BILL ANALYSIS
AB 350
Page 1
Date of Hearing: March 23, 2009
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Pedro Nava, Chair
AB 350 (Lieu) - As Introduced: February 19, 2009
SUBJECT : Debt management and settlement.
SUMMARY : Provides for regulation and licensure by the
Department of Corporations (DOC) of entities that provide debt
settlement services. Specifically, this bill :
1)Creates the Debt Settlement Services Act in the Financial
Code.
2)Defines "debt settlement services" as services provided as an
intermediary between an individual and one or more creditors
of the individual for obtaining concessions on behalf of the
debtor.
3)Requires licensees to obtain a license renewal on an annual
basis.
4)Exempts from licensing:
a) A judicial officer, a person acting under an order of a
court or an administrative agency, or an assignee for the
benefit of creditors;
b) A bank, bank holding company, or the subsidiary, agent,
or affiliate of either, licensed under state or federal
law;
c) A title insurer, escrow company, or other person that
provides bill-paying services if the provision of debt
settlement is incidental to the bill-paying services; and,
d) Financial planning services provided in a financial
planner-client relationship by a member of a
financial-planning profession.
5)Provides that no person shall provide debt settlement services
to an individual who resides in this state unless the provider
is licensed.
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6)Requires that the application for licensure be in a form as
proscribed by the commissioner.
7)Requires a licensee to maintain evidence of a surety bond or
minimum coverage of insurance in an amount specified by the
commissioner.
8)Provides that the commissioner shall set the annual
application fee based on estimates of the cost of
administrating the program and the estimated number of
applicants.
9)Allows the commissioner to collect a surcharge to make up any
deficit from administering the licensing program based on the
number of active enrolled California residents in that
licensee's debt management program.
10)Requires every application for licensure to be signed by the
applicant and to declare that the information is true and
accurate. Providing false information on the application
would be a misdemeanor.
11)Requires the application to contain the following:
a) Applicant's name, principal business address and
telephone number and any other business addresses in this
state;
b) Names under which the applicant will conduct debt
settlement business;
c) Address of each business location;
d) A statement describing any material civil or criminal
judgments against the applicant;
e) Evidence of accreditation or certification by an
independent accrediting or certification organization
approved by the commissioner. If an applicant does not
have accreditation then they must obtain it within six
months of application for licensure; and,
f) Results of a criminal history records check, as well as,
submission of fingerprint images and related information.
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12)Provides that the commissioner may deny licensure for the
following:
a) The application is materially erroneous or is
incomplete;
b) An officer, director, or owner of the applicant has been
convicted of a crime or suffered a civil judgment,
involving dishonesty or the violation of state or federal
securities laws; and,
c) If the application for licensure does not include the
fee as established by the commissioner.
13)Requires the approval or denial of an initial license within
60 days of submission of a complete application. If an
application is denied the applicant may appeal and request a
hearing pursuant to the California Administrative Procedure
Act.
14)Requires annual license renewal including an application in a
form proscribed by the commissioner and an annual license
renewal fee.
15)Mandates that providers of debt settlement services maintain
a toll-free communication system staffed during ordinary
business hours.
16)Provides that prior to the provision of debt settlement
services the provider must provide the consumer an itemized
list of goods and services and the charges for each.
17)Requires a provider, prior to entering into an agreement for
services, to inform the individual of the following:
a) Name and business address of the provider;
b) Not all programs are suitable for all individuals;
c) That establishment of a program may affect the
individuals' credit rating or credit scores;
d) That nonpayment of debt may lead creditors to increase
finance and other charges or undertake collection activity;
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e) The program could result in the creation of taxable
income;
f) Specific results cannot be predicted or guaranteed;
g) That the program requires the individual to meet certain
savings goals in order to maximize settlement results;
h) The provider does not provide accounting or legal
services;
i) That the provider is an advocate that does not receive
compensation from the individuals' creditors, banks, or
other third parties;
j) That a provider cannot force negotiations or
settlements; and,
aa) A written good-faith estimate of the length of time it
will take to complete the program and a statement of the
total amount of debt owed to each creditor included in the
program shall be provided to the individual. The estimate
shall be provided prior to the first payment due in the
program.
18)Requires licensees to insert the following statement in their
debt settlement program agreements, "Complaints related to
this agreement may be directed to the Department of
Corporations."
19)Requires a provider to maintain an internet website and to
disclose its license number on the homepage and a link to
DOC's website.
