On July 15, the DFPI issued proposed regulations on the scope of  debt collection licensure required by the DCLA.  The text of the proposed regulations can be found  here:  PRO-05-21-Text-DCLA-Invitation-for-Comments.-7.14.22

There are a number of significant proposed regulations for licensees, applications, or potential licensees.

First, the DFPI’s proposed regulations would confirm that W-2 or true employees are not required to obtain DCLs.  But, the exemption from DCL licensure enjoyed by CFL holders will apply only to listed entities, and not to parent entities, subsidiaries, or to affiliates.

Second, the DFPI’s proposed regulations would define entities “Engage[d] in the business of debt collection” and, therefore, subject to licensure if the person “(A) engages in debt collection for a profit or gain, and (B) the activity is of a regular, frequent, or continuous nature. Advertising or otherwise offering the service of debt collection for remuneration constitutes engaging in the business of debt collection.”

Third, the DFPI’s proposed regulations would clarify and define when creditors collecting their own obligations, and who are not otherwise exempt from licensure, must obtain a DCL.  The DFPI’s proposed regulations would provide that the creditor

is not engaged in the business of debt collection for purposes of licensure under the Debt Collection Licensing Act, unless it meets one or more of the following criteria: (1) Five percent or more of the creditor’s annual profits over the last twelve months, whether contracted for or received, constitute collection fees, late fees, or any other charges added to the original consumer credit transaction that created the debt. (2) Within the last 12 months, an average of ten percent or more of the creditor’s inventory was repossessed at least once, either by the creditor directly or through a third-party. (3) The creditor has a monthly average over the last 12 months of twenty-five percent or more of the gross amount of its accounts receivables ninety or more days past due.

Fourth, the DFPI’s proposed regulations would preserve a servicer exemption for debt servicers who service debt that is not in default:

A person solely servicing debts not in default on behalf of an original creditor, as described in subdivision (c), is not engaged in the business of debt collection for purposes of licensure under the Debt Collection Licensing Act. For purposes of this section, “default” means more than 90 days past due, unless the contract governing the transaction or another law provides otherwise.

Fifth, the DFPI’s proposed regulations would exempt certain types of financial transactions from regulation or licensure.

(a) The following types of debt are not consumer debt within the meaning of section 100002, subdivision (f) of the Financial Code:
(1) Residential rental debt, except as provided in subsection (a)(2).
(2) Debt owed pursuant to a Homeowners’ Association Declaration of Covenants, Conditions, and Restrictions or other equivalent written agreement.
(b) Debt arising from a consumer’s acquisition of healthcare or medical services, where payment is deferred, is presumed to be consumer debt within the meaning of section 100002, subdivision (f) of the Financial Code.
(c) The failure of a personal check to clear does not create a consumer credit transaction under the Debt Collection Licensing Act.

Finally, the DFPI’s proposed regulations would contain a number of provisions related to licensee reporting to the DFPI and document retention, and would define how to calculate a licensee’s bond that must be posted based on the licensee’s ‘net proceeds’ as follows:

“net proceeds generated by California debtor accounts” shall mean the revenues less cost of goods sold or “gross income” generated by California debtor accounts.
(1) For purposes of this section, revenues generated by California debtor accounts means any income generated from collection activity for California debtor accounts, including but not limited to fees for services related to the collection of California debt accounts, income received from the payment of debt by a debtor, and income received from buying and selling California debtor accounts.
(2) For purposes of this section, cost of goods sold for the collection of California debtor accounts includes expenses directly attributable to the debt being collected, including the cost of the debt. The cost of goods sold does not include operational costs that are not directly attributable to the expenses for the collection of California debtor accounts.

For further information about the proposed regulations, please contact Scott J. Hyman at sjh@severson.com