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Banking Interpretations

NYSBL 579 and 641
General Business Law 455 and 458

_______________________________________________________
To: Examiner Modaffieri
From: Alan M. Weinberg - Legal Division
Date: November 16, 2005
Subject: Budget Planning – [ ]
_______________________________________________________
Issue

Is [ ] required to obtain a budget planner's license? You
also asked whether [ ] must provide a surety bond pledged to the Department to
protect its New York clients. I will also address the question of whether [ ] must
obtain a money transmitters license.

Recommendation

Since [ ] is not engaged in "budget planning" as defined by New York
law, it is not required to obtain a budget planner's license. Furthermore, it need not
obtain a surety bond pledged to the Department, which might ordinarily be required to
protect New York clients while any required license application for an unlicensed budget
planner is pending. In the event that [ ] deals with its New York clients
from a location in New York, directly or indirectly, it would have to obtain a money
transmission license from the Department.

Background

[ ] is a not-for-profit entity with IRS 501(c)(3) status that provides a
"debt pooling" service to individuals nationwide pursuant to the terms of the contract you
supplied. This service calls for an individual to pay his or her debts by making a
monthly payment to [ ]and for [ ] to disburse 100% of the payment to the
individual's creditors. [ ] receives no money or other compensation
directly from the individuals it serves, but rather receives voluntary "fair share
contributions" from the creditors to which it directs the payments. These contributions
typically range from 0-8% of the amount of the payment made to the creditor, but the
debtor's account is credited with 100% of the payment amount received by the creditor
from [ ].

 

Reasoning

BUDGET PLANNERS -- In general, a person or entity is required to obtain a license to
engage in the business of "budget planning" in New York, including the solicitation of
such business in New York and contracting for it with a New York resident.

Banking Law Article 12-C coupled with General Business Law Article 28-B essentially
establishes that only type B not-for-profit corporations, as defined in section 201 of the
Not-For-Profit Corporation Law, that are licensed by the Superintendent of Banks (and
attorneys who are exempt from the licensing requirement) may engage in budget
planning activities. "Type B not for profit corporations" are defined in section 201(b) of
the Not-For-Profit Corporation Law as corporations "formed for any one or more of the
following non-business purposes: charitable, educational, religious, scientific, literary,
cultural or for the prevention of cruelty to children or animals."

Thus, we need to determine whether [ ] actually engages in the
business of "budget planning" in New York and, if so whether it qualifies to be licensed.

Section 455.1 of the General Business Law includes the following definition of budget
planning:

"Budget planning, as used in this article, means the making of a contract
between a person or entity engaged in budget planning with a particular debtor
whereby the debtor agrees to pay a sum or sums of money periodically and the
person engaged in the budget planning distributes, or supervises, coordinates or
controls the distribution of, the same among certain specified creditors in
accordance with a plan agreed upon and the debtor further agrees to pay to
such person or entity any valuable consideration for such services or for any
other services rendered in connection therewith." (Emphasis Added.)

From the materials you submitted for our review, it appears that [ ]'s activities would
not constitute "budget planning" based on the fact that in the contracts between [ ]
and the debtors there is no agreement for the debtor to pay any fees or compensation
to [ ]. Indeed, the contract provides that "[ ] shall not charge, accept or request
compensation from the client for the services rendered." Thus, [ ] should not be
considered a budget planner and need not obtain a license unless 1) the fair share
contributions from creditors can be characterized as indirect payments to [ ] and 2)
such indirect payments are sufficient to cause [ ]'s activities to come within the
definition of "budget planning."

One could argue that the payments to [ ] from the creditor are, in substance,
payments by the debtor to [ ]. The payments to [ ] from the creditor would not be
made to [ ] but for a arrangement under which a debtor, typically an individual,
makes a payment to [ ] and [ ] disburses it to the
individual's creditors. While [ ] receives no compensation directly from
the individual, the "fair share contributions" that [ ] directly receives from the creditor
can be viewed as coming indirectly from the debtor if the transaction is recharacterized.
In another way of looking at the arrangement, the individual, in effect, pays less than
100% of the individual's debt to the creditor and the balance of the debt, or the "fair
share contribution," can be viewed as being forgiven by the creditor and paid by the
individual to [ ].

Regardless of whether the fair share contributions from creditors can be characterized
as indirect payments to [ ], however, such indirect payments should not cause [ ]'s
activities to constitute "budget planning."

The language of GBL 455 is fairly clear that for the activity to constitute "budget
planning" there needs to be a contract between the individual and [ ] to pay [ ]
valuable consideration. The payment of one's previously contracted debts to [ ] with
[ ]’s promise to transmit 100% of such payment to the creditor does not appear to be
such consideration. Furthermore, such consideration appears to be lacking inasmuch
as the contract provides that [ ] will accept individuals into the program and attempt to
deal with all creditors regardless of whether the creditors make any fair share
contributions.

