Starting July 1, 2025, California’s debt collection landscape will change significantly, with new regulations that impact small business loans. For creditors and debt collectors in the commercial finance space, the state’s latest law imposes strict protections typically reserved for consumer debt—putting new demands on collections for commercial loans of $500,000 or less. The new rules could have major implications, especially for in-house collection teams and creditors, who will now be subject to the same restrictions as consumer debt collectors.
What Does the New Law Entail?
California’s expanded version of the Rosenthal Fair Debt Collection Practices Act (RFDCPA) introduces a set of consumer-style protections that will now apply to small business debt collection. The most striking aspect of this law is that it will apply not only to third-party debt collectors but also directly to creditors—meaning businesses that extend commercial loans must comply with these new standards, even if they handle their own collections.
Some of the key provisions include:
- No Simulation of Legal or Governmental Action: Collection notices cannot give the impression of being issued by a governmental agency or attorney, nor can they simulate legal proceedings if they are not.
- Identity Theft Claims: If a borrower claims identity theft, collection efforts must immediately cease once they provide information confirming the claim.
- Prohibited Threats and Practices: The law prohibits any threat of physical force, violence, or legal accusations. Debt collectors cannot imply that failure to pay a debt will result in a criminal accusation.
- Jurisdictional Restrictions: Debt collectors/creditors can only initiate judicial proceedings in the county where a non-natural person (such as a business) is located.
- Timing Restrictions: There are new limitations regarding the timing of collection notices and calls. The law includes a range of provisions aimed at protecting borrowers from aggressive or misleading collection tactics.
While these rules seem straightforward, the potential for legal pitfalls is significant. Even minor violations could lead to costly litigation or damage to a company’s reputation.
Additional Considerations for Creditors and Debt Collectors
- Attorney Liability: Many may wonder whether their attorneys will be subject to these new rules. The law likely applies to legal counsel who engage in collection practices on behalf of creditors, which means attorneys must be prepared to comply with these stringent standards.
- Independent Contractor Liability: Creditors will also need to ensure that any independent contractors handling collections are well-versed in the new regulations. Violations caused by contractors could still fall back on the creditor.
- Communication Timing: One of the law’s more nuanced provisions concerns communication frequency. It prohibits communication “with such frequency as to be unreasonable,” but the definition of unreasonable is subjective. This could open the door for lawsuits, particularly from consumers who feel harassed by overly frequent or aggressive communications.
- The Threat of Legal Action: The new law also bans “false representation that a legal proceeding has been or is about to be instituted.” This means creditors and debt collectors can no longer make threats to sue unless they are ready and willing to actually follow through on those threats.
While some of the provisions, such as the absence of a licensing requirement for commercial debt collectors/creditors, may provide some relief, the law still poses significant challenges for those in the commercial finance space.
Navigating the Minefield
For any business that deals with small business loans in California, staying compliant with this new law will be crucial. The rules are detailed, and there are many potential legal pitfalls. To mitigate risks, it’s highly advisable to consult with an attorney who specializes in debt collection to prepare a comprehensive best practices guide for your team.
In short, while this law may introduce much-needed protections for borrowers, it also presents significant challenges for creditors and debt collectors who must adapt their operations to comply with the new requirements. The advice for creditors is clear: be proactive, seek legal guidance, and prepare for the changes ahead to avoid costly missteps.