BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 708 (Corbett) Hearing Date: April 27,
2011
As Amended: April 12, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would enact the Debt Settlement Consumer Protection
Act, administered by the Department of Corporations (DOC), for
the purpose of licensing and regulating debt settlement
providers, as specified.
DESCRIPTION
1. Would enact the Debt Settlement Consumer Protection Act,
administered by DOC, as a new division of the Financial Code
(Section 12500 et seq.).
2. Would prohibit a person from acting as a debt settlement
provider without a valid license issued by the Commissioner
of Corporations (commissioner). "Debt settlement provider"
would be defined as any person or entity engaging in, or
holding itself out as engaging in the business of providing
debt settlement services to California consumers in exchange
for any fee or compensation, or any person who solicits for
or acts on behalf of that person or entity.
3. Would define "debt settlement services" as either of the
following:
a. Offering to provide advice or service, or acting as
an intermediary between or on behalf of a consumer and
one or more of a consumer's creditors, where the purpose
of the advice, service, or action is to obtain a
settlement, adjustment, or satisfaction of any of the
consumer's unsecured debt in an amount less than the full
amount of the principal amount of the debt or an amount
less than the current outstanding balance of the debt.
b. Offering to provide, or providing, services related
to advising, encouraging, assisting, or counseling a
SB 708 (Corbett), Page 2
consumer to accumulate funds for the purpose of
proposing, obtaining, or seeking to obtain a settlement,
adjustment, or satisfaction of any of the consumer's
unsecured debt in an amount less than the full amount of
the principle amount of the debt or an amount less than
the current outstanding balance of the debt.
4. Would provide that a debt settlement provider has a
fiduciary duty to a consumer in connection with the
solicitation and provision of debt settlement services.
5. Would prohibit 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.
6. Would specify 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.
b. The fee or consideration may not exceed 15% 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.
c. 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.
SB 708 (Corbett), Page 3
7. Would authorize a provider to request or require that a
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 freely chosen by the consumer.
b. The consumer owns the funds in the account and is
the owner of any accrued interest on the account.
c. The entity administering the account is not owned or
controlled by, or in any way affiliated with, or under
contract 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.
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.
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; maintain a minimum net worth of $100,000 and a
surety bond of $200,000 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 disclosures and
documents required to be provided under the bill, if a
provider communicates with an individual primarily in a
SB 708 (Corbett), Page 4
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 30 different metrics for the
preceding five calendar years, as specified.
10. Would authorize 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.
11. 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, and would provide that
any contract entered into in violation of the provisions of
the bill governing the contents of contracts is void.
12. Would require 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. Would
authorize the commissioner to examine the books, records,
accounts, and activities of each licensee at any time, but
not less than once every two years.
13. Would allow individuals, the commissioner, and the Attorney
General to bring actions against licensees for violations of
the bill, and would subject violators to administrative,
civil and criminal penalties for failure to comply with the
bill's provisions. Would additionally provide 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 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.
SB 708 (Corbett), Page 5
14. Would exclude the following persons and entities from the
requirement to be licensed under the Debt Settlement
Consumer Protection Act: an attorney providing information,
advice, or legal representation with respect to a case or
proceeding under Title 11 of the United States Code; 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; escrow agents,
accountants, broker dealers in securities, or investment
advisors in securities, when acting in the ordinary practice
of their professions; and any person who performs credit
services for his or 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;
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 financial planning services provided in a
financial planner-client relationship, as specified.
15. Would exempt 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.
EXISTING LAW
16. 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 DOC. The
Proraters Law 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).
17. 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
SB 708 (Corbett), Page 6
made on recurrent obligations, as defined (Section 12314).
18. Provides that if a prorater contracts for, receives, or makes
any charge in excess of the maximum allowed under the 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).
19. Provides an exemption from the Proraters Law for nonprofit
community service organizations, as specified, and limits the
fees that may be charged by these organizations, when providing
services to debtors, 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).
20. Provides for administrative penalties of up to $2,500 per
violation of the 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
(Section 12105).
