In the past year new enacted and proposed legislation has developed within the debt settlement industry. Felix Shipkevich and Bianca Petcu, of Shipkevich PLLC recently hosted a webinar that detailed the new enacted and proposed legislation titled, Legislative Update in The Debt Settlement Industry: Enacted and Proposed Legislation. The webinar discussed the newly enacted legislation in Virginia and Texas, and the newly proposed legislation in Illinois, New Jersey, New York, and California. This article contains a summary of the legislative changes discussed during that webinar.
On April 7, 2020 Virginia passed HB 1553, which amended and reenacted the Code of Virginia to include a chapter on Debt Settlement Service Providers. The bill outlines new licensing and regulatory requirements for debt settlement services providers doing business in Virginia.
This recently enacted legislation defines Debt Settlement Service Companies as: “any action or negotiation initiated or taken on behalf of any consumer with any creditor of the consumer for the purpose of obtaining debt forgiveness of all or a portion of the credit extended by the creditor to the consumer or a reduction of payments, charges, or fees payable by the consumer.”
The newly enacted regulation also requires debt settlement service providers to apply directly with Virginia’s Commissioner for a license via the Commonwealth’s application form and a payment of an application fee of $500. Additionally, there are record retention, reporting, examination and bond requirements; the surety bond ranges from $25,000 but nor more than $350,000. Prohibited conduct is also outlined, including prohibiting false, misleading, or deceptive advertisements in connection with the offered services. It is also important to note that this new law also provides for cease and desist orders, civil penalties, and criminal penalties to be issued against licensees that violate the prohibition requirements.
Additionally, this legislation expressly grants consumers a private right of action against licensees and makes a violation a prohibited practice under the Virginia Consumer Protection Act. As for fee caps, they are “(i) no more than 20 percent of the principal amount of the debt enrolled by a consumer into the licensee’s service or (ii) no more than 30 percent of the difference between the amount owed by a consumer at the time the licensee settles the debt and the amount to be paid by the consumer to satisfy the debt.” This new licensing process and all of its requirements become effective on July 1, 2021.
The newly enacted legislation in Texas is very straight forward and does not drastically impact Debt Management and Debt Settlement Providers in Texas but they are important changes, nonetheless. There are some minimal increases in fee costs that were enacted on February 28, 2020 and go into effect from July 1, 2020 to June 30, 2021. The minimal increases include a three dollar increase for the debt management setup fee to now be $114.00; a one dollar increase for debt management monthly service fee to now be the lesser of $11.00 per account or $57.00; a ten dollar increase for debt settlement setup fee to now be $455.00; a one dollar increase for debt settlement monthly service fee to now be the lesser of $11.00 per account or $57.00; a three dollar increase for counseling or education if no debt management or settlement service provided to now be $114.00; and lastly no increase for the fee for dishonored payment staying at $28.00. Though the increases are minimal, it is important to note the change.
On January 30, 2020 Rep. Camille Y. Lilly (D) introduced HB4430 otherwise known as the DFPR – Email Address of Record. This bill was assigned to Financial Institutions Committee on March 12, 2020 and aims to amend the Illinois the Debt Settlement Consumer Protection Act by requiring applicants for a license or renewal of a license to operate as a debt settlement provider to provide an email address of record to the Department of Financial and Professional Regulation. The proposed bill defines who it affects, including a “debt settlement provider” which means “any person or entity engaging in, or holding itself out as engaging in, the business of providing debt settlement service in exchange for any fee or compensation, or any person who solicits for or acts on behalf of any person or entity engaging in, or holding itself out as engaging in, the business of providing debt settlement service in exchange for any fee or compensation.”
Additionally, in provisions concerning service of certain notices and orders, the proposed bill allows for service by email to the newly added email address of record. The bill goes further to include that service to an email address of record is deemed complete when sent, and that service by certified mail shall be deemed completed when the notice is deposited in the United States mail. The most important takeaway from this newly proposed bill is that if enacted, email addresses will now be required within the licensing process and communication, including that sending a service for process can now be done via email.
