The 2021-22 Budget: Funding for Debt Collector Licensing and Regulation

analysis full gutter The 2021-22 Budget: Funding for Debt Collector Licensing and Regulation FEBRUARY 2021 Background higher level of oversight than CCFPL. For example, in implementing the SB 908 license application Recent Legislation Broadens Authority process, DFPI will need to assess whether of Department of Financial Protection and applicants are of sound financial condition, have a Innovation (DFPI). Chapter 157 of 2020 (AB 1864, reasonable business plan, and are likely to comply Limón)—known as the California Consumer with state law. Financial Protection Law (CCFPL)—broadens DFPI’s authority in various ways beginning Governor’s Proposal January 1, 2021. For example, the legislation allows Limited-Term Resources to Implement DFPI to promulgate regulations to require entities Legislation. The Governor’s budget proposes providing financial products or services to California three-year, limited-term funding including a consumers to register with the department. These total of $16.5 million (FPF) and 71 positions in providers are known as “new covered persons” 2021-22 (increasing annually to $18 million and (NCPs). DFPI estimates that CCFPL will require 90 positions by 2023-24) for DFPI to implement roughly 9,000 NCPs to register and that the large SB 908. This total amount includes (1) $10.7 million majority of these NCPs—roughly 7,000—will be and 44 positions in newly authorized resources debt collectors. To support the implementation of and (2) $5.8 million and 27 positions in existing CCFPL, the 2020-21 budget package provided resources redirected from CCFPL implementation. four-year, limited-term support. Specifically, the The proposed positions would be divided between budget includes $8.3 million from the Financial a licensing and examination unit, an enforcement Protection Fund (FPF) and 44 positions for DFPI in unit, and a legal division. In addition, the positions 2020-21 (increasing annually to $19.2 million and include various support staff such as human 90 positions by 2023-24). (The FPF is the primary resources and information technology positions. fund supporting DFPI and receives revenue largely from regulatory fees.) Assessment Separate Legislation Requires DFPI to Overall Need for Resources Subject to License Debt Collectors. Chapter 163 of 2020 Uncertainty. To estimate the amount of resources (SB 908, Wieckowski) requires DFPI to establish necessary to implement SB 908, DFPI made a regulatory and licensing system to oversee debt various workload assumptions. For example, collectors. DFPI began implementing SB 908 on the department estimates that it will need to January 1, 2021 and is required to allow any license 7,000 debt collectors—consistent with debt collector that applies for a license prior to its assumption that it will need to register 7,000 January 1, 2022 to operate pending review of the debt collectors under CCFPL. According to the application. We note that some of the oversight department, this estimate is based on the fact responsibilities specified in SB 908 for the that Texas currently licenses roughly 7,000 debt department are similar to those specified in CCFPL. collectors and the assumption that California would For example, both pieces of legislation authorize have at least the same number of debt collectors. DFPI to conduct examinations of debt collectors to In addition, because the department is still in the uncover unlawful practices. However, the licensing process of drafting SB 908 regulations, it had to requirements in SB 908 would generally create a make assumptions about the level of staff time 2021-22 LAO Budget Series 1 analysis full gutter and resources needed to license and regulate • Debt Collector License Applications. debt collectors. For example, based on various We recommend the Legislature require the assumptions about the amount of time aspects department to report on the number of debt of the licensing and examination process take, collectors who have applied for a license as DFPI estimates it will need 17 financial institutions of January 1, 2022. (Because debt collectors examiners in 2021-22 (increasing annually to would be unable to legally operate in 28 examiners by 2023-24). California if they have not applied for a license If these assumptions are accurate, the overall by January 1, 2022, it is reasonable to think level of resources proposed in the Governor’s the vast majority will have done so by then.) budget for the implementation SB 908 are This report, which should be provided no reasonable, including the amount of resources that later than January 10, 2022, would provide would be redirected from CCFPL implementation. the Legislature with sufficient information to However, the assumptions made by the department assess whether the department’s assumption are subject to considerable uncertainty. For that it will need to license and regulate example, because many of the regulations to 7,000 debt collectors is accurate. To the implement SB 908 are still being developed, it extent it is not, the Legislature would be in a is unclear whether DFPI will issue licenses in the position to adjust the department’s funding same manner as Texas. It is possible that DFPI for SB 908 implementation as part of the could license significantly more or less than 7,000 2022-23 budget process. debt collectors. As a result, there is considerable • Assumed Versus Actual Workload. We uncertainty about the amount of resources recommend the Legislature require the necessary to implement SB 908, both in the short department to report by January 10, 2024 on and long run. how actual workload compares to the level of workload assumed for each position approved Recommendation for SB 908 implementation. Since much of Approve Proposed Resources, but Require the SB 908 regulatory framework will be Future Reports on Actual Workload. We in place and workload will be underway by recommend that the Legislature approve the then, the department should have a much proposed level of limited-term resources to clearer understanding of the actual resources implement SB 908 as they appear reasonable necessary to implement SB 908. This would based on the assumptions made by the provide the Legislature with information to department. However, it is unclear how much assess the department’s ongoing need for funding the department will need on an ongoing resources as it considers the budget for basis due to the uncertainty about the accuracy of 2024-25—the year SB 908 funding would the assumptions. In order to assist the Legislature expire. to make future funding decisions, we recommend requiring the department to report on: LAO Publications This report was prepared by Drew Soderborg and reviewed by Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. 2021-22 LAO Budget Series 2