Considerations when Completing the California Debt Collection License Application

As previously reported, the California Department of Financial Protection and Innovation (DFPI) has begun to accept applications on September 1, 2021 for debt collection licenses under the Debt Collection Licensing Act (“DCLA”). This article will walk through the information that must be provided both in the application and in the NMLS as well as highlight some additional considerations as it relates to the information that must be included in the application.

The good news for applicants is that DFPI will accept debt collection licenses through the NMLS. Navigating the NMLS can be difficult and should be left to the experienced practitioners who understand the nuances of the NMLS. The streamline nature of the NMLS will result in less opportunities for misplaced or lost documents while at the same time enhance the communication between the applicant and the regulator.
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NMLS Forms

When applying for a debt collection license on the NMLS, the following forms, if applicable, must be included and uploaded with the debt collection license application.

MU1 Form – Companies and Sole Proprietors

When completing the MU1 Form the applicant must provide the following information:

• Business activity(ies) for which the license request if being submitted;
• The location where the applicant will do business (whether it be in California or another state);
• Any trade names of the applicant;
• The name and address of the registered agent of the applicant (the registered agent has to be in California) as well as appoint the Commissioner as the agent for service of legal process;
• Web address of the applicant;
• The primary contact employee for the company for consumer complaints. Non primary contact employees must also be identified for public consumer complaint and legal questions (The person can be one and the same or you can have several persons designated);
• A record(s) custodian and the location of those records.(There can be more than one records custodian if they are in charge of specific records);
• Any approvals or designations from other regulators;
• Bank account information only if instructed by your regulator;
• The legal status of the applicant;
• Any affiliates or subsidiaries (for affiliates seeking to be licensed under a single license, each affiliate must file a MU1 form and comply with all licensing requirements except the filing fee) ;
• Any financial institutions that may control the applicant;
• Response to disclosure questions;
• Information about all direct owners and executive officers.[i] (Any direct owners of 10% or more of the applicant, executive officers and/or control person(s), meaning who will be in charge and make decisions on behalf of the applicant)
• Information about indirect owners (meaning those that have ownership interests in the applicant but not otherwise involved in the daily operations or management of the applicant); and
• All qualifying individuals who will sign the MU2 attestation.

MU2 Form – Individuals 

The MU2 form is for individuals who have been identified in the MU1 form (as either a direct or indirect owner, or qualifying individual) or for some reason is applying on an individual basis. The following information must be provided by the individual:

• Name(s), address and telephone number(s);
• Residential history for the past 10 years;
• Employment history for the past 10 years;
• Other businesses engaged in by the individual in any capacity;
• Response to disclosure questions;
• Fingerprint information;
• A credit report (the credit report will be accessible to each state regulator where you have a pending license and the applicant shall provide the necessary authorization through the NMLS so that credit reports can be obtained);
• The individual attesting to the filing of the MU1 form must be a duly authorized individual who has submitted the MU2 form and includes an agreement that at the time of approval the applicant will be familiar with the statute(s), rule(s) and regulations of the state of California, will be qualified for the position for which the application is being made and that all information is accurate; and
• The licenses that will be supervised by the company.

Fingerprints and credit reports must be submitted for all individuals identified in MU2.

MU3 Form – Branch Information   

The MU3 form is for branch information. The following information must be provided:

• Business activity(ies) for which the license request if being submitted;
• Branch address;
• Other trade names used by the branch;
• Identification of the branch manager (will need to complete the MU2 form)
• Web address;
• Location of books and records for the branch;
• Operation information including whether the branch office operating under a written agreement or contract, and whether the branch office has any responsibility with respect to decision relating the hiring and compensation of individuals who participate in financial related service at the branch office; and
• Provide contact information about any party responsible for expenses, financial ownership or liability interest in the branch, separate from the applicant.

NMLS Check List

The NMLS published a checklist for applicants which provides instructions for the information that must be included in the application and to assist in gathering documents. It is important to note that the checklist is not a substitute for decisions you as the applicant must make with respect to who is the license, whether you will have a branch office, who will be in control of the licensee, etc. Those are internal decisions and those decisions could impact how the license is completed. The checklist walks you through the application in additional to submission of the MU1, MU2 & MU3 forms.

Here are some items worth noting:

Owners, Control Persons & Qualifying Individuals.

It is important to understand and consider that owners, control persons and qualifying individuals can be the same or different people and that will be significant when it comes to the submitting their respective information in the MU2 form. Control is defined under the DCLA as

“possession, direct or indirect, of the power to direct or cause the direction of management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. A person who, directly or indirectly, own, controls, hold with the power to vote or holds proxies representing, 10 percent (10%) of the then outstanding voting securities issued by another person is presumed to control such person”.

