BILL ANALYSIS                                                                                                                                                                                                    






                  SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
                             Senator Juan Vargas, Chair


          SB 708 (Corbett)                        Hearing Date:  April 27, 
          2011  

          As Amended: April 12, 2011
          Fiscal:             Yes
          Urgency:       No
          

           SUMMARY    Would enact the Debt Settlement Consumer Protection 
          Act, administered by the Department of Corporations (DOC), for 
          the purpose of licensing and regulating debt settlement 
          providers, as specified.  
          
           DESCRIPTION
           
            1.  Would enact the Debt Settlement Consumer Protection Act, 
              administered by DOC, as a new division of the Financial Code 
              (Section 12500 et seq.).

           2.  Would prohibit a person from acting as a debt settlement 
              provider without a valid license issued by the Commissioner 
              of Corporations (commissioner).  "Debt settlement provider" 
              would be defined as any person or entity engaging in, or 
              holding itself out as engaging in the business of providing 
              debt settlement services to California consumers in exchange 
              for any fee or compensation, or any person who solicits for 
              or acts on behalf of that person or entity.  

           3.  Would define "debt settlement services" as either of the 
              following:

               a.     Offering to provide advice or service, or acting as 
                 an intermediary between or on behalf of a consumer and 
                 one or more of a consumer's creditors, where the purpose 
                 of the advice, service, or action is to obtain a 
                 settlement, adjustment, or satisfaction of any of the 
                 consumer's unsecured debt in an amount less than the full 
                 amount of the principal amount of the debt or an amount 
                 less than the current outstanding balance of the debt.

               b.     Offering to provide, or providing, services related 
                 to advising, encouraging, assisting, or counseling a 




                                               SB 708 (Corbett), Page 2




                 consumer to accumulate funds for the purpose of 
                 proposing, obtaining, or seeking to obtain a settlement, 
                 adjustment, or satisfaction of any of the consumer's 
                 unsecured debt in an amount less than the full amount of 
                 the principle amount of the debt or an amount less than 
                 the current outstanding balance of the debt.

           4.  Would provide that a debt settlement provider has a 
              fiduciary duty to a consumer in connection with the 
              solicitation and provision of debt settlement services.  

           5.  Would prohibit a debt settlement provider from entering 
              into a contract with a consumer for debt settlement 
              services, unless the provider makes a written determination 
              that the consumer can reasonably meet the requirements of 
              the proposed debt settlement program, the debt settlement 
              program is suitable for the consumer at the time the 
              contract is to be signed, and the consumer is reasonably 
              expected to receive a tangible net benefit from the debt 
              settlement program.

           6.  Would specify the following, with respect to fees that may 
              be charged by debt settlement providers:

               a.     No fee may be charged until the provider settles at 
                 least one debt pursuant to a settlement agreement, 
                 provides documentation of the agreement to the consumer, 
                 and the funds to settle the debt in full have been paid 
                 to the creditor.

               b.     The fee or consideration may not exceed 15% of the 
                 amount saved by settling each debt.  The percentage 
                 charged may not change from one individual debt to 
                 another.  The amount saved must be calculated as the 
                 difference between the principal amount of debt brought 
                 into the debt settlement program and the amount paid to 
                 the creditor pursuant to the settlement negotiated by the 
                 debt settlement provider as full and complete 
                 satisfaction of the creditor's claim with regard to that 
                 debt.

               c.     No fee may be charged or collected at any time, if 
                 the total fees, settlements, and unsettled debt exceed 
                 the principal amount of debt brought into the debt 
                 settlement program.  





                                               SB 708 (Corbett), Page 3




           7.  Would authorize a provider to request or require that a 
              consumer place funds in an account to be used for the 
              provider's fees and for payments to creditors or debt 
              collectors, provided that all of the following conditions 
              are met:

               a.     The funds are held in an account at an insured 
                 financial institution freely chosen by the consumer.

               b.     The consumer owns the funds in the account and is 
                 the owner of any accrued interest on the account.

               c.     The entity administering the account is not owned or 
                 controlled by, or in any way affiliated with, or under 
                 contract with the debt settlement provider.

               d.     The entity administering the account does not give 
                 or accept any money or other compensation in exchange for 
                 referrals of business involving the debt settlement 
                 provider.

               e.     The consumer may withdraw from the debt settlement 
                 service at any time without penalty and must receive all 
                 funds in the account, other than funds earned by the debt 
                 settlement provider in compliance with the law, within 
                 seven business days of the consumer's request.  

           8.  Would require applicants for licensure to submit specified 
              fees to the commissioner, include specified information on 
              their license applications, and submit to state and federal 
              background checks; would specify the conditions under which 
              the commissioner may issue, suspend, deny, or revoke 
              licensure; and would provide applicants who have their 
              licenses suspended, denied, or revoked an opportunity to 
              appeal the commissioner's decision.