COMMENTS
1. Purpose: Co-sponsored by the Center for Responsible Lending
(CRL) and Consumers Union (CU), SB 708 is intended to
establish a licensing and regulatory scheme to protect
consumers from predatory and dangerous practices used by
debt settlement companies. According to the bill's
co-sponsors, the key provisions of the bill include its
across-the-board advance fee ban and its fee cap of 15% of
the amount saved on a settlement, collectable only after a
consumer's debt is fully paid and released. Other key
provisions include a requirement that licensed debt
settlement providers screen consumers before enrolling them
in a debt settlement program, to determine whether the
program is suitable for, and likely to benefit the consumer,
and reporting requirements intended to allow policymakers to
analyze the debt settlement model and its impact on
California consumers.
2. Background and Discussion:
a. Debt Settlement Business Model: Debt settlement
SB 708 (Corbett), Page 7
providers are in the business of negotiating reductions
in the principal amount of unsecured debt (typically, but
not exclusively credit card debt) that is owed by
consumers to their creditors. This distinguishes them
from credit counselors, who typically advise consumers
about how to manage their finances, and from debt
management companies, which typically negotiate different
payment terms for borrowers struggling to make their
payments, without reducing the principal amount of debt
that is owed. SB 708 speaks only to the regulation of
debt settlement providers.
The average amount of consumer debt brought by a consumer
into a debt settlement program ranges from $20,000 to
$30,000. A customer who signs up with a debt settlement
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.
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 notify the debtor
about the negotiated amount, and the debtor is
responsible for sending money to the creditor. Other
providers work with a third party financial institution,
which facilitates the transfer of money from the debtor's
account to the creditor. Still other 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 had fallen out
of favor in recent years). Alternate business models are
also possible. Until recently, there was no restriction
on the timing of fee collection by debt settlement
providers, nor on the way(s) in which fees could be
calculated. That all changed with issuance of the
so-called Telemarketing Sales Rule (TSR) by the Federal
Trade Commission (FTC; this rule is discussed in more
detail below).
b. Historic Debate Over Licensure: The issue of
whether for-profit debt settlement service providers
SB 708 (Corbett), Page 8
should be licensed, and under which law, is a
controversial one, and has been the subject of a number
of different bills during prior Legislative Sessions.
Historically, DOC's enforcement staff has taken the
position that for-profit debt settlement service
providers meet the criteria for licensure under the
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 has historically maintained that,
because they do not physically hold money for debtors,
nor control debtors' assets, they do not fall under the
Proraters Law, and need not obtain a prorater's license.
Instead, they have asserted that they need a separate
licensing law, and, toward that end, have sponsored
several pieces of legislation, which would have created
such a licensing scheme (e.g., AB 69 (Lieu), AB 2611
(Lieu), and SB 1678 (Florez) during the 2007-08
Legislative Session, and AB 350 (Lieu) during the 2009-10
Legislative Session).
This year, two consumer groups, which opposed prior,
industry-sponsored legislation, are sponsoring SB 708.
They assert that SB 708 contains consumer protections
lacking in earlier, industry-sponsored legislation and
that, when combined with the recently-promulgated FTC
rule described below, will allow for the provision of
debt settlement services to be offered in California in a
manner that will be protective of consumers who seek out
these services.
c. The FTC Rule: In July 2010, the FTC issued a rule
(the TSR) to regulate certain practices of for-profit
companies selling debt relief services over the phone.
All of the provisions of the TSR other than the advance
fee ban became effective September 27, 2010. The advance
fee ban became effective October 27, 2010. The language
of the TSR can be found in 16 CFR Part 310.
The FTC rule has had a dramatic impact on the debt
settlement services industry since its issuance.
According to industry representatives, well over half,
and probably closer to two-thirds of industry
participants have left the business altogether. Those
businesses that remain have downsized their sales forces
and are struggling to make a profit.
SB 708 (Corbett), Page 9
d. Who is Covered by the FTC Rule? According to the
FTC, its new rule "applies to for-profit sellers of debt
relief services and telemarketers for debt relief
companies. The new rule defines a 'debt relief service'
as a program that claims directly, or implies, that it
can renegotiate, settle, or in some way change the terms
of a person's debt to an unsecured creditor or debt
collector....The TSR defines 'telemarketing' as a 'plan,
program, or campaign...to induce the purchase of goods or
services' involving more than one interstate telephone
call."
