Jane Azia Testifies Before the New York Assembly Committees on Consumer Affairs and Protection, Banks, and Judiciary on Debt Management Industry
May 14, 2009
Good Morning Assemblypersons Pfeffer, Weinstein and Towns. On behalf of the New York State Banking Department, I appreciate this opportunity to speak with you today on the regulation of debt management services. I would like to first provide some background on the current regulatory scheme and the Department’s oversight in this area. I would then like to discuss our views on the proposed model legislation, some of the legislative measures we believe should be adopted, and areas that warrant further discussion and study.
The Current Regulatory Scheme – Regulation of “Budget Planning”
The New York State Banking Department is currently responsible for licensing, supervising, examining and regulating budget planners. To be licensed under existing New York law, a budget planner must be a type B not-for-profit corporation and enter into a contract under which the budget planner “distributes, supervises, coordinates or controls” money on behalf of a consumer. For-profit entities may not engage in budget planning in New York. Additionally, entities that don’t directly handle or supervise consumer funds for disbursement, whether for-profit or non-profit, are not required to be licensed in New York and currently operate outside any regulatory framework.
The not-for-profit entities licensed in New York to engage in budget planning provide consumers with budgeting, education and counseling services on managing personal finances. Generally, this includes establishing a budget for the consumer and providing financial education. These services are typically performed in connection with the establishment of a debt management plan ("DMP") to be developed for the consumer in order to assist him/her paying down unsecured debt.
With respect to the establishment of a DMP for consumers, New York State licensed budget planners first have to determine if an individual qualifies for such a plan. In this regard, a budget analysis is performed to determine the amount of disposable income available to the consumer that can be used to eliminate the consumer’s debt identified in the DMP.
A DMP is an agreement between the budget planner and the consumer whereby the consumer agrees to pay a sum or sums of money periodically to the person engaged in budget planning who will distribute the agreed upon payment, minus any applicable fees for budget planner services, among certain specified creditors in accordance with a plan agreed upon. Generally, the consumer will make one fixed monthly payment to the budget planner.
The budget planner may obtain concessions from the various creditors, which may include a lower interest rate on specified unsecured credit account and the elimination of late fees and over the limit fees, but not a reduction in principal. This allows the consumer to eliminate his/her debt enrolled in the plan within a 60 month period. A budget planner may typically charge a one time set-up fee of up to $75 and a monthly fee of up to $50. The consumer will receive a statement of account from both the budget planner and each one of his/her creditors.
Budget planners are required to be licensed by the New York State Banking Department. As a condition for licensing, they must adhere to strict consumer protection standards:
Every licensee is required to provide budgeting, education, and counseling services directly to each consumer.
A written agreement between the budget planner and the consumer must be signed by the consumer and must disclose all fees to be charged, a commencement and termination date, cancellation terms and a monthly payment amount. The payment period may not exceed 60 months.
A statement must be sent to the consumer by the budget planner at least once every three months showing payment activity.
Payment to creditors must be made in a timely manner and in accordance with the written agreement.
The licensee must have a toll-free number or a phone number that may be called “collect” by the consumer, in order to assist the consumer with any questions. The Banking Department toll-free number (1-877-226-5697) must also be disclosed in writing in the DMP.
Every licensee must file with the superintendent a surety bond, or in lieu of such bond, pledged assets in an amount to be determined by the superintendent based upon the licensee’s financial condition, business plan, and the actual or estimated aggregate amount of payments and fees paid by debtors to the licensee.
Currently, there are slightly over 76,000 New York debtors enrolled in DMPs through 52 licensed budget planners.
Debt Settlement Companies Are Currently Not Regulated under New York Law
In contrast to budget planners, New York law currently does not regulate what are known as debt settlement companies. Debt settlement companies negotiate with a debtor’s creditor to settle the debt for a percentage less than the amount of principal owed. The consumer deposits and accumulates settlement funds and related fees, many of which are front-loaded, in a bank account the consumer personally controls. Settlement will not occur until the consumers has deposited and accumulated sufficient settlement funds and fees.
Unlike budget planners, debt settlement companies do not receive or hold consumer funds for distribution. Rather, as noted, the consumer accumulates funds in a consumer controlled account. Therefore, consumer funds are not at risk for nonpayment by the debt settlement company. As a result, debt settlement companies are not regulated as budget planners, and there is no law that expressly prohibits or restricts their activities.
