BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 350 (Lieu) Hearing Date: July 9, 2009
As Amended: June 23, 2009
Fiscal: Yes
Urgency: No
SUMMARY Would enact the Debt Settlement Services Act,
effective January 1, 2012, for the purpose of licensing debt
settlement service providers, as specified.
DIGEST
Existing law
1. 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 the
Department of Corporations (DOC), which 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);
2. 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
made on recurrent obligations, as defined (Section 12314);
3. Defines recurrent obligations for purposes of the
aforementioned fee cap as current rent payments, current utility
payments, current telephone bills, current alimony payments,
current monthly insurance premium payments, and first lien
mortgage payments, and authorizes a fee not to exceed $4 per
disbursement on recurrent obligations consisting of current rent
payments or first lien mortgage payments, and not to exceed $1
on other recurring obligations (Section 12314);
AB 350 (Lieu), Page 2
4. Provides that when a debtor has not canceled or defaulted on
the performance of his or her contract with the prorater within
12 months after engaging in the contract with the prorater, the
prorater must refund the origination fee (Section 12314);
5. Requires the prorater to pay the debtor's creditors at least
70% of all funds received by the debtor each month (Section
12314);
6. Prohibits a prorater from receiving any fee unless he or she
has the consent of at least 51% 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 (Section
12315);
7. Requires every contract between a prorater and a debtor to list
every debt to be prorated with the creditor's name, and disclose
the total of all such debts; provide payments reasonably within
the ability of the debtor to pay in precise terms, disclose in
precise terms the rate and amount of the prorater's charge;
disclose the approximate number and amount of installments
required to pay the debts in full; disclose the names and
addresses of the prorater and the debtor; and contain other
items, as deemed necessary by the Commissioner of Corporations
(commissioner) for the protection of the debtor (Section 12319);
8. Provides that if a prorater contracts for, receives, or makes
any charge in excess of the maximum allowed under the Check
Sellers, Bill Payers, or 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);
9. Provides an exemption from the Check Sellers, 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% 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);
10. 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
AB 350 (Lieu), Page 3
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).
This bill
1. Would enact the Debt Settlement Services Act, administered
by DOC, as a new division of the Financial Code (Section
60000 et seq.), effective January 1, 2012;
2. Would prohibit a person from providing debt settlement
services to an individual who it reasonably should know
resides in this state at the time it agrees to provide the
services, unless that provider obtains a license, and
annually renews that license, pursuant to the provisions of
the bill. The term "provider" is used interchangeably with
the term "licensee" throughout the remainder of this
analysis;
3. Would define "debt settlement services" as acting as an
intermediary between an individual and one or more creditors
of the individual for the purpose of obtaining concessions
on behalf of the individual, but without receiving money
from the individual, for distribution to the individual's
creditor;
4. Would define "provider" as a person that provides, offers
to provide, or agrees to provide debt settlement services
directly or through others;
5. Would exclude the following persons and entities from the
requirement to be licensed under the Debt Settlement
Services Act: an attorney licensed to practice law in this
state, or a licensed certified public accountant or public
accountant, when that person renders services in the course
of his or her practice; a family member of an individual
that negotiates financial concessions, with or without
compensation, from an individual's creditors; a judicial
officer; a person acting under a court order or
administrative order; an assignee acting for the benefit of
creditors; a financial institution licensed under state or
federal law; a person licensed or registered to originate
loans secured by real property; a title insurer, escrow
company, or other person that provides bill-paying services,
if those persons do not provide debt settlement services;
and a financial planning services provider, as specified;
AB 350 (Lieu), Page 4
6. Would exempt a person or entity licensed as a debt
settlement services 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;
7. Would cap the fees authorized to be charged by licensees at
20 percent of the amount of debt an individual brings into
the debt settlement program, including a five percent setup
fee; would require the total fees to be spread over at least
half the length of the debt settlement program, unless
accelerated by the individual or until offers of settlement
by creditors are obtained on at least half of the debts
brought into the program; would provide that total fees plus
settlements cannot exceed the principal amount of the debt