The FTC rule covers both in-bound calls (calls potential
customers place to debt relief providers or those working
on the providers' behalf) and outbound calls (calls debt
relief providers or those working on their behalf place
to potential customers). Thus, the rule covers calls to
debt relief providers in response to advertising,
including consumer calls in response to TV or radio
commercials, infomercials, home shopping programs, ads in
magazines, newspapers, or the phone book, online ads,
billboards, or ads in other media. It also covers calls
to debt relief providers in response to most direct mail
promotions, including calls in response to postcards,
flyers, door hangers, brochures, certificates, letters,
e-mails, and faxes, urging people to call about debt
relief services.
e. Advance Fee Ban: Under the TSR, telemarketers of
for-profit debt relief services, including credit
counseling, debt settlement, and debt negotiation
services, are prohibited from charging a fee before
settling or reducing a customer's credit card or other
unsecured debt. Fees for debt relief services may not be
collected until all of the following occur:
i. The debt relief service
successfully settles, reduces, or otherwise
changes the terms of at least one of the
customer's debts pursuant to a written settlement
agreement, debt management plan, or other valid
contractual agreement executed by the customer;
ii. The customer makes at least one
payment pursuant to that settlement agreement;
SB 708 (Corbett), Page 10
and
iii. The fee or consideration paid by
the consumer either: 1) bears the same
proportional relationship to the total fee that
the individual settled debt bears to the entire
debt amount brought into the program; or 2) is a
percentage of the amount saved as a result of the
settlement, reduction, or alteration. If fees
are charged under the savings model described in
number 2, the same percentage must be charged for
each of the consumer's debts.
f. Other Provisions of the TSR: In addition to its
advance fee ban, the TSR requires debt relief providers
to make specific disclosures to consumers and refrain
from making misrepresentations in their interactions with
consumers.
Another provision of the rule allows debt relief companies
to request or require that consumers set aside their fees
and savings for payment to creditors in a dedicated
account at a specific financial institution, from which
the money can be deducted to pay the debt relief
provider's fees or make payments to creditors or debt
collectors. However, all of the following conditions
must be met, if a dedicated account is requested or
required of a consumer by a debt relief provider: i) the
dedicated account must be maintained at an insured
financial institution; ii) the consumer must own the
funds and any interest accrued on those funds; iii) the
consumer must be able to withdraw funds from the account
at any time without penalty; iv) the provider may not own
or control, or have any affiliation with the company
administering the account; and v) the provider may not
exchange any referral fees with the company administering
the account.
3. How Does SB 708 Differ from the FTC Rule? The FTC rule is
broader than SB 708 in some ways and narrower in other ways.
For example, the FTC rule covers all types of debt relief
services, including credit counseling, debt management, and
debt settlement. SB 708 covers only debt settlement
services.
The FTC rule exempts non-profit entities, intrastate phone calls
SB 708 (Corbett), Page 11
soliciting debt relief services, face-to-face solicitation
of debt relief services, and internet-only transactions. SB
708 covers non-profits, intrastate phone calls, face-to-face
solicitations, and internet-only transactions, as long as
they involve the marketing of debt settlement services to
California consumers.
The FTC rule addresses the timing of fee collection, but does
not cap the amount of the allowable fee, nor does it require
that the fee be a percentage of the savings realized for a
customer (as described above, the FTC rule allows the fee
for settling a single debt to be calculated either as a
percentage of the total fee that will be charged for
settling all debts brought into the debt relief program or
as a percentage of the savings realized for a consumer). SB
708 caps the allowable fee at 15% of the savings to the
consumer.
The FTC rule allows fees to be paid to debt relief providers in
connection with negotiated installment payments, before all
of the installment payments are made, and thus before the
debt is fully paid off. SB 708 requires installment payment
debt to be fully paid off, before a debt settlement provider
can receive payment for settling that debt.
The FTC rule allows debt relief providers to recommend or direct
consumers to deposit money into accounts at specific,
insured depository institutions, provided certain
requirements are met. SB 708 prohibits debt settlement
providers from requiring a consumer to deposit his or her
funds into a specific financial institution. SB 708 also
prohibits debt settlement providers from taking a power of
attorney from a consumer, exercising control over a
consumer's bank account, being named on that account,
creating a demand draft from that account, or obtaining any
information about that account from any person other than
the consumer.
The FTC rule does not prescribe a licensing or regulatory
scheme. SB 708 provides for one.
