Yes...I will bore you with the details...
BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 350
Assemblymember Lieu
As Amended June 23, 2009
Hearing Date: July 14, 2009
Financial Code
BCP:jd
SUBJECT
Debt Management and Settlement
DESCRIPTION
This bill would enact the Debt Settlement Service Act for the
purpose of licensing debt settlement service providers. That
Act would, among other things:
permit providers to charge a fee of 20% of the principal
amount of debt, as specified, including a 5% setup fee;
exempt a person or entity licensed as a debt settlement
services provider from the Check Sellers, Bill Payers, and
Proraters Law, as specified;
prepare a written financial analysis, and a good faith
estimate on the length of time it will take to complete the
program, prior to entering into an agreement with a consumer;
provide that an agreement is void if the provider is not
licensed, or charges a fee that is not authorized by the Act;
and
allow a consumer to bring a civil action, except as specified,
against a provider who violates the Act and recover
compensatory damages and reasonable attorney's fees and costs.
This bill would become effective on January 1, 2012
BACKGROUND
Debt settlement companies work on a consumer's behalf with their
creditors to reduce their overall debts. Consumers who contract
with a debt settlement company are typically instructed to stop
paying their creditors, put money aside in a bank account, and
add to that account each month. The debt settlement company
(more)
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then negotiates with the consumer's creditors to reach a
settlement on the debt that the consumer then pays with funds
that were set aside in the bank account.
On average, the sponsors note that consumers bring between
$20,000 to $30,000 into a debt settlement program. Those
programs generally last three years, although some consumers do
complete the program in 24 months or less. Despite promises to
settle a portion of a consumer's debt for pennies on the dollar,
numerous parties question whether the average consumer who
enters into debt settlement actually benefits. The New York
Times' April 19, 2009 article entitled Debt Settlers Offer
Promises but Little Help reported:
As many as 2,000 settlement companies operate in the United
States, triple the number of a few years ago. Settlement
ads offering financial salvation blanket radio and
late-night television. Consumers who turn to these
companies sometimes get help from them, personal finance
experts say, but that is not the typical experience. More
often, they say, a settlement company collects a large fee,
often 15% of the total debt, and accomplishes little or
nothing on the consumer's behalf.
. . . [D]ebt settlement firms frequently manage to please
no one. An executive of the American Bankers Association,
representing the credit card industry at a recent forum,
labeled debt settlement companies "very harmful" to both
creditor and consumer. Even debt collectors are upset,
saying the settlement companies prevent them from
collecting.
The premise of debt settlement is simple: A consumer stops
trying to pay even the minimum on his cards. Instead, he
accumulates money in an account that the settlement company
promises to use to strike a bargain with creditors.
Confronted with the certainty of some money now versus the
possibility of no money later, the card company settles for
40 cents on the dollar or less.
Even if the goal makes sense, achieving it can be difficult.
Once the consumer stops paying the minimums, the card
companies increase efforts to collect. Their fees and
interest charges do not stop. They may sue. The consumer's
credit score falls through the floor.
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Last year several bills sought to enact a similar licensing
scheme for debt settlement providers - AB 2611 (Lieu, 2008) was
double referred to the Senate Committee on Banking, Finance and
Insurance (and this Committee) but never was heard in that
committee; SB 1678 (Florez, 2008) contained similar provisions
as AB 2611 but failed in the Senate Banking, Finance and
Insurance Committee. It should be noted that neither bill
reached the Senate Judiciary Committee.
Although amended significantly from AB 2611/SB 1678, this bill
would similarly enact the Debt Settlement Services Act (the Act)
for the purpose of licensing debt settlement service providers.
Instead of the above-referenced fee of 15% of the total debt
referenced by the New York Times article, the Act, would, among
other things, permit a provider to charge a fee not to exceed
20% of the principal amount of debt for their services, as
specified.
CHANGES TO EXISTING LAW
Existing law , the Check Sellers, Bill Payers, and Proraters Law,
is administered by the Department of Corporations (DOC), and
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. (Fin. Code Sec. 12000 et seq.)
Existing law limits the fees that may be charged by a prorater,
or by any other person for the prorater's services, to an
origination fee of up to $50, plus 12% 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.
(Fin. Code Sec. 12314.)
Existing law 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.
(Fin. Code Sec. 12314.)
Existing law 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
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creditors have accepted a distribution of payment. (Fin. Code
Sec. 12315.)
