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Texas Testimony, National Trends in Regulation of Debt Settlement

Texas Testimony, National Trends in Regulation of Debt SettlementYesterday there was a hearing in Texas regarding upcoming debt settlement regulation. Below you will find the testimony regarding the Uniform Debt Management Services Act that was given.

I was told the committee had no patience for USOBA and John Ansbach, who was not even on the witness list. He attempted to make comments in the public forum time allotted but was effectively snubbed.

I was told that the USOBA position is still to fight regulation rather than embrace something. Just my opinion but that ship has sailed and if USOBA wants to be taken seriously then they need to get onboard some advanced fee ban regulation right now. Look, I get the fact they don’t want advanced fee bans but they might as well want free plane tickets for life. That’s not going to happen either.

As you will see below debt settlement marketers, escrow companies and attorneys all found their way into the crosshairs in Michael Kerr’s testimony. In case you don’t know Mr. Kerr he is with nccusl.org

Texas Testimony, National Trends in Regulation of Debt Settlement
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In 2003, the Uniform Law Commission began work drafting what would become the Uniform Debt Management Services Act (UDMSA). The UDMSA was the first national effort to comprehensively regulate the broad category of service providers who stand between individual debtors and their unsecured creditors, and the first national effort to specifically include debt settlement providers in that overall regulation.

The inclusion of debt settlement plan (DSP) providers with credit counseling (CC) and debt management plan (DMP) providers in the overall legislation was controversial. Many existing providers, especially the nonprofit credit counseling agencies, took the position that debt settlement was an inherently flawed business plan, and that they did not want credit counseling to be “lumped in” with the growing debt settlement industry. The UDMSA drafting committee, however, was convinced that because (1) debt settlement providers were targeting the same segment of consumers as established CC and DMP companies, (2) that the risks of fraud and misrepresentation were similar across all three industries, (3) that an increasing number of companies were offering a blend of three services, and (4) that there were clear regulatory benefits to having a common system of registration, disclosure, insurance, and remedies under a single regulator, that DSPs should be part of the uniform regulatory framework. Because DSPs were, at the time, largely for-profit businesses, the UDMSA committee gave states the option of effectively excluding DSP providers from operating in their states by including an optional, bracketed provision which would limit lawful operations to non-profit entities.

To date, seven US jurisdictions have adopted the UDMSA, and it (or acts largely derived from it) have been under active consideration in at least another 10 states. In 2009, SB 2233 by Senator Eltife was largely based on the UDMSA and made substantial progress through the legislature before adjournment.

Significant Developments

Since 2009, however, there have been a number of significant developments with respect to the regulation of debt settlement providers. First, a number of state attorneys general have aggressively pursued enforcement actions against some of the most prominent DSPs, on a variety of charges (operating without registration, deceptive business practices, violation of fiduciary duties, etc.), and a number of states have introduced legislation the industry claims would make it difficult for DSPs to continue to operate under their current business models. Second, the Federal Trade Commission has conducted a number of public hearings and workshops, and has announced plans to introduce federal regulations which, as drafted, would have the effect of banning any DSP fees assessed prior to successful settlements. Third, and most recently, U.S. Senator Schumer has recently introduced legislation (S. 3264) that would prohibit all pre-settlement fees to a flat $50 enrollment fee (refundable) and cap settlement fees at 5% of the amount saved by the consumer (comparing the principal amount of the debt at enrollment with the amount for which the debt is settled). The timing and likely outcome of these federal efforts is still speculative, however, and state regulatory reform should still continue.

Another development of note is the effort, in at least some states, to regulate debt settlement separately from other debt management services. Legislation of this sort has been brought both by the debt settlement industry itself (see CA AB 350) and by state regulatory agencies (see IL HB4781, pending Governor’s approval). While these efforts in large part draw upon the language and structure of the UDMSA, they vary in terms of scope, exclusions, and fee limitations.

