Does a Collection Agency Need a License in Every State?

Licensing is a state by state question, not a yes or no. Which states license commercial collection agencies, what a license and a surety bond actually require, and what to check before you place an account.

By Howard Updegraff, Vice President of Client Services, C2C Resources

Somewhere in the first ten minutes of a call with a new credit manager, the question arrives: are you licensed in my state? It is a good question. It is also usually the wrong one, because the person asking has a customer in Tennessee, two in Illinois and one that just moved its headquarters to Texas, and what they actually want to know is whether the agency they are about to trust with those accounts is allowed to work them.

The answer is not a simple yes or no, and any agency that gives you one is skipping something. Collection agency licensing in the United States is decided state by state. Some states license every agency, some exempt commercial collection, some require nothing at all, and a couple of cities issue their own. I run client services at C2C Resources, so I am the one who fields this question most often. Here is how licensing actually works, what a license and a surety bond require, and what you should check before you place a single account.

Does a collection agency need a license in every state?

Many credit managers picture one license, issued somewhere in Washington, that an agency either has or does not. There is no such thing. What exists is fifty state statutes, each written at a different time with a different problem in mind, plus a small number of city ordinances on top of them.

Those statutes sort into three rough groups. The first group licenses every collection agency that collects from debtors in the state, consumer or commercial, no exceptions. The second group licenses collection agencies but exempts, or simply never reaches, agencies that collect only commercial accounts, so a business to business agency can work there without one. The third group has no collection agency license at all. Which state falls into which group changes over time, because legislatures add requirements, drop them and rewrite definitions. Earlier this year one of the states we had held a license in for years removed its requirement, and we retired that license. In the same period we added two others. Any list that says "these states require a license" is a snapshot, and you should treat it that way.

So the useful question is whether the agency holds a license in every state that requires one for the accounts it works, and whether it can tell you that plainly, state by state.

Why is commercial collection licensed differently from consumer collection?

The Fair Debt Collection Practices Act is the law most people mean when they talk about collection rules. Its definition of a debt, in 15 U.S.C. 1692a, covers an obligation of a consumer arising from a transaction that is primarily for personal, family or household purposes. An unpaid invoice from one business to another is none of those things. The FDCPA says a great deal about how a consumer debt may be collected and nothing about licensing anyone, and it does not reach a commercial account.

That leaves the states, and the states disagree. Some wrote their collection agency statute broadly enough that it covers anyone collecting any debt for another party, so commercial agencies are licensed exactly like consumer ones. Others defined a collection agency in consumer terms and never touched commercial work. Laws vary by state, and this is not legal advice; it is the reason a commercial agency can be fully compliant while holding a license in some states and none in others.

For you as a creditor, "are you licensed" has to be asked about the states where your debtors are, not the agency's home state. Our guide to how a commercial collection agency works covers what happens after placement; licensing has to be in place before it.

What does a state collection agency license actually require?

The specifics vary, but every licensing statute asks the same two questions: who is running this agency, and what happens to the client's money between the day a debtor pays and the day the client is remitted.

• The people. The application names the owners, officers and managers, and many states run background checks or ask about prior enforcement actions. A license follows the people as much as the company.
• The bond. A surety bond, in an amount the state sets, that pays out if the agency fails to remit collected funds. More on that below, because it is the part that protects you.
• The trust account. Money an agency collects for a client is the client's money. Licensing states require it to be held in a separate account, apart from the agency's operating funds, and some audit that account on a schedule.
• Renewal and reporting. Licenses expire. Annual or biennial renewal is standard, usually with a financial statement or report, and a lapsed license is the same as no license.
• A place to be served. Most states want a registered agent or a designated office for legal process, which is not the same thing as an office in the state.

From the client services side, what this looks like at C2C is a calendar. Licenses in different states come due in different months, two of our licenses are issued per office so we hold two in those states, and every renewal has its own paperwork and its own fee. That calendar is somebody's job here. When a credit manager asks me whether we are licensed in a given state, I am reading from it, and that is the standard you should hold any agency to: a specific answer, with a license number, not a shrug and "we work everywhere".

What is a surety bond, and why does the amount matter?

The bond is the piece of licensing that is actually about you. It exists for the day an agency collects your money and does not send it on, whether through fraud, insolvency or plain mismanagement, and it is the surety company, not the agency, that makes you whole up to the bond amount.

That is why the amount matters. A state's minimum bond can be modest, set decades ago for a different kind of agency. An agency working commercial accounts, where a single placement can be six figures, should be bonded at a level that means something against the balances it handles. C2C Resources carries a $500,000 surety bond. That figure is also a requirement of the Commercial Law League of America's agency certification, which is one of the reasons the certification is worth checking for separately from the license.