           9.  Would require licensees to satisfy several requirements and 
              provide specified disclosures before entering into an 
              agreement with an individual to provide debt settlement 
              services; maintain a minimum net worth of $100,000 and a 
              surety bond of $200,000 at all times; include specified 
              items in each agreement with a consumer; provide a specified 
              "consumer notice and rights form" to each consumer; furnish 
              a foreign language translation of the disclosures and 
              documents required to be provided under the bill, if a 
              provider communicates with an individual primarily in a 




                                               SB 708 (Corbett), Page 4




              language other than English; refrain from engaging in 
              certain enumerated "bad acts"; provide a periodic accounting 
              to consumers detailing debts brought into the program, 
              settlements completed, remaining outstanding debts, and fees 
              paid; and submit an annual report to the commissioner, 
              reporting information on 30 different metrics for the 
              preceding five calendar years, as specified.  

           10. Would authorize consumers to cancel a debt settlement 
              services agreement at any time, by giving the provider oral, 
              written, or electronic notice.  No fees may be charged to 
              cancel, and no fees may be charged after cancellation, but a 
              debt settlement provider may collect a settlement fee that 
              it earned prior to cancellation of the agreement.  

           11. Would provide that an agreement is void, if a provider 
              imposes a fee or other charge or receives money or other 
              payments not authorized by the bill, and would provide that 
              any contract entered into in violation of the provisions of 
              the bill governing the contents of contracts is void.

           12. Would require licensees to maintain books, accounts, and 
              records intended to enable the commissioner to evaluate the 
              licensee's compliance with the bill, and to retain those 
              documents for at least five years, beginning from the later 
              of the date that a consumer's debt settlement services 
              agreement expires, is completed, or is finalized.  Would 
              authorize the commissioner to examine the books, records, 
              accounts, and activities of each licensee at any time, but 
              not less than once every two years.

           13. Would allow individuals, the commissioner, and the Attorney 
              General to bring actions against licensees for violations of 
              the bill, and would subject violators to administrative, 
              civil and criminal penalties for failure to comply with the 
              bill's provisions.  Would additionally provide that if an 
              agreement is void, an individual may recover all money paid 
              by or on behalf of that individual, and may also recover 
              compensatory damages for injury caused by a violation of the 
              bill, together with reasonable attorney's fees and costs.  
              Any enforcement action brought for a violation of the bill 
              would have to commence within four years of the later of: a) 
              the date that money was last transmitted to a provider by or 
              on behalf of a consumer or b) the date on which the consumer 
              discovered or reasonably should have discovered the facts 
              giving rise to the consumer's claim, as specified.




                                               SB 708 (Corbett), Page 5





           14. Would exclude the following persons and entities from the 
              requirement to be licensed under the Debt Settlement 
              Consumer Protection Act: an attorney providing information, 
              advice, or legal representation with respect to a case or 
              proceeding under Title 11 of the United States Code; a bank, 
              bank holding company, credit union, the subsidiary or 
              affiliate of a bank, bank holding company, or credit union, 
              or any other financial institution licensed under state or 
              federal law, when these institutions are engaged in the 
              regular course of their business;  escrow agents, 
              accountants, broker dealers in securities, or investment 
              advisors in securities, when acting in the ordinary practice 
              of their professions; and any person who performs credit 
              services for his or her employer while receiving a regular 
              salary or wage, when the employer is not engaged in the 
              business of offering or providing debt settlement services; 
              a California licensed title insurer, escrow company, or 
              other person in good standing that provides bill paying 
              services, if the person does not provide debt settlement 
              services; and financial planning services provided in a 
              financial planner-client relationship, as specified.

           15. Would exempt a person or entity licensed as a debt 
              settlement provider from the Check Sellers, Bill Payers, and 
              Proraters Law, except to the extent that person is 
              performing services and activities governed by that law, 
              which do not constitute debt settlement services.

           EXISTING LAW
           
           16. Provides for the Check Sellers, Bill Payers, and Proraters Law 
              (Proraters Law; Financial Code Section 12000 et seq.; all other 
              references are to the Financial Code), administered by DOC.  The 
              Proraters Law defines a prorater as a person who, for 
              compensation, engages in whole or in part in the business of 
              receiving money or evidences thereof for the purpose of 
              distributing the money or evidences among creditors in payment 
              or partial payment of the obligations of the debtor (Section 
              12002.1).

