Student Loan Assistance Companies Need a Good Debt Relief Lawyer

The more I talk to regulators around the country the more I’m hearing that student loan assistance companies that charge advance fees are operating illegally in a number of states.

The issue is a bit murky at the moment but the argument is student loan assistance companies are charging advance fees and charging a fee for a service to assist the consumer with a modification of the terms of their loan. State debt management laws and UDMSA state debt management laws would make this illegal.

Other states have similar definitions. I urge any company that is planning to engage in student loan assistance services to make sure the states they are fully compliant with all state regulations in the states they will enroll consumers in. Companies would be wise to seek the professional advice of a law firm that is experienced in the debt relief industry.

According to the UDMSA statute, a debt management services are defined as “an intermediary between an individual and one or more creditors of the individual for the purpose of obtaining concessions.” – Source

White Collar CriminalIf you think that sounds like what student loan assistance companies are offering, as a growing number of regulators do, then these student loan companies need to be registered as debt management companies, be bonded, and a number of other very strict guidelines.

For those of us who watched the abuses and crackdowns in the debt settlement industry, we know the penalties for violating debt management laws are very strict and harsh.

Most companies are going to first wonder how does complying with UDMSA statutes limit fees.

According to the UDMSA statute:

(a) A provider may not impose directly or indirectly a fee or other charge on an individual or receive money from or on behalf of an individual for debt-management services except as permitted by this section.

(b) A provider may not impose charges or receive payment for debt-management services until the provider and the individual have signed an agreement that complies with Sections 19 and 28.

(c) If an individual assents to an agreement, a provider may not impose a fee or other charge for educational or counseling services, or the like, except as otherwise provided in this subsection and Section 28(d). The administrator may authorize a provider to charge a fee based on the nature and extent of the educational or counseling services furnished by the provider.

(d) Subject to adjustment of dollar amounts pursuant to Section 32(f), the following rules apply:

(1) If an individual assents to a plan that contemplates that creditors will reduce finance charges or fees for late payment, default, or delinquency, the provider may charge:

(A) a fee not exceeding $50 for consultation, obtaining a credit report, setting up an account, and the like; and

(B) a monthly service fee, not to exceed $10 times the number of creditors remaining in a plan at the time the fee is assessed, but not more than $50 in any month.

(2) If an individual assents to a plan that contemplates that creditors will settle debts for less than the principal amount of the debt, a provider may charge:

(A) subject to Section 19(d), a fee for consultation, obtaining a credit report, setting up an account, and the like, in an amount not exceeding the lesser of $400 and four percent of the debt in the plan at the inception of the plan; and

(B) a monthly service fee, not to exceed $10 times the number of creditors remaining in a plan at the time the fee is assessed, but not more than $50 in any month. (3) A provider may not impose or receive fees under both paragraphs (1)
and (2).

(4) Except as otherwise provided in Section 28(d), if an individual does not assent to an agreement, a provider may receive for educational and counseling services it provides to the individual a fee not exceeding $100 or, with the approval of the administrator, a larger fee. The administrator may approve a fee larger than $100 if the nature and extent of the educational and counseling services warrant the larger fee.

(e) If, before the expiration of 90 days after the completion or termination of educational or counseling services, an individual assents to an agreement, the provider shall refund to the individual any fee paid pursuant to subsection (d)(4).

(f) Except as otherwise provided in subsections (c) and (d), if a plan contemplates that creditors will settle an individual’s debts for less than the principal amount of the debt, compensation for services in connection with settling a debt may not exceed, with respect to each debt, 30 percent of the excess of the principal amount of the debt over the amount paid the creditor pursuant to the plan, less, to the extent it has not been credited against an earlier settlement fee:

(1) the fee charged pursuant to subsection (d)(2)(A); and

(2) the aggregate of fees charged pursuant to subsection (d)(2)(B). (g) Subject to adjustment of the dollar amount pursuant to Section 32(f), if a payment to a provider by an individual under this [act] is dishonored, a provider may impose a reasonable charge on the individual, not to exceed the lesser of $25 and the amount permitted by law other than this [act].