20)Provides that before a consumer assents to an agreement for
debt the provider shall provide the following information in
writing:
a) Name, address and contact information of the provider
and the consumer;
b) The type of services that will be provided;
c) The amount of fees and how those fees were determined;
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d) A full accounting of the debt settlement program;
e) The conduct of a program may affect the individual's
credit rating or credit scores;
f) The non-payment of debt may lead creditors to increase
finance and other charges or undertake collection activity,
including litigation;
g) That the debt settlement program could lead to the
creation of taxable income;
h) That the results cannot be predicted or guaranteed;
i) The provider does not provide accounting or legal
services;
j) That the provider does not receive compensation from an
individual's creditors, banks, or third-party collection
agencies;
aa) That the provider cannot force negotiations or
settlements;
bb) Notification of the consumer's rights to cancel the
contract;
cc) The consumer can cancel the agreement and receive a full
refund of any moneys paid before midnight of the third
business day after the agreement was formed; and,
dd) That power of attorney only authorizes the provider to
communicate with creditors for the purpose of negotiating
settlement offers.
21)Prohibits an agreement from requiring a waiver of forums or
procedural rights, limit liability or indemnifying any person
from liability.
22)Provides that the total of all fees charged by the provider
shall not exceed 20 percent of the amount of debt brought into
the program which includes a maximum of a 5 percent setup fee.
23)Requires that the total fees must be spread over at least
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half the length of the program, unless accelerated by the
individual or until offers of settlement by creditors are
obtained on at least half of the debts enrolled to provider.
Total fees plus settlement cannot exceed the principle amount
of debt.
24)Requires a provider to notify the individual within three
business days after learning of a creditor's decision to cease
final negotiation with the provider.
25)Requires a provider to furnish accounting to the consumer
who has entered into an agreement:
a) Upon settlement of a debt;
b) Within five business days after a request by an
individual; and,
c) Upon cancellation or termination of an agreement.
26)Specifies that a provider shall furnish the following to each
individual if a creditor has agreed to accept as payment in
full an amount less than the principal amount of debt owed by
the individual:
a) The total amount and terms of settlement;
b) The amount of the debt when the individual assented to
the program;
c) The amount of the debt when the credit agreed to the
settlement; and,
d) Calculation of the fee, if any, charged to the
individual based on a percentage of the settlement of debt
or based on a percentage of the savings realized by the
individual.
27)Requires a provider to maintain records of each individual
for whom it provides services for three years.
28)Prohibits a provider from doing any of the following:
a) Exercising power of attorney after an individual has
terminated an agreement;
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b) Initiating an unauthorized electronic transfer from the
individuals' bank account;
c) Structuring a program that could lead to negative
amortization of the consumer's debt;
d) Claiming that a debt has been settled when it, in fact,
has not;
e) Settle a debt or lead an individual to believe that a
payment to a creditor is in settlement of a debt to the
creditor unless, at the time of settlement, the individual
or provider receives a certification or confirmation by the
creditor that the payment is in full settlement, or is part
of a payment plan that is in full settlement, of the debt;
f) Making any representations that the provider will
furnish money to pay bills or that participation in the
program will or may prevent litigation, garnishment,
attachment, repossession, foreclosure, eviction, or loss of
employment;
g) Representing that it is a not-for-profit entity;
h) Knowingly employ any unfair, unconscionable, or
deceptive actor practice including the knowing omission of
any material information;
i) Failing to respond a consumer complaint within 20 days
of receipt;
j) Requiring an individual to utilize additional ancillary
services that require additional charges or fees to be paid
to the provider;
aa) Receiving financial incentives or additional
compensation based on the outcome of the program;
bb) Paying referral fees to creditors or potential creditors
who refer new clients;
cc) Forcing or require an individual to deposit his or her
funds into a specific financial institutions;
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dd) Disclosing, except as provided by federal law. The
identity or identifying information of the individual;
ee) Charging for or provide credit or other insurance,
coupons for service, club memberships, access to computers
or internet or any other matter not related to debt
settlement services;
ff) Furnishing legal advice;
gg) Advising an individual to stop payment on any of the
accounts being handled by the provider;
hh) Purchase a debt or obligation of the individual; or,
ii) Hold an individual's funds in trust.
29)Prohibits a provider from:
a) Except through a separately licensed affiliate, receive
from or on behalf of the individual either of the
following:
i) A promissory note or other negotiable instrument
other than a check or a demand draft.
ii) A postdated check or demand draft.
b) Except through a separately licensed affiliate, lend
money or provide credit to the individual, except as a
deferral of a fee at no additional expense to the
individual or advance a settlement payment for the
individual at no additional expense to the individual; or
c) Except through a separately licensed affiliate, obtain a
mortgage or other security interest from any person in
connection with the services provided to the individual.
