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Reminder: California’s New Commercial Debt Collection Protections Take Effect July 1, 2025
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.
STATES DIALING IN ON MORTGAGE TRIGGER LEADS
In a notable trend in state consumer financial regulation, state legislatures are increasingly seeking to regulate a variety of marketing and advertising practices, rather than limiting their regulatory focus limited to the actual terms of consumer financial transactions themselves. A growing number of states are seeking to regulate conduct that may occur long before a loan is ever consummated by enacting laws to regulate companies’ use of “trigger leads.” These “trigger leads” generally refer to consumer reports obtained by a mortgage company that a consumer did not apply for a loan with, where the issuance of the reports is triggered by inquiries made with a consumer reporting agency in response to an application for a mortgage with another lender. Companies use these reports as leads to market to consumers with whom they do not have a prior relationship.
Arkansas, Georgia, Idaho, Iowa, and Utah have each passed legislation in 2025 that regulates the use of trigger leads, and the Texas Department of Saving and Mortgage Lending promulgated regulations governing the use of “trigger leads” in late 2024. These six states join a handful of others that already regulate the use of mortgage trigger leads in similar ways.
According to proponents of these new laws, consumers are often unable to distinguish whether a call is from the mortgage company that received the consumer’s application or another company trying to solicit new business. Each of these new state laws seek to address consumer advocates’ concerns by requiring companies to make certain disclosures to consumers when using mortgage trigger leads. The laws in Arkansas, Georgia, Idaho, Iowa, and Texas also make contacting consumers who have opted out of prescreened offers of credit pursuant to the Fair Credit Reporting Act (“FCRA”) a violation of state law, and the laws in Arkansas, Georgia, Idaho, and Iowa prohibit making calls to consumers on the national Do-Not-Call registry.
Each of the new laws defines trigger leads (or mortgage trigger leads or prescreened trigger leads) in a substantially similar manner. Although Utah’s definition is the only of these six states to not provide a carve-out for reports obtained by a lender or servicer that holds or services existing indebtedness of the applicant, its definition is limited to reports given to third parties not affiliated with the consumer, effectively carving out consumer reports obtained firsthand from the meaning of trigger leads.
ARKANSAS
Arkansas House Bill 1184, which will go into effect on August 4, 2025, prohibits a person from using a mortgage trigger lead in a misleading or deceptive manner, including by failing to state the following six items in the initial communication with a consumer:
- the mortgage loan officer’s (“MLO”) name and mortgage company on behalf of whom the MLO is acting;
- a brief explanation of how the MLO or the MLO’s sponsor obtained the consumer’s contact information to make the communication, or an explanation of a mortgage trigger lead;
- that the solicitation is based on personal information about the consumer that was purchased from a consumer reporting agency without the knowledge or permission of the mortgage company with whom the consumer initially applied;
- that the MLO and the MLO’s sponsor are not affiliated with the creditor with whom the consumer initially applied;
- that the purpose of the communication is to solicit new business for the sponsor; and
- to make a firm offer of credit as provided by FCRA.
The Arkansas law also provides that the following practices are a violation of state law: soliciting or contacting a consumer who has opted out of prescreened offers of credit pursuant to FCRA, placing a telephone call to a consumer who has placed his or her contact information on a national Do-Not-Call registry, or knowingly using information from a mortgage trigger lead in violation of the new law or FCRA.
GEORGIA
Effective May 13, 2025, Georgia House Bill 240 prohibits the following acts and practices when using a mortgage trigger lead to solicit a consumer who has applied for a loan with another mortgage lender or mortgage broker:
- failing to state in the initial solicitation that the person is not affiliated with the mortgage lender or broker with which the consumer initially applied;
- failing in the initial solicitation to conform to state and federal law relating to prescreened solicitations using consumer reports, including the requirement to make a firm offer of credit to the consumer;
- using information regarding consumers who have opted out of the prescreened offers of credit or who have placed their contact information on the federal Do-Not-Call registry; or
- soliciting a consumer with an offer of certain rates, terms, and costs with the knowledge that the rates, terms, or costs will be subsequently changed to the detriment of the consumer.
The new Georgia law also prohibits any person transacting a mortgage business, including those required to be licensed or exempt from licensing, to engage in these unfair or deceptive acts or practices.
