D R A F T
FOR DISCUSSION ONLY
UNIFORM CONSUMER DEBT COUNSELING ACT
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
January 3, 2005
WITH PREFATORY NOTE AND PRELIMINARY COMMENTS
Copyright ©2004
By
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
______________________________________________________________________________
The ideas and conclusions set forth in this draft, including the proposed statutory language and any comments or reporter’s notes, have not been passed upon by the National Conference of Commissioners on Uniform State Laws or the Drafting Committee. They do not necessarily reflect the views of the Conference and its Commissioners and the Drafting Committee and its Members and Reporter. Proposed statutory language may not be used to ascertain the intent or meaning of any promulgated final statutory proposal.
DRAFTING COMMITTEE ON UNIFORM CONSUMER DEBT COUNSELING ACT
The Committee appointed by and representing the National Conference of Commissioners on Uniform State Laws in preparing this Uniform Consumer Debt Counseling Act consists of the following individuals:
WILLIAM C. HILLMAN, U.S. Bankruptcy Court, Room 1101, 10 Causeway St., Boston, MA
02222, Chair
BORIS AUERBACH, 332 Ardon Ln., Wyoming, OH 45215, Enactment Plan Coordinator
ROBERT G. BAILEY, University of Missouri-Columbia, School of Law, 217 Hulston Hall,
Columbia, MO 65211
MARION W. BENFIELD, JR., 10 Overlook Circle, New Braunfels, TX 78132
MICHAEL A. FERRY, 200 N. Broadway, Suite 950, St. Louis, MO 63102
BENNY L. KASS, 1050 17th St. NW, Suite 1100, Washington, DC 20036
MORRIS W. MACEY, 600 Marquis II, 285 Peachtree Center Ave. NE, Atlanta, GA 30303
MERRILL MOORES, 7932 Wickfield Ct., Indianapolis, IN 46256
NEAL OSSEN, 21 Oak St., Suite 201, Hartford, CT 06106
HIROSHI SAKAI, 3773 Diamond Head Circle, Honolulu, HI 96815
STEPHEN C. TAYLOR, D.C. Department of Insurance, Securities & Banking, 810 1st St. NE,
Suite 701, Washington, DC 20002
MICHAEL M. GREENFIELD, Washington University School of Law, Campus Box 1120, One
Brookings Dr., St. Louis, MO 63130, Reporter
EX OFFICIO
FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Rd., Room 3056,
Norman, OK 73019, President
JOANNE B. HUELSMAN, 235 W. Broadway, Suite 210, Waukesha, WI 53186, Division Chair
AMERICAN BAR ASSOCIATION ADVISOR
CARLA STONE WITZEL, 233 E. Redwood St., Baltimore, MD 21202, American Bar
Association Advisor
EXECUTIVE DIRECTOR
WILLIAM H. HENNING, University of Alabama School of Law, Box 870382, Tuscaloosa, AL
35487-0382, Executive Director
Copies of this Act may be obtained from:
NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS
211 E. Ontario Street, Suite 1300
Chicago, Illinois 60611
312/915-0195
www.nccusl.org
CONSUMER DEBT COUNSELING ACT
TABLE OF CONTENTS
SECTION 3. APPLICATION: RESIDENTS AND NON-RESIDENTS
SECTION 6. APPLICATION FOR REGISTRATION: FORM AND CONTENTS
SECTION 7. APPLICATION FOR REGISTRATION: PUBLIC INFORMATION
SECTION 8. CERTIFICATE OF REGISTRATION: ISSUANCE OR DENIAL
SECTION 9. CERTIFICATE OF REGISTRATION: TIMING
SECTION 10. RENEWAL OF REGISTRATION
SECTION 11. REGISTRATION IN ANOTHER STATE
SECTION 14. PREREQUISITES FOR PROVIDING DEBT-MANAGEMENT SERVICES
SECTION 15. COMMUNICATION BY ELECTRONIC MEANS
SECTION 16. FORM AND CONTENTS OF AGREEMENT
SECTION 18. VOIDABLE AGREEMENTS
SECTION 20. FEES: MONETARY LIMITS
SECTION 21. FEES: OTHER LIMITS
SECTION 22. PERIODIC REPORTS AND RETENTION OF RECORDS
SECTION 23. PROHIBITED ACTS AND PRACTICES
SECTION 24. ADVERTISING; PUBLIC EDUCATION
SECTION 26. POWERS OF ADMINISTRATOR
SECTION 27. ADMINISTRATIVE REMEDIES
SECTION 28. VIOLATION OF UNFAIR OR DECEPTIVE PRACTICES STATUTE
SECTION 29. SUSPENSION, REVOCATION, OR NON-RENEWAL OF REGISTRATION
SECTION 30. PRIVATE ENFORCEMENT
SECTION 31. STATUTE OF LIMITATIONS
SECTION 33. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT
SECTION 34. RELATION TO LAW OF OTHER STATES
SECTION 35. UNIFORMITY OF APPLICATION AND CONSTRUCTION
SECTION 38. TRANSITIONAL PROVISIONS; APPLICATION TO EXISTING TRANSACTIONS
UNIFORM CONSUMER DEBT COUNSELING ACT
The consumer credit counseling industry arose as a means of assisting individuals to pay their credit card debt without resorting to bankruptcy and a means of enabling creditors to collect debt that otherwise would be discharged in bankruptcy. Through the 1980s the industry was financially supported almost entirely by creditors, which returned to the industry approximately 15% of the money they received through the efforts of the industry. Over the last decade, however, the industry has changed significantly. Responding to the dramatic increase in credit card debt, a new generation of credit counseling agencies arose. Reports of abuses by counseling agencies and injury to consumers appeared with increasing frequency in numerous media outlets. A report of two prominent consumer organizations (Consumer Federation of America and the National Consumer Law Center) has documented the situation. The problems include
• deception concerning the nature of, the need for, and the cost of debt-management plans to help consumers deal with burgeoning debt;
• excessive cost to consumers; and
• self-dealing and other conduct by agencies to evade the ban on private inurement that appears in the Internal Revenue Code requirements for tax-exempt status.
These problems are compounded by a drastic reduction in support for the industry by its traditional benefactors, the issuers of credit cards. This has led counseling agencies to impose on consumers an increasing share of the cost of their operations.
In January 2003 the Executive Committee of the Conference authorized the appointment of a drafting committee to develop a uniform law that would address the problems that have developed and enable the states to take a common approach to regulation of the counseling industry. A uniform approach is particularly important because the great majority of agencies operate in multiple states and would otherwise be subject to multiple and sometimes conflicting requirements.
The Drafting Committee first met in Chicago in November 2003 and considered a discussion draft. Committee members reacted to numerous aspects of that draft but the Committee did not take formal votes on any of its provisions. The Committee met again in March 2004. At the Annual Meeting of the Conference in August 2004, the drafting committee received numerous comments on the draft, and many of them are reflected in this draft. Others are identified in the Preliminary Comments. In addition, the Committee of the Whole adopted two sense-of-the-house resolutions: the scope of the Act should encompass debt-settlement companies as well as credit-counseling agencies; and the Act should be drafted in such a way that each state may decide whether to permit for-profit entities to provide credit-counseling and debt-settlement services. This draft reflects those decisions.
The Drafting Committee met again in October 2004, and this draft reflects the decisions and discussions at that meeting.
UNIFORM CONSUMER DEBT COUNSELING ACT
Legislative Note: The state must make the basic policy decision whether to permit for-profit entities to engage in the [debt adjustment][debt management] business. This decision is implemented by virtue of the presence or absence of specified provisions in the following sections: [list to be developed].
SECTION 1. SHORT TITLE. This [act] may be cited as the Uniform Consumer Debt Counseling Act.
Preliminary Comment
In view of the decision to include debt settlement companies within the scope of the Act, the Act needs a new title, e.g., Uniform Debt Adjustment Act or Uniform Debt Management Act.
