BILL ANALYSIS Ó 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