On February 21, 2019 New Jersey State Senator Nellie Pou (D) introduced a bill to amend New Jersey’s current “debt adjusters’ law,” which is administered and enforced by the Department of Banking and Insurance, only nonprofit social service agencies and nonprofit consumer credit counseling agencies may operate debt adjustment services in the State. The newly proposed bill would amend the current “debt adjusters law” to allow for- profit debt adjustment companies to conduct business in the state as long as “the company: (1) does not receive or hold, actually or constructively, consumer funds; and (2) is regulated by the Federal Trade Commission pursuant to the commission’s “Telemarketing Sales Rule.”” The bill would remove New Jersey’s blanket ban on for-profit debt settlement and would bring the state’s statute more in line with other states which allow such services pursuant to a state provided license. While certain requirements, such as surety bond values and licensing information requirements have been set forth already in the bill, other important details, such as fee restrictions, have still not been confirmed. Since March 4, 2019 the New Jersey State Senate has had this legislation pending in Senate Commerce Committee Hearing, with no new updates as of April 2020.
Though the proposed bill to amend the current “debt adjusters’ law” is moving very slowly through the NJ State Legislature, on February 20, 2020 and March 16, 2020 Assembly-member Verlina Reynolds-Jackson (D) in the State Assembly and Senator Ronald L. Rice (D) in the State Senate, respectively, introduced Concurrent Resolutions that also involve the debt settlement industry. Unlike the bill introduced in 2019 which is attempting to lessen the strict restrictions already placed on debt settlement companies in New Jersey, the Concurrent Resolutions are seemingly seeking to make the practice of debt adjusting obsolete. According to the Resolution, its purpose is to first and foremost urge efforts at state and federal levels to “protect minority communities from certain practices of debt settlement companies.” The Resolution goes on to encourage the federal government to conduct a comprehensive review of its oversight of debt servicing companies to include a review of federal bankruptcy rules; how debt settlement companies act as credit counseling services; the status of these companies as money servicing businesses; and a review of the enforcement of current laws and regulations by the Consumer Financial Protection Bureau and Federal Trade Commission. And to consider legislation restricting debt settlement companies’ unsafe or unsustainable loans directly or indirectly to consumers. The Assembly Resolution has not been subject to a specific committee yet, but the Senate Resolution has been Referred to Senate Community and Urban Affairs Committee where Sen. Rice is Vice-Chair.
Currently, New Jersey limits debt settlement practices for the most part to not-for profits and attorneys licensed in this state. It is important to note that in the State of New Jersey, “a resolution adopted by both the Senate and General Assembly to express the policy or opinions of the Legislature; often used to petition Congress to take certain actions; to establish study commissions composed entirely of legislators or appointees of the presiding officer, to adopt joint rules; and to propose amendments to the State Constitution. Requires no action by the Governor.” Therefore, this Resolution could potentially be a way for the collective New Jersey State government to petition or in effect lobby the federal government and Congress to enact stricter debt settlement laws since New Jersey already has some of the strictest laws.
The proposed bill, 2019 New York Assembly Bill No. 3266, out of the New York State Legislature was introduced over a year ago, in January of 2019. It is moving very slowly through the New York State Legislature – as of January 8 of 2020 it was referred to Customer Affairs and Protection Committee but has been stalled there. With COVID-19 impacting a lot of state governments’ ability to hold hearings it will seemingly be stuck in Committee for a while longer. The proposed legislation is seeking to adopt the Uniform Debt-Management Services Act (UDMSA), which therefore means New York would now have a licensing requirement and fees in accordance with those outlined in the UDMSA.
The proposed legislation includes definitions of “Debt Settlement Companies” and “Debt Settlement Services” including exceptions for both. According to the bill, Debt Settlement Companies are “any person (a) engaging in, or holding himself, herself, or itself out as engaging in, the business of providing debt settlement services in exchange for or in expectation of any compensation or gain; or (b) soliciting for or acting on behalf of any person engaging in, or holding himself, herself, or itself out as engaging in, the business of providing debt settlement services in exchange for or in expectation of any compensation or gain…” with the commonplace attorney exception added as well. Debt Settlement Services are roughly defined as “offering to act or acting as an intermediary between or on behalf of a debtor and one or more of the debtor’s creditors.”
