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California's Senate Bill 1286, effective July 1, 2025, has expanded debt collection rules to include certain commercial debts up to $500,000. This law extends consumer protections under the Rosenthal Fair Debt Collection Practices Act (RFDCPA) to small business loans and commercial credit involving natural person guarantors.
Here’s a quick breakdown:
This law aims to curb unfair debt collection practices, offering small business owners similar protections to consumers. Debt collectors and buyers must now update compliance practices, train staff, and use technology to meet these requirements.
For businesses trading debt portfolios, thorough due diligence is critical. Portfolios must be screened for compliance, especially for debts involving personal guarantors. Non-compliance risks include penalties, lawsuits, and reduced portfolio value.
California's regulatory shift is reshaping how commercial debts are collected and traded, with a focus on transparency and fairness.
California SB 1286: What's Covered vs Excluded Under New Debt Collection Law
One major update under SB 1286 is the inclusion of commercial credit transactions of $500,000 or less under the Rosenthal Fair Debt Collection Practices Act. Before this change, these types of debts had little to no consumer-style protections. Now, if an individual is directly responsible for a business debt - either as the borrower or through a personal guarantee - these protections apply.
The $500,000 limit is calculated by adding up all transactions between the debtor and the same lender or debt buyer. For example, if a small business owner has a $400,000 loan and a $200,000 line of credit with the same lender, the combined $600,000 total exceeds the threshold, meaning the protections wouldn’t apply. For open-end credit agreements, the limit is based on the total amount committed, not just the outstanding balance.
However, purely business-to-business loans remain outside the law’s reach. For instance, if one corporation lends money to another without an individual guarantor involved, the Rosenthal Act doesn’t apply. These changes mark a shift toward tighter rules on how commercial debts can be collected.
The new law also outlaws several aggressive collection tactics that were previously common. For starters, harassment through excessive calls is no longer allowed, with collectors generally restricted to contacting debtors between 8:00 a.m. and 9:00 p.m. local time.
Collectors are prohibited from using obscene language, making repeated calls, or threatening violence. They’re also barred from pretending to be attorneys or government officials, issuing fake legal documents, or implying government approval. Threats of legal action without intent to follow through are not permitted either. Publicly shaming debtors by posting their names on "deadbeat lists" is another banned practice. Violations can lead to misdemeanor charges, carrying penalties of up to six months in jail or a $2,500 fine.
The law also limits how collectors can interact with third parties. They’re generally forbidden from discussing a debtor’s obligations with employers or family members, except for specific purposes like locating the debtor or confirming employment for wage garnishment. Collectors must also adhere to strict documentation guidelines to back up their collection efforts.
The updated law requires collectors to have proper documentation before contacting debtors in writing about a delinquent debt. This includes a copy of the original contract or another document that proves the debtor’s agreement to the obligation. This rule applies to both original creditors and debt buyers.
If a debtor submits a written request, collectors must provide detailed validation within 30 days. This includes the current balance, interest, fees, and the date the debt became delinquent. For assigned debts, a validation notice must also be included.
When dealing with time-barred debts, collectors must inform the debtor that legal action will not be pursued due to the debt’s age. Additionally, all written and digital communications must display the collector’s California license number in at least 12-point type. These requirements aim to provide debtors with clear information about their rights and obligations, ensuring greater transparency in the collection process.
Adjust your compliance policies to include commercial debts up to $500,000 that involve individuals or guarantors. Begin by auditing your portfolios to pinpoint accounts where a person is directly responsible for the debt. Make sure your policies require proper documentation - such as the original contract or, for revolving credit, the latest monthly statement - before sending any written collection attempts. Update your letter templates to include required disclosures for time-barred debts and clear validation details. Additionally, implement identity theft protocols to pause collection efforts when a debtor raises concerns about identity theft.
Introduce a strict 15-day cure period to identify and fix any compliance violations. These steps not only align with SB 1286 requirements but also reduce risks during debt portfolio transactions. Once these updates are in place, they’ll serve as the foundation for training your staff on the new rules.
Train your staff on the "natural person" rule and the consumer safeguards it triggers. This is especially important when business debts involve an individual borrower or personal guarantor, as consumer-focused protections apply in these cases. Make sure collectors are trained to recognize such situations during account reviews.