Given this backdrop, the Uniform Law Commission is closely following developments at the federal and state level. The advantages of the UDMSA remain compelling – to the extent that debt settlement is to be a viable option for consumers looking for help in dealing with unsecured creditors, the need to have those providers be properly insured, bonded, and registered are paramount. Without a comprehensive statute like the UDMSA, regulators will continue to have difficulty in assessing the business practices, success rates, and financial stability of DSPs. And without a comprehensive registration system, it will remain difficult to screen legitimate service providers from “fly by night” providers who might collect fees and collapse or disappear.

Regardless of how Texas proceeds, since the introduction of the UDMSA in state legislatures beginning in 2006 a number of additional areas of regulatory concern have been noted.

Affiliates and Agents

While the UDMSA does cover “agents’ and “affiliates” of providers, there is at least anecdotal evidence suggesting that more explicit coverage of certain parts of the industry is warranted. The first of these are those companies that serve as referral agents or lead generators for DSPs. While many DSPs themselves may not make false or misleading claims, and may adhere to a code of conduct suggested by their trade association, the same may not be true for the entities referring business to those DSPs. As described in the recent GAO report to the U.S. Senate Commerce Committee, a number of lead generators have in direct statements or in advertising made misleading claims about the services rendered, from claiming false affiliations with a purported government “program” to misleading statements about the ability o creditors to pursue legal remedies.

Another part of the debt settlement industry where additional scrutiny may be warranted (beyond that explicit in the UDMSA) are “escrow” companies where consumers are directed to establish “settlement savings” accounts as part of their plan. While business practices vary from company to company, there have been a number of problems associated with companies automatically deducting fees from these accounts, misusing powers of attorney, or otherwise breaching fiduciary norms.

A third area of concern involves the use of licensed attorneys, either to avoid state regulation altogether or to mislead consumers into thinking an attorney is handling threatened litigation or garnishments when in fact such legal services are not being provided. This is a thorny issue, in that attorneys routinely provide debt work-out services for individual and business clients, and it would be undesirable to interfere with those ongoing client services, but there is mounting evidence that attorneys (often out of state) are lending their credentials to DSP providers without supplying competent legal representation to the underlying clients.

Advertising

While the UDMSA does prohibit a large number of misleading and deceptive claims, and requires that DSP paperwork provide consumers with explicit warnings about the possible adverse consequences of DSPs, it does not generally attempt to directly regulate advertising, especially over success rate claims. While the forthcoming FTC trade rule may provide state regulators with clearer authority to review advertising, for such efforts to be successful it is important that the advertisers themselves be registered in the state and subject to the administrative review of the regulator. One particularly troublesome advertising claim that has been increasingly seen in the past year is that there is a “government program” or “new law” that gives consumers a “right” to settle debts. Some of these advertisements go further, implying that these “government programs” are part of the federal banking bailout. While there is no limit to the possible range of misleading claims, a state may want to consider explicit prohibitions on certain unsupported claims.

Advance fees and Flat fees

Both the proposed FTC trade rule and S.3264 would prohibit the collection of settlement fees prior to the successful settlement of a debt. The UDMSA allows for the collection of a refundable setup fee and monthly account maintenance fees, subject to an overall fee cap tied to the amount saved by the consumer (see Section 23(d)(2) of the UDMSA). Thus, it is possible that federal action on fees might require an adjustment in the fee structures of state enactments of the UDMSA. We would note however, that the proposed federal changes are still speculative, and that regardless of federal action in this area state regulatory oversight will remain primary.

Also, the Uniform Law Commission would urge states to carefully review nonuniform amendments which allow for settlement fees based on the amount of debt enrolled (flat fee model), rather than on the amount of consumer savings (contingency fee model). The UDMSA expressly chose the contingency fee model because this aligns the interests of DSP providers with the interests of consumers – the more a consumer saves, the more a DSP can charge. To the extent a flat fee is authorized, care should be taken to ensure that such a fee model is assessed over time to avoid disincentives associated with front-loaded fees, and does not conflict with any federal or other policies on the assessment of fees before settlement actually occurs.

Illustration Credit: sylvester75117

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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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