30)Specifies that a provider disclose to a consumer:
a) All of the services to be provided by the provider and
any initial and ongoing fees to be charged for those
services; and,
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b) A written, reliable estimate of the length of time it
will take to complete the program and a statement of the
total amount of debt owed to each creditor included in the
program.
31)Provides that if a provider imposes any fee or charge that is
not allowed, then the agreement is void.
32)States that provider may cancel an agreement when an
individual fails to make a required payment for 60 days.
33)Requires each provider to establish an internal formal
complaint policy that creates a process for the provider to
receive, review, and address or resolve formal complaints
internally and requires that the file of complains be
available to the commissioner upon request.
34)Specifies that a no later than 30 days after a provider has
been served with a notice of a civil action, the provider must
notify DOC.
35)Prohibits the use of any advertisement that includes false,
misleading, or deceptive statements.
36)Allows the commissioner to investigate and examine the
activities, books, accounts, and records of a person that
provides or offers to provide debt settlement services and in
connection with such activity the commissioner may:
a) Charge the person reasonable expenses; and,
b) Require or permit a person to file a statement under
oath as to all the facts and circumstances of a matter to
be investigated.
37)Allows the commissioner to adopt fee amounts for licensure
that adjust for inflation.
38)Provides the commissioner with the following enforcement
authorities related to debt settlement:
a) Issue desist and refrain orders;
b) Issue correction and restitution orders;
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c) Impose civil penalties not to exceed $1,000 per
violation;
d) Obtain injunctions; and,
e) Impose penalties of $10,000 per violation for a knowing
and willful violation of an order issued by the
commissioner.
39)Provides that the commissioner may examine and investigate
once every two years the activities, books, accounts and
records of person that provides or offers to provide debt
settlement services.
40)Allows the commissioner to enforce the provisions of this
legislation by taking one or more of the following actions:
a) Ordering a provider or a director, employee, or other
agent of a provider to desist and refrain from any
violations;
b) Ordering a provider or a person that has caused a
violation to correct the violation, including making
restitution of money or property to a person aggrieved by a
violation;
c) Imposing an administrative penalty not exceeding two
thousand five hundred dollars ($2,500) for each violation
on a provider or a person that has caused a violation; or,
d) Prosecuting a civil action to do either or both of the
following:
i) Enforce an order.
ii) Obtain restitution or an injunction or other
equitable relief, or both.
41)Provides that if a person knowingly violates or knowingly
authorizes, directs, or aids in the violation of a final
order, the commissioner may impose an administrative penalty
not exceeding ten thousand dollars ($10,000) for each
violation.
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42)Allows the commissioner may recover the reasonable costs of
enforcing this division under subdivisions (a) and (b),
including attorney's fees based on the hours reasonably
expended and the hourly rates for attorneys of comparable
experience in the community.
43)Allows an individual who has suffered from a violation to
recover in a civil action, damages and attorney's fees.
44)Specifies an operative date of July 1, 2009.
EXISTING LAW :
1) The Check Sellers, Bill Payers and Proraters Law (Proraters
Law), provides for licensing and regulation by DOC of
proraters, i.e., persons who receive money from a debtor for
the purpose of distributing the money among the debtor's
creditors in full or partial payment of the debtor's
obligations. [Financial Code Section 12000, et. Seq.]
2)Defines "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 thereof among creditors in payment or partial
payment of the obligations of the debtor. [Financial Code,
Section 12002.1]
3)Exempts from licensing and regulation certain non-profit
credit counselors that provide prorating services if those
organizations comply with certain requirements. [Financial
Code, Section 12104].
4)Provides for an administrative penalty of $2,500 per
violation, or $10,000 per willful violation. [Financial Code,
Section 12105]
5)Provides that the commissioner of DOC may recover costs
associated with any review, examination, audit, or
investigation. [Financial Code, Section 12106]
FISCAL EFFECT : Unknown
COMMENTS :
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This bill implements a licensing framework for debt settlement
providers who negotiate on the behalf of consumers with their
creditors to lower their debt for a fee. DOC has issued orders
for many of these entities to comply with the prorater's law,
but some industry participants have argued that because they do
not directly control the consumer's money, and only negotiate on
their behalf, that they are not proraters as defined in law.