Clear communication protocols are key. Instruct staff to limit calls to the window of 8:00 a.m. to 9:00 p.m. local time and to restrict contact to no more than seven call attempts within seven days. Training should also emphasize validation procedures: collectors must send a written validation notice - including the debt amount and the consumer's right to dispute - within five days of initial contact. Additionally, ensure they stop direct communication if notified that the debtor has legal representation. Reinforce these updated policies during training sessions to ensure compliance with SB 1286.
Once policies are updated and staff are trained, use technology to maintain compliance. Automated systems can help enforce rules. For instance, phone systems can be programmed to restrict calls to the 8:00 a.m.–9:00 p.m. timeframe and monitor call limits to ensure no more than seven attempts in seven days.
Automation can also streamline validation notices, ensuring they are sent within five days of initial contact and include all required disclosures for time-barred debts. Digital recordkeeping systems should be centralized, storing data for at least three years after the last activity. Platforms like Debexpert can simplify compliance by automating processes and securing data during debt portfolio transactions. These systems can also guide staff on handling identity theft claims, ensuring proper verification steps are followed.
"Debt collectors... can avoid civil liability with a proper showing that a violation was unintentional, despite the maintenance of appropriate procedures."
- Daniel B. Pearson and Jeffrey P. Taft, Associates/Partners, Mayer Brown
Configure your systems to distinguish between older debts and those created, renewed, or sold on or after July 1, 2025, as the new regulations primarily apply to the latter. Centralize documentation so collectors can quickly access proof of debt and validation notices before initiating collection efforts.
Debt portfolio trading is becoming more complex with the added need for thorough due diligence. For starters, portfolios must be screened to identify natural person guarantors and calculate total debts to ensure they remain under the $500,000 threshold. This matters because only commercial debts involving natural persons - whether as borrowers or guarantors - require compliance with the new rules. Meanwhile, transactions between corporate entities remain unaffected.
The $500,000 threshold isn't as simple as it sounds. It requires combining all related debts owed by a single debtor to the same lender, covering both regulated and non-regulated commercial credit transactions. If the combined total exceeds $500,000, the debt is exempt from the new regulations.
When trading portfolios, documentation becomes critical. Sellers must ensure original contracts or proof of debtor agreement are complete and accessible. For assigned debts, a full chain of title - including the names and addresses of previous holders - must be provided. If a debtor requests this information, it must be available within 30 days.
Timing also plays a big role. The law applies to any covered commercial debt "sold or assigned on or after July 1, 2025", regardless of when the debt was originally created. This means portfolios must be evaluated based on their transfer date rather than their origination. Legacy debts held by the original creditor remain outside the scope, but the moment they’re sold after July 1, 2025, compliance requirements kick in.
The added focus on due diligence is already changing how portfolios are priced and valued. Portfolios missing complete documentation are seeing valuation discounts because collectors cannot legally pursue accounts without proper proof.
Operational costs are another factor impacting pricing. Buyers now need to account for expenses tied to compliance, such as providing disclosures in 12-point font, meeting 30-day deadlines for detailed account information, and verifying natural person guarantors. Attorney Christopher E. Ng warns that businesses failing to meet these new requirements under SB 1286 could face lawsuits for what were once routine transactions.
"Commercial financers and servicers... may need to devote additional resources to compliance by July 1 if they are subject to the amended Rosenthal Act."
- Daniel B. Pearson and Jeffrey P. Taft, Mayer Brown
California-based portfolios face even more challenges due to litigation risks. Penalties for willful violations can reach $1,000 per action, plus actual damages and attorney's fees. While debt collectors have a 15-day window to correct violations after discovery, the risk of private lawsuits makes portfolios with natural person guarantors less attractive.
Fee recovery restrictions also reduce portfolio value. Collectors need a strong legal foundation to recover finance charges or attorney's fees. Any false claims about these charges could result in Rosenthal Act violations. This limitation especially affects accounts with accrued interest and fees, cutting into potential recovery amounts.
With these challenges in mind, effective tools and processes are more important than ever. Debexpert offers a platform designed to simplify compliance and valuation for debt portfolio transactions.
One key feature is secure file sharing with end-to-end encryption, which lets sellers provide buyers with complete documentation packages, including original contracts and chain of title records. This ensures that all necessary documents are in place before any collection activities begin.
Debexpert also provides portfolio analytics tools to assist buyers in meeting the enhanced due diligence requirements under SB 1286. Sellers can organize California-based accounts by their "sold or assigned" date, helping buyers quickly identify which portfolios fall under the new regulations. These tools also allow buyers to verify guarantor status and calculate aggregate debts before making a purchase.