The FTC rule requires debt relief providers to retain records
for at least two years. SB 708 requires that business
records be retained for five years.
The FTC rule does not include reporting requirements. SB 708
SB 708 (Corbett), Page 12
includes extensive reporting requirements on licensees, as
well as an annual report by the commissioner summarizing the
information submitted by licensees.
4. Will There Be Enough Licensees To Justify A Licensing
Scheme? The significant contraction of the debt settlement
industry leaves some question as to whether a sufficient
number of licensees remain to support a licensing scheme.
If DOC lacks a sufficient number of licensees across which
to spread its set-up and administrative costs, the cost of
an individual license will be prohibitively high, and DOC is
likely to recommend a veto of the bill, based upon the lack
of a sufficiently large licensee population. The only
entity capable of determining whether there are enough
licensees to support a licensing program is DOC, and that
department has not yet taken a position on the bill.
If, after further review, it appears that there are an
insufficient number of potential debt settlement licensees
to support a debt settlement licensing scheme, one option
available to the author and sponsors involves scaling the
bill back to one that requires debt settlement providers to
register with DOC, rather than obtain licenses from DOC. A
registration scheme would eliminate the costs associated
with licensing, such as license application review, license
issuance, license renewal, regulatory examinations, and
regulator enforcement actions, without necessarily removing
the bill's other requirements and prohibitions.
If desired by the author and sponsor, a provision could also be
added to a registration bill, allowing DOC to issue a
finding that licensure is warranted, if and when the number
of debt settlement companies registered with the state grows
to a large enough population to support licensure. That
finding, in turn, could trigger the full licensing
requirements contained in the bill. This option is offered
as a suggestion for future consideration, rather than an
amendment, at this time.
5. Summary of Arguments in Support: Consumers Union (CU), one
of the bill's two co-sponsors, highlights several positive
aspects of SB 708 in its support letter. The bill "would
impose two simple limits on debt settlement fees - that fees
cannot exceed 15% of the savings, and that fees cannot be
charged on a debt until a settlement releases that
debt...Permitting fees based on a percentage of the
SB 708 (Corbett), Page 13
principal debt, as many debt settlement companies do, is
very problematic because the provider can collect fees that
easily exceed the amount of savings achieved...SB 708 ties
debt settlement fees directly to the savings resulting from
actual, binding settlements, measured as 15% of the
difference between the amount paid to settle the debt and
the principal amount of debt at the time of enrollment...SB
708 also includes other valuable provisions, such as
creating an industry-fee funded licensing process and
imposing bonding requirements. Importantly, it requires
that providers screen consumers before enrolling them in a
debt settlement program. In addition, it would place strong
prohibitions on harmful conduct that can mislead consumers
and leave them in a substantially worse financial position
than they were before entering a debt settlement program."
CU also comments on the breadth of SB 708, compared to the FTC
rule. "Because the FTC rule is grounded in its authority to
regulate telephone sales...it does not apply to a sale of
debt settlement services where 'payment is not required
until after a face to face meeting.' It also does not apply
to sales conducted solely on the Internet. SB 708 extends
the timing rule developed by the FTC to debt settlement no
matter how it is sold."
The Center for Responsible Lending (CRL), the bill's other
co-sponsor, believes that the debt settlement model is
flawed, because it requires consumers to stop making
payments to their creditors, which forces a costly growth in
the debt load before it is paid down. According to CRL,
data shows that debt settlement is beneficial for only a
small percentage of consumers, and that many debt settlement
participants end up financially worse off than when they
entered the program. CRL asserts that SB 708 would put
strong rules into place to "ensure that consumers for whom
debt settlement will provide no benefit are not enrolled to
their detriment; and the fees and practices of debt
settlement companies maximize the changes of consumers to
succeed when they do enroll."
In its letter of support, CRL touts four key elements of SB 708:
1) its comprehensive advance fee ban; 2) reasonable fees
tied to settlement (which will align the interests of the
company with the interests of the consumer, ensure that
consumers pay only if, and to the extent that, services are
provided, and incentivize companies to screen out consumers
SB 708 (Corbett), Page 14
for whom successful settlements are not likely); 3) consumer
screening (which will prohibit providers from enrolling
consumers before determining that the debt settlement
program is suitable for the consumer and ensure that the
consumer is likely to derive a net financial benefit from
participating); and 4) robust data reporting (which will
allow for monitoring and oversight of the industry).
