See Who is For and Against California SB 708 Debt Settlement Legislation
A tipster (send in your tips here) sent me in the link to the current California debt settlement bill that listed who was before and against it. What is interesting to note is that Visa is for it and Consumers Union. Gail Hillebrand who was behind these efforts at Consumers Union is now with the CFPB.
In Support of the Bill
- Consumers Union (CU), one of the bill’s two co-sponsors, highlights several positive aspects of SB 708 in its support letter. The bill “would impose two simple limits on debt settlement fees – that fees cannot exceed 15% of the savings, and that fees cannot be charged on a debt until a settlement releases that debt…Permitting fees based on a percentage of the principal debt, as many debt settlement companies do, is very problematic because the provider can collect fees that easily exceed the amount of savings achieved…SB 708 ties debt settlement fees directly to the savings resulting from actual, binding settlements, measured as 15% of the difference between the amount paid to settle the debt and the principal amount of debt at the time of enrollment…SB 708 also includes other valuable provisions, such as creating an industry-fee funded licensing process and imposing bonding requirements. Importantly, it requires that providers screen consumers before enrolling them in a debt settlement program. In addition, it would place strong prohibitions on harmful conduct that can mislead consumers and leave them in a substantially worse financial position than they were before entering a debt settlement program.”
CU also comments on the breadth of SB 708, compared to the FTC rule. “Because the FTC rule is grounded in its authority to regulate telephone sales…it does not apply to a sale of debt settlement services where ‘payment is not required until after a face to face meeting.’ It also does not apply to sales conducted solely on the Internet. SB 708 extends the timing rule developed by the FTC to debt settlement no matter how it is sold.”
- The Center for Responsible Lending (CRL), the bill’s other co-sponsor, believes that the debt settlement model is flawed, because it requires consumers to stop making payments to their creditors, which forces a costly growth in the debt load before it is paid down. According to CRL, data shows that debt settlement is beneficial for only a small percentage of consumers, and that many debt settlement participants end up financially worse off than when they entered the program. CRL asserts that SB 708 would put strong rules into place to “ensure that consumers for whom debt settlement will provide no benefit are not enrolled to their detriment; and the fees and practices of debt settlement companies maximize the changes of consumers to succeed when they do enroll.”
In its letter of support, CRL touts four key elements of SB 708:
- its comprehensive advance fee ban;
- reasonable fees tied to settlement (which will align the interests of the company with the interests of the consumer, ensure that consumers pay only if, and to the extent that, services are provided, and incentivize companies to screen out consumers for whom successful settlements are not likely);
- consumer screening (which will prohibit providers from enrolling consumers before determining that the debt settlement program is suitable for the consumer and ensure that the consumer is likely to derive a net financial benefit from participating); and 4) robust data reporting (which will allow for monitoring and oversight of the industry).
- Visa, Inc. believes that SB 708 contains a number of reasonable protections for consumers who are vulnerable to predatory commercial debt settlement practices. Consumers facing debt should be given legitimate, effective tools, information, and assistance to help them regain their financial well-being and reclaim their creditworthiness.
- U.S. Debt Resolve identifies itself as a debt relief firm that operates in California and offers debt relief services in alignment with the proposed 15% savings model contained in SB 708. U.S. Debt Resolve believes that SB 708 compliments the TSR by providing additional safeguards to address licensing, certification, insurance and bonding; imposing suitability testing of enrollees; and requiring comprehensive data submissions to help evaluate the success of program results.
- Consumer Recovery Network (CRN) provides consumer education and debt settlement solutions, using a business approach it describes as unique. Among these unique approaches: CRN empowers consumers to work out arrangements directly with their creditors, without the need for a third party to intervene in providing a direct debt settlement service; CRN offers full-service debt settlement to its members when they request it and only charges a fee of 15% of savings when it reaches a settlement that its member approves. CRN’s members fund their settlements directly from their own accounts. CRN supports all of the provisions of SB 708, except for the bill’s surety bond amount, which CRN requests be reduced to $50,000 (down from the $200,000 amount specified in the bill). Staff notes that the author will propose amendments in Committee to reduce the amount of the surety bond to $50,000, as requested by CRN.