1. Debt settlement companies should be subject to the same regulatory oversight as budget planners. This means the regulatory and licensing requirements that apply to budget planners should be extended to those who engage in debt settlement services. Although debt settlement companies don’t receive consumer money to be distributed, they often charge consumers considerable fees, typically in advance of any services being provided. Consumers complain that some debt settlement companies either charge fees for services not rendered, do not follow-through with what they promise or achieve the promised results, and that consumer are unable to contact the debt settlement company after an agreement has been executed.
2. Amend, Don’t Repeal, the existing laws that govern budget planners. A wholesale replacement of Article 12-C of the Banking Law with the proposed Uniform Debt Management Services Act (UDMSA) is not warranted. A better approach is to amend the current Article 12-C to encompass both the business of budget planning and debt settlement. The standards and requirements of the current 12-C and its supporting regulations are, in most respects, more comprehensive and stronger than the model law. They also allow the Superintendent greater flexibility to handle a changing business environment. A chart comparing the current and model laws is attached to this testimony as Exhibit A.
For example, the current law and regulations address many areas on which the UDMSA is silent.
Article 12-C requires licensees to prominently post their license so that the public knows it is dealing with a licensed entity.
Article 12-C requires licensees to obtain the Superintendent’s approval before changes in control take place.
Article 12-C authorizes the Superintendent to adopt rules and regulations necessary for the proper conduct of licensed activity.
Article 12-C requires licensees to promptly notify the Superintendent of changes in officers and directors.
Article 12-C requires licensees to file reports with Superintendent.
Article 12-C sets a maximum contract term of 60-months, while the model law contains no maximum term.
Part 402 of the Superintendent’s Regulations requires signage disclosing the name and address of the licensee and the fact that complaints may be directed to the Banking Department.
Part 402 further requires licensees to notify the Superintendent when they change locations.
Part 402 of the Superintendents’ Regulations requires licensees to notify the Superintendent of any arrest, indictment or conviction.
Part 402 requires the licensee to report any arrest, indictment or conviction of its employees, officers or directors.
- Part 402 of the Superintendent’s Regulations requires licensees to demonstrate a ‘good faith effort’ to locate and refund any monies to the debtor.
In other instances, Article 12-C and current Banking Department regulations provide greater protections than those in the model legislation. Examples include the following:
The Superintendent’s Regulations require licensees to post a bond of $250,000 at time of application. The model law requires of a bond of only $50,000.
Article 12-C requires licensees to inform debtors of the Banking Department’s toll free number and to maintain a toll free or collect number for clients. The model law only requires that licensees maintain a toll free number.
Termination of agreement may be with as little as 10-days written notice to the provider without additional penalties or fees.
Part 402 imposes more detailed books and recordkeeping requirements than the model law and has a longer retention period.
3. Amend Article 12-C to require improved disclosure of terms and fees. We support the model law disclosure requirements, including requiring separate written disclosures before a debt management services agreement, e.g. debt settlement contract, is executed. Required disclosures should include at a minimum that:
plans are not suitable for all individuals and the individual may ask the provider about other alternatives, including bankruptcy, to deal with his or her indebtedness;
the establishment of the plan may adversely affect the individual’s credit rating or credit scores;
the nonpayment of debt may lead creditors to increase finance and other charges and may undertake collection activity, including litigation;
unless it is not true, that the provider may receive compensation from the creditors of the individual;
unless the individual is insolvent, if a creditor settles for less than the full amount of the debt, the plan may result in the creation of taxable income to the individual, even though the individual does not receive money.
Consumers should be given copies of these disclosures to keep whether or not they enter into an agreement with the provider. It is further recommended that consumers sign the disclosure form and that both the provider and consumer retain a signed disclosure form.
4. Certain provisions of the model law should not be incorporated into New York law.
- Do not permit temporary licenses: The model law would allow the Superintendent to issue a temporary license. We do not believe this should be permitted. We recommend that a debt service provider not be allowed to conduct business until receiving a permanent license. Consumers entering into contracts should not be placed at risk in the event a provider does not meet the standards necessary for a permanent license.