IDAHO
Effective July 1, 2025, Idaho House Bill 149 prohibits the following acts and practices when solicitating a consumer for a residential mortgage loan based on information contained in a mortgage trigger lead:
- failing to clearly and conspicuously state in the initial phase of the solicitation that the solicitor is not affiliated with the lender or broker with which the consumer initially applied;
- failing to clearly and conspicuously state in the initial phase of the solicitation that the solicitation is based on personal information about the consumer that was purchased from a consumer reporting agency without the knowledge or permission of the lender or broker with which the consumer initially applied;
- failing, in the initial solicitation, to comply with FCRA’s provisions relating to prescreening solicitations that use consumer reports, including the requirement to make a firm offer of credit to the consumer; and
- knowingly or negligent using information from a mortgage trigger lead (a) to solicit consumers who have opted out of prescreened offers of credit under FCRA or (b) to place telephone calls to consumers who have placed their contact information on a federal or state Do-Not-Call list.
IOWA
Effective July 1, 2025, Iowa House File 857 prohibits financial institutions from engaging in an unfair or deceptive practice when using mortgage trigger lead information derived from consumer reports to solicit a consumer who has applied for a loan with a different financial institution. The bill deems the following practices as unfair or deceptive:
- in an initial phase of a solicitation from a lender or loan broker, the financial institution fails to clearly and conspicuously state that the financial institution is not affiliated with the financial institution with which the consumer initially applied;
- in an initial solicitation, the financial institution fails to conform to state and federal law relating to prescreened solicitations using consumer reports, including but not limited to the requirement to make a firm offer of credit to the consumer;
- the financial institution uses information regarding a consumer who has opted out of prescreened offers of credit or who has placed the consumer’s contact information on a federal Do-Not-Call list; and
- the financial institution solicits a consumer with an offer of certain rates, terms, or costs, but subsequently changes the rates, terms, or costs to the detriment of the consumer.
UTAH
Effective May 7, 2025, Utah House Bill 99 prohibits a person transacting the business of residential mortgage loans from using prescreened trigger lead information to solicit a consumer who has applied for a mortgage loan with another financial institution if the person:
- fails to state in the initial solicitation that the person is not affiliated with the mortgage loan company (or broker) with which the consumer initially applied;
- fails in the initial solicitation to conform to state and federal law relating to solicitations using consumer reports, including the requirement to make a firm offer of credit to the consumer; or
- solicits a consumer with an offer of certain rates, terms, and costs with the knowledge that the person will subsequently change the rates, terms, or costs to the detriment of the consumer.
TEXAS
Texas adopted regulations in November of 2024 which provide that a mortgage company, mortgage banker, or sponsored mortgage loan originator acts in a fraudulent and dishonest manner when using a trigger lead in a misleading or deceptive manner. The regulations further provide that when using a trigger lead, failing to state the following five items in the initial communication with the consumer is misleading or deceptive for purposes of the regulation:
- the mortgage banker’s name;
- a brief explanation of how the mortgage banker obtained the consumer’s contact information to make the communication (i.e., an explanation of trigger leads);
- that the mortgage banker is not affiliated with the creditor to which the consumer made the credit application that resulted in the trigger lead; and
- that the purpose of the communication is to solicit new business for the mortgage banker. The regulations also provide that contacting a consumer who has opted out of prescreened offers of credit under FCRA and failing in the initial communication with the consumer to make a firm offer of credit as provided by FCRA are misleading and deceptive and therefore fraudulent and dishonest acts.
These new state laws are similar to federal legislation, S.B. 1467 and H.R. 2808, which passed the Senate and House, respectively, in June 2025. Although there are differences in the two pieces of legislation, the federal legislation would, if enacted, permit a consumer reporting agency to furnish a mortgage trigger lead only when the consumer has provided consent for the agency to share the information with the recipient or when the consumer has a prior a relationship with the recipient, such as being the lender or servicer for the consumer’s mortgage or a bank or credit union with whom the consumer has an account.
Companies’ use and practices with respect to mortgage trigger leads are the subject of increasing focus at both the state and federal level. As the list of states regulating the use of trigger leads grows, mortgage companies and other market participants should consider reviewing their policies and procedures for using these leads.