Visa, Inc. believes that SB 708 contains a number of reasonable
protections for consumers who are vulnerable to predatory
commercial debt settlement practices. Consumers facing debt
should be given legitimate, effective tools, information,
and assistance to help them regain their financial
well-being and reclaim their creditworthiness.
U.S. Debt Resolve identifies itself as a debt relief firm that
operates in California and offers debt relief services in
alignment with the proposed 15% savings model contained in
SB 708. U.S. Debt Resolve believes that SB 708 compliments
the TSR by providing additional safeguards to address
licensing, certification, insurance and bonding; imposing
suitability testing of enrollees; and requiring
comprehensive data submissions to help evaluate the success
of program results.
Consumer Recovery Network (CRN) provides consumer education and
debt settlement solutions, using a business approach it
describes as unique. Among these unique approaches: CRN
empowers consumers to work out arrangements directly with
their creditors, without the need for a third party to
intervene in providing a direct debt settlement service; CRN
offers full-service debt settlement to its members when they
request it and only charges a fee of 15% of savings when it
reaches a settlement that its member approves. CRN's
members fund their settlements directly from their own
accounts. CRN supports all of the provisions of SB 708,
except for the bill's surety bond amount, which CRN requests
be reduced to $50,000 (down from the $200,000 amount
specified in the bill). Staff notes that the author will
propose amendments in Committee to reduce the amount of the
surety bond to $50,000, as requested by CRN.
Multiple non-profit credit counseling agencies are also
supportive of the measure, but are seeking amendments to
exclude themselves from the provisions of the bill (the
author will also propose amendments in Committee to exempt
SB 708 (Corbett), Page 15
the credit counseling agencies from the bill's provisions).
Credit counseling agencies including (among others) the
Coalition for Quality Credit Counseling, Money Management
International, Springboard Nonprofit Consumer Credit
Management, Novadebt, and ClearPoint Credit Counseling
Solutions support the bill's efforts to ensure that
consumers are better protected when they seek out debt
settlement services. Credit counseling agencies often
counsel clients who previously sought out unscrupulous debt
settlement providers, and who seek out help from credit
counseling agencies after failing to obtain help from the
debt settlement providers. These credit counseling agencies
believe that SB 708 will better protect consumers by
improving transparency, affording them full disclosures, and
limiting fees.
6. Summary of Arguments in Opposition: The United States
Organization for Bankruptcy Alternatives (USOBA), a debt
settlement industry trade association, opposes SB 708,
stating that, "In light of recent action by the Federal
Trade Commission, this bill is unnecessary and, as currently
written, serves one purpose - to kill the bankruptcy
alternative industry in California." USOBA observes that
65% to 70% of the debt settlement industry went out of
business in the six months since the FTC regulations went
into effect.
USOBA sees this constriction as both positive and negative. On
the positive side, it forced some bad actors out of the
business. On the negative side, many legitimate small
businesses were also forced out of business. Unfortunately,
the rules also left what USOBA views as gaping loophole,
which allows makeshift law firms and nonprofits to continue
operating debt settlement companies.
According to USOBA, SB 708 does nothing to address this
loophole. The bill also imposes fees on a licensing
population that is too small to cover the costs of the
regulatory program the bill proposes. SB 708 is also
inconsistent with federal law in that it imposes surety bond
requirements on entities that, under federal law, do not
hold any client funds.
Freedom Debt Relief (FDR), the largest debt resolution company
in the nation, opposes the bill based on its fee cap.
Although FDR supported the new FTC rule, the company
SB 708 (Corbett), Page 16
believes that SB 708 goes too far. "The recently
promulgated FTC regulations already provide significant
restrictions on businesses and protections for consumers
seeking debt relief services. SB 708, if enacted, would
simply add an unworkable and arbitrary fee cap on legitimate
California business, putting them out of business."
FDR states that the fee cap in the bill will not cover even a
fraction of FDR's costs to offer debt relief services. As
such, the bill is an effective ban on the industry. FDR
observes that a law with almost identical fee restrictions
went into effect in Illinois last year, and since then, FDR
and every other company in its industry stopped servicing
new clients in that state. The only companies still
providing debt settlement services in Illinois are those
claiming exemptions from the law, due to affiliations with
attorneys or nonprofits.