For debt management service providers that may have to be grand-fathered, i.e. for-profit providers, the grand-fathered debt settlement service providers would be allowed to continue to service debtor contracts in existence at the time of application, but would be prohibited from signing-up new New York debtors until licensed. This would provide incentive for the debt management service providers to be responsive and complete the application process as soon as possible.
Only the Superintendent should be able to make a claim on the bond: The model law would permit both the Superintendent and an individual consumer to make a claim on the bond. Currently, the bonds are written in the name of the Superintendent for the benefit of the debtors, and only the Superintendent is able to make claims. We recommend that this remain the same as it will become uncertain which claims are being made and make it more difficult to determine the adequacy of the bond.
The Superintendent should retain his authority to determine fees: The model legislation sets the fees that may be charged. Under existing law, the Superintendent approves fees at the time of application and thereafter with 30-days notice prior to a fee change becoming effective. In addition, the Superintendent has the authority to review the reasonableness of the fees. We believe the current regulatory framework allows for greater flexibility and regulatory review of fee structure and should not be altered.
5. The Legislature Should Consider Whether Not-for-Profit and Tax Exempt Status Should be Prerequisites for Engaging in Budget Planning or Debt Settlement.
Under current New York law only not-for-profit Type B corporations may engage in the business of budget planning. The model law would require debt settlement companies to be not-for-profit entities and also to have tax exempt status under section 501 (c) 3 of the Internal Revenue Service Code.
A key question is whether distinguishing between not-for-profit and for-profit entities still makes sense in the current market environment. Does the fact that an entity has a not-for-profit and tax exempt status ensure that the consumers it deals with are adequately protected? To answer this question, we need to hear from all interested stake holders - the for-profit and not-profit industry, as well as consumers and consumer advocacy groups. There are a number of reasons for this recommendation.
Historically not-for-profit budget planners and debt settlement companies also obtained tax exempt status. Yet over the last number of years, the IRS has been challenging the tax exempt status of many of these not-for-profit companies on the ground that they were not meeting the core education mission of a tax exempt entity and were in essence working as collection agencies for creditors. Since 2005, the IRS has revoked over forty 501(c) 3 designated budget planners/credit counselors. The vast majority of its revocations are under appeal.
Of the 52 budget planners currently licensed by New York, 19 have been subject to IRS examination. There has been one final revocation, six preliminary revocations with appeals pending, one no-change determination, and eleven on-going examinations.
Consumers may be better protected by regulating the services provided by budget planners and debt settlement companies and the manner in which they are provided rather than limiting budget planning and debt settlement to not-for-profit entities. A statute that covers both for-profit and not-for-profit entities would ensure that all consumers are working with a licensed entity that is required to meet minimum statutory standards. This would also create a level playing field between the not-for-profit budget planner and the for-profit debt settlement company.
Licensing not-for-profit and for-profit entities would enable the Superintendent to determine that all entities possess the requisite character and fitness to engage in the business of budget planning or debt settlement. All entities would have to post a bond and all would be subject to fee limitations and required consumer disclosures. In addition, all licensed entities – whether for profit or not – could, and should, be required to provide educational programs for their debtors as licensed New York budget planners are currently required to do. Currently, a licensee’s education program is evaluated based on the following terms: the qualifications of person(s) or organization providing such services either directly or indirectly; the adequacy of the delivery systems used to provide such services; the methodology used to measure the effectiveness of the education being provided; and the level of recordkeeping associated with individuals or organizations participating in educational programs. Consumers receiving educational programs have a greater opportunity to break their dependence on excessive indebtedness. Otherwise, the downward spiral into debt may continue even if the debtor initially settles his debt.
Article 12-C of the Banking Law currently governs budget planners. This statute and associated Superintendent’s Regulations should not be repealed and replaced in totality, but amended, with amendments including, but not limited to, inclusion of debt settlement companies and additional disclosure upfront whether or not a consumer enters into a debt management service contract. However, the issue of for-profit or not-for-profit requirement for these entities providing services requires more information for study from the various industry participants, e.g. consumers, consumer advocacy groups, and for-profit and not-for-profit entities. Changes to improve consumer protection in the area of debt management services are welcomed and supported by the Department.