           17. Limits the fees that may be charged by a prorater, or by any 
              other person for the prorater's services, to an origination fee 
              of up to $50, plus 12% of the first $3,000 distributed by the 
              prorater to the creditors of a debtor; 11% of the next $2,000; 
              and 10% of any of the remaining payments, except for payments 




                                               SB 708 (Corbett), Page 6




              made on recurrent obligations, as defined (Section 12314).

           18. Provides that if a prorater contracts for, receives, or makes 
              any charge in excess of the maximum allowed under the Proraters 
              Law, except as the result of an accidental and bona fide error, 
              the prorater's contract with the debtor is void, and the 
              prorater is required to return to the debtor all charges 
              received from the debtor (Section 12316).

           19. Provides an exemption from the Proraters Law for nonprofit 
              community service organizations, as specified, and limits the 
              fees that may be charged by these organizations, when providing 
              services to debtors, to a one-time fee of up to $50, plus the 
              lesser of $35 or 8% of the amount disbursed monthly for debt 
              management plans, or up to 15% of the amount of debt forgiven 
              for negotiated debt settlement plans (Section 12104).

           20. Provides for administrative penalties of up to $2,500 per 
              violation of the Proraters Law, and states that any licensee or 
              person who willfully violates any provision of the law, or any 
              rule or order adopted pursuant to the law, is liable for a civil 
              penalty of up to $10,000, enforceable by the commissioner 
              (Section 12105).  

           COMMENTS

          1.  Purpose:   Co-sponsored by the Center for Responsible Lending 
              (CRL) and Consumers Union (CU), SB 708 is intended to 
              establish a licensing and regulatory scheme to protect 
              consumers from predatory and dangerous practices used by 
              debt settlement companies.  According to the bill's 
              co-sponsors, the key provisions of the bill include its 
              across-the-board advance fee ban and its fee cap of 15% of 
              the amount saved on a settlement, collectable only after a 
              consumer's debt is fully paid and released.  Other key 
              provisions include a requirement that licensed debt 
              settlement providers screen consumers before enrolling them 
              in a debt settlement program, to determine whether the 
              program is suitable for, and likely to benefit the consumer, 
              and reporting requirements intended to allow policymakers to 
              analyze the debt settlement model and its impact on 
              California consumers.  

           2.  Background and Discussion:   

                a.     Debt Settlement Business Model:   Debt settlement 




                                               SB 708 (Corbett), Page 7




                 providers are in the business of negotiating reductions 
                 in the principal amount of unsecured debt (typically, but 
                 not exclusively credit card debt) that is owed by 
                 consumers to their creditors.  This distinguishes them 
                 from credit counselors, who typically advise consumers 
                 about how to manage their finances, and from debt 
                 management companies, which typically negotiate different 
                 payment terms for borrowers struggling to make their 
                 payments, without reducing the principal amount of debt 
                 that is owed.  SB 708 speaks only to the regulation of 
                 debt settlement providers.

               The average amount of consumer debt brought by a consumer 
                 into a debt settlement program ranges from $20,000 to 
                 $30,000.  A customer who signs up with a debt settlement 
                 provider is commonly instructed to put money aside in a 
                 bank account, and add money to that bank account each 
                 month.  Because creditors typically want assurances that 
                 an individual will pay his/her settled debts, the debt 
                 settlement service providers use the existence of money 
                 in the bank account as leverage, when they seek out the 
                 consumer's creditors to negotiate a reduction in the 
                 amount the consumer owes.  

               Once a reduction in a person's debts is negotiated by a 
                 debt settlement service provider, one of several business 
                 models is followed.  Some providers notify the debtor 
                 about the negotiated amount, and the debtor is 
                 responsible for sending money to the creditor.  Other 
                 providers work with a third party financial institution, 
                 which facilitates the transfer of money from the debtor's 
                 account to the creditor.  Still other providers direct 
                 the negotiated amount to the creditor, using a power of 
                 attorney granted to the debt settlement provider by the 
                 debtor (though reportedly, this practice had fallen out 
                 of favor in recent years).  Alternate business models are 
                 also possible.  Until recently, there was no restriction 
                 on the timing of fee collection by debt settlement 
                 providers, nor on the way(s) in which fees could be 
                 calculated.  That all changed with issuance of the 
                 so-called Telemarketing Sales Rule (TSR) by the Federal 
                 Trade Commission (FTC; this rule is discussed in more 
                 detail below).  

                b.     Historic Debate Over Licensure:   The issue of 
                 whether for-profit debt settlement service providers 




