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Explanatory All Institutions Letter

September 6, 2006


RE: Adoption of New Part 404 of the Superintendent’s Regulations (Budget Planners)

The Superintendent has adopted the attached new Part 404 of the Superintendent’s Regulations. The regulation became effective upon publication in the State Register, which occured on September 6, 2006. The adopted regulation is substantially similar in form to an emergency regulation which has been in effect since December 19, 2003.

Chapter 629 of the laws of 2002, which became effective on April 7, 2003, made substantial changes to the conduct of the business of budget planning in this state.

It has come to the attention of the Banking Department that many licensed budget planners utilize third party entities to assist them in distributing the monies of debtors to their creditors. This type of “outsourcing”, in which an entity other than the licensee which has a contract for budget planning services with a debtor has access to or controls the monies of debtors, raises the possibility that those monies will not be sufficiently protected, as intended by the Legislature. New Part 404 is intended to provide protection to debtors when a third party “outsourcer” is used in the process of paying debtor funds to creditors of the debtors.

Specifically, if the third party “outsourcer” is another budget planner licensed under Article 12-C of the New York Banking Law, the amount of that licensee’s bond or assets placed on deposit, as the case may be, the proceeds of which constitute a trust fund to reimburse payments made by debtors that have not been properly distributed to their creditors, must be increased to reflect the additional amount of debtors’ funds that it has access to or controls as a result of its “outsourcing” activities. However, if the licensed budget planner which utilizes another licensed budget planner as an “outsourcer” places assets on deposit pursuant to Section 580(4) of the Banking Law in an amount sufficient to cover the debtors’ funds that the licensed “outsourcer” has access to or controls, then the licensed “outsourcer” would not be required to obtain a surety bond in a greater amount, or place additional assets on deposit to cover the additional amount of debtors’ funds that it has access to or controls, as a result of its outsourcing activities. In such case, the monies of debtors would be fully protected by the original licensee’s asset deposit.

If the third party “outsourcer” is not a licensed budget planner in New York State, the issue of the safety of the monies of the debtors becomes more paramount as an entity unregulated by, and probably unknown to, the Banking Department will have access to or control of the monies of debtors. In such case, unless the licensed budget planner places assets on deposit sufficient to cover the debtors’ funds that the non-licensed “outsourcer” has access to or controls, the non-licensed “outsourcer” would be required to place assets on deposit sufficient to protect the monies of the debtors that it has access to or controls as a result of its “outsourcing” activities.

The rule also contains provisions relating to the contractual relationship between the licensed budget planner and the service provider, which give protection to debtors who may be adversely affected if the contract between the licensee and the service provider is terminated.

The primary legislative objective of Chapter 629 is to provide greater consumer protection to New York residents who contract with licensed budget planners for budget planning services. Accordingly, considering the foregoing, emergency adoption of this rule is necessary and appropriate.

Very truly yours,

Sam L. Abram
Secretary of the Banking Board

Text of New Part 404

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