The sponsors of this legislation, The Association of Settlement
Companies (TASC) and the United State Organization for
Bankruptcy Alternatives (USOBA) both debt settlement industry
trade groups also dispute the application of the proraters law
to their business model in which they claim to lack direct or
indirect control over the consumer's money. Instead, they
support a new licensing framework with enhanced regulatory
oversight and consumer protections.
The key part of this dispute is whether a debt settlement
company should comply with the proraters law is contained with
the definition of "Prorater." Under the Prorater's Law, the
definition of "prorater" is
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
thereof among creditors in payment or partial payment of the
obligations of the debtor.
Sponsors contend that because they do not handle or control the
consumer's money that they are not proraters per the definition.
Instead, the sponsors operate as intermediaries who negotiate
with creditors on some type of settlement for the consumer's
outstanding debt. In this process they only direct the consumer
to pay a determined amount or monthly payment to the creditor to
satisfy the terms of any settlement that is reached. They claim
that at no time do they control the consumer's funds and that
payment of the debt is completely the responsibility of the
consumer based on the negotiated settlement achieved by the
settlement provider.
Recently, litigation has occurred that sheds some light on this
debate. The case Nationwide Asset Services, Inc v. The
California Department of Corporations recently resolved in the
California third appellate district arose out of the issuance of
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a cease and defrain order by DOC against Nationwide Asset, for
operating as proraters without a license. Nationwide filed
suite against DOC disputing the order.
Nationwide was headquartered in Sacramento, California and
offered to reduce or eliminate consumer's debts. Consumer paid
an enrollment fee and directed a monthly transfer of funds to
dedicated accounts in the consumer's name in a bank in Colorado.
Nationwide required consumers to execute authorizations that
vested control of the funds in Nationwide or their designee.
Nationwide used an independent company, Global, to manage the
customer accounts under a contract with the Colorado bank.
Global would withdraw funds from the accounts for payment of the
management fees charged by Nationwide to their customers.
Subsequent to the deposit of enrollment fees from customers,
Nationwide would negotiate with creditors for a debt settlement.
Once a settlement was reached, Global made electronic
transfers from the customer's bank accounts to the creditors.
Global also transferred money from the customer's account to
Nationwide to pay fees.
In 2005, DOC issued a desist and refrain order that prohibited
Nationwide from continuing their operations until they obtained
a proraters license. In issuing its order, DOC concluded that
under the proraters law the receipt of money can be actual or
constructive. In making its decision the court considered the
concept of constructive possession of the customer's funds.
While Nationwide did not have direct, physical control over the
customer's funds, it did have constructive control for two
reasons. First, Global was acting, in effect, as an agent for
Nationwide. Second, Nationwide was directing the amount,
collection and timing of payments from customer's accounts. The
court concluded that Nationwide was acting within the meaning of
the proraters law and that the order issued by DOC was correct.
The sponsors of this bill claim that they do not operate the
same business model as Nationwide, but that the decision in the
Nationwide case could be applied to them because there is no
alternative to the current proraters law. This bill is designed
to ensure that debt settlement providers do not control the
customer's funds and that consumers will be provided adequate
protections, including protections from the practices outlined
in the Nationwide case.
Over the previous few years debt settlement has emerged as an
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alternative for consumers to pay off debts. However, the
industry is marked by a history of bad actors. Those bad actors
typically would encourage customers to default on debts while
they collected payments from the consumer to eventually leverage
the creditor to settle for an amount less than what is owed.
However, this approach would lead the creditor to impose
additional finance charges and delinquency fees that would lead
to collection activity, including litigation. Perhaps even more
serious than advising consumers not to pay their debts is the
failure of many debt settlement companies to assist consumers
with the consequences. It should not surprise anyone that a
consumer that stops paying credit card debt is likely to face
debt collection harassment and in many cases collection
lawsuits. In fact, debt settlement company advertisements play
heavily on these themes, in many cases sounding much more like
companies that stop collection harassment rather than settle
debts. Many companies highlight stopping collection calls as the
first item in a list of company services
A second, serious problem is that not all collection tactics can
be stopped once a consumer is delinquent. This is because on one
hand, the federal fair debt collection law and most state laws
cover third party debt collectors only. A creditor collecting
its own debts is not required to comply with the federal fair
debt law. This is not an open invitation to abuse because other
legal claims may apply. However, the debt settlement companies
focus almost exclusively on the fair debt laws, which do not
apply in all cases. In addition, even if collection calls are
stopped, debtors can still be sued.
