Your collection firm is fortunate to begin working with a client that has a large number of monthly placements and the debtors are located all over the country.  Before now, you may have only sent letters and made phone calls to debtors located in your home state. At your first firm meeting to discuss the handling of these new accounts, you determine that you will only need to utilize telephone calls and the mail service to collect your new client’s accounts.  You assume this activity falls within the parameters of Interstate Commerce as described by both the federal government and the judicial system, and thus, you are protected from other state’s licensing and regulatory demands.  Think again!

 

Many states have enacted laws and regulations establishing licensing requirements for out-of-state collection firms to collect accounts from debtors located within the borders of their states.  Some of these requirements are strenuous and involve a great deal of paperwork, as well as substantial fees and payments.  Penalties range from a cease and desist order to fines of thousands of dollars. To complicate the matter further, there is no standardized licensing program that applies to every state; requirements differ widely from state to state, and sometimes even within the state itself if individual municipalities set their own licensing standards. An effort to obtain nationwide licensing is a daunting task.

 

As a law firm with a nationwide collection practice, we sought to secure licensing as a collection firm in all fifty states.  Our first task was to find out which states required us to be licensed, and which did not.  Fortunately, there are several states that do not have any statutory requirements to regulate out-of-state collection firms.  Examples include California, Colorado, Georgia, and Kansas.  Most other states have some form of statutory licensing requirement; however, that is not to say that a firm will automatically have to obtain a license for each of those states.  There are a number of states that, while they do have statutory licensing procedures in place, they also provide a number of exemptions that excuse a firm from the need to hike through the entire licensing process.  For example, several states’ statutes contain exemptions that specifically exclude attorneys and law firms from collection agency licensing requirements.  Also, a handful of states exempt any activity conducted within the parameters of Interstate Commerce.  Examples of states which employ these and other exemptions include Arizona, Illinois, New Mexico, Michigan, and Wisconsin.  There are two states that do not require licensing if a firm is located outside of the state/has no presence within the state: Delaware and Hawaii.  It is important to note, however, that just because your firm’s activity falls under an exemption, the state may still require some obligations unrelated to licensing requirements.  For example, Hawaii and West Virginia exempt out-of-state agencies and attorneys, respectively, but they both require firms to file a Certificate of Exemption to register their activity with the state.  The process is generally very simple and costs only $25.00.

 

Many other states have licensing requirements that cannot be escaped via a convenient exemption: most are strenuous and involve the filing of several different documents and applications, along with hefty fees.  Some states also require collection firms to become bonded in the amount of several thousand dollars prior to engaging in collection activity.  Enforcement efforts vary widely from state to state, and it is important to be aware of each state’s individual licensing process prior to starting out on the task.

 

For example, Connecticut, Florida, Nevada, North Dakota, and Texas all have statutory licensing obligations for out-of-state collection firms attempting to collect their client’s collection accounts within their borders.  In addition to obtaining this collection agency license, Maryland, Massachusetts, and New York City also require licensees to register with their state as a foreign corporation, which can be an expensive and laborious process in itself.  Nevada requires the firm’s collection agency manager to sit for testing before a license can be issued, regardless of whether the licensee is an attorney or a collection agency.  For a person who already passed a bar examination, the Nevada test can be an eye opening experience.  Nevada seemed to be flexible with the score needed to actually pass the test; the test lacks spell check and noun-verb agreements, and getting a cab back from the testing site takes longer than the test itself.

 

So what is the best way to determine whether or not your firm is required to be licensed?  How do you know whether or not you qualify for an exemption?  Where do you find the paperwork, and how much it will cost?  The only definitive way to know what regulations will apply to your firm is to do the legwork: call each state’s licensing board/commission/etc. and ask what their requirements are.  It is also very helpful to take the time to explore each state’s statutes yourself.  When making our own phone calls, we discovered that about 85% of the time, the people on the other end of the phone did not even know their own licensing requirements, and could not direct us to anyone that would be able to help.  Several states refused to give us any information on the topic at all, citing “we aren’t allowed to give legal advice.”  You should also be aware that many states’ employees may tell you that you definitely must get licensed—even if you don’t.  Whether this is an accident of ignorance or a purposeful attempt to gain revenue is unknown, but it is an easy trap to fall into.  Our advice: do a bit of research into the statutes to discover what requirements will apply to your firm, and then, if necessary, call to confirm and/or ask any questions.  It is also very important to re-check the statutes annually, since states frequently revise their statutes and requirements.  If you do not follow up with the revisions on a regular basis, you may fail to notice new requirements, thereby subjecting your firm to needless penalties and/or fines. 

 

As we progressed through the states seeking information and forms regarding licensing to do collection work in that particular state, we began to ask whether the states were unnecessarily interfering with interstate commerce.  Only Florida was fully prepared to discuss the issue and suggested that we could file for a declaratory judgment to exempt our law firm from their licensing requirement.  Perhaps one day a collection firm, cited and fined by a state in which they have no physical presence, will take issue with whether the state has overstepped its bounds and impermissibly infringed upon the free practice of Interstate Commerce.  Until then, it is better to be prepared than to be sorry—that is what we decided to do. 

 

Summary
 

 

 

Brian M. Cloud is a founding partner and managing member of Cloud & Tidwell, LLC.  A native of Hartford, Connecticut, Mr. Cloud earned his B.A. in history and government from the University of Notre Dame, and his J.D. and M.B.A from Cumberland School of Law, Samford University.  He is a member of the Georgia and Alabama State Bars.  While Mr. Cloud’s practice encompasses all aspects of the law, he has distinguished himself in real estate, corporate law, and legal representation of delinquent debt collections.  Mr. Cloud is a member of ACA International, IACC, Commercial Law League of America, NARCA, American Bar Association, and the Birmingham Bar Association. 

 

Attorney Cloud can be reached at Cloud & Tidwell, LLC, 1625 Richard Arrington Jr. Blvd S., Birmingham, AL 35205, Phone: (205) 201-7272, Fax: (205) 201-7288 or via email at bcloud@cloudtidwell.com.