On February 19, 2021, California Assembly Member Buffy Wicks introduced Assembly Bill No. 1405 (the “Bill”), which initially sought to amend the Consumer Legal Remedies Act. The Bill was referred to the CA Assembly Committee on Banking & Financing (the “Committee”), which on March 25, 2021, amended the Bill to establish the Fair Debt Settlement Practices Act (the “Act”). The newly amended Bill is currently in the California State Assembly and has been re-referred to the Assembly Committee on Banking & Finance. The Bill still needs to be sent to the Assembly floor, where it will require a majority approval vote to be referred to a California Senate Committee for review (and possibly amended again). Once the CA Senate has reviewed the Bill, it will be sent to the floor for a vote, where if amended, it will return to the Assembly for concurrence, or if approved, will be sent to CA’s Governor to either sign into law or veto the Bill.
The Act would: (1) prohibit debt settlement (“DS”) providers from engaging in false, deceptive, or misleading acts or practices when providing DS services; (2) require a DS provider to provide consumers with certain disclosures along with an unsigned copy of the written contract between the DS provider and the consumer; (3) prescribe certain requirements within said contracts; (4) prohibit certain abusive or deceitful practices in connection with DS provider activities; and (4) create a civil cause of action for a consumer who suffers damages due to a DS provider failing to comply with the Act.
The Act defines “DS providers” as a person who, for compensation and on behalf of the consumer, provides services to assist a consumer with debt settlement services. The definition of “DS services” includes “offering to provide advice or offering to act or acting as an intermediary, including, but not limited to, offering debt negotiation, debt reduction, or debt relief services between a consumer and one or more of the consumer’s creditors, if the primary purpose of that advice or action is to obtain a settlement for less than the full amount of the debt,” or “advising, encouraging, assisting, or counseling a consumer to accumulate funds in an account for future payment of a reduced amount of debt to one or more of the consumer’s creditors.” Since DS services are broadly defined within the Act, both frontend and backend companies would likely be affected by this proposed legislation.
At the high-level, this Act would essentially prohibit frontend DS companies from operating in the state of California as it would make it an abusive or deceitful act for a DS provider to offer, pay, or give any compensation to any person for referring any prospective consumer to the DS provider. Furthermore, the Act makes it an abusive or deceitful act for a DS provider to offer lending or credit services. While the Act does also contemplate fee caps by making certain charges abusive or deceitful, these caps are only imposed when the DS provider is distributing the consumer’s payments, which is prohibited according to federal law. As such, these fee caps would likely not apply.
The civil cause of action shall include a civil penalty of not more than $5,000, compensatory damages, reasonable attorney’s fees and costs, and injunctive relief. There would be a 4-year statute of limitations commencing from the last payment by or on behalf of the consumer pursuant to the contract or the date on which the consumer discovered or reasonably should have discovered the facts giving rise to the consumer’s claim.
While there is an attorney exemption, the Act contemplates attorney models for DS services. Attorneys may not charge for services regulated by the Act, any charges by an attorney must be incidental to representation for a debt collection matter or a purpose other than the settlement of consumer debt, and the fees and disbursements may not be charges or costs shared, directly or indirectly, with a DS provider.
If you would like to read the entire text of the proposed legislation, please click on the following link: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220AB1405.