Establishes the uniform debt-management services act

Summary of provisions

This bill would enact the Uniform Debt-Management Services Act. The Act requires entities that offer to serve as an intermediary between an individual and one or more creditors of the individual for the purpose of obtaining concessions, often referred to as debt management services, to register with the Department of Financial Services. Registration would require submission of detailed information concerning the service, including its financial condition, the identity of principals, locations at which service will be offered, form for agreements with debtors and operational history in other jurisdictions. To register, a service must have an effective insurance policy against fraud, dishonesty, and theft in an amount no less than $250,000. It must also provide a surety bond of a minimum of $50,000.

The bill would require debt management services to provide debtors with certain disclosures regarding fees and the services to be offered, and the risks and benefits of entering into such a contract. Services would be required to offer counseling services from a certified counselor or certified debt specialist and a plan must be created in consultation with the counselor for debt management service activities to commence.

The bill specifies the contents of the agreements and the manner in which fees that may be charged. The bill provides for a penalty-free three-day right of rescission on the part of the debtor, as well as a restricted 30-day period cancellation period. Any payments for creditors received from a debtor would be required to be kept in a trust account that may not be used to hold any other funds of the service. The bill provides for strict accounting requirements and periodic reporting requirements respecting funds held.

The bill prohibits specific acts on the part of a service including: charging or collecting any fee for services until a settlement agreement has been reached with a creditor and at least one payment has been made towards such settlement; misappropriation of funds in trust; settlement

of any debt with a creditor without a debtor's consent; gifts or premiums to enter into an agreement and representation that settlement has occurred without certification from a creditor. The bill provides for enforcement by the Department of Financial Services and private individuals. The Department would have investigative powers, power to order an individual to cease and desist; power to assess a civil penalty up to $10,000, and the power to bring a civil action. An individual would be authorized to bring a civil action for compensatory damages if a service obtains payments not authorized in the Article, any may seek punitive damages and attorney's fees.

Justification

Advertisements for entities offering debt management services, which include credit counseling, debt consolidation, debt management, and debt settlement, have become ubiquitous. Many debt-laden consumers are confused as to which entities offering help are legitimate. Calls for stronger oversight of debt management services have increased in recent years. Several witnesses at the December 1, 2008, Assembly hearing on Senior Scams recommended that the State increase its regulation of the debt management services industry. The U.S. Senate Homeland Security and Governmental Affair's Investigative subcommittee, the Consumer Federation of America, and the National Consumer Law Center have all issued reports in the past five years documenting abuses in the industry.

This comprehensive uniform act initially drafted by the National Conference of Commissioners on Uniform State Laws is aimed at reining in the excesses of the debt management services industry while allowing such services to continue to provide services that benefit consumers. The Act provides guidance and regulation to the consumer credit counseling and debt settlement industries. The Act is a comprehensive statute that provides rules for, among other things, registration requirements, bond requirements, certification requirements, disclosure requirements, and penalties for noncompliance.

The need for uniform state laws in this area increased significantly following the enactment of the Bankruptcy Abuse prevention and Consumer Protection Act (BAPCPA) of 2005. pursuant to the BAPCPA, most individuals filing for Chapter 7 bankruptcy are required to show that credit counseling and debt education/management has been sought and attempted. This shifts a highly significant burden upon private services to perform honestly and effectively. Because the new bankruptcy rules are federal and apply in every state, regulating the debt management services industry in every state must be uniform in character for the new bankruptcy rules to be effective and for consumers to be protected.

Legislative history

S.7067 of 2010 - Reported from Banking Committee to Codes Committee.

Fiscal implications

To be determined.

Effective date

One year after enactment.