Debt Collection Licensing is Coming to California. Are You Ready?
Beginning January 1, 2022, the California Department of Financial Protection and Innovation (DFPI) will require all debt collectors operating in California to be licensed under the Debt Collection Licensing Act (“DCLA”). However, DFPI will be accepting applications starting September 1, 2021.
Under the DCLA, “debt collector” “means any person who, in the ordinary course of business, regularly, on the person’s own behalf or on behalf of others, engages in consumer debt collection. The term includes any person who composes and sells, or offers to compose and sell, forms, letters and other collection media used or intended to be used for debt collection. The term ‘debt collector’ includes ‘debt buyer.’” §1850(h). Based upon this definition creditors and first parties would be required to be licensed if they engaged in the collection of a debt, which is defined broadly under the California Finance Code Section 90005. [i] Debt buyers will also need to be licensed. [ii]
Fortunately, DFPI will be accepting applications through the National Mortgage Licensing System and Registry (NMLS), so many of the standard definitions, forms and requirements found in the NMLS will be applicable to license applications filed in California.
The following is a high-level summary of the immediate requirements DFPI will be seeking from applicants and what debt collectors should be considering when gathering your information for your debt collection license.
SUMMARY
As an overview, here are some key takeaways and important application requirements regarding the DCLA and its requirements: The DCLA requires:
- pre-approval of all fictitious business names;
- a registered agent in California;
- identification and investigation requirements for direct and indirect owners;[iii]
- identification of affiliates of the applicant;
- samples of certain documents to be sent to consumers (§ 1850.7);
- appointment of the DFPI Commissioner as an agent to receive service of process in any noncriminal judicial or administrative processing against the collector (§ 1850.8) (which must be sent directly to the DFPI); and
- hiring a search firm to investigate certain individuals who control the company and are not (or have not been) U.S. residents for at least 10 years. §1850.10.
The DCLA further authorizes the Commissioner to share information that has been filed in the NMLS with any government agency, including the California Attorney General, the California Department of Justice, the Consumer Financial Protection Bureau (CFPB), and the U.S. Department of Justice. §1850.13.
The DCLA also allows affiliates and the debt collector to all be licensed under one license.
Importance of the timing of your application
Starting September 1, 2021, debt collectors may begin to file their license applications using the NMLS registry.[iv] Any debt collector who files an application between September 1, 2021 and December 31, 2021 may continue to operate in California pending the denial or approval of its application. If a debt collector submits an application after December 31, 2021, it may not operate in California until it is issued a license. Although agencies may begin applying for California licenses on September 1, 2021, through the NMLS registry, California will not yet have finalized the regulations it must promulgate under the DCLA related to licensure, among other topics.
“Affiliates”, their requirements, and who may be covered by the license
The DCLA defines “affiliate” as “any person controlling, controlled by, or under common control with, the specified person, directly or indirectly, through one or more intermediaries. “Affiliate” includes an affiliated company. An affiliate is an applicant for purposes of the Debt Collection Licensing Act.” §1850.
Affiliates of the applicant who engage in debt collection or other financial/settlement services are required to be identified on the license application. However, only affiliates engaged in the business of debt collection are required to apply for a license. These debt collection affiliates may be licensed under a single license for the debt collector. To do so, each affiliate must:
- File a Form MU1[v]
- Comply with all licensing requirements (except the $350 fee)
- Pay the investigation fee of $150 per applicant. Fees are paid through NMLS.
NMLS required forms and required information
NMLS typically provides a checklist (NMLS Checklist) for specific requirements (such as where on the forms to place specific information and how to name documents for uploading). It will be important to check the NMLS website when the application period opens for an NMLS Checklist for the DCLA. Unlike some other states, DFPI, at this time, will not require pre-approval of letter templates, separate licenses for agency managers, or branch agency licenses.
California intends to adopt the standard NMLS documents that applicants will be required to use such as :
- Company (MU1) Form [vi]
- Individual (MU2) Form [vii] – The following persons will be required to fill out MU2:
- Branch Managers
- Applicant (if an individual);
- Principal officers;
- Directors;
- Managing members (if the applicant is a limited liability company);
- General partners (if the applicant is a partnership);
- Trustees (if the applicant is a trust);
- Individuals owning or controlling, directly or indirectly, ten percent (10%) or more of the applicant; and
- Individuals responsible for the conduct of the applicant’s debt collection activities in this state.