The platform's real-time communication features make it easy for buyers and sellers to resolve documentation questions. For portfolios involving California accounts under $500,000 with natural person guarantors, users can confirm that all validation requirements are met, such as debt balance breakdowns, delinquency dates, and original creditor details.
Debexpert's auction options - English, Dutch, Sealed-bid, and Hybrid - give sellers flexibility in presenting portfolios that carry higher compliance risks. Sellers can use presale marketing tools to highlight strong documentation or complete chain of title records, which may help counteract valuation concerns tied to the new regulations.
Finally, Debexpert's compliance verification process adds an extra layer of trust. By requiring participants to verify their readiness for the July 1, 2025 requirements, the platform ensures that both buyers and sellers are equipped to handle the new compliance landscape.
California's decision to expand the Rosenthal Fair Debt Collection Practices Act to include commercial debts under $500,000 marks a major change for debt collectors, buyers, and sellers. Starting July 1, 2025, any commercial debt involving a natural person as a borrower or guarantor will receive the same protections that were previously limited to consumer debt. This shift requires adjustments across the board, from updating collection scripts to verifying guarantor status in portfolios and ensuring all necessary documentation is in place before initiating collections.
Debt collectors must follow strict rules for documentation and validation. Violations can lead to penalties of up to $1,000 per action, along with actual damages and attorney's fees. However, a 15-day cure period allows collectors to correct issues and avoid penalties if addressed promptly.
For portfolio trading, it's essential to screen for natural person guarantors and confirm that aggregate debts remain below $500,000. Complete documentation must accompany any sale. The law applies to debts sold or assigned on or after July 1, 2025, regardless of when the debt originated.
Technology will be a key ally in meeting these new requirements. Tools that provide secure file sharing, portfolio analytics, and real-time communication between buyers and sellers can streamline compliance while maintaining efficiency. Additionally, licensed debt collectors must file their 2025 annual report by March 16, 2026, through the DFPI Self-Service Portal, with a minimum annual assessment of $250.
These updates not only reshape how the industry operates today but also highlight the need to prepare for future regulatory challenges.
As these changes take hold, staying ahead of compliance requirements will be critical for navigating upcoming legislative developments. California’s regulatory trajectory shows a clear pattern of increasing oversight in commercial finance. From the 2018 disclosure law to the 2023 UDAAP regulations and now the expanded Rosenthal Act, the state has steadily tightened its grip on the industry. Mayer Brown has observed that "California's scrutiny of the small business financing industry shows no signs of flagging". This trend could inspire similar measures in other states, making California a bellwether for broader changes.
These developments emphasize the importance of proactive operational strategies across debt collection and portfolio trading. For example, a March 2025 proposal seeks to exempt certain motor vehicle dealer transactions from the new commercial debt requirements. Amendments like this could significantly impact portfolio composition and compliance planning, so companies should establish systems to monitor and respond to pending legislation.
To stay ahead, businesses should focus on scalable compliance systems that can adapt to new regulations. Instead of reacting to each change, building flexible frameworks can help manage evolving requirements. This includes maintaining thorough records, training staff on new rules, and leveraging technology to handle updated disclosure formats and reporting obligations efficiently.
SB 1286 broadens the scope of the Rosenthal Fair Debt Collection Practices Act to include specific commercial debts, even those backed by a personal guarantee. This update will officially go into effect on July 1, 2025.
The $500,000 limit refers to the combined value of property, services, or money obtained on credit within a commercial transaction. This applies no matter how many loans are involved, as long as the total remains under $500,000 and is intended mainly for business or other non-personal purposes, excluding personal, family, or household use.
Before reaching out to you or trying to collect a debt in California, a collector must have specific documentation to confirm their authority and provide clarity about the debt. This includes:
These requirements are designed to ensure compliance with California laws and promote transparency in debt collection practices.
More than a decade of Ivan's career has been dedicated to Finance, Banking and Digital Solutions. From these three areas, the idea of a fintech solution called Debepxert was born. He started his career in Big Four consulting and continued in the industry, working as a CFO for publicly traded and digital companies. Ivan came into the debt industry in 2019, when company Debexpert started its first operations. Over the past few years the company, following his lead, has become a technological leader in the US, opened its offices in 10 countries and achieved a record level of sales - 700 debt portfolios per year.
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