California Gov. Gavin Newsom recently signed SB 1286 amending the Rosenthal Fair Debt Collection Practices Act’s coverage to certain commercial debt. Prior to this amendment, the RFDCPA’s restrictions applied only to certain debt collectors and creditors collecting consumer debt. The amendments are effective Jan. 1, 2025.
EXPANSION OF COVERED DEBT
The amendments expand covered debt to include “covered commercial debt,” “covered commercial credit,” and “covered commercial credit transaction.”
Under the amended act, “covered debt” means a consumer debt or a covered commercial debt.
“Covered credit” means consumer credit or covered commercial credit.
“Covered commercial debt” and “covered commercial credit” mean money, property, or their equivalent, due or owing or alleged to be due or owing from a natural person to a lender, a commercial financing provider, or a debt buyer, as specified, by reason of a covered commercial credit transaction.
“Covered commercial credit transaction” means a transaction between a person and another person in which property, services, or money, of a total value of no more than $500,000, is acquired on credit by that person from the other person primarily for other than personal, family, or household purposes.
DEFINING A “DEBT COLLECTOR”
Because the act now covers commercial debt, the definition of debt collection was amended to read “any act or practice in connection with the collection of covered debts.” A “debt collector” is “any person who, in the ordinary course of business, regularly, on behalf of that person or others, engages in debt collection.” As a result, even collectors who solely collect commercial debts may now be covered by the amended RFDCPA.
EXPANSION TO COMMERCIAL DEBT
Commercial debt would fall within the Act if it were a “covered commercial credit or covered commercial debt entered into, renewed, sold, or assigned on or after July 1, 2025.”
The amended Act’s definition of “covered commercial credit transaction” would capture debt owed not only by natural persons, but also debt owed by a “partnership, corporation, limited liability company, trust, estate, cooperative, association, or other similar entity.”
However, a commercial debt would not be covered by the Act if “the total amount of all covered commercial credit transactions and all other noncovered commercial credit transactions due and owing by the debtor or other person obligated under the transactions to the same lender, commercial financing provider, or debt buyer” exceeds $500,000.
A natural person who “guarantees an obligation related to a covered commercial credit transaction,” is considered a “debtor” protected by the amended Act.
IMPACT ON COMMERCIAL COLLECTIONS
Commercial debt collectors are now subject to stringent rules regarding communication and debt recovery tactics. Prohibited actions include the use of allegedly false statements, harassment, and threats. Moreover, the Act introduces limitations on adding fees or interest to existing debts and expands protections against debtors claiming to be impacted by identity theft.
Overall, the new regulations are certain to increase operational risks for traditional lenders, debt buyers, merchant cash advance companies and other alternative financing providers doing business in California and covered under the Act. Alleged violations of these provisions under the Act may offer debtors and other parties covered under the Act an independent cause of action.
While the Act allegedly aims to protect small business owners, it also increases the burden on creditors, who must now navigate heightened legal compliance requirements. The expansion of debt collection restrictions will likely increase the cost and complexity of recovering unpaid debts, particularly for commercial financing providers that serve small businesses in California.
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