BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 708 (Corbett)
Hearing Date: 5/23/2011 Amended: 5/10/2011
Consultant: Maureen Ortiz Policy Vote: BFI: 4-2 Jud: 3-2
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BILL SUMMARY: SB 708 enacts the Debt Settlement Consumer
Protection Act to provide for the licensure and regulation of
debt settlement providers, caps the fee allowed at 20% of the
amount of debt saved, and requires numerous disclosures from the
provider to the consumer before entering into an agreement for
debt settlement services. The Act would be enforced by the
Commissioner of Corporations and the Attorney General.
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Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
Licensing program ----$586 annually partially
offset
by
fee revenue ----- Special*
Enforcement -----$600 to $800
potentially offset
by fines and penalties----- General
*Corporations Fund
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
SB 708 authorizes the Department of Corporations (DOC) to
recover all costs for administering the program through fees
imposed on licensees. However, it is uncertain at this time
whether the pool of applicants will be sufficient to maintain a
reasonable fee. The cost estimate above is based on
approximately 40 entities requiring licensure. The fee will be
a pro rata share of all costs and expenses reasonably incurred,
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and will be based on the proportion that a licensee's total
enrolled debt for debt settlement services in California bears
to the aggregate total enrolled debt of all licensees as shown
by the audited financial statements filed with the DOC.
SB 708 requires the Commissioner to notify each licensee by May
30 of each year of the licensing fee, and authorizes the
assessment of penalties if the payment is not made within 30
days. The bill further authorizes the Commissioner to suspend
or revoke a license if fees are not paid by June 30 of each
year.
The Department of Justice estimates costs of between $600,000
and $800,000 for enforcement including responding to consumer
complaints. Costs include Deputy Attorney General positions to
develop investigations, one paralegal to assist in
investigations, and one-half auditor position to prepare
forensic auditing and other financial investigatory work. SB
708 will allow the Attorney General to recover expenses from
licensees, but again the costs and revenues will be dependent on
the number of program participants.
Specifically, SB 708 does the following:
1) Defines "debt settlement provider" as any person or entity
providing debt settlement services in exchange for any fee or
compensation.
2) Excludes escrow agents, accountants, broker dealers in
securities, or investment advisors in securities when acting in
the ordinary practice of their profession; a title insurer or
escrow company that provides bill paying services; financial
planning services, or any person who performs credit services
while receiving a salary.
3) Excludes attorneys if providing debt settlement services
while acting in the ordinary practice of law, and not primarily
engaged in the business of providing debt settlement services.
The attorney must put any advance fee in a trust, as specified.
4) Excludes tax exempt nonprofit organizations.
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5) Defines "debt settlement" as a service to act as an
intermediary between a consumer and one or more of a consumer's
creditors for the purpose of obtaining a settlement, or
adjustment of the consumer's unsecured debt.
6) Requires debt settlement providers to be licensed by the
Department of Corporations, and requires the commissioner to
publish a list of all providers by July 1, 2012.
7) Authorizes the commissioner to charge an application fee of
$1,000, an investigation fee of $1,000, and a fee to cover the
cost of fingerprint processing.
8) Requires the application to be accompanied by proof of a
$50,000 surety bond, audited financial statements, and proof of
documents to conduct business in California.
9) Requires a licensee to maintain a minimum net worth of
$100,000, and to extensively report annually to the commissioner
as outlined.
10) Requires licensees to pay a pro rata share of all costs and
expenses reasonably incurred in the administration of the
program, as estimated by the commissioner.
11) Provides for a civil penalty of up to $50,000 for providing
false information on the application, and authorizes the
Attorney General to bring an action for a civil penalty.
12) Requires every executive officer of the applicant to
undergo fingerprint background checks.
13) Requires numerous disclosures on the application including
the applicant's name, principal business address and telephone
numbers, and all other business addresses in California; and the
name of each executive officer and director as specified
including common ownership.
14) Requires the DOC to investigate the background and
experience of the applicant as specified.
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15) Requires the Department of Justice (DOJ) to process all
fingerprint images, request information from the FBI as
necessary and compile and disseminate a response to the
Commissioner of Corporations, and authorizes the DOJ to charge a
fee to the licensee for these costs.
16) Requires a debt settlement provider to provide numerous
disclosures to consumers including a Consumer Notice and Rights
Form Caution, prior to entering into a written contract.
17) Outlines all of the specifications to be included in a debt
settlement services agreement between the provider and the
consumer.
18) Prohibits a provider from imposing any fees until the
provider has settled at least one debt, and limits the fee to
20% of the amount saved as a result of the settlement of each
debt settled. The bill outlines procedures in the event the fee
collected is not authorized including a void of the agreement
and a refund of all fees paid.
19) Requires enforcement actions to be commenced within four
years.
A recent ruling by the Federal Trade Commission, among other
things, prohibited the collection of upfront fees by debt
settlement providers. Fees for debt relief services may not be
collected until all of the following occur: 1) the provider
successfully settles or changes the terms of at least one of the
customer's debts, 2) the customer makes at least one payment
pursuant to that settlement agreement, and 3) the fee for the
settlement debt bears the same proportional relationship to the
fee for the total debt.
The FTC ruling exempts non-profit entities, intrastate phone
calls soliciting debt relief services, face-to-face solicitation
of debt relief services, and internet-only transactions. The
FTC rule does not cap the fee.
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