Following a busy few months for the California legislature, financial institutions are now facing some new requirements.
Governor Jerry Brown signed several bills into law by the September 30 deadline, including amendments to the state’s debt collection law, the Student Loan Servicing Act, and the Military and Veterans Code as well as Senate Bill 1235, which imposes first-in-the-nation disclosure requirements for certain business purpose loans.
What happened
As the legislative session wound down, several bills impacting the financial services industry piled up on Gov. Brown’s desk.
First, the Governor signed Assembly Bill 1526, a measure that amended the state’s debt collection law to require certain written notice to be included in the first written communication provided to the debtor if the debt is time-barred under the Rosenthal Fair Debt Collections Practices Act.
Specifically, the first written communication with respect to such a time-barred obligation must state: “The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it. If you do not pay the debt, [insert name of debt collector] may [continue to] report it to the credit reporting agencies as unpaid for as long as the law permits this reporting.”
If the debt is time-barred and past the obsolescence dates of Section 605 of the Fair Credit Reporting Act, the first written communication to the debtor must instead state that the debt will not be reported to any credit reporting agency.
AB 1526 also affirmatively banned the filing of time-barred lawsuits or initiating arbitration or any “other legal proceeding” to collect debts.
Importantly, the new law has broad application beyond entities that may be exempt from the Fair Debt Collection Practices Act, such as mortgage servicers and even collectors who are collecting debt they originated, as it applies to “any person who, in the ordinary course of business, regularly, on behalf of himself or herself or others, engages in debt collection.”
The new law will take effect on January 1, 2019.
Amendments to the Student Loan Servicing Act (the act) were the subject of Assembly Bill 38, also signed into law by Gov. Brown. Pursuant to the new law, student loan servicers are now subject to licensure, regulation and oversight by the California Department of Business Oversight (DBO).
The statute clarified the criteria for the DBO to deny a license application, including the failure to meet a material requirement for issuance of a license, violations of a similar regulatory scheme of California or a foreign jurisdiction, liability in any civil action by final judgment or an administrative judgment by any public agency within the past seven years, and the failure to establish that the business will be operated honestly, fairly, efficiently and in accordance with the requirements of the act.
Also within the DBO’s power are the ability to require license applicants and licensees to submit required filings with the DBO through the Nationwide Multistate Licensing System and Registry and to report violations of the act, enforcement actions, and information to the licensing system and registry to the extent the information is a public record.
Now excluded from the act, however, are debt collectors that exclusively service defaulted student loans.
Expanding the protections of the Military and Veterans Code, Gov. Brown signed Assembly Bill 3212 into law. Amendments to the statute include an extension of the interest rate and default judgment protections. Servicemembers may not be charged an interest rate in excess of 6 percent on any obligations bearing interest, and AB 3212 generally extends this prohibition to 120 days after military service and on student loans to one year after military service, while a court may now stay an action or proceeding during the period of military service or 120 days (twice the prior 60 days) thereafter.
The new law—which applies to members of the National Guard, State Military Reserve and the Naval Militia called to full-time active state or federal service—requires a written acknowledgment of a good faith request for relief (the failure to do so waives any objection to the request) and adds motor vehicles to servicemember lease termination rights, similar to the federal Servicemember Civil Relief Act.
AB 3212 took immediate effect.
Finally—and most significantly—Senate Bill 1235 became law, imposing a mandatory disclosure requirement for certain business purpose loans, akin to those required for consumer loans under the Truth in Lending Act.
SB 1235 encompasses “commercial financing,” defined to include commercial loans and commercial open-end credit plans as defined in the California Financing Law as well as factoring and merchant cash advances.
The disclosures required by the new law include the total amount of funds provided; the total dollar cost of the financing; the term or estimated term; the method, frequency and amount of payments; and a description of prepayment policies. A disclosure of “the total cost of the financing expressed as an annualized rate” is scheduled to sunset by 2024 but could be extended or made permanent.
Since some of the disclosures will be tricky to provide when the financing consists of factoring or asset-based lending, SB 1235 does permit the disclosures to be provided by means of an example.
Many questions remain about the new law. Given the breadth of coverage and types of loans included, application of some of the disclosure requirements currently appears unworkable. The law delegated the development of regulations to the DBO, which will not be an easy task. Also unclear: whether the statute created a private right of action.
To read AB 1526, click here.
To read AB 38, click here.
To read AB 3212, click here.
To read SB 1235, click here.
Why it matters: The new laws cover a wide variety of financial transactions, from additional protections for servicemembers to new oversight for student loan servicers. The high-profile SB 1235 will likely have the biggest impact and could prove to be a game-changer, particularly if other states follow California’s lead. While lenders should brace themselves for the changes, enforcement of SB 1235 will not begin until the DBO can implement regulations, a challenging task because of the variety of financing transactions covered by the new law. For example, while the required disclosures may prove somewhat straightforward for a term loan, the application of SB 1235’s mandated disclosures to merchant cash advances or factoring is very uncertain.