB-1286 aims to create a fairer and more transparent debt collection environment.

Lenders, financial advisors, attorneys, and debt collectors must familiarize themselves with the new requirements and take proactive steps to ensure compliance. With the effective date set for July 1, 2025, there is ample time to review and adjust practices accordingly.

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