State Law Licensure Issues Affecting Debt Collectors

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Levels of Licensure

Current and evolving licensure issues affect our industry as both state and federal regulations become more numerous and complex. Beyond litigation concerns arising under the Fair Debt Collection Practices Act and other state and federal laws, there have been recent federal enforcement actions, regulatory exams, and extensive licensing and supervisory examination changes. It is important to be aware of these issues in order to help ensure our businesses have processes and procedures in place so that we can comply with this myriad of complexity. I am thankful to be able to pass this important information along to help not only further my regulatory knowledge but advance this realm of our industry as a whole.

Currently, there are 36 states, 4 cities, and the District of Columbia that require those in our industry to hold a license. Luckily, there isn’t currently a movement towards a federal licensure requirement for our industry, eliminating at least this additional requirement for operating our businesses. However, any operation in any of the 36 states requiring licensure, whether it is contracted out or not, means that your business will need licensure for that state/city. Ensuring correct licensure is a crucial step in managing legal compliance and a critical factor in managing risk for your business.   

FDCPA’s Relationship to State Licensure

The Federal Fair Debt Collection Practices Act (FDCPA) is the most commonly used statute in lawsuits against our industry. The FDCPA does not, however, include any licensing requirements. However, this lack of regulation can actually make prosecution under it more subjective, as the reading is thus subject to subsequent judicial interpretations. The FDCPA does include, however, language in sections 15 USC 1692e(1) and (10) that we in our industry don’t allege affiliation with any state or federal entity or make false claims about any license granted from any state or federal agency. Of course, it is known best practices that consumer interactions such as these are not attempted as these represent assured FDCPA prosecutable violations.

While these two sections of the FDCPA are specifically prosecutable, there is much more language in the FDCPA that is more subject to interpretation. Lack of state licensure has case precedent to be ‘not prosecutable’ under the FDCPA as decided by two district state-level rulings: Watson v. Arc Capital in 2017 (Tennessee) and Cox v. Sherman Capital in 2017 (Indiana). Conversely, though, there are state-level rulings from Goetze v. CRA Collections in 2017 (Minnesota) and Veras v. LVNV Funding in 2014 (New Jersey) in which FDCPA reading was interpreted by the Judge as prosecutable regarding licensure requirements under the FDCPA.

In states that require a license, for example from cases in Minnesota and New Jersey, whether the defendant engaged in FDCPA violation explicitly becomes less relevant, as they weren’t following the letter of the law regardless of a Judge’s interpretation of the FDCPA. Another case in New Jersey (Tompkins v. Selip & Stylianou, 2019) saw a similar ruling prosecutable as an FDCPA violation, however, yet again the defendant did not possess the correct state licensure requirements. 

By adhering to state licensure requirements, all these violations judged against our industry using the FDCPA would likely be dropped and the cases dismissed. In this case, the judge also ruled that the defendant violated the New Jersey Consumer Finance Licensing Act (NJFLA) as well. While the specifics of this NJ statute aren’t necessarily relevant to those of us working outside of New Jersey, the important take-away point is that business entities operating in states must satisfy state licensure statutes as well as FDCPA statutes to avoid even more harsh anti-compliance rulings.

Additional State Law Licensing Litigation

Some in our industry may remember in 2010 in West Virginia when the State Attorney General combed all state records and brought many suits against operators in our industry who did not seem to have the correct licensing requirements. The take-away of this situation is that this could happen in any state at any time and ensuring compliance on the front end is crucial to not get caught up in a net of perceived impropriety. While this example only affected one state, it could happen anywhere, and maintaining the best risk management practices by ensuring adequate licensure at the state level is crucial. Massachusetts represents another state that brought large-scale compliance questions to the forefront of our industry’s operations by questioning the very definition of “operators” in our industry, introducing large-scale ambiguity, and opening doors to question the definition of an operator and which entities operating in the state need licenses versus not. With a state-level large-scale question regarding the very definition of who needs a license, district judges could potentially rule favorably regarding whether a license is needed to conduct our business, and yet the converse can also be judged to be the case. Due to this potential ambiguity of interpretation, the best risk mitigation is to possess state licenses as needed and interpret need broadly. Obviously, all business decisions must be made under the umbrella of risk and reward, but the net of state licensure compliance can be broadly cast and proper compliance from the beginning of business operations is an excellent way to continue smooth business operations. 

Consumer Financial Protection Bureau (CFPB) and State Licensure 

Those not new to our industry most assuredly remember the 2010 UDAAP (unfair, deceptive, or abusive acts or practices) addition to the CFPB. The addition of this UDAAP language opened CFPB interpretation to include a much broader net. For instance, the CFPB brought a group of actions that stated that because the loan origination was in violation of a particular state’s licensing requirements, the collection of these debts was also in violation of the law. While due diligence of portfolio acquisition is a major tenet of our industry that I’ve discussed before, this example of the CFPB’s very broad interpretation of state licensing requirements was unprecedented, and one that even proper portfolio vetting may not readily uncover. Interpreting UDAAP with such latitude has not occurred since, and the cases were all dropped due to staffing appointment changes in the CFPB; but such wide brushstrokes of interpretation present a threat to the smooth operation of our industry, especially since these cases could have been brought against businesses in our industry who always ensure best practices and adequate state licensing requirements on even a tertiary level. Put simply, even proper risk mitigation could potentially not protect a business in a situation such as this. Regardless, following all state licensing requirements still provides a first-level defense against litigation and is a way to ensure compliance and operate under best practices for risk mitigation and excellence in business operations.

Underscoring the Importance of Licensing

If it wasn’t clear to us all previously, seeing these collected cases against our industry demonstrates that having correct state licensure requirements is a simple way to avoid any legal pushback on the state and federal level. Especially since many cases use the FDCPA to bring the cases, which even without extant specific state legislation, having correct state licensure will prohibit clashes with Federal regulation violations. Of course, invoking the FDCPA won’t be judges as prosecutable in all judges’ rulings, but throwing that di may not be a best-case risk/reward scenario. 

Now more than ever state licensure requirements are an important aspect of compliance, best practices, and a great safety net to avoid litigation. Given the broad interpretation of the FDCPA by numerous courts across the country, we have yet another example of compliance with all laws, requirements, and statutes at the state (and federal) level being essential for smooth business operations. At Tag Process, we are consummate compliance professionals and can help any aspect of your business succeed in regards to service, due process, and best practices for consumers while upholding our industry’s highest standards. We look forward to working with you in all aspects of our industry using the utmost professionalism and broad knowledge from which to work.

This information is not legal advice and may not be used as legal advice. The information discussed or contained is not an explanation of the law and is presented for educational purposes only. 

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