On September 24, 2023, Governor Gavin Newsom signed SB-1286 which expands California’s Rosenthal Fair Debt Collection Practices Act (California FDCPA) to apply to certain commercial financial products. Lenders, servicers, and those collecting on their behalf – including attorneys – should pay careful attention to the requirements of the California FDCPA that may apply going forward to some commercial debts.

Scope, Licensing, and Applicability

SB-1286 modifies the California FDCPA, which applies to entities collecting their own debts, to apply to a “covered commercial debt” which are “entered into, renewed, sold, or assigned on or after July 1, 2025.” The legislation defines a “covered commercial debt” as “money due or owing or alleged to be due or owing from a natural person to a lender, a commercial financing provider, as defined in Section 22800 of the Financial Code, or a debt buyer, as defined in Section 1788.50, by reason of one or more covered commercial credit transactions.” A “covered commercial credit transaction” is defined as “a transaction between a person and another person in which a total value of no more than five hundred thousand dollars ($500,000), is acquired on credit by that person from the other person for use primarily for other than personal, family, or household purposes.”

Structurally, SB 1286 amends the California FDCPA by substituting the term “consumer” debt in many places throughout the Act with the term “covered” debt, so as to apply various provisions of the Act to commercial debt. For commercial debt, SB 1286 evaluates the aggregate debt owed by a commercial debtor, exempting aggregate commercial debt from its reach where 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 is no more than $500,000.

The legislation itself explicitly provides that the bill is not intended to impose any additional licensing requirements under the Debt Collection Licensing Act (DCLA).

Takeaways:

• Some California commercial debts are entitled to consumer protection: Some commercial credit transactions under $500,000 will be subject to procedural and substantive servicing obligations that had historically only been applicable to consumer credit transactions.
• Attorneys collecting California “commercial credit transactions” may be subject to the California FDCPA: Attorneys previously held an exemption from compliance with the Rosenthal Act. That exemption was eliminated in 2019, rendering attorneys collecting consumer debts subject to the Rosenthal Act’s requirements. Attorneys collecting commercial credit transactions under SB 1286 will need to evaluate applicability of their obligations under the Rosenthal Act. 
• Non-delinquent accounts may remain exempt: The California Attorney General opined in 2022 that the California FDCPA does not apply unless the obligation is “due and owing”. 85 Ops Cal Atty Gen 215 (2002) (debts are due or owing when they “have become delinquent, making them subject to collection” and “current” credit obligations are not subject to the Rosenthal Act’s requirements). SB 1286 does not, on its face, modify the language of the California FDCPA which is the basis of the AG’s opinion.
• Aggregate commercial debt exceeding $500,000 may trigger an exemption: “For example, a debtor who owes $400,000 on one loan and $200,000 on another loan from the same lender will not be covered by this bill as the cumulative amount owed exceeds $500,000.” (SB 1286 Analysis, Senate Rules Committee, (August 9, 2024)).
• SB 1286 applies only to debtors who are “natural persons”. B-2-B commercial credit transactions that do not involve either a borrower or a guarantor who is a natural person remain exempt from SB 1286.
• SB 1286 does not impose new licensure under California’s Debt Collection Licensing Act.
• SB 1286 applies only to covered transactions entered into, renewed, sold, or assigned on or after July 1, 2025.

Do’s and Don’ts Regarding Commercial Debts Under the California FDCPA

• Lenders and servicers of covered commercial debts should be aware of the “consumer” protections under the California FDCPA that now apply to California small business financial products. Industry groups raised a number of concerns before the bill became law due to the fact that business debt and consumer debt under the California FDCPA are inherently different, which is likely to lead to litigation over unresolved questions from the law.
• For example, industry groups highlighted that California Civil Code § 1788.12(a) restricts how a debt collector may communicate with the employer of a debtor and further limits how a debt collector may communicate with those other than debtors, such as family members and other third parties. However, the employer itself is the debtor in a commercial debt transaction, and the debt collector may need to speak with employees of a business that are family members of the guarantor of the debt or bookkeepers and accountants to facilitate payment of the debt.
• Nevertheless, the California FDCPA extends a number of protections and restrictions, many of which are incorporated from the Federal FDCPA, to debt collectors of covered commercial debts. Below are a list of some of the important “Do’s and Don’ts” that are often the target of debt collection enforcement and litigation.

Do’s:

• Send Validation of Debt Notice – If a third-party collector, send a validation of debt letter that includes a description of debtors rights, included with the first written notice initially sent to a California address of a debtor;
• Send Time-Barred Debt Notice – A debt collector may not collect or attempt to collect a time-barred debt until it first sends a written communication that includes a prescribed disclosure pursuant to CC §1788.14(d);
• Understand Identity Theft – When a debtor notifies a debt collector that the debtor is a victim of identity theft, the debt collector must stop collection activities and follow a number of prescribed procedures.

Don’ts:

• Communicate at Certain Times, Places, or Methods – A debt collector may not communicate or attempt to communicate with a debt at unusual or inconvenient times or places, which is generally outside of the times of between 8 am and 9 pm local time for the debtor, or at the debtor’s place of employment if the debt collector has reason to know that the employer prohibits the debtor from receiving these communications at work. Additionally, the debtor can state that certain communication times, places, or methods are inconvenient, which the debt collector must honor. (Bus & P C §6077.5(c); CC §1788.17);
• Communicating with a Debtor Represented by Counsel – A debt collector may not communicate with a debtor once it receives notice in writing that the debtor is represented by an attorney;
• Harass, Abuse, or Threaten – Debt collectors may not use threats, violence, or other criminal means in collection of debt. They may not use obscene or profane language, or publish a “deadbeat” list;
• Call Restrictions – A debt collector may not cause a telephone to ring or engage in conversation repeatedly or continuously with the intent to annoy, abuse or harass anyone at the called number. Debt collectors may also not place telephone calls without meaningful disclosure of the caller’s identity; 
• Make False and Misleading Representations – A debt collector may not use false, deceptive, or misleading representations or means in collecting a debt. These can include falsely implying that the debt collector is affiliated with a government entity; misrepresenting the character, amount, or legal status of the debt; or threats to take legal action or defame debtor;
• Engage in Unfair Practices – A debt collector may not use unfair or unconscionable means to collect or attempt to collect a debt. Debt collectors should be careful in their fee practices, as “unfair or unconscionable” includes collecting any amount not authorized by the agreement creating the debt or permitted by law (Debt collectors are under scrutiny for charging “pay-to-pay”/“convenience” fees, which are fees charged to debtors for making a payment by a certain method, or other illegal fees that are not expressly authorized by law or by a written agreement with the debtor.

Conclusion

Commercial lenders, servicers, and those collecting on their behalf should carefully review the requirements imposed by SB-1286 and make sure their practices are in compliance with the California FDCPA.