The Federal Trade Commission (FTC) summarized these problems in
its May 2004 lawsuit against National Consumer Council (NCC) and
affiliates. According to allegations in this lawsuit,
"Consumers find out, only after enrolling in defendants' debt
negotiation process that: a) even after they execute powers of
attorney authorizing defendants to represent them in dealing
with creditors, they are still called, harassed, and sued by
their creditors for collection of their outstanding debts; b) it
is not realistic for them to successfully complete the program
or eliminate their debts because of intervening creditor
collection efforts ; c) they will continue to accrue late fees,
penalties, and interest on their debt during the time they are
enrolled in the debt negotiation process, even though they are
making monthly payments to defendants; d) their creditors may
raise the interest rates applicable to their debt because, while
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they are enrolled in the debt negotiation program, the creditors
are not receiving the consumers' minimum monthly debt payments;
and e) defendants will not reach a settlement, if at all, with
the consumer's creditors, and in fact typically will not even
contact the creditors, until after the consumer has deposited
enough money into his NCC trust account to make a lump sum
payoff to the creditors, which often does not occur until many
months after the consumer has enrolled in the program."
In its lawsuit against Better Budget, the FTC alleged that
rather than negotiating with creditors, the defendant in
numerous instances failed to contact creditors and debt
collectors. Consumers enrolled in the program were still
contacted by creditors.
Other states : Several other states either have, passed or
introduced legislation relating to debt settlement. Some of
those states include Hawaii, Illinois, Maryland, Massachusetts,
New Mexico, Ohio and Pennsylvania.
Recommended amendments .
Committee staff has identified some key changes that may be
necessary to move this bill forward. First, on page 13,
beginning with line 23, the bill describes the manner in which
fees may be changed and assessed for providing debt settlement
services. This paragraph requires clarification and consistency
regarding the use of the terms "debt" and "principle amount of
debt." In order to provide consistency within the
aforementioned paragraph and the current definition of
"principle amount of debt" currently in the bill, the committee
staff recommends the following amendments on page 13, line 24:
23 60021. (a) The total of all fees charged by a
provider shall not
24 exceed 20 percent of the principle amount of debt
brought into the program
25 which includes a maximum of a 5-percent setup fee.
The total fees
26 must be spread over at least half the length of the
program, unless
27 accelerated by the individual or until offers of
settlement by
28 creditors are obtained on at least half of the debts
enrolled to
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29 provider. In no case shall total fees exceed 20
percent of the
30 principal debt, and the total fees plus settlements
cannot exceed
31 the principal amount of the debt.
Second, the bill prohibits a debt settlement services provider
from lending money, or approving credit, or taking any other
security interesting in the personal property of the individual
in need of services. However, these prohibited actions are
allowed if they are conducted through a separately licensed
affiliate. This raises a host of potential issues as the term
"licensed affiliate" is not clearly defined, nor is it clear
what the intent with these sections may be. This affiliate
relationship could lead to potential conflicts of interest such
as a case where the lender-affiliate is also a creditor of the
of the individual seeking debt settlement services.
Additionally, this could create an incentive for bad actors to
set up affiliate relationships that are simply shell
organizations used as pass through entities in order to provide
credit to consumers at disadvantageous terms.
Staff believes that the risks of interpretation and
implementation of this section far outweigh any benefit to
either consumers or debt settlement providers. With this being
the case, staff recommends the following amendments on Page 16
beginning with line 21.
21 (2) Except through a separately licensed
affiliate, receive from
22 or on behalf of the individual either of the
following:
23 (A) A promissory note or other negotiable
instrument other than
24 a check or a demand draft.
25 (B) A postdated check or demand draft.
26 (3) Except through a separately licensed
affiliate, lend money
27 or provide credit to the individual, except as a
deferral of a fee at
28 no additional expense to the individual or advance a
settlement
29 payment for the individual at no additional expense
to the
30 individual.
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31 (4) Except through a separately licensed
affiliate , obtain a
32 mortgage or other security interest from any person
in connection
33 with the services provided to the individual.
Previous legislation :
AB 2611 (Lieu) of 2008 would have established a debt settlement
licensing framework, as well as, required the licensing of
non-profit credit counselors. This bill was referred to Senate
Banking, Finance and Insurance but never received a hearing.
SB 1678 (Florez) of 2008, would have established a debt
settlement licensing framework. This bill failed passage in
Senate Banking, Finance and Insurance.
REGISTERED SUPPORT / OPPOSITION :
Support
United States Organizations for Bankruptcy Alternatives
(Sponsor)
AFSCME
Freedom Financial Network
The Association of Settlement Companies (TASC)
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081