Existing law provides that if a prorater contracts for,
receives, or makes any charge in excess of the maximum allowed
under the Check Sellers, Bill Payers, 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. (Fin. Code Sec. 12316.)
Existing law 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. (Fin. Code Sec. 12104.)
Existing law provides for administrative penalties of up to
$2,500 per violation of the Check Sellers, Bill Payers, and
Proraters Law, and states that any licensee or person who
willfully violates any provision of the law, or any rule or
order adopted pursuant to the law, is liable for a civil penalty
of up to $10,000, enforceable by the Commissioner of the
Department of Corporations (the commissioner). (Fin. Code Sec.
12105.)
This bill would enact the Debt Settlement Services Act,
administered by the Department of Corporations (DOC), and
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 Act.
This bill would define "debt settlement services" as an
intermediary between an individual and one or more creditors of
the individual for the purpose of obtaining concessions on
behalf of an individual, but without receiving money from the
individual for distribution to the individual's creditor. This
bill would define "provider" as a person that provides, offers
to provide, or agrees to provide debt settlement services
directly or through others.
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This bill would exclude the following persons and entities from
the licensing requirement: (1) an attorney licensed to practice
law, a certified public accountant, or public accountant when
rendering service in the course of his or her practice; (2) a
family member that negotiates financial concessions; (3) a
judicial officer, a person acting under an order of a court or
administrative agency, or assignee for the benefit of creditors;
(4) a financial institution licensed under state or federal law;
(5) a title insurer, escrow company, or other person that
provides bill paying services if the person does not provide
debt settlement services; (6) a financial planning services
provider, as specified; and (7) a person licensed or registered
to originate loans secured by real property.
This bill 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.
This bill would cap the fees authorized to be charged by
licensees at 20% of the amount of debt an individual brings into
the debt settlement program, including a five percent setup fee.
This bill 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. This bill would further provide that the
total fees plus settlements cannot exceed the principal amount
of the debt brought into the program, and prohibit the
imposition of fees by a licensee until a written agreement is in
place between the licensee and the individual.
This bill would require applicants for licensure to submit
specified fees to the commissioner, include specified
information on their license applications, submit to state and
federal background checks, specify the conditions under which
the commissioner may issue, suspend, deny, or revoke licensure,
and provide applicants who have their licenses suspended,
denied, or revoked with an opportunity to appeal the
commissioner's decision.
This bill would require licensees to satisfy several
requirements, including preparing and providing a written
financial analysis, and require that specified disclosures be
given before entering into an agreement with an individual to
provide debt settlement services. This bill would require each
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agreement to include specified items, including an estimate of
the total amount of fees reasonably expected to be paid over the
term of the agreement, that an individual may terminate the
agreement at any time, and that an individual may cancel the
agreement within five business days and receive a full refund.
This bill would require a provider to furnish a foreign language
translation of the required disclosures and documents, if that
provider communicates with an individual primarily in a language
other than English. The provider must also maintain 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, and
establish a process for handling customer complaints that
provides a response within 20 days to each customer who files a
formal complaint.
This bill 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. This bill would
provide that any provision of any agreement that violates the
requirements of the debt settlement services law is void.
This bill 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 law, and subject violators to
administrative, civil and criminal penalties for failure to
comply.
This bill would additionally provide that if an agreement is
void, an individual may recover all money paid by or on behalf
of the individual, and that an individual may also recover
compensatory damages for injury caused by a violation of the Act
and their reasonable attorney's fees and costs.
This bill would become effective on January 1, 2012.
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COMMENT
1. Stated need for the bill
According to the author,
Credit counseling and debt settlement services are in demand
now more than ever. Statistics show that median household
income has continued to decline, unemployment levels are
record highs, and the overall economy is suffering through a
recession. As the recession worsens, debt settlement
service becomes an even more critical piece of the overall
economic solution for consumers.
AB 350 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. The DOC has
issued orders for many of these entities to comply with the
prorater's law. However, because debt settlement companies
do not directly control the consumer's money, and only
negotiate on their behalf, they are not proraters as defined
in the law. Proraters are defined in current law as 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. . . . Debt
settlement companies do not handle or control the consumer's
money, and therefore are not proraters per the definition.
Instead, debt settlement companies operate as intermediaries
who negotiate with creditors on some type of settlement for
the consumer's outstanding debt.
Under current law, debt settlement providers, credit
counselors and debt management organizations are not
licensed or regulated. The Financial Code only requires the
registration of non-profit credit counselors with the
Department of Corporations. However, their oversight is
limited to registration.
