BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 708|
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THIRD READING
Bill No: SB 708
Author: Corbett (D)
Amended: 5/31/11
Vote: 21
SENATE BANKING & FINANCIAL INST. COMMITTEE : 4-2, 4/27/11
AYES: Vargas, Evans, Kehoe, Liu
NOES: Blakeslee, Walters
NO VOTE RECORDED: Padilla
SENATE JUDICIARY COMMITTEE : 3-2, 5/3/11
AYES: Evans, Corbett, Leno
NOES: Harman, Blakeslee
SENATE APPROPRIATIONS COMMITTEE : 6-3, 5/26/11
AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg
NOES: Walters, Emmerson, Runner
SUBJECT : Debt Settlement Consumer Protection Act
SOURCE : Center for Responsible Lending
Consumers Union
DIGEST : This bill enacts the Debt Settlement Consumer
Protection Act for the purpose of licensing debt settlement
service providers, prohibits, beginning January 1, 2014,
acting as a debt settlement provider unless the provider is
licensed by the Department of Corporations, as specified,
and provides specific requirements that a provider must
comply with in offering debt settlement services, including
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the preparation of an individualized
financial analysis, and a good faith estimate on the length
of time it will take to complete the program, prior to
entering into an agreement with a consumer.
ANALYSIS : Existing law, the Check Sellers, Bill Payers,
and Proraters Law, is administered by the Department of
Corporations (DOC), and defines a prorate 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.
Existing law 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
percent of the first $3,000 distributed by the prorater to
the creditors of a debtor; 11 percent of the next $2,000;
and 10 percent of any of the remaining payments, except for
payments made on recurrent obligations, as defined.
Existing law provides that when a debtor has not canceled
or defaulted on the performance of his/her contract with
the prorater within 12 months after engaging in the
contract with the prorater, the prorater must refund the
origination fee.
Existing law prohibits a prorater from receiving any fee
unless he/she has the consent of at least 51 percent of the
total amount of indebtedness and of the number of creditors
listed in the prorater's contract with the debtor, or
unless a like number of creditors have accepted a
distribution of payment.
Existing law provides that if a prorater contracts for,
receives, or makes any charge in excess of the maximum
allowed under the Check Sellers, Bill Payers, and 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.
Existing law provides an exemption from the Check Sellers,
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Bill Payers, and Proraters Law for nonprofit community
service organizations, as specified, and limits the fees
that may be charged by these organizations, when providing
services to a debtor, to a one-time fee of up to $50, plus
the lesser of $35 or 8 percent of the amount disbursed
monthly for debt management plans, or up to 15 percent of
the amount of debt forgiven for negotiated debt settlement
plans.
Existing law provides for administrative penalties of up to
$2,500 per violation of the Check Sellers, Bill Payers, and
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
of the DOC (Commissioner).
This bill:
1. Enacts the Debt Settlement Consumer Protection Act,
administered by the DOC, and prohibits any person,
beginning January 1, 2014, from acting as a debt
settlement provider without a valid licensed issued by
the Commissioner. The Commissioner would be required to
maintain and publicize a list of all licensed providers
and publish that list. Prohibits, until January 1,
2014, a person from acting as a debt settlement provider
unless the person registers with DOC, and is issued and
maintains a certificate of registration, as specified.
2. Provides that a debt settlement provider has a fiduciary
duty to a consumer in connection with the solicitation
and provision of debt settlement services.
3. Prohibits 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.
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4. Specifies 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 or at least one
payment has been made to the creditor pursuant to an
installment plan that is negotiated by the provider
and agreed to by the consumer.
B. The fee or consideration that is disclosed to the
consumer and charged at the time of payment, is
calculated as a percentage 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. In the case of an installment plan, the
provider may receive the fee or consideration in
installments, made simultaneously with the consumer's
installment payments to the creditor, but any
installment fee payment made to the provider may not
be a greater percentage of the provider's total
compensation for settlement of the debt that the
simultaneous payment to the creditor is of the entire
settlement amount for the debt.
C. Requires the fee or consideration charged be
reasonable and rationally related to the benefit
provided to the consumer relative to all the
circumstances.
D. 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.
5. Authorizes a provider to request or require that a
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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;
B. The consumer owns the funds in the account and is
paid accrued interest on the account, if any;
C. The entity administering the account is not owned
or controlled by, or in any way affiliated 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; and
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.
6. Requires 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; specifies the conditions
under which the Commissioner may issue, suspend, deny,
or revoke licensure; and provides applicants with an
opportunity to appeal the Commissioner's decision, as
specified.
7. Requires 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 $50,000 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
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disclosures and documents required to be provided under
the bill, if a provider communicates with an individual
primarily in a 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 for
the preceding five calendar years, as specified.
8. Authorizes 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.
9. Provides 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 provides that
any contract entered into in violation of the provisions
of the bill is void.
10.Requires 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. This bill authorizes the
Commissioner to examine the books, records, accounts,
and activities of each licensee at any time, but not
less than once every two years.
11.Allows individuals, and the Commissioner, to bring
actions against licensees for violations of the bill,
and subjects violators to administrative, civil and
criminal penalties for failure to comply with the bill's
provisions. This bill additionally provides 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
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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.
12.Excludes the following persons and entities from the
requirement to be licensed under the Debt Settlement
Consumer Protection Act: (1) an attorney providing debt
settlement services, as specified; (2) a 501(c)(3)
organization, as specified; (3) 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; (4) escrow agents,
accountants, broker dealers in securities, or investment
advisors in securities, when acting in the ordinary
practice of their professions; (5) any person who
performs credit services for his/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; (6) 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
(7) financial planning services provided in a financial
planner-client relationship, as specified.