- Multiple non-profit credit counseling agencies are also supportive of the measure, but are seeking amendments to exclude themselves from the provisions of the bill (the author will also propose amendments in Committee to exempt the credit counseling agencies from the bill’s provisions). Credit counseling agencies including (among others) the:
- Coalition for Quality Credit Counseling
- Money Management International
- Springboard Nonprofit Consumer Credit Management
- Novadebt, and
- ClearPoint Credit Counseling Solutions
support the bill’s efforts to ensure that consumers are better protected when they seek out debt settlement services. Credit counseling agencies often counsel clients who previously sought out unscrupulous debt settlement providers, and who seek out help from credit counseling agencies after failing to obtain help from the debt settlement providers. These credit counseling agencies believe that SB 708 will better protect consumers by improving transparency, affording them full disclosures, and limiting fees.
Against The Bill
- The United States Organization for Bankruptcy Alternatives (USOBA), a debt settlement industry trade association, opposes SB 708, stating that, “In light of recent action by the Federal Trade Commission, this bill is unnecessary and, as currently written, serves one purpose – to kill the bankruptcy alternative industry in California.” USOBA observes that 65% to 70% of the debt settlement industry went out of business in the six months since the FTC regulations went into effect.
USOBA sees this constriction as both positive and negative. On the positive side, it forced some bad actors out of the business. On the negative side, many legitimate small businesses were also forced out of business. Unfortunately, the rules also left what USOBA views as gaping loophole, which allows makeshift law firms and nonprofits to continue operating debt settlement companies.
According to USOBA, SB 708 does nothing to address this loophole. The bill also imposes fees on a licensing population that is too small to cover the costs of the regulatory program the bill proposes. SB 708 is also inconsistent with federal law in that it imposes surety bond requirements on entities that, under federal law, do not hold any client funds.
- Freedom Debt Relief (FDR), the largest debt resolution company in the nation, opposes the bill based on its fee cap. Although FDR supported the new FTC rule, the company believes that SB 708 goes too far. “The recently promulgated FTC regulations already provide significant restrictions on businesses and protections for consumers seeking debt relief services. SB 708, if enacted, would simply add an unworkable and arbitrary fee cap on legitimate California business, putting them out of business.”
FDR states that the fee cap in the bill will not cover even a fraction of FDR’s costs to offer debt relief services. As such, the bill is an effective ban on the industry. FDR observes that a law with almost identical fee restrictions went into effect in Illinois last year, and since then, FDR and every other company in its industry stopped servicing new clients in that state. The only companies still providing debt settlement services in Illinois are those claiming exemptions from the law, due to affiliations with attorneys or nonprofits.
- CareOne is a national debt relief services company that offers credit counseling, debt management, and debt settlement. It opposes SB 708, but would remove its opposition if the bill were amended. Among the amendments CareOne is seeking:
- increase the fee cap to 30% of savings (up from 15%);
- mirror the FTC rule by allowing debt settlement companies to require or recommend that consumers deposit the funds that will be used to pay settled debts into a specific, insured financial institution;
- mirror the disclosures required by the FTC rule rather than expand them, as this bill proposes to do;
- expand the bill’s limitations on debt settlement companies’ ability to obtain power of attorney to settle an individual’s debt;
- allow debt settlement companies who negotiate installment payment settlements to be paid before the debts are fully discharged;
- reduce the number of metrics that debt settlement companies are required to include in their annual reports; and
- exempt licensed debt settlement providers from the Money Transmitter’s Law.
- The Tax Problem Resolution Services Coalition (coalition) represents CPAs, attorneys, and enrolled agents who help negotiate reductions in tax debts. It, too, is opposed to SB 708, unless the bill is amended. The coalition observes that the FTC’s recently issued rule included tax debts among the unsecured debts it covers. The tax professionals within the coalition objected to the inclusion of tax debts within the TSR, reasoning that tax debts are secured debts. Without agreeing with the coalition, the FTC agreed to study the issue before taking final action, and issued a notice deferring the application of the TSR to tax debts, until the legal issue of tax debts as secured or unsecured could be resolved. Because that legal issue remains unresolved, the coalition is concerned about SB 708’s application to unsecured debts. The coalition believes that their concerns with SB 708 could be addressed, if the bill were amended to restrict the bill’s application to unsecured debt “for personal, family, or household purposes,” thus excluding tax debt.
- Gregory Fitzgerald describes himself as a consumer protection attorney who represents consumers against collection companies. He believes that the bill should be amended to include a broader exemption for attorneys licensed to practice in California (staff notes that the author additionally plans to propose this as an amendment in Committee). –
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