2. Opposition's major concerns
Although the author has taken numerous amendments to address the
concerns of the opposition, staff notes that there are
significant unresolved issues that the sponsors and opponents
are still attempting to resolve. In addition to those
significant issues, there are numerous additional amendments
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that are suggested by the opposition to provide greater consumer
protection within the proposed Act. (See Comment 5.) Staff
also notes that Consumers Union (CU) and Center for Responsible
Lending (CRL) have submitted a proposal detailing the amendments
necessary for them to remove their opposition. While the author
and sponsors rejected that proposal, the sponsors have indicated
some willingness to address the issues raised by the proposal
but there has been no agreement to date.
As discussed below, given the numerous issues that currently
remain unresolved, the Committee should consider holding the
bill to provide additional time for the parties to work out the
remaining issues.
a. Allowable fees of 20% of the principal amount of debt
This bill would permit a provider to charge a setup fee of up
to 5% of the principal amount of debt brought into the
program, and cap fees at 20% of that debt. Those fees must be
spread out over at least half the length of the program, or
until offers of settlement by creditors are obtained on at
least half of the debts enrolled by the provider. (For
comparison, existing California law caps the setup fee for
proraters at $50, and prohibits their total fees from
exceeding 12% for the first $3,000, 11% for the next $2,000,
and 10% for any of the remaining payments, as specified.
(Fin. Code Sec. 12314.))
Consumers Union (CU), in opposition, contends that "[a]dvance
fees are not associated with good outcomes for consumers, and
they reduce the incentive to provide good service in order to
retain a customer, because the customer has already paid long
before the full service is rendered." CU also notes that
while they previously proposed capping the setup fee at $200,
and the percentage fee at 12%, "in the spirit of compromise,
in early June we proposed to the author a fee reduction that
allows most of the fee levels set forth in AB 350 but makes
those fees more fair in another way, by spreading them out
across more of the contract, by eliminating 'stacking' in
which a set up fee and another fee are both paid in the same
month, by ensuring that no fee would be owed after termination
of the contract, by ensuring that no percentage fee could be
retained unless there was a reasonable determination that the
creditor to whom the debt was owed would engage in
negotiations about the debt, and by eliminating any type of
voluntary prepayment of fees required to be spread out over
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time."
Staff notes that CU's proposal would reduce the total fee from
20 to 18% of the debt, spread out the setup fee over six
months with a charge not to exceed two-thirds of one percent
per month, prevent the "stacking" of fees, and spread out the
entire fee over three-quarters of the length of the program.
As of the writing of this analysis, the author, sponsors, CU,
and CRL have been unable to reach agreement on the above fee
issue. The sponsors, in support of the current fee structure,
contend that front loading is not possible because the bill
limits the amount of the setup fee and requires fees to be
spread out over half the program. The sponsors further
contend that "the fee cap proposed in AB 350, if passed, would
not be the highest cap in the country (other states have
adopted a 20% cap) and [that the fee] would be lower than the
25% cap suggested in the model act that was adopted by the
National Conference on State Legislatures. "
Despite those contentions, CRL notes that "[t]he 20% total fee
is also among the highest allowed by any state, with many
states allowing only a capped monthly fee, and others capping
the total fee at the 15%-18% range, with some tying the
compensation to settlements." From a policy standpoint, the
fee should be structured in a way that both compensates the
debt settlement company for its time and effort but also
provides a financial incentive for the desired behavior.
Although the amount of fees that may be collected is limited
by the "not worse off" language (see Comment 2(d)), staff
notes that the present version of the bill fails to provide a
financial incentive for a provider to offer a consumer the
best possible service and advocacy (the CU/CRL compromise
appears to increase consumer protections in lieu of this lack
of incentive). One way in which that incentive can be created
would be to, instead of allowing a provider to charge based on
a percentage of the debt brought into the program, allow the
provider to charge based upon a percentage of the debt
actually settled. Basing payment upon the amount of debt
actually settled would create a strong incentive for providers
to work to settle as much debt as possible.
Considering that this bill is set for hearing on the last
committee hearing before the Senate's committee deadline, that
the Committee just received the bill from its first Senate
policy Committee, and that significant policy related issues
appear to remain regarding the fee (and other items below),
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the committee should consider holding this bill in policy
committee to provide the additional time needed to resolve the
numerous open policy issues.