                                               SB 708 (Corbett), Page 8




                 should be licensed, and under which law, is a 
                 controversial one, and has been the subject of a number 
                 of different bills during prior Legislative Sessions.  
                 Historically, DOC's enforcement staff has taken the 
                 position that for-profit debt settlement service 
                 providers meet the criteria for licensure under the 
                 Proraters Law, and has taken enforcement action against 
                 some debt settlement service providers who have failed to 
                 obtain licenses as proraters.  The debt settlement 
                 services industry has historically maintained that, 
                 because they do not physically hold money for debtors, 
                 nor control debtors' assets, they do not fall under the 
                 Proraters Law, and need not obtain a prorater's license.  
                 Instead, they have asserted that they need a separate 
                 licensing law, and, toward that end, have sponsored 
                 several pieces of legislation, which would have created 
                 such a licensing scheme (e.g., AB 69 (Lieu), AB 2611 
                 (Lieu), and SB 1678 (Florez) during the 2007-08 
                 Legislative Session, and AB 350 (Lieu) during the 2009-10 
                 Legislative Session).  

               This year, two consumer groups, which opposed prior, 
                 industry-sponsored legislation, are sponsoring SB 708.  
                 They assert that SB 708 contains consumer protections 
                 lacking in earlier, industry-sponsored legislation and 
                 that, when combined with the recently-promulgated FTC 
                 rule described below, will allow for the provision of 
                 debt settlement services to be offered in California in a 
                 manner that will be protective of consumers who seek out 
                 these services.

                c.     The FTC Rule:   In July 2010, the FTC issued a rule 
                 (the TSR) to regulate certain practices of for-profit 
                 companies selling debt relief services over the phone.  
                 All of the provisions of the TSR other than the advance 
                 fee ban became effective September 27, 2010.  The advance 
                 fee ban became effective October 27, 2010.  The language 
                 of the TSR can be found in 16 CFR Part 310.  

               The FTC rule has had a dramatic impact on the debt 
                 settlement services industry since its issuance.  
                 According to industry representatives, well over half, 
                 and probably closer to two-thirds of industry 
                 participants have left the business altogether.  Those 
                 businesses that remain have downsized their sales forces 
                 and are struggling to make a profit.




                                               SB 708 (Corbett), Page 9





                d.     Who is Covered by the FTC Rule?   According to the 
                 FTC, its new rule "applies to for-profit sellers of debt 
                 relief services and telemarketers for debt relief 
                 companies.  The new rule defines a 'debt relief service' 
                 as a program that claims directly, or implies, that it 
                 can renegotiate, settle, or in some way change the terms 
                 of a person's debt to an unsecured creditor or debt 
                 collector....The TSR defines 'telemarketing' as a 'plan, 
                 program, or campaign...to induce the purchase of goods or 
                 services' involving more than one interstate telephone 
                 call."  

               The FTC rule covers both in-bound calls (calls potential 
                 customers place to debt relief providers or those working 
                 on the providers' behalf) and outbound calls (calls debt 
                 relief providers or those working on their behalf place 
                 to potential customers).  Thus, the rule covers calls to 
                 debt relief providers in response to advertising, 
                 including consumer calls in response to TV or radio 
                 commercials, infomercials, home shopping programs, ads in 
                 magazines, newspapers, or the phone book, online ads, 
                 billboards, or ads in other media. It also covers calls 
                 to debt relief providers in response to most direct mail 
                 promotions, including calls in response to postcards, 
                 flyers, door hangers, brochures, certificates, letters, 
                 e-mails, and faxes, urging people to call about debt 
                 relief services.

                e.     Advance Fee Ban:   Under the TSR, telemarketers of 
                 for-profit debt relief services, including credit 
                 counseling, debt settlement, and debt negotiation 
                 services, are prohibited from charging a fee before 
                 settling or reducing a customer's credit card or other 
                 unsecured debt.  Fees for debt relief services may not be 
                 collected until all of the following occur:  

                        i.             The debt relief service 
                         successfully settles, reduces, or otherwise 
                         changes the terms of at least one of the 
                         customer's debts pursuant to a written settlement 
                         agreement, debt management plan, or other valid 
                         contractual agreement executed by the customer; 

                        ii.            The customer makes at least one 
                         payment pursuant to that settlement agreement; 




                                               SB 708 (Corbett), Page 10




                         and 

                        iii.           The fee or consideration paid by 
                         the consumer either: 1) bears the same 
                         proportional relationship to the total fee that 
                         the individual settled debt bears to the entire 
                         debt amount brought into the program; or 2) is a 
                         percentage of the amount saved as a result of the 
                         settlement, reduction, or alteration.  If fees 
                         are charged under the savings model described in 
                         number 2, the same percentage must be charged for 
                                                                               each of the consumer's debts.  

                f.     Other Provisions of the TSR:   In addition to its 
                 advance fee ban, the TSR requires debt relief providers 
                 to make specific disclosures to consumers and refrain 
                 from making misrepresentations in their interactions with 
                 consumers.  