The UDMSA comment on this section says:

1. Subsection (a) is comprehensive: unless authorized by this section, a provider may not receive a payment for debt-management services. Since this section does not authorize fees for such matters as preparing a financial analysis, preparing a budget, or terminating an agreement, the prohibition in this subsection means that providers may not impose a charge for them. This would be indirectly charging for debt-management services.

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Courts and the administrator should be vigilant to attempts to evade this limitation. A provider might attempt to divide the cost to an individual into separate components and argue that only some are properly viewed as charges for debt-management services. Or a provider might require the individual to pay some components of the cost to the provider and some to others, arguing that only the amounts that the provider itself receives are subject to this section. For example, a provider might use the services of a third person to solicit individuals, determine whether they are qualified for debt-management services, and refer them to the provider. This person might be paid by the provider or by the individual. If paid by the individual, this tactic shifts some of the provider’s costs of doing business to the individual and amounts to an attempt to evade the limits of this section. Amounts paid to a third person for determining that an individual qualifies for debt-management services or for referring an individual to a provider, even if paid by the individual, should be viewed as part of the charge by the provider that this section limits. Hence, subsection (a) prohibits imposition of fees directly or indirectly except as permitted by this section.

2. In addition to specifying some of the contents of an agreement, section 19(a)(5) 61
requires immediate delivery of a record containing the agreement. If the record is a writing, subsection (b) of this section prohibits a provider from collecting any money before the individual receives it. If the record is electronic, the provider may impose a fee if otherwise permitted by this section, as soon as it delivers the record, which occurs (as provided in section 19(b)) when it makes the record available in retrievable and printable form and notifies the individual that it is available.

3. Section 17(b)(1) requires a provider to provide reasonable education about the management of personal finance as a prerequisite to performing debt-management services. Subsection (c) of this section requires that the basic education and counseling be provided at no charge. This prohibition against charges encompasses charges for tangible materials, e.g., books, used in connection with the education. The education must meet the minimum standard of “reasonable,” as determined by the administrator or the courts. To avoid creating a disincentive to exceed the minimum requirement, subsection (c) authorizes the administrator to approve a fee for education if the administrator determines that a provider’s education or counseling services exceed the minimum standards for the basic service. The approval must specify the fee and must relate to the specific course of instruction or counseling performed by the provider.

4. The administrator should be vigilant to attempts by a provider to evade the prohibition against charges for the basic education and counseling. Two factors are especially important: the voluntariness of the purchase by the individual and the substance of the education. Since the basic education must be provided at no charge, the individual must be permitted to form an agreement without having to purchase additional education. Voluntariness may be negated by the sales practices of the provider, including such things as the sales pitch and the manner in which the decision to acquire additional education is presented. If the provider routinely includes the cost of additional education in the proposed agreement that it presents to the individuals it solicits, the purchase of additional education is not truly voluntary. This may be true even if the provider obtains a separate manifestation of the individual’s assent to the additional charge. E.g., see In re USLIFE Credit Corp., 91 F.T.C. 1017, modified 92 F.T.C. 353, rev’d sub nom. USLIFE Credit Corp. v. FTC, 599 F.2d 1387 (5th Cir. 1979). For purposes of this Act, the opinion of the Federal Trade Commission, not the Fifth Circuit, takes the correct approach. Tactics such as these violate section 28(a)(16) (prohibiting unfair, unconscionable, or deceptive acts or practices).

The other factor is the substance of the education. To justify a charge, the education must go beyond the education that the provider must supply at no charge as a prerequisite to providing debt-management services and being compensated for providing those services. The education must consist of more than providing a book or other materials for the individual to read on his or her own. To prevent evasion of the prohibition of this subsection, the administrator must evaluate the program of instruction, including any materials to be used, in order to determine that it goes beyond the education that must be provided at no charge and to determine the amount of any additional charge that is appropriate.

5. Section 28(d) permits a provider to charge amounts permitted by government- sponsored programs that require persons such as first-time home buyers to receive education or counseling services as a condition of eligibility for the program. Subsection (c) does not limit the charges authorized by those programs.