ARE THERE LEGITIMATE POLICY ISSUES THAT REMAIN UNRESOLVED, AND
SHOULD THE BILL REMAIN IN POLICY COMMITTEE UNTIL THOSE ISSUES
ARE, IN FACT, RESOLVED?
It should also be noted that the bill's current fee language
allows a consumer to voluntarily prepay fees earned by the
provider - the Committee should consider whether this
provision creates a loophole by which an individual may
mistakenly agree to accelerate payment of fees. CU
additionally notes that further amendments may also be
required to clarify that terminating a contract terminates
liability for any fees not yet charged.
b. Suitability
Before a consumer agrees to engage in a debt settlement
program, the provider must take certain actions, including
preparing a financial analysis and, based on that analysis,
make a determination that the individual is qualified for a
debt settlement program and that the individual can reasonably
meet the requirements of the program. CU and CRL believe that
the provider should, instead, determine whether the particular
program is right for the individual (in other words that the
consumer is actually suitable for a particular program). A
properly crafted suitability requirement that requires
providers to determine whether a particular program is
"suitable" for a particular individual could arguably reduce
the number of individuals who fail to complete the program
(and face the undesirable result of both losing their amount
paid and gaining late charges from their creditors). In
response, the sponsors contend that:
Making "a determination that an individual is suitable"
for a program or service is unprecedented. Nowhere is
this requirement imposed on any other profession licensed
by the Department of Corporation. Moreover, the term
suitable (as proposed) is undefined and subject to varied
interpretation. Therefore, a better alternative would be
to mirror those uses of suitability found in other
[parts] of our licensing laws where a disclosure to
consumers that a program or service may not be suitable
for every individual is required.
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Despite those contentions, this bill would create a licensing
law which is specifically tailored to debt settlement
providers and should contain appropriate consumer safeguards
as a result. If, in fact, the bill is intended to mirror
other licensing laws, the above fee provision should also
limit the fee to the cap contained within the proraters law,
which has been held to apply to at least some of those
providers. (See Comment 4.)
Assuming that the author and sponsors do not intend on
replicating the proraters law, and the issues regarding
permissible fees, the author should continue to work with the
committee to include a suitability standard that provides some
assurance that individuals who are, in fact, charged those
fees are actually suitable for a particular program. Related
to the proposed suitability standard, CU and CRL also
recommend requiring a determination that a consumer can meet
the monthly savings amounts set forth in the savings goals.
SHOULD THE BILL BE HELD IN POLICY COMMITTEE TO RESOLVE ISSUES
SURROUNDING THE SUITABILITY STANDARD?
c. Voidability
The bill currently provides that if a provider violates the
fee provision or is not licensed, the agreement is void and
the individual may bring an action to recover all money paid
by or on behalf of the individual, compensatory damages
(damages to compensate for any injury as a result of the
violation), and reasonable attorneys fees and costs.
CU and CRL additionally request that a contract be voidable if
the provider fails to comply with the requirement to perform a
financial analysis, provide a good faith written estimate,
determine that the individual is qualified for a debt
settlement program, or if a provider fails to include certain
required elements in a contract. CU contends that adding
voidability would create an incentive to comply with basic
requirements and that voidability is a "simple, non-litigation
way for the consumer to get a refund on a contract that failed
to meet statutory preconditions." The sponsors, in response,
contend that "[d]eclaring a contract voidable is an extreme
remedy historically reserved for very specific circumstances"
and that adding voidability would be unprecedented,
unwarranted, and unneeded.
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Despite that contention, the bill already declares a contract
void under certain circumstances. (See proposed Fin. Code
Section 60022.) It should also be noted that voidability is
intertwined with suitability - if suitability is added to the
requirement to perform a financial analysis, an agreement
would be voidable if a provider violates the suitability
requirement given the many other consumer remedies contained
in the bill.
SHOULD THE BILL BE HELD IN POLICY COMMITTEE TO RESOLVE ISSUES
SURROUNDING THE VOIDABILITY OF CONTRACTS?
As part of the above voidability language, CU and CRL are also
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." Unlike the above
provision, this language would only void the particular waiver
in violation, not the entire contract.
d. "Not worse off" fee provision
To address the valid issue of consumers finishing a debt
settlement program in a worse financial position than when
they enter, the bill provides that total fees plus settlements
cannot exceed the principal amount of the debt. CU states
that "unfortunately such a formula doesn't work unless it also
considers any remaining unsettled debt that the program did
not resolve." That inclusion of that unsettled debt within
the "not worse off" language is important because the consumer
could end up owing more than he or she did when they entered
the program due to the accrual of interest, penalties, and
late fees on those debts.