Two practical notes. First, the bond protects the money the agency has already collected. It does not guarantee that the agency will collect anything, and no bond does. Second, ask for the bond amount in writing, and if an agency will not tell you, treat that as information.

What happens if an agency collects in a state without a license?

We say this plainly on our own overview page: operating without a required license is a felony in some states, and creditors can be drawn into the legal consequences. It is not a line we put there for effect. An unlicensed agency does not only expose itself. The account it is working is yours, the demand letters go out in pursuit of your invoice, and if a debtor's counsel finds that the agency had no right to collect in that state, the first thing that happens is that your account stops moving and the second is that your name is in the file.

A business that owes money and would rather not pay it has every incentive to look for a reason the collection is improper, and an unlicensed agency hands them one. We have seen accounts that were perfectly collectable turn into arguments about the collector instead of the debt. The way to avoid that is boring: place with an agency that holds the license where the debtor is, or can show you that the state does not require one.

Laws vary by state and penalties differ, so a concern about an account already worked is a question for counsel. The point here is prevention: ten minutes of checking before placement is cheaper than finding out afterward.

What should you verify before placing an account with any agency?

This is what I hand every credit manager who asks me the licensing question. It turns a yes or no into something you can check.

1. Ask where your debtors are, then ask about those states. List the states your past due customers sit in. Ask the agency which of those states require a license for commercial collection and which licenses it holds, with numbers. A good agency answers from a list, not from memory.
2. Look the licenses up. Every licensing state has a regulator, usually under banking, financial institutions or consumer affairs, and most run a public lookup. Check that the license is active and note the expiration date. This takes a few minutes per state.
3. Ask for the bond amount in writing. You want the figure and the surety. Then ask yourself whether that number is meaningful against the balances you are about to place.
4. Ask how client money is held. The right answer is a separate trust account, reconciled and audited, with a remittance schedule written into your placement agreement so you know when collected funds reach you.
5. Check the certification. The Commercial Law League of America's commercial collection agency certification, endorsed by the International Association of Commercial Collectors, is held by a small group of agencies nationally. It involves a third-party review of operations and financial practices, a surety bond requirement, an annual trust audit, continuing education for agency leadership, and annual renewal. It does not replace a license or promise results, but it is the one check that looks at how the agency is run rather than whether it filed the right forms.
6. Read the placement agreement. Fees on contingency, so there is no fee unless money is recovered. When and how you are remitted. What happens to an account that needs to go to counsel. If the agreement is vague about remittance, that matters more than anything on the license.

The honest limit of all this: a license tells you an agency is allowed to collect in a state. It does not tell you the agency is good at commercial work, that its collectors have spent decades on business accounts, or that it will keep your customer relationship intact while it collects. Those are different questions, and you should ask them separately, once the licensing boxes are ticked. If an account is in genuine dispute, or you cannot show the goods were delivered, the agency's license is not your problem either; the file is. Fix the file first.

Where is C2C Resources licensed, and what about the other states?

Since you will ask, here is our own answer, the same one I give on the phone. C2C Resources has collected commercial accounts in all fifty states since 2002. We hold state collection agency licenses in Arizona, Arkansas, Delaware, Florida, Idaho, Illinois, Indiana, Louisiana, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Oregon, Tennessee, Washington and West Virginia. Indiana and North Carolina issue their licenses per office, so we hold two in each. We also hold city licenses in Buffalo, New York and in Metairie, Louisiana. New York licenses collection agencies at the city level in Buffalo rather than statewide, which is why we describe it as a city license and not a New York license. The current list, state by state, is on our Where We Collect page, and it is the page we update when a license is added or retired.

A license is not an office. C2C Resources is headquartered in Atlanta, Georgia, with a second office in Metairie, Louisiana. Every account, in every state, is worked from those two offices by collectors who average 26 years in commercial collections. That is the whole footprint, and it is all the footprint a commercial agency needs, because the work is done by phone, by letter and through counsel, not by someone driving to the debtor's door.

In the states that do not require a license for commercial collection, the license question falls away and the question of how the agency is run is all that is left. That is why it is important to use a certified commercial agency. C2C Resources is certified by the Commercial Law League of America, endorsed by the International Association of Commercial Collectors, carries a $500,000 surety bond, and holds collection licenses in the states that require them. If an account needs to move from collection to litigation, our Legal Forwarding Edge program places it with counsel in the debtor's state, and that is the only point at which where the debtor sits becomes a question of local law rather than licensing.

If your past due commercial accounts sit in several states, start with third-party commercial debt collection and tell us where they are. Which states we are licensed in, and what each file needs before placement, is a conversation we have every day.

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