SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Bradford, Chair

2019 - 2020 Regular

Bill No: SB 750 Hearing Date: April 10, 2019

Subject: Debt collection agencies: licensure and regulation

SUMMARY

This bill authorizes the Commissioner of Business Oversight to license and regulate collection agencies, as specified.

EXISTING FEDERAL LAW provides for the Fair Debt Collection Practices Act (FDCPA; Public Law 95-109), codified as 15 U.S.C. Sections 1692 through 1692p, which prohibits debt collectors from engaging in abusive, unfair or deceptive practices to collect debts. Violations of the FDCPA are enforceable through a private right of action or a class action, or through administrative action taken by the Federal Trade Commission or applicable federal banking agencies, including the federal Consumer Financial Protection Bureau.

EXISTING LAW

1. Provides for the Rosenthal Fair Debt Collection Practices Act (Rosenthal Act; Civil Code Section 1788 et seq.), California’s state equivalent of the FDCPA. Like the FDCPA, the Rosenthal Act prohibits debt collectors from engaging in specified abusive, unfair, or deceptive practices to collect debts. Violations of the Rosenthal Act are enforceable through a private right of action.
   
2. Provides for the Fair Debt Buying Practices Act (FDBPA; Civil Code Section 1788.5 et seq.), which requires persons that purchase delinquent or charged-off consumer debt to maintain, and provide upon request, specified documentation proving that the alleged debtor is the individual associated with the original contract or agreement, and that the amount of indebtedness is accurate. The FDBPA also requires debt buyers to provide specified disclosures to consumers when attempting to collect debts that are beyond the applicable statute of limitations. Violations of the FDBPA are enforceable through a private right of action or a class action. Recovery in an action brought under the Rosenthal Act precludes recovery for the same action under the FDBPA.
   

THIS BILL

1. Adds a new chapter (Chapter 10.5 of Division 3) to the Business and Professions Code, related to debt collection, administered by the Commissioner of Business Oversight (commissioner).
   
   1. Defines the terms “applicant,” “collection agency,” “commissioner,” “consumer credit transaction,” “consumer debt,” “creditor,” “debt,” “debt collection,” “debt collector,” “debtor,” “department,” “licensee,” and “person.”
      
   2. Prohibits a collection agency from engaging in the business of debt collection, directly, or indirectly, without first obtaining a license, but provides that this requirement does not apply to a financial institution that collects its own debt in its own name.
      
   3. Requires license applicants to submit specified information and pay specified fees to the commissioner, exempts collection agencies from the requirement to obtain a separate license for each branch, and requires collection agency licenses to be renewed annually.
      
   4. Grants the commissioner authority to administer the article, as specified, and conduct investigations and examinations of applicants and licensees, as specified.
      

COMMENTS

1. Purpose: This bill is sponsored by the author to require debt collectors and debt buyers to be licensed before collecting consumer debt from California residents.
   
2. Background and Author’s Perspective: According to the author’s office, California licensed the debt collection industry, from 1927 to 1992. California’s prior debt collection agency law was overseen by the Bureau of Collection and Investigative Services, under the Department of Consumer Affairs. As of the date this analysis was prepared, the author’s office had not located a copy of the former law.
   
   In citing the need for this bill, the author’s office observes that California is in the minority of states that fail to license debt collectors, along with Georgia, Kentucky, Mississippi, Missouri, Montana, New York, Oklahoma, South Carolina, Vermont, and Virginia. Most of the states that require licensing also have their own state-level fair debt collection laws with enforcement provisions; thus, other states impose licensing laws in addition to, not in lieu of fair debt collection laws.
   
   Finally, the author’s office observes that the debt collection and debt buying industries are notoriously unscrupulous in their practices. Despite federal and state Fair Debt Collection Practices Acts, collection practices consistently remain a top consumer complaint. From July 2011 to March 2018, the federal Consumer Financial Protection Bureau received just over 400,000 debt collection complaints, representing nearly one-third of all complaints received. The most common concerns identified by consumers were attempts to collect a debt not owed (39%), written notification about debt (17%), and communication tactics (17%). The author notes that, while the California Attorney General (AG) can accept consumer complaints about debt collection and debt buying practices and does pursue major, widespread violations of the law, the AG cannot engage on every complaint filed or take enforcement action on every alleged violation. It is also unreasonable to expect individual consumers to bring their own actions for violations of the Rosenthal Act or the FDBPA, because very few attorneys will take small-dollar cases, and most consumers do not know what protections the laws afford them.
   
3. Discussion: As currently drafted, this bill is a work in progress. It uses the wrong code to grant the Department of Business Oversight (DBO) licensing authority over collection agencies; fails to include several administrative, investigative, and enforcement components common to licensing laws administered by DBO; and fails to specify allowable and prohibited activities for collection agencies. Some of the bill’s definitions may also require refinement.
   
   This bill is triple-referred to the Senate Banking and Financial Institutions Committee, Senate Public Safety Committee, and Senate Judiciary Committee and is subject to the April 26^th fiscal deadline. Because of the very short length of time between referral of the bill to this Committee and this Committee’s need to hear it, staff lacked sufficient time to draft suggested amendments, solicit input from the author and interested parties on those amendments, and revise the amendments to address that input. In the alternative, given the desire of this bill’s author to keep the bill moving, staff suggests that the Committee seek a commitment from the author to amend his bill in the future to incorporate all of the suggestions below. These suggestions reflect the author’s desire to establish a licensing law for collection agencies, which is administered by DBO and is consistent with other financial services licensing laws administered by that department.
   