               Another provision of the rule allows debt relief companies 
                 to request or require that consumers set aside their fees 
                 and savings for payment to creditors in a dedicated 
                 account at a specific financial institution, from which 
                 the money can be deducted to pay the debt relief 
                 provider's fees or make payments to creditors or debt 
                 collectors.  However, all of the following conditions 
                 must be met, if a dedicated account is requested or 
                 required of a consumer by a debt relief provider:  i) the 
                 dedicated account must be maintained at an insured 
                 financial institution; ii) the consumer must own the 
                 funds and any interest accrued on those funds; iii) the 
                 consumer must be able to withdraw funds from the account 
                 at any time without penalty; iv) the provider may not own 
                 or control, or have any affiliation with the company 
                 administering the account; and v) the provider may not 
                 exchange any referral fees with the company administering 
                 the account.

           3.  How Does SB 708 Differ from the FTC Rule?   The FTC rule is 
              broader than SB 708 in some ways and narrower in other ways. 
               For example, the FTC rule covers all types of debt relief 
              services, including credit counseling, debt management, and 
              debt settlement.  SB 708 covers only debt settlement 
              services.

          The FTC rule exempts non-profit entities, intrastate phone calls 




                                               SB 708 (Corbett), Page 11




              soliciting debt relief services, face-to-face solicitation 
              of debt relief services, and internet-only transactions.  SB 
              708 covers non-profits, intrastate phone calls, face-to-face 
              solicitations, and internet-only transactions, as long as 
              they involve the marketing of debt settlement services to 
              California consumers.  

          The FTC rule addresses the timing of fee collection, but does 
              not cap the amount of the allowable fee, nor does it require 
              that the fee be a percentage of the savings realized for a 
              customer (as described above, the FTC rule allows the fee 
              for settling a single debt to be calculated either as a 
              percentage of the total fee that will be charged for 
              settling all debts brought into the debt relief program or 
              as a percentage of the savings realized for a consumer).  SB 
              708 caps the allowable fee at 15% of the savings to the 
              consumer.

          The FTC rule allows fees to be paid to debt relief providers in 
              connection with negotiated installment payments, before all 
              of the installment payments are made, and thus before the 
              debt is fully paid off.  SB 708 requires installment payment 
              debt to be fully paid off, before a debt settlement provider 
              can receive payment for settling that debt.

          The FTC rule allows debt relief providers to recommend or direct 
              consumers to deposit money into accounts at specific, 
              insured depository institutions, provided certain 
              requirements are met.  SB 708 prohibits debt settlement 
              providers from requiring a consumer to deposit his or her 
              funds into a specific financial institution.  SB 708 also 
              prohibits debt settlement providers from taking a power of 
              attorney from a consumer, exercising control over a 
              consumer's bank account, being  named on that account, 
              creating a demand draft from that account, or obtaining any 
              information about that account from any person other than 
              the consumer.  

          The FTC rule does not prescribe a licensing or regulatory 
              scheme.  SB 708 provides for one.

          The FTC rule requires debt relief providers to retain records 
              for at least two years.  SB 708 requires that business 
              records be retained for five years.

          The FTC rule does not include reporting requirements.  SB 708 




                                               SB 708 (Corbett), Page 12




              includes extensive reporting requirements on licensees, as 
              well as an annual report by the commissioner summarizing the 
              information submitted by licensees.

           4.  Will There Be Enough Licensees To Justify A Licensing 
              Scheme?   The significant contraction of the debt settlement 
              industry leaves some question as to whether a sufficient 
              number of licensees remain to support a licensing scheme.  
              If DOC lacks a sufficient number of licensees across which 
              to spread its set-up and administrative costs, the cost of 
              an individual license will be prohibitively high, and DOC is 
              likely to recommend a veto of the bill, based upon the lack 
              of a sufficiently large licensee population.  The only 
              entity capable of determining whether there are enough 
              licensees to support a licensing program is DOC, and that 
              department has not yet taken a position on the bill.  

          If, after further review, it appears that there are an 
              insufficient number of potential debt settlement licensees 
              to support a debt settlement licensing scheme, one option 
              available to the author and sponsors involves scaling the 
              bill back to one that requires debt settlement providers to 
              register with DOC, rather than obtain licenses from DOC.  A 
              registration scheme would eliminate the costs associated 
              with licensing, such as license application review, license 
              issuance, license renewal, regulatory examinations, and 
              regulator enforcement actions, without necessarily removing 
              the bill's other requirements and prohibitions.  

          If desired by the author and sponsor, a provision could also be 
              added to a registration bill, allowing DOC to issue a 
              finding that licensure is warranted, if and when the number 
              of debt settlement companies registered with the state grows 
              to a large enough population to support licensure.  That 
              finding, in turn, could trigger the full licensing 
              requirements contained in the bill.  This option is offered 
              as a suggestion for future consideration, rather than an 
              amendment, at this time.