- Branch (MU3) Form [viii] – It is important to note that branch offices only need to register and do not need to be separately licensed. It is still unclear at this time whether remote workers will be considered branch offices. Based upon the definition of a branch office, it is possible that remote workers may need to register their home addresses, but it does not appear they will need to be separately licensed. DFPI has made no comments or provided any guidance on this issue to date. Further updates are pending.
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Issuance of a license
The Commissioner will issue a license to the applicant via email. The Commissioner will send the license to the individual named in Form MU1 as the Primary Company Contact.
Amendments
Companies may file an amendment to their application. They must file the amendment within 10 days of the event requiring the amendment.
What prospective licensees should do now
Agencies should be doing the following as the September deadline fast approaches:
- Aiming for filing within the month of September to allow for as little interruption in the operation of the business as possible.
- Drafting/updating its policies and procedures regarding how it will comply with DCLA, Rosenthal Act, FDCPA and others;
- Drafting the description of its business activities;
- Determining what if any affiliates will be included under the license;
- Picking a Primary Company Contact for the duration of the license;
Footnotes:
[i] (h) “Debt” means any obligation of a person to pay another person money regardless of whether the obligation is absolute or contingent, has been reduced to judgment, is fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured and includes any obligation that gives rise to right of an equitable remedy for breach of performance if the breach gives rise to a right to payment.
[ii] “Debt buyer” “means a person or entity that is regularly engaged in the business of purchasing charged-off consumer debt for collection purposes, whether it collects the debt itself, hires a third party for collection, or hires an attorney-at-law for collection litigation. “Debt buyer” does not mean a person or entity that acquires a charged-off consumer debt incidental to the purchase of a portfolio predominantly consisting of consumer debt that has not been charged off.” §1850(f).
[iii] Direct or indirect owners are defined has having the power to vote or hold proxies representing 10% or more of the then outstanding voting securities in the entity.
[iv] https://nationwidelicensingsystem.org/Pages/default.aspx
[v] Resources for NMLS
[vi] Detailed instructions on how to fill out the MU1 is available here: https://nationwidelicensingsystem.org/licensees/resources/LicenseeResources/Company%20(MU1)%20Form%20Filing%20Instructions.pdf
[vii] Detailed instructions on how to fill out the MU2 is available here: https://nationwidelicensingsystem.org/licensees/resources/LicenseeResources/Individual%20(MU2)%20Form%20Filing.pdf
[viii] Detailed instructions on how to fill out the MU3 is available here: https://nationwidelicensingsystem.org/licensees/resources/LicenseeResources/MU3%20New%20App.pdf
Joann Needleman
Joann Needleman leads the firm’s financial services regulatory and compliance practice and advises banks, financial institutions, and financial services entities on regulatory compliance matters. Joann prepares and represents these same financial institutions during state and federal supervisory examinations and regulatory investigations before agencies such as the Consumer Financial Protection Bureau (CFPB), Federal Trade Commission (FTC) and the Office of the Comptroller of Currency (OCC) as well as state financial services regulators and attorneys general.
A former member of the Consumer Financial Protection Bureau’s (CFPB) Consumer Advisory Board, Joann provides her clients with useful strategies and common-sense solutions in order to prepare for areas of regulatory scrutiny.
Leslie Bender
Leslie Bender counsels financial services and healthcare clients on a broad range of privacy, data security, and consumer financial protection laws.
She provides counsel on matters including privacy, consumer financial protection, HIPAA, data security, labor and employment, litigation, contracts, alternative dispute resolution and mediation, government affairs, regulatory relations, and change and project management. Leslie has more than two decades of experience in privacy and consumer financial protection and related regulatory relations before various federal and state regulators.
In addition, Leslie has more than 30 years of experience working with financial institutions, collection agencies, and as a compliance consultant and trainer for hospitals. Recognized as a national authority on information privacy and security law, she was one of the first privacy officers accredited by the International Association of Privacy Professionals as a Certified Information Privacy Professional.