BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Joseph L. Dunn, Chair
2005-2006 Regular Session
SB 896 S
Senator Runner B
As Amended April 28, 2005
Hearing Date: May 3, 2005 8
Family Code 9
DSH/GMO:cjt 6
SUBJECT
Private Child Support Collection Agencies: Consumer
Protections
DESCRIPTION
This bill would require private child support collectors
(PCSCs), as defined, to comply with some basic consumer
protections to ensure that child support obligees have
clear information about the contract they are entering
into, have some basic rights to cancel the contract,
receive meaningful notice of collections made and the
amount of the collections kept by the private agency as its
fee, require PCSCs to follow the debt collection practices
that apply to collectors of other types of consumer debt,
and provide remedies when PCSCs do not comply with these
requirements.
BACKGROUND
Last session, in response to the growth in the private
child support collection industry, and the growing number
of complaints being brought to her attention, Senator Dede
Alpert brought SB 339 before the Legislature. That bill
sought to regulate the private child support collection
industry to ensure that support obligees, who were
desperate to collect even some portion of the past due
support they were owed, were not taken advantage of on
account of that desperation. Among other things, the bill
sought to protect obligees and obligors in the following
manner: 1) capping the amount of child support collections
(more)
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PCSCs could retain as their own fee; 2) defining the type
of collections from which fees could be retained; 3)
requiring specified disclosures in advertisements and
solicitations; 4) setting forth provisions that must be
included in contracts; 5) defining the opportunities for
obligees to cancel a contract; 6) subjecting PCSCs to the
Rosenthal Fair Debt Collection Practices Act; 7) ensuring
that PCSCs could not take a percentage of collections
attributable to actions of the government child support
entity; 8) requiring PCSCs to send specified notices to the
support obligee, obligor, and the local child support
agency; and 9) prohibiting the PCSC from misrepresenting
itself, its rights, or the responsibilities of the obligor
or others to pay past due child support.
SB 339 was vetoed by the Governor. The veto message
stated, in pertinent part, "while I support ensuring
parents are not taken advantage of in securing child
support payments, this bill will have the effect of
severely limiting a consumer's choice to go to a private
collection agency when government efforts to collect the
owed child support falter. ?I welcome many of the
provisions in this bill that would ensure families are
protected when they choose to contract with a private
agency; however the provisions such as capping the amount a
collection agency can charge and prohibiting a person from
contracting with a private collection agency when they have
received partial payment in the last six months are
particularly onerous to the industry and to parents seeking
choices." According to the sponsors of the current
measure, Supportkids, Inc., this bill is an attempt to
respond to the Governor's call in the veto message for some
basic consumer protections to ensure that oblige parents
are not taken advantage of.
CHANGES TO EXISTING LAW
1.Existing law governs the collection of child support by
local child support agencies. (Family Code Section 17000
et seq.)
This bill would require a PCSC to meet some basic
consumer protections in its dealings with the support
obligees in contracting for the collection of past due
child support. Among other things, this bill would:
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a. Define a PCSC as a person, corporation, attorney,
or other nongovernmental entity who is engaged by an
obligee to collect court-ordered child support for a
fee or other consideration. A PCSC does not include
attorneys who deal with ongoing child support issues
in the course of representing a client in a family law
matter.
b. Require contracts to be in 10-point type and
disclose all of the following: (1) the fees imposed by
the contract and an example of how they are
calculated; (2) the nature of services to be provided;
(3) the expected duration of the contract; (4) how the
contract may be canceled; (5) the address and other
access information for the PCSC; (6) that the PCSC is
not a government entity, and government child support
agencies in California provides services for no
charge; (7) that the PCSC may not take a fee from
collections that are primarily attributable to the
actions of a government entity or another; and (8)
that the obligee may seek, or continue to use the
services of a government child support agency.
c. Require the PCSC to include a notice of
cancellation with the contract to ensure obligees
understand their rights to cancel and have an easy
form to accomplish this task.
d. Provide, at a minimum, the right of an obligee to
cancel a contract within 15 business days of execution
of the contract, or receipt of the notice of
cancellation, whichever is later, or at any time if
the PCSC commits a material breach of any provision of
the contract or a material violation of any provision
of the statute.
e. Require the PCSC to issue a notice of collections
to the obligee, which shall include the amount of each
collection, and the date it was received by the PCSC
and sent by the PCSC to the obligee, how the payment
is allocated between the obligee and the PCSC's fees,
and the source of the payment (so the obligee can
determine if the PCSC's retaining a portion of the
collection as its fee was appropriate). If this
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information is provided by telephone or internet
access, it shall be up-to-date. Written notices shall
be sent at least quarterly.
f. Require the PCSC to retain records for the same
length of time that government child support entities
are required to retain records, and to allow access to
obligees and obligors of nonconfidential portions of
those records.