This proposed bill would require businesses conducting in this manner to apply for a license and follow the specific fees and fee caps. Like the definitions of Debt Settlement Companies and Debt Settlement Services, the fee cap requirements are taken from the UDMSA. Most importantly the fee caps are, “the amount of the settlement fee charged by a debt settlement company with respect to each debt covered by a debt settlement services agreement shall not exceed the lesser of: (a) the amount that is reasonable and commensurate to the debt settlement services provided to the debtor; and (b) the amount that is twenty percent of the difference between: (i) the principal amount of the debt; and (ii) the amount: (A) paid by the debt settlement company to the creditor pursuant to the settlement negotiated by the debt settlement company on behalf of the debtor as full and complete satisfaction of the creditor’s claim with regard to that debt; or (B) negotiated by the debt settlement company and paid by the debtor to the creditor pursuant to a settlement negotiated by the debt settlement company on behalf of the debtor as full and complete satisfaction of the creditor’s claim with regard to that debt.” Again, it is important to note that the proposed bill is still in Committee a year after its introduction and it is moving very slowly through the New York State legislature, with its future remaining unclear.
There are two proposed bills out of the California State Legislature, and one, Bill No. 2524, is creating quite a buzz within the debt settlement industry. Assembly Bill No. 2443 was introduced on February 19, 2020, the same date Bill No. 2524 was introduced. Bill No. 2443 was co-sponsored by Assemblywoman Buffy Wicks (D) and Assemblywoman Shirley Weber (D) and is an active bull in the committee process in the Committee of Banking and Finance. Similar to other states, all Committee hearings are currently postponed until further notice because of COVID-19 so the timeline of this proposed legislation is unclear. This bill, Bill No. 2443, the less controversial bill, is aiming to add to the Consumer Legal Remedies Act, unlawful or deceptive acts in the settlement of debt owed to another, including violations of the provisions regulating proraters. The bill would specify that vicarious liability under this provision would be imputed to persons or entities providing payment processing services for any company that negotiates or promises to negotiate the settlement of debts owed by another.
Assembly Bill No. 2524, sponsored solely by Assemblywoman Buffy Wicks (D), is also an active bill currently postponed in the committee process in the Committee of Banking and Finance. The proposed bill is colloquially known as the “prorater bill” because it is fundamentally changing the meaning of a prorater in California. Per the proposed legislation, a prorater is now defined as “a person who, for compensation, engages in whole or in part in the business of receiving or soliciting money or evidence thereof, or processing payment for the purpose of distributing the money or evidences thereof among creditors in payment or partial payment of the obligations of the debtor.” The additions in italics, which is language that the Assemblywoman is proposing, have made the new prorater definition a bit unclear, so it will be important to follow how the legislation is edited throughout its journey within the Committee of Banking and Finance. The language added to amend the attorney exemption is also quite confusing and incomplete, so it is important to follow this part of the proposed bill to see how it is edited within Committee as well. The proposed five percent fee cap from the original twelve to ten percent fee cap is also a drastic change which could fundamentally change the profitability of debt settlement businesses in California. And lastly, the disclosures that have been added as requirements to disclose to all debtors who sign up for a debt settlement program are currently very heavy handed in favor of creditors. If passed as is Bill No. 2524 will drastically change the way the debt settlement industry operates in California, so at this point while the bill is in Committee the best California residents can do is to send Letters of Opposition to the Banking and Finance Committee with questions and concerns. Letters of Opposition are an important part of the legislative process and should be mailed to the author and committee members before the bill is scheduled to be heard in committee.
The webinar on Tuesday, April 28th covered all of these topics in more detail, please find a recording of the webinar with the corresponding PowerPoint slides on DebtReliefWatch.com.. Additionally, if you have more specific questions related to your personal business or company please do not hesitate to email us directly.