Companies that service or collect commercial debt are reminded that new practice requirements are taking effect in California starting July 1, 2025. As Mayer Brown reported when California Senate Bill 1286 was enacted in 2024, the legislation will amend the California Rosenthal Fair Debt Collection Practices Act (the "Rosenthal Act") so as to subject persons collecting certain commercial debts in amounts of $500,000 or less to some of the Rosenthal Act's practice requirements and restrictions on unfair and deceptive debt collection practices.
This Legal Update summarizes some of the more significant requirements that will apply to collectors of certain commercial debts starting July 1, and takes a closer look at the particular transactions and activities that are subject to—and excluded from—the amended Rosenthal Act, including certain nuances around the law's scope.
Restrictions on Practices
Similar to the federal Fair Debt Collection Practices Act (FDCPA), the amended Rosenthal Act prohibits a broad range of unfair and deceptive debt collection practices by debt collectors, in addition to imposing a number of practice obligations. The provisions that will apply to collectors of certain commercial debts include, but are not limited to, restrictions or prohibitions on the following:
- Using threatening or profane language with debtors, harassing a debtor, or threatening to take unlawful conduct to collect a debt;
- Making certain false representations to debtors;
- Collecting time-barred debts without providing certain notice to the debtor; Collecting fees or charges from debtors that are not permitted by law;
- Collecting delinquent debt without possessing appropriate documentation substantiating the debt; and
- Failing to provide certain debt validation information to a delinquent debtor upon the debtor's written request.
Pointers on the Scope of Amendments
In advance of the effective date, commercial financers and servicers have been examining the potential impact of the amendments to their collection activities. Below are some reminders as to the law's applicability and a discussion of certain nuances for industry to consider when applying the new requirements:
- The amended Rosenthal Act applies to commercial debts in amounts of $500,000 or less.
- In the case of open-end debt, the transaction amount is the maximum commitment—or "maximum amount that is enumerated" under the agreement—for purposes of computing the $500,000 threshold, rather than credit outstanding.
- The $500,000 threshold is computed by aggregating transactions
between the same parties. Specifically, the $500,000 metric
includes all covered and "noncovered" commercial
credit transactions owed by the debtor or other person obligated
under the transactions to the same lender. Although not
specifically defined, "noncovered" transactions
implicitly would include debts that are not specifically covered by
SB 1286, potentially including:
- Debts owed under commercial credit transactions that are in amounts greater than $500,000; and
- Commercial debts of any amount owed to business organizations guaranteed by the same natural person guarantor who is obligated under a covered commercial credit transaction.
- The amended Rosenthal Act applies equally to first- and third-party debt collectors—meaning persons that collect on debts they own, on their own behalf, as well as persons collecting debts owned by another person.
- The amendments apply to commercial debts that are owed by a "debtor," defined as a natural person who guarantees a qualifying commercial debt. While the amendments are unclear, the legislative history suggests that debts owed by sole proprietorships or general partners/partnerships, in addition to natural persons, are subject to the amended Rosenthal Act given that in each case a natural person is an obligor.
- The protections of the amended Rosenthal Act appear limited to commercial debts due as a result of a "commercial credit transaction," such that other non-traditional forms of financing like merchant cash advances (MCA) and non-recourse factoring may fall outside the statute's scope.
As a reminder, real-estate-secured debt is not generally excluded from the amended Rosenthal Act. The statute also does not provide blanket exemptions for depository institutions or other regulated or licensed entities. Legislation introduced on March 18, 2025 would, if enacted, provide a new exemption from the Rosenthal Act's commercial debt collection requirements for commercial financing transactions of $50,000 or more in which the recipient is a motor vehicle dealer as defined under California law or affiliate thereof. This proposed exemption is similar to a common exemption that appears in the state commercial finance disclosure laws, including California, enacted in recent years.
Penalties
The penalties for violations of applicable provisions of the Rosenthal Act will extend to persons collecting in-scope commercial debt when the legislation takes effect on July 1. The potential penalties for violations of the Rosenthal Act include:
- damages sustained by a debtor in an action brought under the Rosenthal Act's private right-of-action (only individual and not class actions may be brought to enforce these provisions);
- attorney's fees and costs; and
- an additional penalty in such an action not exceeding $1,000 for willful and knowing violations.
Debt collectors have a 15-day cure period to avoid liability after discovery of a violation, and can avoid civil liability with a proper showing that a violation was unintentional, despite the maintenance of appropriate procedures. The enforceability of a debt is not impaired by any violation of the Rosenthal Act.
Effective Date
SB 1286's amendments to the Rosenthal Act apply only to commercial credit or debts "entered into, renewed, sold, or assigned on or after July 1, 2025." Thus, while a person servicing or collecting existing commercial debts will not be required to comply with the new requirements so long as the debts are not renewed, sold, or assigned on or after July 1, 2025, commercial financers may need to update their practices in order to service new accounts going forward.
Takeaways and Regulatory Landscape
Commercial financers and servicers of small business debt that do not also collect consumer debt may lack significant experience complying with the relatively extensive practice requirements that apply to many consumer debt collectors under the federal Fair Debt Collection Practices Act (FDCPA) and state collection laws. These companies may need to devote additional resources to compliance by July 1 if they are subject to the amended Rosenthal Act, although some of the Rosenthal Act's provisions echo the Federal Trade Commission Act's prohibitions on unfair or deceptive acts or practices (UDAP), which are not limited to consumer-purpose debts.
Relatedly, providers of commercial financing should recall that in 2023 California's Department of Financial Protection and Innovation (DFPI) promulgated regulations imposing California's own flavor of UDAAP (unfair, deceptive or abusive acts or practices) prohibitions on a broad range of commercial finance providers, as discussed in a prior Legal Update. The DFPI's UDAAP provisions echo the UDAAP standard enforced at the federal level by the Consumer Financial Protection Bureau (CFPB), but also incorporate California's unfair competition law and relevant case law. The 2023 rules also require certain providers of commercial financial products or services to file an annual report with the agency each March 15. Shortly after these rules were adopted, California enacted legislation prohibiting providers or brokers of commercial financing from charging certain fees to a defined set of small businesses, including but not limited to a fee for account statements, an origination fee without a clear corresponding service provided, and limitations on UCC lien filing fees.
As all of these developments show, California's scrutiny of the small business financing industry shows no signs of flagging.
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