   1. Move the bill language from the Business and Professions Code to the Financial Code.
      
   2. Delete the current licensing language of the bill (Article 2) and replace it with licensing language similar to that contained in the financial services licensing laws administered by DBO. Because this bill’s author wishes to use the Student Loan Servicing Act as a model for his bill, staff suggests that the new licensing language be consistent with Financial Code Sections 28112, 28114, 28116, 28117, 28118, 28120, 28122, 28124, and 28125). These sections prescribe rules to apply for a license; require background checks of license applicants, as specified; provide criteria for use by the commissioner to deny a license application; provide that a license remains effective until suspended or revoked by the commissioner or surrendered by the licensee; require license applicants to appoint the commissioner as agent for service of process; and authorize the commissioner to establish relationships or contracts with the Nationwide Multistate Licensing System & Registry for specified purposes.
      
      If the author wishes to use a financial services licensing law other than the Student Loan Servicing Act as a model, staff suggests the California Financing Law and California Deferred Deposit Transaction Law as two laws whose provisions could be used as guides for a new law regulating collection agencies. Although the activities regulated by these laws differ from the activities in which collection agencies engage, both of these laws contain boilerplate provisions that can serve as models for use by this bill’s author.
      
   3. Delete the current administration language of the bill (Article 3) and replace it with administrative language similar to that contained in Financial Code Sections 28106, 28108, 28110, and 28111 (or similar Financial Code sections found in other DBO licensing laws). These sections provide general administrative authority to the commissioner, authorize the commissioner to prescribe circumstances under which to accept electronic records or electronic signatures, and require applicants to make some or all filings and pay assessments through the Nationwide Mortgage Licensing System & Registry.
      
   4. Delete the current investigations and examinations section of the bill (Article 4) and replace it with investigation, examination, and enforcement provisions similar to those contained in the Financial Code Sections 28152, 28153, 28153.5, 28154, 28156, 28158, 28160, 28162, 28164, 28166, 28168, 28170, 28172, 28174, and 28176 (or similar Financial Code sections found in other DBO licensing laws). These sections include examination authority and examination frequency; authorize the commissioner to request information in the form of special reports or answers in writing to specific questions or requests for information; prescribe civil and administrative penalties and other enforcement tools available to the commissioner; and clarify the applicability of the Administrative Procedures Act to all enforcement proceedings undertaken by the commissioner.
      
   5. Add a series of provisions to the bill to prescribe the basic duties of a licensee, using Financial Code Sections 28126, 28128, 28130, 28132, 28134, 28136, 28138, 28140, 28142, 28144, 28146, 28148, and 28150 (or similar Financial Code sections found in other DBO licensing laws) as a model, but modifying the language as appropriate for the activities of collection agencies. These sections include net worth and surety bond requirements, require submission of annual and other special reports and annual financial audits, provide a method to calculate annual license fees, require licensees to notify the commissioner regarding changes in the information provided in license applications, require licensees to file applications for branch office licenses, and specify a series of required and prohibited activities.
      
   6. Clarify the extent to which the commissioner has authority to enforce violations of the Rosenthal Fair Debt Collection Practices Act and the Fair Debt Buying Practices Act by licensed collection agencies.
      
   7. Once the old debt collection agency law is located, review that law to see what portions of it, if any, should be re-enacted.
      
4. Support: None received.
5. Opposition:
   
   1. The California Association of Collectors (CAC) opposes this bill on the basis that it is unnecessary and contains a number of vague or irrelevant provisions. “The bill imposes unnecessary burdens on an industry that is already highly regulated. The vast majority of collection agencies that would be subject to the unduly burdensome provisions of this bill are California small businesses. Collection agencies operating in California are highly regulated by a variety of federal agencies (the CFPB, FTC, and FCC) and statutes (including the FDCPA, FCRA, TCPA, and others), along with state statutes including the Rosenthal Act....Additionally, the CFPB is soon expected to unveil a wide-ranging set of new rules that collection agencies will be required to follow. The imposition of a licensing requirement on this already highly-regulated industry will not promote further consumer protection. Instead, it will create another bureaucratic layer for these small businesses and add unnecessarily to their costs.”
      
      In its letter, CAC points out a number of specific concerns with the bill language. However, given staff’s recommendation that all of the provisions of this bill other than the definitions section be deleted and replaced with language that is more consistent with other DBO licensing laws, those concerns are not listed here. The two concerns noted in CAC’s letter, which would not be addressed by deleting Articles 2, 3, and 4 of the bill, relate to the bill’s definition of “collection agency,” which CAC believes inappropriately includes “an association of debt collectors” such as CAC and the bill’s lack of a definition for “financial institution.”
      
   2. USCB, America shares CAC’s concern that this bill imposes an unnecessary layer of licensing and regulation that is duplicative of existing state and federal laws and offers no additional benefit to the public. “The sole purpose of SB 750 appears to be to make it more difficult to operate a debt collection business in California, which hurts consumers. When lenders know that it is harder and more expensive to collect debts, they tend to make the cost of credit higher. That means poor people and people with marginal credit will have a more difficult time obtaining credit, and when they do, the rates they pay will be higher.”
6. Prior and Related Legislation:
   
   1. SB 233 (Leno and Correa), Chapter 64, Statutes of 2013, enacted the Fair Debt Buying Practices Act.

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

None received

Opposition

California Association of Collectors

USCB, America

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