1.Debt collection practices
Existing law , the Rosenthal Fair Debt Collection
Practices Act, prohibits debt collectors from engaging in
a variety of practices in collecting consumer debt.
Among the practices prohibited are the following:
a. Communicating with the debtor with such frequency
as to be unreasonable and to constitute harassment to
the debtor.
b. Communicating to any person any list of debtors
which discloses the nature or existence of a consumer
debt, commonly known as "deadbeat lists."
c. Communicating with the debtor by means of a written
communication that displays or conveys any information
about the consumer debt or the debtor which is
intended both to be seen by any other person and also
to embarrass the debtor.
d. Making a false representation that any person is an
attorney.
e. Representing that any debt collector is vouched
for, bonded by, affiliated with, or is an
instrumentality, agent or official of the government.
f. Communicating directly with a debtor who is
represented by an attorney with respect to the
consumer debt.
g. Sending a communication which simulates legal or
judicial process. (Civil Code Section 1788.10 -
1788.16.)
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Existing law defines its applicability to the collection
practices of consumer debt. Child support debt is not
included in that definition. (Civil Code Section
1788.2.)
This bill would prohibit a PCSC from engaging in any debt
collection practices that are prohibited by the Rosenthal
Fair Debt Collection Practices Act.
This bill would prohibit a PCSC from misstating the
amount of the fee that may be lawfully paid to the PCSC
or the identity of the person who is obligated to pay the
fee.
This bill would prohibit a PCSC from making a false
representation of the amount of child support to be
collected, or ask any party other than the obligor to pay
the child support obligation, unless that party is
legally responsible for the debt or is the legal
representative of the obligor. The PCSC is not in
violation of this prohibition if it reasonably relies on
information provided by the government entity, a court
order, the obligee, or the obligor as to the amount of
the obligation due and owing.
1.Remedies
Existing law authorizes the following remedies for
violation of the Rosenthal Fair Debt Collection Practices
Act:
a. An action for actual damages.
b. A civil penalty of $100 to $1,000 if the debt
collector willfully and knowingly violates the
provisions of the Act.
c. Costs to the prevailing party and reasonable
attorney's fees to the prevailing debtor. Reasonable
attorney's fees may be awarded to a prevailing
creditor upon a finding the debtor's action was not in
good faith. (Civil Code Section 1788.30.)
This bill would apply those same remedies to violations
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of the provisions of this statute, as to the obligor or
the obligee.
COMMENT
1.Stated need for the bill
The author comments that "in California and elsewhere,
government collection of child support debt is
continually hampered by budget and personnel constraints.
As a result, a number of private companies specializing
in child support debt collection have emerged around the
country." However, these private child support
collectors are largely unregulated. This bill would
therefore impose some basic consumer protections to
ensure that support obligees better understand the
services they are contracting for, get appropriate and
meaningful notice of the collections received, do not in
fact receive less support than they would have if they
never entered into such a contract, and have some ability
to extract themselves from these contracts.
The sponsor of this measure, Supportkids, Inc., one of
the largest providers of private child support collection
services in the nation, comments that "this bill will
help parents who need assistance collecting child support
and who have hired, or are considering hiring, a private
child support enforcement agency. Senate Bill 896 will
establish appropriate standards for private enforcement
agencies that offer their child support collection
services in California. It will, most importantly,
afford custodial parents with full disclosures to help
them make an informed choice about the private
enforcement option." Supportkids comments that
"government child support programs will never have the
funding necessary to collect all, or even most, of the
child support that is due to parents. We believe that
custodial parents deserve to have other options, beyond
just the government, when seeking assistance in
collecting child support."
The National Coalition for Child Support Options concurs,
and notes that "Senate Bill 896 will help ensure that
reputable private agencies remain a viable option in
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California for parents who have not had any luck getting
their support through their county child support office."