To resolve their concerns CU and CRL suggest amending the bill
to provide that total fees, plus settlements, settlement
offers, and unsecured debt without settlement offers cannot
exceed the principal amount of debt brought into the program.
If that cap were exceeded, fees must be refunded to the extent
the principal balance is exceeded. In response, the sponsors
contend that "[t]his industry, like all other professions,
cannot guarantee results for everyone particularly when
success in a debt settlement program depends (in part) on the
active participation of the consumer."
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It should be noted that the not worse off provision would
provide some minimum financial incentive to debt settlement
providers to settle at least some portion of a consumer's debt
so that they can collect their desired fees. It should also
be noted that the concept of "not worse off" refers to fees
only, and not the damage to a consumer's credit score as a
result of not paying their debts.
3. Judiciary related issues
In addition to the concerns mentioned above and below, the bill
does raise several issues of particular interest to this
committee. Given the unresolved nature of those issues, the
Committee should consider whether the bill should be held in
policy committee until they are resolved.
a. Arbitration
This bill would provide that, except as permitted by the
California Arbitration Act (CAA), an agreement shall not
contain a provision that modifies or limits otherwise
available forums or procedural rights that are generally
available to the individual under law other than as provided
in the Act. Since the CAA generally allows parties to agree
to submit any existing or future controversy to arbitration,
the bill would permit a debt settlement company to require a
consumer to agree to submit any dispute to arbitration,
thereby limiting the private right of action that may be
brought under (c), below.
The Consumer Attorneys of California, in a request for
amendments striking the reference to the CAA, further contend
that this provision would "make[] all contracts between the
debt settlement companies and the consumers subject to
mandatory binding pre-dispute arbitration, which would
essentially allow the debt negotiation companies to contract
out any and all consumer protections provided in this bill.
Consumers should not be lulled into thinking they are being
provided protections under the law that can easily be taken
away by a pre-dispute binding arbitration provision."
SHOULD THE BILL BE HELD IN POLICY COMMITTEE TO RESOLVE
CONCERNS ABOUT THE ARBITRATION PROVISION?
b. Waiver of rights or remedies
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This bill would also prohibit an agreement from containing a
provision that restricts the individual's remedies under the
Act or under another law of this state, limit or release the
liability of any person for not performing the agreement or
violating the Act, and prohibit the agreement from containing
a provision that indemnifies any person for liability arising
under the agreement or the Act.
Staff notes that some issues remain surrounding the waiver
language (such as whether the language should also prohibit
waiving of the individuals right to participate in a class
action), and that should the bill be held in Committee, the
author and sponsors should continue to work to ensure that the
above provisions do effectively protect consumers.
SHOULD THE BILL BE HELD IN POLICY COMMITTEE TO RESOLVE ISSUES
CONCERNING THE WAIVER LANGUAGE?
c. Private right of action with reasonable attorney's fees
This bill would also permit a consumer to bring a civil action
for a violation of the Act, including when an agreement is
void, to recover compensatory damages for injury caused by the
violation, and allow recovery of reasonable attorney's fees
and costs. Since compensatory damages are generally intended
make a consumer "whole," the likely amount of recovery in such
an action (exclusive of attorney's fees) are the amounts paid
for fees and potentially late charges or other penalties as a
result of the provider's violation. Despite somewhat limited
damages, the attorney fee provision would arguably permit an
injured individual to locate a willing attorney to bring their
case for a violation of the Act, provided that the debt
settlement company had not required the consumer to agree to
arbitration, as discussed above in (a).
It should also be noted that if a provider violates both the
Act and the Unfair Business Practices Act (Bus. & Prof. Code
Sec. 17200 et seq.), a consumer may not recover under both the
Act and Section 17200 for the same act or practice.
4. Controversy surrounding licensing of for-profit debt
settlement service providers
The Department of Corporations has taken the position that
for-profit debt settlement service providers should be licensed
under the Check Sellers, Bill Payers, and Proraters Law, and
brought enforcement actions against certain debt settlement
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service providers who do not have a proraters license.
On July 15, 2008, the Court of Appeal, Third Appellate District,
upheld the DOC's position regarding the application of the
proraters law to certain debt settlement service providers.