brought into the program; and would prohibit the imposition
of fees by a licensee until a written agreement is in place
between the licensee and the individual;
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; include specified items in each agreement; 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
language other than English; offer a toll-free phone number
that allows people to speak to a customer service
representative during ordinary business hours; maintain an
Internet Web site that contains specified information;
establish a process for handling customer complaints that
provides a response within 20 days to each customer who
files a formal complaint; and allow individuals to cancel an
agreement at any time, as specified;
10. Would provide customers five days in which to rescind an
agreement and receive a full refund of fees paid;
AB 350 (Lieu), Page 5
11. Would authorize the commissioner to examine the books,
records, accounts, and activities of each licensee once
every two years, and would authorize the commissioner to
charge licensees reasonable expenses incurred to conduct
these examinations;
12. 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, or if the provider is
not licensed as a debt settlement services provider in this
state when an individual assents to the agreement, and would
provide that any provision of any agreement that violates
the requirements of the bill is void;
13. Would prohibit specified acts and practices by providers;
allow individuals, law enforcement agencies, and the
commissioner to bring actions against licensees for
violations of the Debt Settlement Services Act; and subject
violators to administrative, civil and criminal penalties
for failure to comply. Would additionally provide that if
an agreement is void, an individual may recover all money
paid by or on behalf of the individual, and may also recover
compensatory damages for injury caused by a violation of the
bill, together with reasonable attorney's fees and costs.
COMMENTS
1. Purpose of the bill To create a regulatory scheme
specifically tailored to debt settlement service providers.
2. Background The business model of debt settlement service
providers involves working on behalf of individuals behind
on their debts, and helping these debtors negotiate
reductions in the amounts owed to their creditors. A
customer who signs up with a debt settlement services
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.
AB 350 (Lieu), Page 6
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 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 has fallen out of favor in recent years). Other
providers notify the debtor about the negotiated amount, and
the debtor is responsible for sending money to the creditor.
Still other providers work with a third party financial
institution, which facilitates the transfer of money from
the debtor's account to a creditor (this model appears to be
growing in popularity). Alternate business models are also
possible.
According to the sponsors, the average amount of consumer debt
brought into a debt settlement program ranges from $20,000
to $30,000. Most debt settlement programs are set up to
last three years, although about half the people who
complete their programs finish those programs in 24 months
or less. Although estimates of the percentage of customers
who finish their programs vary (consumer groups claim
percentage completion rates as low as 2%), industry
representatives assert that about half of all customers
complete their programs. The remainder drop out at some
time before completion. The fees charged by providers vary.
Some providers charge flat fees; others charge based on the
amount of money they are able to save the consumer.
Licensing disputes: The issue of whether for-profit debt
settlement service providers should be licensed, and under
which law, is a controversial one, and has been the subject
of recent litigation. DOC's enforcement staff believe that
for-profit debt settlement service providers should be
licensed under the Check Sellers, Bill Payers, and 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 maintains that, because they do not physically hold
money for debtors, nor control debtors' assets, they do not
fall under the definition of a prorater under the Check
Sellers, Bill Payers, and Proraters Law, and need not obtain
a prorater's license. Instead, they assert that they need a
separate licensing law, and, toward that end, sponsored AB
69 (Lieu), AB 2611 (Lieu), and SB 1678 (Florez) during the
prior Legislative Session, and are sponsoring AB 350 (Lieu)
this year.
AB 350 (Lieu), Page 7
On July 15, 2008, the California Court of Appeal upheld a lower
court opinion and ruled in favor of DOC's position regarding
the application of the Check Sellers, Bill Payers, and
Proraters Law to debt settlement service providers, in a
case titled Nationwide Asset Services, Inc. v. DuFauchard
(79 Cal. Rptr. 3d. 844). In that case, the court held that
the debt settlement company constructively received funds
from its customers; the license requirements of the Check
Sellers, Bill Payers, and Proraters Law apply to companies
that receive funds constructively; and the Check Sellers,
Bill Payers, and Proraters Law did not violate the debt
settlement company's right to due process, as applied. The
court case concluded an enforcement action that had been
initiated by DOC in December 2005.