CareOne is a national debt relief services company that offers
credit counseling, debt management, and debt settlement. It
opposes SB 708, but would remove its opposition if the bill
were amended. Among the amendments CareOne is seeking:
increase the fee cap to 30% of savings (up from 15%); mirror
the FTC rule by allowing debt settlement companies to
require or recommend that consumers deposit the funds that
will be used to pay settled debts into a specific, insured
financial institution; mirror the disclosures required by
the FTC rule rather than expand them, as this bill proposes
to do; expand the bill's limitations on debt settlement
companies' ability to obtain power of attorney to settle an
individual's debt; allow debt settlement companies who
negotiate installment payment settlements to be paid before
the debts are fully discharged; reduce the number of metrics
that debt settlement companies are required to include in
their annual reports; and exempt licensed debt settlement
providers from the Money Transmitter's Law.
The Tax Problem Resolution Services Coalition (coalition)
represents CPAs, attorneys, and enrolled agents who help
negotiate reductions in tax debts. It, too, is opposed to
SB 708, unless the bill is amended. The coalition observes
that the FTC's recently issued rule included tax debts among
the unsecured debts it covers. The tax professionals within
the coalition objected to the inclusion of tax debts within
the TSR, reasoning that tax debts are secured debts.
Without agreeing with the coalition, the FTC agreed to study
SB 708 (Corbett), Page 17
the issue before taking final action, and issued a notice
deferring the application of the TSR to tax debts, until the
legal issue of tax debts as secured or unsecured could be
resolved. Because that legal issue remains unresolved, the
coalition is concerned about SB 708's application to
unsecured debts. The coalition believes that their concerns
with SB 708 could be addressed, if the bill were amended to
restrict the bill's application to unsecured debt "for
personal, family, or household purposes," thus excluding
tax debt.
Gregory Fitzgerald describes himself as a consumer
protection attorney who represents consumers against
collection companies. He believes that the bill should be
amended to include a broader exemption for attorneys
licensed to practice in California (staff notes that the
author additionally plans to propose this as an amendment in
Committee).
7. Amendments:
a. The author plans to submit amendments in Committee
to make technical corrections and add clarifications, and
to make the following three substantive changes:
i. Create a broader exemption for
attorneys from the bill.
ii. Exempt non-profit credit counseling
agencies from the bill's provisions.
iii. Reduce the surety bond requirement
from $200,000 to $50,000.
8. Prior and Related Legislation:
a. AB 350 (Lieu), 2009-10 Legislative Session:
Would have enacted the Debt Settlement Services Act,
administered by DOC, for the purpose of licensing and
regulating debt settlement service providers.
Sponsored by the debt settlement industry. Failed
passage in the Senate Judiciary Committee.
b. AB 2611 (Lieu) and SB 1678 (Florez), 2007-08
Legislative Session: Would have licensed debt
settlement service providers in a manner similar to
SB 708 (Corbett), Page 18
that contemplated in AB 69 (Lieu), described below.
Sponsored by the debt settlement industry. AB 2611
was not heard by the Senate Banking, Finance &
insurance Committee; SB 1678 failed passage in that
committee.
c. 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. Sponsored by
the debt settlement industry. Language amended out.
d. 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.
e. 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.
f. 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;
and required DOC to conduct a study of the consumer
credit counseling industry in California.
SB 708 (Corbett), Page 19
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Center for Responsible Lending (co-sponsor)
Consumers Union (co-sponsor)
Association of Independent Consumer Credit Counseling Agencies
Cambridge Credit Counseling Corporation
ClearPoint Credit Counseling Solutions
Coalition for Quality Credit Counseling
Consumer Attorneys of California
Consumer Recovery Network
Consumer Credit Counseling Service of the North Coast
Money Management International
Novadebt
Springboard Nonprofit Consumer Credit Management
Surepath Financial Solutions
UCSB, Inc.
US Debt Resolve
Visa, Inc.
Opposition
CareOne
Freedom Debt Relief
Tax Problem Resolution Services Coalition
United States Organization for Bankruptcy Alternatives
Gregory Fitzgerald
Consultant: Eileen Newhall (916) 651-4102