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SB-908's Impact On Industry Uncertain
By Jeffrey A. French, Esq.
On September 25, 2020, Governor Newsom signed Senate Bill 908 into law, enacting the Debt Collection Licensing Act (the “DCLA”). Its adoption places California with the majority of states that already require consumer debt collectors to be licensed. Notably, Senate Bill 908 (“SB-908”) is one of the three bills adopted pursuant to California’s three-part overhaul of the consumer financial services legislation.
SB-908 came into effect on January 1, 2021, requiring the Commissioner of the Department of Financial Protection and Innovation (“DFPI”) to take all action necessary to implement the debt collection licensing requirements that became effective January 1, 2022.
In order to meet the start date in 2022 for licensing, the Commissioner spent much of 2021 adopting regulations designed to implement the licensing program. Recognizing that there would be a flood of license applications in late
2021, any person or entity that submitted an application before the end of 2021 is permitted to operate in 2022 without the required license, and perhaps beyond, pending the approval or denial of the application by DFPI.
Does SB-908 Apply to Delinquent Assessments?
In the wake of SB-908, there has been much debate throughout the industry about whether the SB-908 licensing requirement applies to the collection of delinquent community association assessments. This is largely due to the ambiguous nature and scope of some of the terms under the DCLA.
For example, the DCLA requires licensure for any person or entity engaged in the business of “debt collection,” which means any act or practice collecting “consumer debt.” The term “consumer debt” is defined to include money or property owed as a result of a “consumer credit transaction,” which is defined 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.”
Are delinquent community association assessments “acquired on credit” and are they “primarily for personal, family, or household purposes”? Unfortunately, the answer to this question remains unclear.
One side of the debate posits that community association assessments are not “consumer debt” governed by the Act because, similar to property taxes, common interest development assessments provide funding for municipal and community services critical to all residents, and property taxes have been found to be outside of the realm of consumer debt as defined by the Fair Debt Collection Practices Act (FDCPA).
By extension then, the argument is that community association assessments should be outside of the realm of consumer debt as defined by the DCLA. It was hoped that the regulations being promulgated by DFPI might shed some light on this issue, but no clarification has been put forth by DFPI regulations at this point. Rather, the exceptions to the DCLA set forth in the regulations simply repeat and do not expand upon the exceptions originally set forth in the text of SB-908.
Difficulty in Getting Licensed
Thus far, the state rollout of DCLA has been anything but stellar. Those within the industry who have decided to get licensed have quickly discovered that it is not an easy process.
DFPI opted to use a third-party company to process the license applications on behalf of the state, Nationwide Multistate Licensing System (“NMLS”). NMLS found itself underwater with California applications and unable to process them consistent with the statutory requirements and timelines.
The task of even opening an account with NMLS to get the process started proved somewhat confusing and took far longer than advertised. And, then, the processing of the license application itself with NMLS proved to be even more time consuming, highly intrusive into firm operations and structure, and somewhat complicated.
In response to complaints, DFPI back-pedaled on its California deadlines. DFPI in a recent bulletin let applicants know that as long as they were making efforts to open an NMLS account and pursue a license, it would not take enforcement action against them (DFPI January 2022 Bulletin Vol. 9, No. 6). Moreover, despite the requirement to display a license number on all debtor communications, the DFPI has permitted those in process to simply indicate that they have applied for a license and that the license is pending.
Still, more recent guidance from NMLS has indicated that it may take into 2023 for NMLS to process all of the California license applications that it presently has pending. Needless to say, the rollout of the licensing program has been bumpy at best and plagued by delays. The DFPI has recognized these issues and addressed them, albeit quite slowly.
Some within the industry that opted not to pursue a license decided to submit letters to DFPI asking for clarification and an official opinion on the issues of whether the pursuit of delinquent assessments equates to the pursuit of consumer debt and debt collection. In response to these inquiries, DFPI has granted those that are covered under these letters a sort of safe harbor on enforcement of the DCLA against them.
This safe harbor will exist until such time as the DFPI and/or the Attorney General are able to respond via rule making or opinion letter and answer the question as to whether the DCLA is intended to apply to community association assessment collection activities (See DFPI January 2022 Bulletin Vol. 9, No. 6). As of this date, nothing has come out of DFPI or the Attorney General on this issue and no timeline for a response has been provided. Rather, it is simply a case of wait and see at this point for those seeking clarification from DFPI via a letter request.
An Unknown Future
It remains uncertain whether the DCLA will apply to community association assessment collection activities and whether it will have a large or no impact on assessment collection in the future.
In view of the problematic rollout of the DCLA by DFPI, there is no telling when answers will be provided and whether an exception for assessment collection will be forthcoming. For now, the CID industry remains in a state of flux on the application of the DCLA licensing requirement to assessment collection activities by associations, law firms and management companies.
Jeffrey A. French, Esq.
Jeffrey A. French, Esq., of Green Bryant & French, LLP specializes in community association law and has been in the industry for 25 years.