           5.  Summary of Arguments in Support:    Consumers Union (CU), one 
              of the bill's two co-sponsors, highlights several positive 
              aspects of SB 708 in its support letter.  The bill "would 
              impose two simple limits on debt settlement fees - that fees 
              cannot exceed 15% of the savings, and that fees cannot be 
              charged on a debt until a settlement releases that 
              debt...Permitting fees based on a percentage of the 




                                               SB 708 (Corbett), Page 13




              principal debt, as many debt settlement companies do, is 
              very problematic because the provider can collect fees that 
              easily exceed the amount of savings achieved...SB 708 ties 
              debt settlement fees directly to the savings resulting from 
              actual, binding settlements, measured as 15% of the 
              difference between the amount paid to settle the debt and 
              the principal amount of debt at the time of enrollment...SB 
              708 also includes other valuable provisions, such as 
              creating an industry-fee funded licensing process and 
              imposing bonding requirements.  Importantly, it requires 
              that providers screen consumers before enrolling them in a 
              debt settlement program.  In addition, it would place strong 
              prohibitions on harmful conduct that can mislead consumers 
              and leave them in a substantially worse financial position 
              than they were before entering a debt settlement program."

          CU also comments on the breadth of SB 708, compared to the FTC 
              rule.  "Because the FTC rule is grounded in its authority to 
              regulate telephone sales...it does not apply to a sale of 
              debt settlement services where 'payment is not required 
              until after a face to face meeting.'  It also does not apply 
              to sales conducted solely on the Internet.  SB 708 extends 
              the timing rule developed by the FTC to debt settlement no 
              matter how it is sold."

          The Center for Responsible Lending (CRL), the bill's other 
              co-sponsor, believes that the debt settlement model is 
              flawed, because it requires consumers to stop making 
              payments to their creditors, which forces a costly growth in 
              the debt load before it is paid down.  According to CRL, 
              data shows that debt settlement is beneficial for only a 
              small percentage of consumers, and that many debt settlement 
              participants end up financially worse off than when they 
              entered the program.  CRL asserts that SB 708 would put 
              strong rules into place to "ensure that consumers for whom 
              debt settlement will provide no benefit are not enrolled to 
              their detriment; and the fees and practices of debt 
              settlement companies maximize the changes of consumers to 
              succeed when they do enroll."  

          In its letter of support, CRL touts four key elements of SB 708: 
               1) its comprehensive advance fee ban; 2) reasonable fees 
              tied to settlement (which will align the interests of the 
              company with the interests of the consumer, ensure that 
              consumers pay only if, and to the extent that, services are 
              provided, and incentivize companies to screen out consumers 




                                               SB 708 (Corbett), Page 14




              for whom successful settlements are not likely); 3) consumer 
              screening (which will prohibit providers from enrolling 
              consumers before determining that the debt settlement 
              program is suitable for the consumer and ensure that the 
              consumer is likely to derive a net financial benefit from 
              participating); and 4) robust data reporting (which will 
              allow for monitoring and oversight of the industry).

          Visa, Inc. believes that SB 708 contains a number of reasonable 
              protections for consumers who are vulnerable to predatory 
              commercial debt settlement practices.  Consumers facing debt 
              should be given legitimate, effective tools, information, 
              and assistance to help them regain their financial 
              well-being and reclaim their creditworthiness.
           
          U.S. Debt Resolve identifies itself as a debt relief firm that 
              operates in California and offers debt relief services in 
              alignment with the proposed 15% savings model contained in 
              SB 708.  U.S. Debt Resolve believes that SB 708 compliments 
              the TSR by providing additional safeguards to address 
              licensing, certification, insurance and bonding; imposing 
              suitability testing of enrollees; and requiring 
              comprehensive data submissions to help evaluate the success 
              of program results.

          Consumer Recovery Network (CRN) provides consumer education and 
              debt settlement solutions, using a business approach it 
              describes as unique.  Among these unique approaches:  CRN 
              empowers consumers to work out arrangements directly with 
              their creditors, without the need for a third party to 
              intervene in providing a direct debt settlement service; CRN 
              offers full-service debt settlement to its members when they 
              request it and only charges a fee of 15% of savings when it 
              reaches a settlement that its member approves.  CRN's 
              members fund their settlements directly from their own 
              accounts.  CRN supports all of the provisions of SB 708, 
              except for the bill's surety bond amount, which CRN requests 
              be reduced to $50,000 (down from the $200,000 amount 
              specified in the bill).  Staff notes that the author will 
              propose amendments in Committee to reduce the amount of the 
              surety bond to $50,000, as requested by CRN.

