New California Law Targets Unfair and Deceptive Commercial Debt Collection Practices

Legislation signed into law by California Governor Gavin Newsom on September 24, 2024 will subject commercial debt collectors to new compliance requirements starting in 2025. California Senate Bill 1286 extends the reach of the state’s Rosenthal Fair Debt Collection Practices Act (the “Rosenthal Act”), California’s primary law regulating debt collection practices, to also cover certain small business or commercial debts in addition to consumer debts. When the legislation takes effect on July 1, 2025, collectors of business or commercial-purpose debt owed or guaranteed by Californians will be subject to a new range of practice requirements and restrictions.

Although a handful of states have debt collection laws that apply to the collection of commercial debts, there are significantly fewer of these laws than the state laws that regulate only consumer-purpose debt collection. With the enactment of SB 1286, California continues its recent trend of ratcheting up the regulation of various commercial finance activities. The legislation follows the 2018 enactment of California’s commercial finance disclosure law imposing detailed disclosure requirements on providers of a wide range of commercial financing, and the state’s 2023 enactment of legislation directly restricting the fees chargeable by providers of commercial financing, prohibiting unfair, deceptive or abusive acts or practices (UDAAP) in commercial financing transactions, and imposing annual reporting requirements on certain commercial financers.

This article discusses some of the substantive practice requirements SB 1286 imposes on commercial debt collectors, the transactions and persons affected by the legislation, its licensing implications, and potential penalties for noncompliance.

The Rosenthal Fair Debt Collection Practices Act

Enacted in the 1970s, the Rosenthal Act imposes a number of practice requirements and restrictions on collection agencies collecting debts owed by Californians. The Rosenthal Act takes inspiration from the federal Fair Debt Collection Practices Act (FDCPA) and prohibits a broad range of unfair and deceptive debt collection practices by debt collectors. The collection practices prohibited by the Rosenthal Act include:

• using threatening language with debtors or threatening to take unlawful conduct to collect a debt;
• using obscene or profane language in debtor communications or harassing the debtor;
• communicating with a debtor’s employer or other third parties;
• making false representations to debtors;
• collecting impermissible fees from debtors or collecting time-barred debts; and
• failing to make disclosures to debtors regarding the debt, creditor, and debt collector.

As amended by SB 1286, these restrictions will apply also to collectors of commercial debts when the legislation takes effect. The Rosenthal Act already requires collectors of consumer debt to also comply with most requirements of the federal FDCPA, but SB 1286 does not extend this requirement to collectors of commercial debt (presumably because the federal FDCPA does not apply to the collection of commercial debts).

Unlike the FDCPA (in most cases) and many other states’ debt collection laws, the Rosenthal Act applies to debt collectors collecting their own debts (i.e., first-party collectors), as well as to debt collectors collecting only the debts of another party (third-party collectors). The statute also does not provide blanket exemptions for depository institutions or other regulated or licensed entities.

Covered Commercial Debts and Debtors

SB 1286 amends the Rosenthal Act’s definitions to reach collectors of “covered commercial debt” or “covered commercial credit,” which are defined as money due, or owing or alleged to be due, or owing from, a natural person to a lender, a commercial financing provider (as that term is defined under California’s 2018 commercial finance disclosure law), or a debt buyer, by reason of one or more covered commercial credit transactions, provided that the aggregate amount of all covered and non-covered transactions between the parties does not exceed $500,000. For open-end debts, the transaction amount is the maximum commitment. The $500,000 cap mirrors the scope of the state’s commercial finance disclosure law, which is likewise limited to transactions of that amount or less. Like most states’ debt collection laws, a covered debt includes money owed from a wide range of transactions, and is not limited merely to loans or credit transactions. Real-estate-secured debt is also not expressly excluded from the amended Rosenthal Act. Under SB 1286, a debt derives from a covered commercial transaction if it was incurred primarily for a purpose other than personal, family, or household purposes.

As amended, the Rosenthal Act redefines the term “debtor” to mean a natural person who owes a debt and, in the case of a covered commercial debt, a natural person who guarantees a debt owed to another person or entity. As a result, many of the Rosenthal Act’s prohibitions will apply in practice to conduct and communications made to the individual guarantors of a covered commercial debt. A commercial debt owed by a company or organization, and that is not guaranteed by a natural person would not fall within the ambit of the amended Rosenthal Act. It is not clear whether a sole proprietorship would qualify as a debtor covered by the amended statute and these new protections.

While it is not clear what level of connection with California is required to subject a debt to the amended Rosenthal Act, SB 1286 provides that a judicial proceeding to collect a commercial debt may be brought in the county where the debt was incurred, the county where the debtor resides, or the county where the entity whose debt is guaranteed by a personal guarantor is located. In light of this uncertainty, one conservative approach would be to comply with the Rosenthal Act when collecting any debt that was (i) incurred in California; (ii) guaranteed by a personal guarantor who resides in California; or (iii) owed by a debtor that resides in California.

No New Licensing Obligation

Importantly, SB 1286 is limited to the regulation of substantive debt collection practices and does not impose any new licensing obligations. California licenses consumer debt collectors under its Debt Collection Licensing Act (DCLA), enacted in 2020. Unlike the amended Rosenthal Act, the DCLA applies only to consumer-purpose debts.

Penalties

The penalties for violations of applicable provisions of the Rosenthal Act will extend to commercial debt collectors when the legislation takes effect. The potential penalties for violations of the Rosenthal Act include:

• damages sustained by a debtor in an action brought under the Rosenthal Act’s private right-of-action (only individual and not class actions may be brought to enforce these provisions);
• attorney’s fees and costs; and
• an additional penalty in such an action not exceeding $1,000 for willful and knowing violations.

Debt collectors have a 15-day cure period to avoid liability after discovery of a violation, and can avoid civil liability with a proper showing that a violation was unintentional, despite the maintenance of appropriate procedures. The enforceability of a debt is not impaired by any violation of the Rosenthal Act.

Effective Date and Outlook

SB 1286’s amendments to the Rosenthal Act will apply only to commercial credit or debts “entered into, renewed, sold, or assigned on or after July 1, 2025.” Therefore, a commercial debt collector should not need to modify its collection practices to comply with the amended statute in connection with its portfolio of pre-existing debts that were not originated, renewed, sold, or assigned on or after July 1, 2025. While this carve-out for legacy debts should allow entities to continue servicing previously acquired commercial debts, we would recommend that commercial finance lenders update their practices, if necessary, to comply with the requirements of SB 1286. Since many debt collectors (especially those who also collect consumer credit) already comply with most requirements of the amended Rosenthal Act given that they mirror federal prohibitions on UDAAP and the Federal Trade Commission Act’s prohibitions on unfair or deceptive acts or practices (UDAP), many collectors may not struggle to come into compliance with California’s new requirements by July 2025. Collectors of California commercial debts should review the legislation and consider its application to their debt collection activities in advance of the effective date.