In issuing its ruling, the court noted that "if plaintiffs
indeed have managed to 'receive' the money of their
customers in all but name, then their conduct is precisely
that which the statute has targeted. There would not be any
reason to permit them to evade the statute's salutary
requirement of subjecting their practices to defendant's
licensing oversight for the protection of consumers." The
court also noted, "Even if respondent thereafter transferred
all client trust monies into accounts controlled by [a
company] to which respondent does not have any access, the
documents make it clear that respondent still retains
control over both the negotiation of settlements and the
disbursement of funds to pay them, and receives compensation
for doing so."
Despite resolution of the court case described immediately
above, the ongoing debate over whether, under what
circumstances, and under which law, debt settlement services
providers should be licensed has continued. This bill is
crafted in a way that the debt settlement services industry
believes is a better match for its business model(s) than
the Prorater's Law.
The Model Act: In July 2005, the National Conference of
Commissioners on Uniform State Laws (NCCUSL) published a
model law for the regulation of both debt settlement
services provision and debt management services provision
(i.e., credit counseling). That law, titled the Uniform
Debt-Management Services Act (Model Act), was most recently
updated in 2008, and is available at
AB 350 (Lieu), Page 8
http://www.law.upenn.edu/bll/archives/ulc/ucdc/2008final.htm.
AB 350 includes some of the language in the Model Act
relating to debt settlement services, but does not track the
Model Act closely. Instead, it is more closely tailored to
match other licensing laws in California.
3. Outstanding, unresolved issues: AB 350 differs
significantly from the debt settlement bills introduced
during the prior Legislative Session. Relative to those
other bills, it contains several amendments intended to
respond to issues raised by the opposition and to resolve
technical issues present in the earlier bills.
Extensive discussions held by the author and sponsors with the
opposition and representatives of DOC and Committee staff
have identified three significant, unresolved issues that
remain.
The author and sponsors have indicated a willingness to take
amendments addressing these issues, but are seeking
assurances from consumer groups that these groups will
remove their opposition if these issues are successfully
resolved. Consumers Union (CU) and the Center for
Responsible Lending (CRL), the two groups which have been
most active in negotiating with the author and sponsors,
believe that negotiating an acceptable compromise on these
issues is extremely important for consumers. However, they
are also committed to resolving their additional outstanding
concerns, and will not agree to remove their opposition
unless at least some of their other issues are also
addressed.
The most significant outstanding issues that remain are
summarized briefly below. Remaining outstanding issues are
covered in the "opposition" section.
Fee caps: As drafted, the bill allows a set-up fee equal to 5%
of the amount of debt brought into the program, and caps
total fees at 20% of the principal amount of the debt
brought by a customer into a program. The 20% cap includes
the set-up fee. The bill also provides that in no case may
the total fees, plus settlements, exceed the principal
amount of the debt, and requires all fees to be spread out
across at least half the length of the program, or until
offers of settlement are obtained on at least half the debts
brought into the program.
AB 350 (Lieu), Page 9
Consumer groups are concerned about the size of the set-up fee
(they would prefer 4%), would like the set-up fee spread out
across a time period of six months, would like the total fee
to be capped at 18%, would like total fees spread out across
a time period of at least three-fourths the length of the
program, and would like much stronger "not worse off"
language.
"Not worse off": As drafted, the bill does not address the
amount of interest, penalties, or late fees that a customer
might accrue with his/her creditors after enrolling in a
debt settlement program. For this reason, although a
customer need not pay any more in fees and settlements than
the amount of debt that customer brings into a debt
settlement program, a customer could wind up owing more than
he/she did when he/she entered the program, due to the
accrual of interest, penalties, and late fees on unsettled
debts.