TEXAS COMMERCIAL FINANCING DISCLOSURE AND REGISTRATION LAW THREATENS SALES-BASED FINANCING INDUSTRY
Texas has enacted a law that has the potential to place substantial impediments on sales-based financing providers, including merchant cash advance companies, seeking to operate in Texas. The new Texas law prohibits sales-based financing providers and brokers from establishing a mechanism to automatically debit a recipient’s deposit account to recoup receivables unless the provider or broker holds a perfected first-lien security interest in this account—which very few sales-based financing programs are designed to do. In addition, the law specifically excludes sales-based financing transactions from being able to benefit from Texas’s unique exemption from its usury law that applies to “account purchase transactions.” Both provisions have the potential to significantly restrict or impair many sales-based financing programs from offering financing to Texas businesses.
The new law will also require providers and brokers of commercial financing to make disclosures to recipients, becoming the tenth state to enact a commercial finance disclosure law since 2018. Like some but not all of the other nine states’ commercial finance laws, Texas House Bill 700—which was signed into law by the state’s governor on June 20—also requires providers and brokers of “sales-based financing” to register with the state.
Below we discuss how the Texas legislature has addressed the application of state usury limits to the sales-based financing transactions that are subject to the new law (the “Act”), as well as details on the Act’s registration requirement; the timing and content of required disclosures; new UDAAP prohibitions; restrictions on automatic debits for payments; exemptions from the Act; the law’s effective date and how the law will be administered and enforced.
REGISTRATION
The Act requires providers and brokers of sales-based financing to register with the Texas Office of Consumer Credit Commissioner (OCCC). The Texas law defines sales-based financing as:
a transaction that is repaid by the recipient to the provider of the financing:
(A) as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient; or
(B) according to a fixed payment mechanism that provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.
The Act’s registration requirement makes it the first Texas law to license commercial-purpose finance activities. Notably, unlike the Act’s disclosure requirements, the registration obligation is not limited to persons that transact sales-based financing in an amount less than $1 million. Thus, a company that solely provides or brokers sales-based financing transactions of $1 million or more could be required to register, but not to provide disclosures, unless another exemption applies.
The registration form must include the company’s name; any DBA name; principal office address; designated agent contact information; and any judgment, memorandum of understanding, cease and desist order, or conviction related to a violation of law, act of fraud, breach of trust, or money laundering against the company or its directors, officers or controlling persons. The Act directs the OCCC to set the registration fee and adopt a registration form by rule.
Registrations must be renewed annually on or before January 31. If the information submitted on a registration form changes, the registration must be updated within 90 days.
DISCLOSURE REQUIREMENTS
The Act’s disclosure requirements are somewhat similar to the sales-based financing disclosure laws enacted in Connecticut and Virginia in recent years. At a high level, the Texas law requires a provider extending a specific offer of sales-based financing in an amount of less than $1 million to disclose the following information to the recipient:
- the total amount of the financing;
- the disbursement amount;
- the finance charge;
- the total repayment amount;
- the estimated period for the periodic payments to equal the total repayment amount under the terms of the financing;
- the payment amounts, whether payments are fixed or variable;
- a description of all other potential fees and charges not included in the finance charge, including draw fees, late payment fees, and returned payment fees;
- any finance charge the recipient is required to pay if the recipient pays off or refinances before the transaction is scheduled to be repaid in full;
- any additional fees, not included in the finance charge, the recipient will be required to pay upon prepayment;
- a description of any collateral requirements or security interests; and
- a statement outlining whether the provider will pay compensation directly to a commercial sales-based financing broker and the amount of such compensation.
Additional information must be disclosed if the provider requires the recipient to pay off an existing sales-based financing as a condition of obtaining new financing. The disclosures must be signed by the recipient before the application for sales-based financing is finalized.
Although the Act authorizes administrative rulemaking to implement the UDAAP and registration provisions, it does not specifically direct regulators to adopt a template disclosure form. As such, industry participants may be responsible for designing their own disclosures.
RESTRICTIONS ON AUTOMATIC DEBITS
It is relatively common for sales-based financing providers to recoup their purchased receivables through preauthorized electronic debits from one or more of the recipient’s operating accounts. One of the most notable features of the Act is its prohibition on providers or brokers of sales-based financing from establishing a mechanism to automatically debit a recipient’s deposit account unless the provider or broker holds a perfected security interest in such account with first-lien priority. Since many merchants or companies receiving sales-based financing may have existing financing arrangements that are secured by an “all assets” lien, it is unlikely that a significant number of sales-based financing transactions would be able to take a first-lien security interest in a recipient’s deposit account. The Act does not expressly prohibit (i) “split pay” structures, where a sales-based financing provider receives its receivables directly from a payment processor or credit card processor; (ii) arrangements where receivables are recouped prior to the amounts ever reaching a recipient’s deposit account(s), or (iii) receivables that are transmitted by a recipient through a recipient-initiated electronic transfer.