          Multiple non-profit credit counseling agencies are also 
              supportive of the measure, but are seeking amendments to 
              exclude themselves from the provisions of the bill (the 
              author will also propose amendments in Committee to exempt 




                                               SB 708 (Corbett), Page 15




              the credit counseling agencies from the bill's provisions).  
              Credit counseling agencies including (among others) the 
              Coalition for Quality Credit Counseling, Money Management 
              International, Springboard Nonprofit Consumer Credit 
              Management, Novadebt, and ClearPoint Credit Counseling 
              Solutions support the bill's efforts to ensure that 
              consumers are better protected when they seek out debt 
              settlement services.  Credit counseling agencies often 
              counsel clients who previously sought out unscrupulous debt 
              settlement providers, and who seek out help from credit 
              counseling agencies after failing to obtain help from the 
              debt settlement providers.  These credit counseling agencies 
              believe that SB 708 will better protect consumers by 
              improving transparency, affording them full disclosures, and 
              limiting fees.  

           6.  Summary of Arguments in Opposition:    The United States 
              Organization for Bankruptcy Alternatives (USOBA), a debt 
              settlement industry trade association, opposes SB 708, 
              stating that, "In light of recent action by the Federal 
              Trade Commission, this bill is unnecessary and, as currently 
              written, serves one purpose - to kill the bankruptcy 
              alternative industry in California."  USOBA observes that 
              65% to 70% of the debt settlement industry went out of 
              business in the six months since the FTC regulations went 
              into effect.  

          USOBA sees this constriction as both positive and negative.  On 
              the positive side, it forced some bad actors out of the 
              business.  On the negative side, many legitimate small 
              businesses were also forced out of business.  Unfortunately, 
              the rules also left what USOBA views as gaping loophole, 
              which allows makeshift law firms and nonprofits to continue 
              operating debt settlement companies.

          According to USOBA, SB 708 does nothing to address this 
              loophole.  The bill also imposes fees on a licensing 
              population that is too small to cover the costs of the 
              regulatory program the bill proposes.  SB 708 is also 
              inconsistent with federal law in that it imposes surety bond 
              requirements on entities that, under federal law, do not 
              hold any client funds.  

          Freedom Debt Relief (FDR), the largest debt resolution company 
              in the nation, opposes the bill based on its fee cap.  
              Although FDR supported the new FTC rule, the company 




                                               SB 708 (Corbett), Page 16




              believes that SB 708 goes too far.  "The recently 
              promulgated FTC regulations already provide significant 
              restrictions on businesses and protections for consumers 
              seeking debt relief services.  SB 708, if enacted, would 
              simply add an unworkable and arbitrary fee cap on legitimate 
              California business, putting them out of business."  

          FDR states that the fee cap in the bill will not cover even a 
              fraction of FDR's costs to offer debt relief services.  As 
              such, the bill is an effective ban on the industry.  FDR 
              observes that a law with almost identical fee restrictions 
              went into effect in Illinois last year, and since then, FDR 
              and every other company in its industry stopped servicing 
              new clients in that state.  The only companies still 
              providing debt settlement services in Illinois are those 
              claiming exemptions from the law, due to affiliations with 
              attorneys or nonprofits.  

          CareOne is a national debt relief services company that offers 
              credit counseling, debt management, and debt settlement.  It 
              opposes SB 708, but would remove its opposition if the bill 
              were amended.  Among the amendments CareOne is seeking:  
              increase the fee cap to 30% of savings (up from 15%); mirror 
              the FTC rule by allowing debt settlement companies to 
              require or recommend that consumers deposit the funds that 
              will be used to pay settled debts into a specific, insured 
              financial institution; mirror the disclosures required by 
              the FTC rule rather than expand them, as this bill proposes 
              to do; expand the bill's limitations on debt settlement 
              companies' ability to obtain power of attorney to settle an 
              individual's debt; allow debt settlement companies who 
              negotiate installment payment settlements to be paid before 
              the debts are fully discharged; reduce the number of metrics 
              that debt settlement companies are required to include in 
              their annual reports; and exempt licensed debt settlement 
              providers from the Money Transmitter's Law.  

          The Tax Problem Resolution Services Coalition (coalition) 
              represents CPAs, attorneys, and enrolled agents who help 
              negotiate reductions in tax debts.  It, too, is opposed to 
              SB 708, unless the bill is amended.  The coalition observes 
              that the FTC's recently issued rule included tax debts among 
              the unsecured debts it covers.  The tax professionals within 
              the coalition objected to the inclusion of tax debts within 
              the TSR, reasoning that tax debts are secured debts.  
              Without agreeing with the coalition, the FTC agreed to study 




                                               SB 708 (Corbett), Page 17




              the issue before taking final action, and issued a notice 
              deferring the application of the TSR to tax debts, until the 
              legal issue of tax debts as secured or unsecured could be 
              resolved.  Because that legal issue remains unresolved, the 
              coalition is concerned about SB 708's application to 
              unsecured debts.  The coalition believes that their concerns 
              with SB 708 could be addressed, if the bill were amended to 
              restrict the bill's application to unsecured debt "for 
              personal, family, or household purposes,"  thus excluding 
              tax debt. 
               