2.Industry practices demonstrate the need to install some
basic consumer protections
In a 2002 study, the U.S. General Accounting Office
("GAO," now known as the Government Accountability
Office) identified 38 private firms, located in 16
states, that were regularly engaged in the business of
collecting child support. (GAO 02-349, Child Support
Enforcement: Clear Guidance Would Help Ensure Proper
Access to Information and Use of Wage Withholding by
Private Firms, March 2002.) Some project that since the
GAO report was issued, the industry has grown
considerably in size. (Center for Law and Social Policy
[CLASP], Private Child Support Collection Agencies, April
2005). The growth of the private child support
collection industry has also meant greater attention has
been paid to its practices in the recent past. CLASP
reports that "over the last decade, an unregulated
industry has grown rapidly, primarily around the
internet, to aggressively and sometime deceptively market
child support collection services." These companies,
CLASP reports, "often fail to deliver any genuine
services . . . and trap [support obligees] in perpetual
contracts."
The GAO and CLASP reports note that on average, these
PCSCs charge custodial parents 29 percent of the support
that is collected, and some of the largest companies take
34 percent of the collection. Additionally, many of
these companies charge clients an application fee,
averaging at about $95, and also charge clients other
costs or fees for taking particular enforcement actions.
CLASP notes that the "GAO found that the main edge held
by private companies in enforcing support is that the
companies pressure relatives to pay the support owed . .
. and use collection tactics that are prohibited to state
child support agencies, private attorneys, and private
collection agencies that pursue consumer debt." Much of
CLASP's view is a result of the roughly 400 complaints
against PCSCs it has received and reviewed. CLASP points
to four practices that it believes typify the type of
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activity that needs regulation: "(1) promising help with
back support, but instead pocketing a fee from ongoing
monthly support; (2) taking a cut of support collected by
state child support agencies; (3) demanding payments from
grandparents; and (4) coercing payments from
non-custodial parents that are not owed or authorized by
state law." CLASP concludes that "the complaints reflect
an offensive and disturbing picture of deceptive
advertising, misleading contracts, fee gouging,
harassment and abuse, posing as the government, dunning
grandparents, inflating and fabricating debts,
undermining credit worthiness, and abusing legal
process."
Case law and recent press have also illustrated the
prevalence of these practices. In one instance reported
by Time magazine (August 29, 2002), an Arizona-based PCSC
collected a total of $1,100 after five months' work, took
$885 in fees, and left the custodial parent with the
remaining $215. The Time article also reported that a
Texas PCSC directed obligors' employers to re-direct wage
garnishment payments to the PCSC, even when the PCSC
played no role in the garnishment. Another troubling
practice alluded to by CLASP was the subject of a
lawsuit. The court decision in Reno v. Supportkids, Inc.
(2004) U.S. Dist. Lexis 6459, described a practice where
the obligee, in contracting with the PCSC, indicated the
amount of child support due and owing was $13,589. The
PCSC communicated to the obligor that he owed $120,000,
and filed a lien against his home in the amount of
$122,474. Although the court decision centered around
the appropriate remedies available, this underlying fact
does not appear to have been contested (and the
defendants acknowledged the evidence that they filed a
lien in an inflated amount). In fact, the court noted
that the defendants did not remove the lien until one and
one-half years after the complaint was filed.
CLASP comments that "although there may be an appropriate
role for private child support collection companies that
are committed to customer service, use legitimate
collection practices, and help parents obtain overdue
child support that they might not otherwise receive, the
industry currently operates without regulatory controls."
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This bill would remedy many, though certainly not all, of
these concerns. First and foremost, this bill would help
obligees to make fully informed decisions when entering
into a contract with a PCSC. By ensuring that the
contract explains all of the fees that will be taken by
the PCSC, notifying obligees that government agencies
provide similar services free of charge, informing
obligees of their right to keep their cases open with
government child support agencies, limiting the authority
of PCSCs to take as their fee a share of collections that
was attributable to the work of others, and giving
obligees the right to get out of the contract if the PCSC
breaches the contract or violates this statute, this bill
evens the playing field considerably, giving obligees
more information to arm themselves with when dealing with
a PCSC. Although SB 896 would not limit the fees that
PCSCs can take, it requires disclosure so that obligees
are more likely to be able to determine if they are
willing to pay that much of their support collections to
the PCSC or risk that they will get less if they do not
engage the services of the PCSC.
This bill would not set the fees that a PCSC may charge
for the services it would provide. Because SB 896 is
aimed at leveling the playing field for the obligees, it
is important for them to know that fees that a PCSC may
charge are not set by law and that it is negotiable, much
like other collection charges that are negotiable between
creditor and collector and real estate broker fees.