Identifying as a control person is significant because that will determine whether that control person must submit a credit report, background check or fingerprints. Owners can be either direct or indirect and they too require a credit report, background check or fingerprints.

Qualifying individuals are not defined in the DCLA or in the proposed regulations but noted in the MU1 form. They may not be owners but maybe responsible for the conduct of the applicant’s debt collection activities in California. This should include individuals with decision making or operational responsibility for collection activities. Qualifying individuals also must complete an MU2 form and sign an attestation. Qualifying individuals do not require a credit report but will require fingerprints.

Organizational Chart

A company’s organization chart must be uploaded with the application and must identify all direct owners (total direct ownership percentage must equal 100 percent (100%), all indirect owners and affiliates of the applicant that engage in the business of debt collection or other financial services or settlement services. The organizational chart shall also describe the control relationship(s) with the affiliates and control entities, including the percentage of ownership or interest, and identify the names and NMLS entity ID numbers of the affiliates seeking to be licensed together under a single license and the affiliate designated as the primary licensee for purposes of examination.

Business Plan

An applicant must submit a detailed business plan which addresses the following:

• Methods that will be used to collect consumer debt;
• Any products or services offered to consumers or required to be accepted or purchased by consumers in connection with debt collection activities;
• Whether any other business will be solicited or engaged in at the applicant’s place(s) of business;
• Whether and to what extent the applicant intends to use third parties to perform any of its debt collection functions, such as marketing, collecting or any other functions and if so, the names of the third parties and their website address and  principal place of business; and
• Any additional activities the applicant intends to engage in that are not specified in Item Number 1 of Form MU1.

Document Samples

An applicant must submit a sample of the initial letter required under 1692g of the Fair Debt Collection Practices Act and sample notice under 1788.52, subdivision (d) of the California Civil Code.

Management Chart

A Management Chart must be submitted which shows the applicant’s directors, officers, and managers (individual name and title) as well as identify all compliance reporting and internal audit structure.

The following individuals must be included in the Management Chart:

• Directors;
• Principal officers, including president, chief executive officer, treasurer, and chief financial officer and any other officer with direct responsibility for the applicant’s debt collection activities in California;
• Any manager or other individual responsible for the applicant’s debt collection activities in California;
• General and managing partners;
• Managing members; and
• Trustees

Supplemental information

Each applicant must submit the following information at the time of filing:

• The total dollar amount of debt collected from consumers as of the prior calendar year-end. The information is required to determine whether a higher surety bond amount may be required pursuant to California Financial Code section 100019, subdivision (e)(2); and
• The total dollar amount of net proceeds generated from California debtor accounts (i.e., accounts that are owed by consumers who resided in California at the time the consumer made payment on the debt.) The information is required to calculate the assessment for the year of licensing pursuant to California Financial Code section 100020, subdivision (a).

This information will need to be provided thereafter in the licensee’s annual report.

Credit Report and Credit Report Explanations

For those individuals that must submit a credit report, the request for the credit report must be done through the NMLS and each individual will have to complete an Identity Verification Process (IVP) on the NMLS as well.

Additionally, an applicant must submit a line by line, detailed letter of explanation of all derogatory credit accounts along with proof of payoffs, payment arrangements and evidence of payments made, or evidence of any formal dispute filed (documents must be dated) must be submitted. Accounts to address include, but are not limited to: collections items, charge offs, accounts currently past due, accounts with serious delinquencies in the last three (3) years, repossessions, loan modifications, etc.

Fingerprints

Fingerprints are not submitted through the NMLS but sent directly to DFPI. For those individuals that cannot be fingerprinted electronically in California the procedures issued by the California Department of Justice, which is an exemption form that must be signed providing the reason why you cannot get fingerprints in California.

Policies and Procedures

The regulations state that an applicant shall file with NMLS a copy of its policies and procedures, demonstrating how the applicant will comply with the Debt Collection Licensing Act, the Rosenthal Fair Debt Collection Practices Act (Civil Code section 1788 et seq.), the Fair Debt Buying Practices Act (Civil Code section 1788.50 et  seq.), and rules related to consumer protection. NOTE: the checklist does not identify where on the application policies and procedures are identified. It is presumed that for the time being, policies and procedures can be included with the Business Plan.

Footnotes:

[i]  Principal officers; Directors;  Managing members (if the applicant is a limited liability company); General partners (if the applicant is a partnership); Trustees (if the applicant is a trust); Individuals owning or controlling, directly or indirectly, ten percent (10%) or more of the applicant; and Individuals responsible for the conduct of the applicant’s debt collection  activities in this state (control persons).