California’s Old Debt Collection Law Now Applicable to Certain Small Business Loans

By Joseph Garibyan

October 2, 2024

On September 24, 2024, Governor Newsom approved California’s Senate Bill (SB) 1286. SB 1286 expands California’s Rosenthal Fair Debt Collection Practices Act (“Rosenthal Act”) to cover certain commercial debts of $500,000 or less. In 1977, California passed the Rosenthal Act to extend the consumer debt collection protections of the federal Fair Debt Collection Practices Act to first-party debt collections—that is, to debt collectors collecting their own debts, not just the debts of others. The Rosenthal Act defines “debt collector” as any person who, in the ordinary course of business, regularly, on behalf of that person or others, engages in debt collection. The term “debt collection” is also broadly defined under the Rosenthal Act as any act or practice in connection with covered debts. Thus, the Rosenthal Act now applies to depository lenders like credit unions and banks, as well as non-depository companies like private money lenders and loan servicers that collect consumer debts and small commercial debts.

Business or commercial debt collectors previously did not have to worry about the Rosenthal Act because it only applied to individual “consumer debt” and “consumer credit.”  That has now changed with the passage of SB 1286, which has expanded the Rosenthal Act to “covered commercial credit” and “covered commercial debt”.  Those terms would each 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 by reason of a covered commercial credit transaction. The term “covered commercial credit transaction,” in turn, means a credit transaction of $500,000 or less primarily for other than personal, family, or household use.  Note also that the bill defines “debtor” to include guarantors of covered commercial credit transactions.

The following are just some of the many prohibited conduct and practices under the Rosenthal Act that debt collectors now must consider when attempting to collect a covered commercial credit or debt:

• Using obscene or profane language.
• The use, or threat of use, of physical force or violence or any criminal means to cause harm to the person, or the reputation, or the property of any person.
• The threat that the failure to pay a covered debt will result in an accusation that the debtor has committed a crime where the accusation, if made, would be false.
• The communication of, or threat to communicate to any person the fact that a debtor has engaged in conduct, other than the failure to pay a covered debt, which the debt collector knows or has reason to believe will defame the debtor.
• The threat to the debtor to sell or assign to another person the obligation of the debtor to pay a covered debt, with an accompanying false representation that the result of the sale or assignment would be that the debtor would lose any defense to the covered debt.
• The threat to any person that nonpayment of the covered debt may result in the arrest of the debtor or the seizure, garnishment, attachment or sale of any property or the garnishment or attachment of wages of the debtor, unless the action is in fact contemplated by the debt collector and permitted by the law.
• Placing a telephone call without disclosing the caller’s identity.
• Causing expense to any person for long distance telephone calls, telegram fees, or charges for other similar communications, by misrepresenting to the person the purpose of the telephone call, telegram or similar communication.
• Communicating, by telephone or in person, with the debtor with such frequency as to be unreasonable, and to constitute harassment of the debtor under the circumstances.
• Any communication with the debtor other than in the name either of the debt collector or the person on whose behalf the debt collector is acting.
• The false representation that information concerning a debtor’s failure or alleged failure to pay a covered debt has been or is about to be referred to a consumer reporting agency.
• The false representation that a legal proceeding has been, is about to be, or will be instituted unless payment of a covered debt is made.
• Sending written communications to a debtor in an attempt to collect a time-barred debt without providing certain written notices.
• Continuation of collection activities after the borrower or guarantor provides a certified written statement, subject to the Rosenthal Act’s requirements, that they were the victim of identity theft and did not incur the debt in question.

Credit unions, banks, private money lenders, and other debt collectors should update their debt collections practices, procedures and written notices to ensure compliance with Rosenthal Act’s requirements applicable to small business loans of $500,000 or less.

About the Author

Joseph Garibyan

Joseph Garibyan is a Partner at SW&M and leads the firm’s Commercial Lending, Privacy and Cybersecurity and Bankruptcy practice groups. Joseph is also a member of the firm’s Compliance practice group. Prior to joining SW&M, Joseph served as General Counsel […]

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