Consumer groups would like the bill amended to ensure that total
fees, settlements, settlement offers, and unsecured debt
without settlement offers, cannot exceed the principal
amount of debt brought into the program. If this cap were
exceeded, fees, other than set-up fees, would have to be
refunded, to ensure that the principal amount of debt
brought into the program was not exceeded.
The sponsors of this bill are willing to negotiate on the fee
issue, but have expressed their views that they are
for-profit companies who deserve to be compensated for work
they perform on behalf of consumers who enroll in their
programs. While willing to agree to stronger "not worse
off" language, they want assurances that this language will
not be structured in a way that allows a customer who
receives services over a two- to three-year period to walk
away, having paid nothing but a set-up fee.
Suitability: CU and CRL would like to see language added to the
bill to require a determination by a debt settlement company
that a debt settlement program is suitable for an
individual, before the agreement is signed. These groups
distinguish a suitability requirement from the bill's
requirement that a debt settlement company ensure an
individual is qualified for a debt settlement program before
signing them up. The groups believe that both concepts
(qualification and suitability) are important, and that
AB 350 (Lieu), Page 10
suitability must be added. DOC has verbally indicated that
if a suitability requirement is added to the bill, it would
promulgate regulations to clarify the term.
Voidability: As drafted, the bill provides that if a debt
settlement services provider violates the fee provision of
the bill, the agreement is void. The individual may file a
civil action, recover all money paid by or on behalf of that
individual, and receive compensatory damages and reasonable
attorney's fees and costs. Consumer groups would, in
addition, like the agreement to be voidable if the debt
settlement services provider violates the provisions of the
bill that require a debt settlement services provider to
prepare and provide a written financial analysis specific to
the individual, provide a written good faith estimate of the
length of time it will take the customer to complete the
program and a statement of the total amount of debt owed to
each creditor included in the program, require the provider
to make a determination that the individual is qualified for
the program and can reasonably meet the requirements of the
program, and spell out the requirements that each debt
settlement agreement must meet.
The combined effect of the suitability and voidability
amendments sought by consumer groups would render a debt
settlement services agreement voidable if a debt settlement
services provider violates the suitability requirement. The
consumer groups are also seeking a conforming amendment to
ensure that if a contract is void or voided, the consumer
must be given a refund.
Finally, as part of the voidability language, they are seeking
language that states, "Any waiver by an individual of a
right of the individual or of an obligation of the provider
to the individual under this Act is contrary to public
policy and shall be void and unenforceable."
4. Support . The United States Organizations for Bankruptcy
Alternatives and The Association of Settlement Companies,
two debt settlement industry trade organizations, are
sponsoring AB 350 to create a licensing framework under
which their members can operate in California.
5. Opposition CU provided the author and sponsors a complete
set of proposed amendments that, if taken, would address all
of CU's concerns and cause CU to remove its opposition. In
AB 350 (Lieu), Page 11
its letter of opposition to this Committee, CU detailed its
requests related to the outstanding unresolved issues
described above, and provided the author with specific
language. However, as noted above, a commitment from the
author to address these points will not remove CU's
opposition, because CU believes that the bill lacks a
significant number of basic consumer protections, including:
1) a no waiver rule (missing from Section 60022); 2) a
clear statement that the consumer has a right to terminate
the contract at any time (missing from Section 60023); 3) a
statutory cancellation form (missing from Section 60019(a));
4) a "no blank spaces" requirement (missing from Section
60025(a)); 5) no prohibition against debiting a consumer's
bank account through power of attorney (such debits are
authorized in Section 60019(b)(3)); 6) a mechanism for a
refund if the provider loses its license and a consumer has
prepaid for services (missing from 60022(b)); 7) an
effective bar on unconscionable, unfair or deceptive acts or
practices (Section 60025(a)(7) now only addresses such
practices if they are done knowingly); 8) a ban on debt
collection by a debt settlement services provider (missing
from Section 60025(b)(1); 9) a ban on gifts or bonuses being
given to an individual to encourage them to sign up for a
debt settlement services agreement, and on employee
commission arrangements (missing from 60025(a)); and 10) a
requirement for certain affirmative disclosures in
advertisements (missing from 60028).