6. Paragraphs (1) and (2) of subsection (d) permit a provider to charge a set-up fee and a monthly service fee. For all providers, paragraph (2) permits a monthly fee of $10 per creditor, except that the monthly fee may not exceed $50. Since some creditors may be paid off before others, the per-creditor branch of the limit is to be determined with respect to the number of creditors remaining in the plan at the time the fee is assessed. Therefore, if there are only two creditors remaining in a plan, the maximum monthly charge is $20.
Under no circumstances may the monthly fee exceed $50. Courts and the administrator should be vigilant to attempts to evade the per-creditor limitation of these paragraphs. For example, if a provider includes in a plan a creditor who the provider knows will make no concessions and imposes a $10 per month fee for that creditor, the provider may violate this subsection or section 28(a)(16) (prohibiting unfair, unconscionable, or deceptive acts or practices).

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7. If the provider is a credit-counseling entity, paragraph (1) permits a set-up fee not exceeding $50. If the provider is a debt-settlement company, paragraph (2) permits a set-up fee not to exceed four percent of the principal amount of the debt in the plan, but in no event more than $400. Anytime the aggregate debt in a plan exceeds $10,000, the maximum set-up fee is $400. The cross reference in paragraph (2)(A) is to the section that requires refund of 65 percent of the set-up fee if the individual terminates the agreement.

8. A provider may engage in both credit counseling and debt settlement. If so, it must comply with the provisions in the Act applicable to each. Paragraph (3), however, prohibits the provider from being compensated separately for each role. To determine the monthly service fee, the provider must aggregate the number creditors in the plan—whether they are to receive regular payments or a one-time payment in settlement of the debt—and impose any per-creditor charge on that aggregate number (not to exceed a total of $50 in any month). Similarly, a provider may not receive both a $50 set-up fee under paragraph (1)(A) and a 4%/$400 set-up fee under paragraph (2)(A). The applicable limit on the set-up fee should be determined by examining whether the plan is predominantly for full payment of the individual’s debts (with reduction in finance charges or other fees) or predominantly for the settlement of those debts for an amount less than the full principal amount of debt owed.

9. Paragraph (4) permits a provider to impose a charge for education or counseling if an individual does not enter a plan. The maximum fee for this education or counseling is specified in the statute, but this paragraph permits the administrator to authorize a larger fee. The approval may, but need not, refer to a specific provider or a specified program of study, such as a course of instruction developed by a third party for use by others. The nature and extent of the educational services may warrant approval of a larger fee if they exceed the minimum standard contemplated by section 17(b)(1).

10. For an elaboration on the cross reference to section 28(d), see Official Comment 5 above.

11. All dollar amounts in subsection (d) are subject to the adjustment by the administrator required by section 32(f).

12. Subsection (c) prohibits a provider from charging for education or counseling if an individual enters a plan. To evade this limitation, a provider might attempt to divide the enrollment process into two stages: a period of education or counseling, for which it imposes a fee, as permitted by subsection (d)(4), followed by a plan, in connection with which it would obey the prohibition in subsection (c) against a fee for education or counseling. Subsection (e) addresses subterfuges like this by requiring a refund of the fee for education or counseling if the individual assents to a plan before the expiration of 90 days after the completion or termination of the education or counseling. This bright-line test is the minimum restriction on evasion of the limit on charges. Courts and the administrator can and should deal with attempts to evade the prohibition of subsection (c). Moreover, the obligation to act in good faith and the prohibition against unfair, unconscionable, or deceptive acts or practices also constrain attempts to evade the restrictions of this section.

13. Subsection (f) authorizes a debt-settlement entity to charge a settlement fee, but requires it to credit against the settlement fee all set-up and monthly fees. The underlying idea is that the settlement fee represents the real compensation of the provider, and the other fees provide cash flow pending receipt of the settlement fee. Hence, they are advances against settlement fees and are to be credited against the settlement fee. This approach accommodates the provider’s need for cash flow pending the first settlement and provides a simple way to effectuate the credit mechanism.