SHOULD THESE DISCLOSURES INCLUDE A STATEMENT THAT FEES
CHARGEABLE BY THE PCSC ARE NEGOTIABLE AND ARE NOT SET BY
LAW?
The notices to the obligee describing the collections
made are also an important piece of the puzzle. Absent
clear information describing the collections made, and
the fees retained, obligees were in a position of
guessing why they were receiving the money they did.
Common complaints about PCSCs revolved around the agency
taking fees from collections attributable to the actions
of another. By requiring the PCSC to notify the obligee
of every collection received, the allocation of the
collection between the obligee and the PCSC's fees, and
the source of that payment, the obligee will no longer be
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playing as much of a guessing game. By making the PCSC
affirmatively detail the actions it took that resulted in
a collection, hopefully the practice of taking a fee from
collections attributable to government agencies will be
considerably lessened.
From both the government agencies' and the obligees'
perspectives, however, the PCSC's taking a fee from
collections attributable to government agencies is a
windfall, or to say the least, are unearned fees. There
should be a mechanism for these unearned fees to be
forwarded to the obligee, who should stand to benefit
from the efforts of the governmental agencies. If not,
there may be a need to impose penalties on the improper
allocation of collections fees by the PCSCs. All of the
government monies, after all, would have been the
obligee's without the PCSC's assistance.
SHOULD THE BILL CONTAIN A PROVISION FOR THE REIMBURSEMENT
OF THESE UNEARNED FEES DIRECTLY TO THE OBLIGEE BY THE
PCSC OR TO THE GOVERNMENT AGENCY TO BE FORWARDED TO THE
OBLIGEE?
As to its dealings with obligors, this bill would also
ensure a fairer playing field. Among other things, the
PCSC could not engage in the behavior described in the
Reno case, above. SB 896 would prohibit a PCSC from
making a false representation of the amount of child
support to be collected. In that case, the PCSC had
information from the obligee that the maximum amount of
support owed was just over $13,000. This bill would
prohibit the PCSC from telling the obligor that he owed
more than that, and would prohibit the PCSC from filing a
lien against his house for $122,000. The bill would also
require PCSCs to comply with the fair debt collection
practices that other consumer debt collectors are subject
to, protecting obligors from overzealous PCSCs that call
them in the middle of the night, contact their relatives
in an attempt to extract payment from them, call their
employers repeatedly, simulate legal process to scare
employers into redirecting payments to the PCSC, or
otherwise seek to harass obligors and others around them
into paying the child support obligation.
Although this bill only imposes some basic consumer
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protections, and does purport to be the "be all and end
all" of regulation of this industry, it begins the
process of imposing consumer protections that are sorely
lacking. For additional ways the industry could be
regulated in the future, (see Comment 3, below).
3.Comprehensive regulation of the industry left for another
day
As noted above, SB 339 of 2004 attempted to
comprehensively regulate the private child support
collection industry. In addition to the provisions which
SB 896 brings up for consideration, SB 339 also addressed
the following:
a. Capping fees that may be charged by PCSCs . On
average, PCSCs take as their fee 29 percent of
collections that come through the agency, with some as
high as one-third or even 40 percent. Many agencies
also charge additional fees on top of taking a
percentage of the collections received. SB 339 capped
fees at 30 percent, and also sought to limit the
ability of PCSCs to continue to take a percentage of
collections of recurring payments made pursuant to
wage garnishments.
b. Defining rights to cancel a contract . Among the
more common complaints received about PCSCs is the
virtual inability to terminate a contract once
executed. In addition to SB 896's right to
cancellation within 15 business of executing the
contract, SB 339 also would have automatically
terminated contracts 6 months after execution if no
collections had been made, and would have given
obligees the right to cancel a contract after any
6-month period where collections are less than 10
percent of the total amount owed under the contract,
and after any 12- month period where collections are
less than 50 percent of the collections due under a
payment plan.