Not all statutes distinguish between sources of payment. For example, in contrast to
GBL 455, which speaks of the source of the compensation for purposes of determining
whether the activity falls within "budget planning" and hence may require a license to be
obtained, the statute dealing with the requirement of registering as a mortgage broker
focuses on whether or not compensation or gain is obtained rather than its source. See
Banking Law, Sections 590.1(d) and 590.2(b). Registration as a mortgage broker is
required even if the funds come from a source other that the mortgagor. (Also, in a
similar vein, see discussion of credit services businesses below.)

Looking at the legislative history of the "budget planning" statutes before us is
somewhat illuminating. In 2002 a law was enacted strengthening regulation of the
industry, tightening the attorney exemption and ensuring that out-of-state entities
soliciting and engaging in this business in New York would be subject to New York's
requirements. In enacting this statute, the legislature stated that "Since 1956 the
General Business Law has generally prohibited budget planning for a fee... In, 1975,
state law was amended to allow certain not-for-profit corporations to engage in the
business of budget planning for a fee, subject to licensing." (See, New York State
Senate memorandum in support of S.7173B, which became Chapter 629 of the Laws of
2002.)

Thus, there is nothing to indicate that any change was intended to New York's law
dating back to the 1950s that allowed budget planning activity to occur, whether by for-
profit or not-for-profits companies, so long as no fee was charges to individual. [ ]'s
activities, therefore, should not require licensing because they do not come within the
statutory prohibitions that existed since the 1950s or the licensing requirements that
have been imposed since 1975.

Of course, the Banking Department does not have exclusive jurisdiction in this area or
supervisory authority over for-profit budget planners or any person or entity that might
engage in that activity while refusing to obtain a license. The New York Attorney
General's office also would have jurisdiction in such cases. Further, there can be no
assurance that the AG also would take the position recommended above that as long as
a person or entity only took fees from creditors and not debtors, it was not engaging in
the business of budget planning and thus not subject to the general prohibition and
licensing and related requirements thereon.

CREDIT SERVICES BUSINESSES -- A related question, subject to the jurisdiction of
the New York Attorney General's office, exists with respect to [ ]'s activities as a
credit service business. According to section 458-b(1) of the General Business Law, a
"credit services business" is defined as:

any person who sells, provides or performs or represents that he can or will sell,
provide, or perform, a service for the express or implied purpose of improving a
consumer's credit record, history, or rating or providing advice or assistance to a
consumer with regard to the consumer's credit record history or rating in return
for the payment of a fee. Emphasis Added.

Licensed budget planners are excluded from the definition. General Business Law,
§458-b(1 )(a). Enforcement of the credit services businesses is left to the Attorney
General (General Business Law, §458-j), so the Banking Department has no
jurisdiction. [ ] could be subject to the legal requirements that apply to credit services
businesses if their service is found to have the purpose of improving the individuals
credit history or rating. Assuming that is found, it seems clear that if [ ] is not within
the definition of 'budget planning" it could fall within the definition of "credit services
business" because the source of the payment of the fee is not relevant in the definition
of "credit services business" as it is in the case of the definition of "budget planning."

MONEY TRANSMISSION -- With respect to money transmission to creditors, [ ] 's
taking money from consumers and issuing a check or initiating a funds transfer would
likely require it to become licensed as a money transmitter under Banking Law, Section
641, assuming that it is not so licensed and that it has a physical presence in New York
either directly or through an agent. The scope of [ ]'s activities in New York will
determine whether [ ] needs to be licensed, as the statute does not specifically
address the licensing of out-of-state money transmitters. Certain financial institutions
are exempt from being required to be licensed as money transmitters, under Banking
Law, Section 641, although budget planners are not. The Department takes the
position that the ability of a licensed budget planner to transmit money is inherent in that
license because one of the specific purposes of budget planning is to distribute debtor
funds to creditors.

Thus, with no applicable exemption and no budget planner license to protect [ ] in any
money transmission activities, should [ ] have a physical presence in New York as a
"debt pooler," it likely will have to obtain a license as a money transmitter. Assuming
[ ] has no such physical presence, which appears to be the case, it need not obtain
the license.

CONCLUSION – [ ] may engage in "debt pooling" without a license because its
method of remuneration is to receive payment only from creditors, and not debtors, and
the Attorney General's Office may or may not agree to permit them to operate in New
York in that fashion. Assuming the Attorney General agrees or raises no objection to
them operating in New York, I believe they may be subject to enforcement of the
requirements on credit services businesses by the Attorney General. [ ], assuming it
is without a physical presence in New York, need not become licensed as a money
transmitter.