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11 thoughts on “Student Loan Assistance Companies Need a Good Debt Relief Lawyer”

  1. THE ANSWER IS: If the goal is a new loan, it is a service to secure an extension of credit. That practice is clearly covered by the various state Credit Services Organizations laws.

    • Blessed is correct, or so it appears. In Texas a Credit Services Organization is:

      “Credit services organization” means a person who provides, or represents that the person can or will provide, for the payment of valuable consideration any of the following services with respect to the extension of consumer credit by others:
      (A) improving a consumer’s credit history or rating;
      (B) obtaining an extension of consumer credit for a consumer; or
      (C) providing advice or assistance to a consumer with regard to Paragraph (A) or (B).
      (4) “Extension of consumer credit” means the right to defer payment of debt offered or granted primarily for personal, family, or household purposes or to incur the debt and defer its payment.

      In Delaware:

      A credit services organization is a person who, with respect to the extension of credit by others and in return for the payment of money or other valuable consideration, provides, or represents that the person can or will provide, any of the following services:

      (1) Improving a buyer’s credit record, history or rating;

      (2) Obtaining an extension of credit for a buyer; or

      (3) Providing advice or assistance to a buyer with regard to paragraph (1) or (2) of this subsection.

      And the number of states that have similar definitions goes one and on including Indiana, Illinois, Kansas, Utah, Iowa, Ohio, Kansas, etc.

  2. Given your comments. How do you help people with student loans. It seems clear to me that:

    1. They need help.

    2. All of the help is available for free from the DE or elsewhere other than a bk discharge and even this can be done pro se.

    3. The free help will not (or cannot) get used by those that need it most.

    Please answer for both the lawyer and the non-lawyer.

  3. Few questions…

    I don’t see student loans on any of the 97 pages of the UDMSA. Can you show us?

    Federal consolidations are not a concession. It is a new loan. Can you elaborate?

    I did some minor glancing research and the department of education according to your regulators would be in violation of some items in that law? Are they exempt?

    What regulators have your spoken with? Any that are against this business should speak up now before any one gets scammed. Most are welcoming solutions not slapping them down.

    CA AG office told a news reporter that upfront fees are legal. Source… http://www.startribune.com/local/152158365.html

    Let us all know…. Does Loeb N Loeb or Veneble or Greenspoon give you a commish for your stories I heard they had busy phone lines yesterday.

    • I think your questions are addressed to Steve, but he hasn’t answered yet. I’ll give you my thoughts…

      I’m assuming your an industry insider because you know about the big industry law firms.

      I’m going to use “UDMSA” loosely here. This term will apply to whatever applicable law each state has regulating a wide range of services from simply charging a fee to talk to consumers over the phone about their debts right through credit counseling, debt management plans and debt settlement plans. Different states have different definitions of what the regulated service is, and some of them are really pretty all inclusive.

      1. The fact that you don’t see student loans mentioned in UDMSA means student loans are not excluded from UDMSA. Student loans are debts and are covered by applicable law if they are included in a debt management plan, a debt settlement program or any other debt relief product. Car loans and mortgages would not be excluded either, but most service providers don’t touch secured loans for a variety of reasons.

      2. Federal consolidation loans are new loans, as you say. As a lender, the DE doesn’t have to worry about laws regulating debt management, debt settlement, etc. They are acting either as a creditor to manage their debt account, or as a lender to write a new loan, not as a debt relief agency.

      Now, if you’re offering assistance to consumers that happens to match the definitions of a service provider under UDMSA (negotiated lower interest rates, negotiated payment amounts, etc.), then you probably are subject to UDMSA, will require licensure, and will have to abide by the UDMSA fee restrictions.

      However, If you’re a third party service negotiating the terms of a new consolidation loan with DE on behalf of a consumer, you may be clear of UDMSA, but I think you, the third party, are in danger of being a “loan broker” and requiring appropriate licensure. That’s going to vary from state to state depending on the language used to define what a “broker” is.

      The bottom line here is there are a lot of laws regulating what fees can be charged for what services on any debt relief product. They vary from state to state, and you have to know what the definitions are in the laws in each state you service to know if they apply to you. And if they apply to you and you ignore them, either the regulators or the class action attorneys are going to smack you silly.