REMOVAL OF USURY EXEMPTION
In a unique and somewhat unprecedented move, the Act goes beyond registration and disclosure requirements to also regulate substantive transaction terms and practices of sales-based financing agreements. Texas has a unique provision in its Finance Code which provides that the parties to an “account purchase transaction,” which is defined as an agreement under which a person engaged in a commercial enterprise sells accounts, instruments, documents, or chattel paper subject to this subtitle at a discount, (regardless of whether the person has a repurchase obligation related to the transaction), may agree to characterize their transaction as a purchase and sale and, if they do, then there is a conclusive presumption that the transaction is not a loan. The Texas Finance Code also provides that the amount of the discount at which a provider purchases accounts is not interest for purposes of Texas’s usury law. Over the years, courts interpreted the “account purchase transaction” provisions to apply not only to traditional factoring transactions, but also to merchant cash advances and sales-based financing products. This led to Texas being viewed as a jurisdiction that had relatively beneficial regulatory treatment of sales-based financing.
In an unusual provision, the Act specifies that a sales-based financing transaction does not qualify as an “account purchase transaction.” While the Act stops short of declaring sales-based financing to be a per se loan or credit transaction, sales-based financing transactions will no longer benefit from the conclusive presumption that they are not loans, and that the discount charged under a sales-based financing transaction is not interest. The Act does not amend the general definition of a “loan” in the Texas Finance Code, which is “an advance of money that is made to or on behalf of an obligor, the principal amount of which the obligor has an obligation to pay the creditor.”
The Act also prohibits the Finance Commission of Texas from adopting a maximum APR, finance charge, or fee for sales-based financing transactions. It remains to be seen whether the regulator will interpret this provision—and the exclusion of sales-based financing from characterization as an “account purchase transaction”—to mean that sales-based financing transactions are subject to Texas’ usury law and its 18% annual interest rate limit.
UDAAP PROHIBITIONS
The Act authorizes the OCCC to bring enforcement actions for violations of the Act, and requires a different regulator—the Finance Commission of Texas—to adopt rules that identify unfair, deceptive, or abusive acts or practices (known as “UDAAP” in the federal context) related to transactions that are subject to the Act. Texas’s application of UDAAP principles to small business financing echoes recent developments in other states. For example, California subjected certain providers of commercial financial products or services to UDAAP prohibitions in a 2023 rulemaking, and legislation is pending in New York that would enact UDAAP protections for small businesses.
EXEMPTIONS
The Act provides some, but not all, of the exemptions we have come to expect from state commercial finance disclosure laws. Notably absent is a de minimis exemption (e.g., for a company that makes or brokers five or fewer transactions in a single year). The Act exempts:
- a bank, out-of-state bank, bank holding company, credit union, federal credit union, out-of-state credit union, or any subsidiary or affiliate of those financial institutions;
- a person acting in the capacity of a technology services provider to an exempt entity if the person has no interest, arrangement, or agreement to purchase any interest in program transactions;
- transactions secured by real property;
- leases (as defined under the Texas Uniform Commercial Code);
- transactions of $50,000 or more made to a motor vehicle dealer, motor vehicle rental company or affiliate of a motor vehicle rental company;
- manufacturers and captive finance companies; and
- lenders regulated under the Farm Credit Act of 1971.
EFFECTIVE DATE, ADMINISTRATION AND ENFORCEMENT
Non-exempt providers and brokers of sales-based financing must register with the OCCC by December 31, 2026. The remaining requirements of the Act—including the disclosure requirement and prohibition on automatic debits—take effect much sooner, on September 1, 2025, although it is possible that Texas may decide to follow the example of other states and provide a “grace period” to allow sales-based financing providers and brokers to come into compliance with the law and develop compliant disclosures. Providers and brokers of sales-based financing should not rely on this possibility, however.
With fully 20% of the states now having enacted some variety of commercial finance disclosure law—and no significant movement to impose uniform disclosure requirements at the federal level—providers and brokers of commercial financing will have to continue navigating a growing patchwork of state regulatory regimes, now including Texas, for the foreseeable future.
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