Confusion Abounds Over Scope Of Debt Collection Licensing Act

California's new Debt Collection Licensing Act, Cal. Fin. Code § 100000 et seq., took effect on January 1, 2022.  However, the legislature's inartful and inconsistent draftsmanship has resulted in a great deal of uncertainty over who exactly must be licensed.

Section 100001(a) provides that "no person shall engage in the business of debt collection in this state without first obtaining a license . . .".   Section 100005 authorizes the Commissioner of Financial Protection & Innovation to take specified enforcement actions if in her opinion " a person who is required to be licensed under this division is engaged in business as a debt collector without a license . . .".   Note that these two statutes use different terms - "debt collection" and "debt collector".  Both are defined in the DCLA but the definitions are not consistent.  Section 10000(2)(i) defines "debt collection" as "any act or practice in connection with the collection of consumer debt" while Section 100002(j) defines "debt collector" as "any person who, in the ordinary course of business, regularly, on the person’s own behalf or on behalf of others, engages in debt collection".   Thus, the definition of "debt collector" requires more than simply "debt collection".   

The determining the scope of the DCLA is further complicated by the use of nested definitions.  The definition of "debt collection" refers to collection of "consumer debt" which is defined in Section 100002(f) as "money, property, or their equivalent, due or owing, or alleged to be due or owing, from a natural person by reason of a consumer credit transaction".   It also includes mortgage debt and “charged-off consumer debt” as defined in Section 1788.50 of the Civil Code.    Section 100002(e) term "consumer credit transaction" as "a transaction between a natural person and another person in which property, services, or money is acquired on credit by that natural person from the other person primarily for personal, family, or household purposes".    

Recognizing that many businesses are confused about the scope of the DCLA,  the DFPI recently added the following notice to its website:

Furthermore, the DFPI will not bring an enforcement action for unlicensed activity under Financial Code section 100001 if there is a bona fide legal opinion request, or similar request submitted in good faith via, prior to and pending as of December 31, 2021, regarding whether a prospective applicant is “in the business of debt collection."

Unfortunately, anyone reading this notice for the first time today will not be able to take advantage of this lenity.