               Gregory Fitzgerald describes himself as a consumer 
              protection attorney who represents consumers against 
              collection companies.  He believes that the bill should be 
              amended to include a broader exemption for attorneys 
              licensed to practice in California (staff notes that the 
              author additionally plans to propose this as an amendment in 
              Committee).

           7.  Amendments:  

               a.     The author plans to submit amendments in Committee 
                 to make technical corrections and add clarifications, and 
                 to make the following three substantive changes:

                        i.             Create a broader exemption for 
                         attorneys from the bill.  

                        ii.            Exempt non-profit credit counseling 
                         agencies from the bill's provisions.

                        iii.           Reduce the surety bond requirement 
                         from $200,000 to $50,000.
        
          8.  Prior and Related Legislation:   

                  a.        AB 350 (Lieu), 2009-10 Legislative Session:  
                    Would have enacted the Debt Settlement Services Act, 
                    administered by DOC, for the purpose of licensing and 
                    regulating debt settlement service providers.  
                    Sponsored by the debt settlement industry.  Failed 
                    passage in the Senate Judiciary Committee.

                  b.        AB 2611 (Lieu) and SB 1678 (Florez), 2007-08 
                    Legislative Session:  Would have licensed debt 
                    settlement service providers in a manner similar to 




                                               SB 708 (Corbett), Page 18




                    that contemplated in AB 69 (Lieu), described below.  
                    Sponsored by the debt settlement industry.  AB 2611 
                    was not heard by the Senate Banking, Finance & 
                    insurance Committee; SB 1678 failed passage in that 
                    committee.  

                  c.        AB 69 (Lieu), 2007-08 Legislative Session:  
                    Would have enacted two separate regulatory schemes, 
                    one tailored to the licensure of debt settlement 
                    service providers, and the other tailored to the 
                    licensure of debt management providers.  Sponsored by 
                    the debt settlement industry.  Language amended out.

                  d.        AB 535 (Calderon), 2005-06 Legislative 
                    Session:  Would have enacted a law regulating 
                    nonprofit credit counselors and increased the fees 
                    that could be charged by these licensees, relative to 
                    the fees allowed of nonprofit community service 
                    organizations under the Check Sellers, Bill Payers, 
                    and Proraters Law.  Vetoed by the Governor.

                  e.        AB 403 (Correa), Chapter 360, Statutes of 
                    2004:  Increased the fees that may be charged by a 
                    nonprofit community service organization to their 
                    current levels and added additional components to the 
                    best practices that nonprofit community service 
                    organizations must adopt, in order to qualify for an 
                    exemption from the Check Sellers, Bill Payers, and 
                    Proraters Law.

                  f.        AB 2293 (Liu), Chapter 779, Statutes of 2002:  
                    Revised the provisions of the Check Sellers, Bill 
                    Payers, and Proraters Law authorizing an exemption for 
                    nonprofit community service organizations, provided 
                    they meet certain requirements; authorized the 
                    commissioner to investigate violations of the Check 
                    Sellers, Bill Payers, and Proraters Law; imposed 
                    various civil penalties for violations of that law; 
                    and required DOC to conduct a study of the consumer 
                    credit counseling industry in California.

           








                                               SB 708 (Corbett), Page 19




          LIST OF REGISTERED SUPPORT/OPPOSITION
          
          Support
           
          Center for Responsible Lending (co-sponsor)
          Consumers Union (co-sponsor)
          Association of Independent Consumer Credit Counseling Agencies
          Cambridge Credit Counseling Corporation
          ClearPoint Credit Counseling Solutions
          Coalition for Quality Credit Counseling
          Consumer Attorneys of California
          Consumer Recovery Network
          Consumer Credit Counseling Service of the North Coast
          Money Management International
          Novadebt 
          Springboard Nonprofit Consumer Credit Management
          Surepath Financial Solutions
          UCSB, Inc.
          US Debt Resolve
          Visa, Inc.
           
          Opposition
               
          CareOne
          Freedom Debt Relief
          Tax Problem Resolution Services Coalition
          United States Organization for Bankruptcy Alternatives
                                        Gregory Fitzgerald

          Consultant: Eileen Newhall  (916) 651-4102