(Nationwide Asset Services, Inc. v. DuFauchard (2008) 164
Cal.App.4th 1121.) In affirming the Superior Court's judgment,
the Court of Appeal held: "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." (Id. at 1126.)
Despite the above decision, this bill would specifically exempt
individuals licensed under the Debt Settlement Service Act from
the proraters law based upon the sponsor's belief that this bill
is a better match for the business model of debt settlement
companies than that law.
5. Remaining opposition concerns and their suggested
amendments
In addition to the above major issues, CU notes that this bill
lacks the following basic consumer protection provisions
(numbers in parenthesis are the code section in which the
suggestion would be placed): a no waiver rule (60022); a clear
statement that the individual has the right to terminate at any
time (60023); a statutory cancellation form (60019(a)); a "no
blank spaces requirement" (60025(a)); protections on debits to a
bank account which will be lost if authorized through a power of
attorney (60019(b)(3)); a mechanism for a refund if the provider
loses their license and the consumer has paid for services
(60022(b)); an effective bar on unconscionable, unfair, or
deceptive acts or practices (60025(a)(7)); a ban on debt
collection by a debt settlement provider (60025(b)(1)); a ban on
gifts or bonuses to a consumer to sign up, and a ban on employee
commission arrangements (60025(a)); and a requirement for
certain affirmative disclosures in ads (60028).
CU also contends that the bill lacks some licensing and powers
of the commissioner that one would normally expect in a
licensing bill: no obligation to file form agreements and fee
schedules with the license application (60008); no power for the
commissioner to deny a license when a license has been revoked,
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suspended, or subject to a cease and desist order in another
state, or for good cause or material omission (60011(b)); and no
requirement that a renewal application contain all of the
information as the initial license (60013(b)). The sponsors, in
response to those suggestions, note that proposed Section 60036
states that: "The commissioner may make general rules and
regulations and specific rulings, demands, and findings for the
enforcement of this division for the purpose of addressing any
outstanding issues not contained in the bill."
CRL, in opposition, states that together with CU, they have been
working with the author and sponsors to reach a compromise that
would remove their opposition from the bill. CRL states that
they must oppose AB 350 unless it is amended to reduce fees and
provide greater protections and guarantees for consumers.
The Consumer Federation of America and National Consumer Law
Center, in opposition, contend that this bill would
"significantly increase the amount of upfront fees that debt
settlement companies operating in California are now allowed to
charge."'
The Coalition for Quality Credit Counseling (CQCC), in
opposition, contends that this bill "does not provide sufficient
consumer protection and would actually create an environment in
which it is more difficult for the Department of Corporations to
enforce the abusive practices of the debt settlement companies."
CQCC raises the following specific concerns: (1) the definition
of debt settlement services is unclear; (2) large upfront fees
or setup fees should not be allowed; (3) the permitted 20% fee
is excessive; (4) the five day rescission period is too short;
(5) consumers who cancel a contract at any time should be given
a refund of all fees paid, except for a reasonable setup fee;
(6) consumers should receive individualized counseling in
addition to a financial analysis; (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; (9) each debt settlement company
should file an annual report with the DOC; and (10) the
penalties in the bill should be increased.
Support : Freedom Financial Network; American Federation of
State, County and Municipal Employees (AFSCME), AFL-CIO
AB 350 (Lieu)
Page 17 of ?
Opposition : Consumers Union; Center for Responsible Lending;
Consumer Federation of America; National Consumer Law Center;
Coalition for Quality Credit Counseling
HISTORY
Source : The Association of Settlement Companies (TASC); United
States Organizations for Bankruptcy Alternatives (USOBA)
Related Pending Legislation : None Known
Prior Legislation :
AB 69 (Lieu, as amended April 23, 2007), 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. The contents of this
bill were replaced with provisions regarding reporting by
mortgage loan servicers on January 7, 2008.
AB 2611 (Lieu, 2008), contained provisions similar to those in
AB 69. This bill never received a hearing in the Senate
Banking, Finance and Insurance Committee.
SB 1678 (Florez, 2008), contained similar provisions to those in
AB 69. This bill failed passage in the Senate Banking, Finance
and Insurance Committee.
Prior Vote :
Assembly Banking and Finance Committee (Ayes 8, Noes 1)
Assembly Judiciary Committee (Ayes 9, Noes 1)
Assembly Appropriations Committee (Ayes 12, Noes 4)
Assembly Floor (Ayes 56, Noes 22)
Senate Banking, Finance and Insurance Committee (Ayes 10, Noes
0)
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