c. Prohibiting payments from being redirected by the
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government agency from the obligee to the PCSC . A
common complaint was that PCSCs were taking as their
fee a percentage of collections that were attributable
to the collection efforts of government entities
(e.g., intercepts of tax refunds that PCSCs have no
responsibility for). The burden was then on obligees
to discover that the PCSC was not entitled to a fee,
and to take action to get the money back. SB 339
would therefore have prevented government entities
from forwarding payments directly to the PCSC. This
way, the only collections that would go through the
PCSC are those the PCSC was in fact responsible for
collecting. The obligee would not have the burden of
finding and proving that the PCSC was not entitled to
a fee. Although SB 896 does not prohibit the
redirection of payments, it does require the PCSC to
inform the obligee of the affirmative steps taken by
the PCSC that resulted in each collection. By
providing the obligee this notice, and requiring the
PCSC to affirmatively document its actions, this bill
intends to prohibit the PCSC from taking a fee for
collections attributable to the actions of the
government entity or any other person or entity
collecting support.
d. Limiting PCSCs to collecting past due support . SB
339 clarified that PCSCs were only contracting to
collect past due support, and therefore prohibited the
PCSC from taking a percentage of any collection that
was in fact current support. This provision was the
result of an increasingly common complaint that the
PCSC did not collect any more support than the local
agency was already collecting, but merely tapped in to
the stream of ongoing support that was already being
collected, and took a percentage of that. In this
way, obligees were actually receiving less money than
they would have had they not contracted with a private
entity.
Although the sponsor of this bill would prefer to
leave this issue to a much later day, the committee
should probably consider addressing this issue. If
the PCSC takes up to just 25 percent of current
support payments, that fee significantly reduces the
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income stream to the obligee. For example, if the
total collectible sum from a wage garnishment is
$1,000 (25 percent of gross income of the obligor) and
the current support payment is $800, the PCSC fee
would be $250 (25 percent fee) and the obligee would
receive only $750 instead of $800 plus $150, or $950.
If the PCSC's fee from the current support collected
were to be limited to, say 10%, in this example, the
obligee would get a total of $870 [$150 ($200 less
$50) from the arrears plus $720 ($800 less $80) from
the current support].
This would seem to be a workable solution to a big
issue between the sponsor of this bill and proponents
of consumer protections for the obligees. The only
question that would need to be decided is what that
limited percentage fee for current support collections
would be.
SHOULD THE CONSIDERATION BE GIVEN TO PUTTING A CAP ON
THE PERCENTAGE OF FEES HE PCSC TAKES FROM A COLLECTION
OF CURRENT SUPPORT?
e. Requiring certain disclosures in advertisements and
solicitations . In response to complaints that PCSCs
were selecting names that confused obligees into
thinking they were a government agency, SB 339
required all advertisements and solicitations to
indicate the PCSC is not a government entity and
charges a fee for its services.
f. Notifying the obligor . SB 339 would have required
court orders to include a provision making obligors
responsible for fees if an obligee needs to use the
services of PCSC to collect past due support. Because
of this, the bill also required a notice be sent to
the obligor describing the amount of arrearages, how
the collections are apportioned between arrearages and
fees, and notifying the obligor of the right to file a
motion to contest the collection of fees and costs.
The author points to many of these provisions as reasons
for the veto of SB 339.
Irrespective of the on-going debates over the above
issues, this bill recognizes the importance of putting in
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place some basic consumer protections to ensure support
obligees and obligors are treated more fairly when they
exercise their choice to contract with a private child
support collection agency in lieu of - or in addition to
- using the service of California's local child support
agencies. Understanding the benefit of ensuring basic
consumer protections in the face of this growing
industry, advocates for the broader regulation of the
industry encompassed in the Alpert bill (Consumers Union
and the National Center for Youth Law) have worked with
the author to carefully craft the language of the bill
and are now neutral on this measure. The more
comprehensive regulation of the industry attempted by the
Alpert bill in 2004 is a discussion that must not be
forgotten, however, and must be taken up another day.
Support: National Coalition for Child Support Options; San
Luis Obispo County
Board of Supervisors; 6 individuals
Opposition: None Known
HISTORY
Source: Supportkids, Inc.
Related Pending Legislation: None Known
Prior Legislation: SB 339 (Alpert, 2004) (would have
regulated the business of private child
support collection agencies, including
capping fees that may be assessed). Vetoed;
AB 656 (Corbett), Chapter 319, Statutes of
2004 (would have required court orders to
provide that costs for enforcement of unpaid
support obligations shall be borne by the
support obligor; provisions incorporated into
SB 339, gut and amend in the Senate);
AB 1630 (Sweeney, 1998) (would have required
private child support collection agencies to
make various disclosures in brochures and
advertisements; gut and amend in the
Assembly). Vetoed.
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