13.Exempts 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.
Background
Debt settlement companies work on a consumer's behalf with
the consumer's creditors to reduce their overall debts.
Consumers who contract with a debt settlement company are
typically instructed to put money aside in a bank account,
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and add to that account each month. The debt settlement
company then negotiates with the consumer's creditors to
reach a settlement on the debt that the consumer then pays
with funds that were set aside in the bank account.
Concerns have arisen about the arguably low success rate
for consumers who enter into debt settlement programs, and,
the fees charged by providers in exchange for little or no
services. If the debt is not repaid during the settlement
program, it continues to grow in amount and leaves the
consumer with substantial unsettled debts. In response to
nationwide concerns, the Federal Trade Commission (FTC)
promulgated amendments to the Telemarketing Sales Rule in
2010 that, among other things, prohibited the collection of
advance fees by debt settlement providers covered by that
rule.
On the state level, several bills in the 2008-09 session,
sponsored by the debt settlement industry, sought to enact
a licensing scheme for debt settlement providers which
would have codified the ability to charge up-front fees- AB
2611 (Lieu), Session of 2007-08, was double referred to the
Senate Banking, Finance and Insurance Committee and Senate
Judiciary Committee; SB 1678 (Florez), Session of 2007-08,
contained similar provisions as AB 2611 but failed passage
in the Senate Banking, Finance and Insurance Committee.
Last session, AB 350 (Lieu), Session of 2009-10, also
sponsored by the industry, similarly sought to enact a
licensing scheme for debt settlement providers but failed
passage in the Senate Judiciary Committee due to concerns
that there would be no fee cap on what a provider may
charge for their services.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
Licensing program $586 annually partially offset by
Special*
fee revenue
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Enforcement $600 to $800 potentially offset
byGeneral
fines and penalties
* Corporations Fund
SUPPORT : (Verified 5/31/11)
Center for Responsible Lending (co-source)
Consumers Union (co-source)
Association of Independent Consumer Credit Counseling
Agencies California Association of Collectors
Cambridge Credit Counseling
ClearPoint Financial Solutions, Inc.
Coalition for Quality Credit Counseling
Consumer Action
Consumer Attorneys of California
Consumer Credit Counseling Service of the North Coast
Consumer Credit Counseling Service of Twin Cities
Consumer Federation of California
Consumer Recovery Network
Money Management International, Inc.
National Foundation for Credit Counseling
Novadebt
Springboard Nonprofit Consumer Credit Management
Surepath Financial Solutions
UCSB, Inc.
U.S. Debt Resolve (USDR)
Visa, Inc.
OPPOSITION : (Verified 5/31/11)
CareOne
Freedom Debt Relief
Persels and Associates
The Association of Settlement Companies
United States Organization for Bankruptcy Alternatives
Yellow Brick Affordable Debt Solutions
ARGUMENTS IN SUPPORT : According to the author:
"Debt settlement companies commonly tout their ability to
reduce debts for pennies on the dollar, aiming to attract
consumers who are dealing with overwhelming debt loads.
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However, many of these companies collect substantial fees
up front, have a poor track record of settling
significant debt, and often leave clients financially
worse off after their services are complete. Moreover,
recent research by the Center for Responsible Lending
shows that without a strong fee cap . . . consumers will
be better off paying off their cards directly through a
payment plan than enrolling in a debt settlement program.
"On July 29, 2010, the FTC issued amendments to its
Telemarketing Sales Rule that bans advance fees for some
debt settlement providers and puts in place a prohibition
on misleading representations, as well as disclosure
requirements and escrow account requirements. After an
extensive investigation with input from all interested
parties, the FTC concluded that advance fees cause
"substantial harm" to consumers. Because the FTC's
jurisdiction under the TSR is limited to telephone sales,
however, the rule has significant loopholes that some
providers are using to avoid application of the advance
fee ban. In particular, the following are exempted from
the rule: (1) non-profit entities; (2) intrastate phone
calls; (3) certain transactions including face-to-face
contact; and (4) "internet only" transactions.
"Additionally, because the FTC rule does not address the
amount and type of fees that may be charged, providers
can still charge unreasonably high fees that fail to
align the incentives of the provider and consumer. For
example, the FTC does not limit fees to a percentage of
the amount saved for consumers, but also allows providers
to charge fees based on the amount of the enrolled debt,
to be collected as debts are settled. This type of fee
presents perverse incentives for the provider. First,
with such a fee, the provider is guaranteed a set fee
regardless of the quality of the settlement, thereby
incentivizing quick low quality settlements. Second,
this fee structure provides an incentive for providers to
include as much debt as possible in the program (even if
they know that certain creditors will not engage with
debt settlement providers) because doing so would
increase the fees paid for other settlements. Third,
under this fee structure, a provider may be paid a fee
that is larger than the net savings to the consumer from
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the settlement.
"The Debt Settlement Consumer Protection Act fills gaps
in the FTC rule, because its requirements would apply to
all debt settlement companies operating in California.
SB 708 also goes beyond the FTC rule by providing a
strong fee cap tied to savings, and establishing
common-sense rules to prevent companies from taking
advantage of consumers struggling with debt."
ARGUMENTS IN OPPOSITION : The United States Organization
for Bankruptcy Alternatives (USOBA), in opposition, notes
that as a result of the FTC's ban on advance fees, "65% to
70% of the companies operating in the industry have gone
out of business in the six months since the FTC regulations
went into effect." USOBA further contends that this bill
"does nothing to address the real problems that still exist
with respect to bad actors in this industry. It does not
address non-profits or attorneys operating in this arena,"
and imposes fees on a licensing population too small to
cover the costs of the program.
JJA:kc 5/31/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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