      3. I can’t follow the third question. Are you asking if UDMSA applies to DE?

      4.I can’t speak for Steve on who he’s spoken to, but I don’t think he’s trying to discourage anyone from helping. I think he’s just stating what should be obvious. if a company is offering a service and the service provided matches the definition of a service provider under UDMSA, than that company is going to have to abide by the terms of UDMSA, which typically means getting licensed and abiding by applicable fee restrictions and other terms of the law.

      • John,

        Thanks for answering T. I didn’t see it. I think you covered it nicely.

        And yes, the bottom line is for companies to not assume, seek competent counsel, and make 100% certain they do not fall under the DM laws and the advance fee does not create a problem.

        Better safe than sorry, especially on the heals of the debt settlement mess. because of that the regulators are just waiting for the next thing that smells similar.

        If T is hanging his hat on the statement in the article he linked to as proof everything is fine, “But the California attorney general’s office said that its upfront fees are legal, because it’s not a debt settlement company.” That’s crazy!

        Anyone that bases their business and potential liability on an anonymous statement from someone allegedly in the California AG office is not thinking clearly.

        Who in the AG office? Was the office given all the facts? Did they review agreements and monthly fees? What do the current CA DM laws say and if it does not fall under CA DM then the point you raised about needing to potentially be a licensed loan broker is valid. “In general, any person engaging in the business of a finance lender or finance broker is required to obtain a California FInance Lenders license. “Finance broker” includes any person engaged in the business of negotiating or performing any act as broker in connection with loans made by a finance lender.”

        Better safe than sorry. If the phones started ringing at Venable, Loeb and Greensppon, GREAT!

      • There is no negotiation that takes place with these services, and the people doing it absolutely are not loan originators and cannot be called that in any way. However I think there are many other valid points here.

        There are no negotiations, concessions, etc. obtained by the student loan consolidation companies, it’s all a process that the client could do themselves if they knew how to use the online applications (they don’t).

        It does need to be cleaned up – let’s not crush the small companies that are doing it right at the same time as the big ones doing it wrong.

        • I think the question the regulators are looking closely at is not if any negotiation takes place but if the service results in a modification of the terms of the loan.

          The point John brought up about being a loan broker if you are being paid to assist the consumer with a new loan is an interesting one and I have not talked to anyone about that yet.

          I applaud those of you here that are taking notice and having these discussions. History has taught us just recently when we let rouge companies harm consumers the entire industry suffers. If you want a student loan assistance industry to survive you must out the bad actors and put them on the radar.

          In the meantime I did write a guide on how to run a clean program. https://getoutofdebt.org/49310/how-to-run-a-clean-student-loan-assistance-program

          • It’s very interesting to see the how they will deal with these nuances. I think the term loan broker may be applied but it really comes down to what the processors are doing.

            We flat out tell people that we are offering counseling and help completing their student loan applications. We don’t have a special relationship with the DOE, so we are not brokering the loans – just filling out difficult, complex forms and doing an intensive counseling session with the client.

            To take this further, I think it would depend on how much the other firms are doing a form of what I am doing – since I know that the DOE is not working directly with these companies so that they can be enriched by hundreds of dollars per graduate that they help. I just don’t see the DOE going with that, especially with the sequester going on.

            So I tend to think the other companies are doing some form of what I am doing, or using the graduates login data to do this for them online (including the FAFSA pin).

            So to answer the question of whether these companies can fall under the category of loan brokers, I think we will have to find out more about how they are doing the process. It’s safe to say they are not working directly with DOE and doing some form of the counseling/completion process like I am.

            Except the difference is that they are implying that they ARE working with, for, or through the government.

            Steve, the more you discover, the more questions that arise. You’ve been very helpful so far in providing guidance for this.

            I am sure some of the other posters including myself are looking at the option of a moderately producing businesses that is run compliantly and lasting for 5-10+ years, versus having a huge 1-2 year run and then getting shut down and possibly going to prison. So please keep it coming.

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