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
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)
(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.
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).
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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