CU also observes that the bill lacks some licensing authority
and fails to give the commissioner certain powers one would
normally expect to see in a licensing bill, including: 1)
no obligation to file form agreements and fee schedules with
the license application (missing from 60008); 2) no power
for the commissioner to deny a license when a license has
been revoked, suspended, or subject to a cease and desist
order in another state, for good cause, or for a material
omission (missing from 60011(b); and 3) no requirement that
a renewal application contain all of the information in an
initial license application (missing from Section 60013(b)).
CRL has worked with CU to seek a compromise with the bill's
author that would remove its opposition to the bill. "While
we intend to continue working in good faith with the author
and the sponsors for improvements to the bill, AB 350 in its
current form is harmful to consumers." CRL opposes AB 350,
AB 350 (Lieu), Page 12
unless it is amended to reduce fees and provide greater
protections and guarantees for consumers. At a minimum, CRL
believes that the bill must be amended to lower both the
set-up fee and total fees, add protections and guarantees to
provide more certainty that consumers are benefiting from
the services provided, and provide consumers with recourse
in the event they are not benefiting.
The Coalition for Quality Credit Counseling (CQCC) is comprised
of members from the non-profit credit counseling industry.
CQCC opposes the bill, on the basis that it does not provide
sufficient consumer protection and would create an
environment in which it is more difficult for DOC to take
enforcement action against the abusive practices of debt
settlement companies. CQCC raises ten specific concerns,
some of which mirror concerns held by CU and CRL, and some
of which are unique. CQCC believes that: 1) the Prorater's
Law should be amended to include a definition of debt
settlement services (AB 350 creates a new licensing law for
debt settlement providers, separate from the Prorater's
Law); 2) set-up fees should be capped at a lower level than
the 5% cap in the bill (a $50 fee is deemed reasonable under
the fee structure used by CQCC members); 3) fees should not
be spread over half the length of the program, but should be
based upon actual services provided and money disbursed; 4)
the five-day rescission period in the bill is too short and
should be lengthened to six months; 5) consumers who cancel
a contract at any time (not just within the five-day
rescission window) should be given a refund of all fees
paid, except for a reasonable set-up fee; 6) consumers
should not only be given the financial analysis required by
the bill, but should also be provided with individualized
counseling, preferably by a certified financial counselor,
which, at a minimum, addresses managing household finances,
managing credit and debt, personal savings strategies, and a
detailed description of all the various ways to reduce or
eliminate debt, including bankruptcy; 7) before providing
any services, a debt settlement services provider should
obtain the written consent of all creditors that agree to
participate in debt settlement, and should notify the
consumer, within a reasonable period of time, after any
failure to obtain such consent; 8) the Deceptive Trade
Practices Act should be followed in all advertising, to
ensure that debt settlement providers do not advertise
results that cannot be met; 9) each debt settlement provider
should be required to file an annual report with DOC, in a
AB 350 (Lieu), Page 13
form prescribed by DOC; and 10) the penalties in the bill
should be increased.
6. Suggested Amendments The bill requires amendment to address
a reference on page 12, lines 7 and 14, to a subdivision
(Section 60016(c)) that has been amended out of the bill.
7. Prior and Related Legislation
a. AB 2611 (Lieu) and SB 1678 (Florez), 2007-08
Legislative Session: Contained debt settlement
provisions similar to those contained in AB 69. Died
in the Senate Banking, Finance & Insurance Committee;
b. 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. Language
amended out.
c. 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.
d. 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;
e. 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;
AB 350 (Lieu), Page 14
and required DOC to conduct a study of the consumer
credit counseling industry in California.
POSITIONS
Support
United States Organizations for Bankruptcy Alternatives
(co-sponsor)
The Association of Settlement Companies (co-sponsor)
Freedom Financial Network
Oppose
Center for Responsible Lending
Coalition for Quality Credit Counseling
Consumers Union
Consultant: Eileen Newhall (916) 651-4102