Reporter’s Introductory Note to Section 2 (Definitions): There are two significant changes in the definitions:
(1) To simplify the language throughout the draft, the operative terms now are “provider,” “plan,” and “agreement.” These terms are newly defined in Section 2, and they eliminate the need to define (and use) the cumbersome terms “debt-management-services provider,” “debt-management plan,” and “debt-management-services agreement.” Throughout the draft, the Act now speaks simply of “provider,” “plan,” and “agreement.”
(2) Because the Act now applies to both credit counseling and debt settlement, some definitions have been revised to encompass both entities and their activities. For example, subsection (9) defines “debt-management services” to encompass the activities of both kinds of entities. Similarly, subsection (12) defines “plan” to encompass what credit-counseling agencies now call a debt-management plan (or DMP) and what debt-settlement companies now call a “program.” As a result of these changes, “provider” now refers to both types of entities, and the draft does not define or use the term “debt-settlement-services provider.” At those points in the draft where it is desirable to have different rules for the two types of entities, a descriptive phrase differentiates them (e.g., in section 14: “if a plan contemplates that creditors will settle the debts for less than the full principal amount of the debt” and “if a plan contemplates concessions in the form of reduced finance charge or reduced fees for late payment, default, or delinquency.”)
SECTION 2. DEFINITIONS. In this [act], unless the context requires otherwise:
(1) “Administrator” means the ______________.
(2) “Affiliate,” with respect to an individual, means:
(A) the spouse of the individual;
(B) a sibling of the individual or the spouse of the sibling;
(C) a person or the spouse of the person who is a lineal ancestor or lineal descendant of the individual or the individual’s spouse;
(D) an aunt or uncle, great-aunt or -uncle, first- or second-cousin, niece or nephew, grand-niece or -nephew, whether related by the whole or the half blood, adoption, or step relationship, and includes the spouse of any of them; or
(E) any other person occupying the residence of the individual.
(3) “Affiliate,” with respect to an entity, means:
(A) a person that directly or indirectly controls, is controlled by, or is under common control with the entity;
(B) an officer of, or a person performing similar functions with respect to, the entity;
(C) a director of, or a person performing similar functions with respect to the entity;
(D) a person that owns more than 10 percent of, is employed by, or is a director of a person that receives or received more than $25,000 in either the current year or the preceding year from the entity;
(E) an officer or director of, or a person performing similar functions with respect to, a person described in paragraph (A);
(F) the spouse of or an individual occupying the residence of an individual described in paragraph (A), (B), (C), (D), or (E); or
(G) an individual who has the relationship specified in subsection (2)(D) to an individual or the spouse of an individual described in paragraph (A), (B), (C), (D) or (E) of this subsection.
(4) “Agreement” [means] [is limited to] an agreement between a provider and an individual for the performance of debt-management services.
(5) “Bank” means a person engaged in the business of banking and includes a savings bank, savings and loan association, credit union, and trust company.
(6) “Certified counselor” means an individual certified by:
(A) an independent, nationally recognized certification organization that authenticates the competence of individuals providing education and assistance to other individuals in connection with debt management services; or
(B) a training program approved by the administrator.
(7) “Day” means calendar day.
(8) “Debt-management services” means acting as an intermediary between an individual and one or more creditors of the individual for the purpose of obtaining concessions in the form of repayment on terms other than the terms of the original contracts between the individual and these creditors.
(9) “Employee,” when used in connection with “provider,” means an individual who furnishes services related to debt-management services whether or not paid by the provider that receives the benefit of the individual’s services. This definition does not apply in Section 4.
(10) “Entity” means a person other than an individual.
(11) “Person” means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, or any other legal or commercial entity. The term does not include a public corporation, government, or governmental subdivision, agency, or instrumentality.
(12) “Plan” means a program or strategy in which a provider furnishes debt-management services to an individual and which includes a schedule of payments or deposits that are to be made by or on behalf of the individual and used to pay all or part of all or some of the debts owed by the individual.
(13) “Provider” means a person that, in the current calendar year or in the immediately preceding calendar year, has provided debt-management services to more than three individuals.
(14) “Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(15) “Signed” includes the use of any electronic symbol or process executed or adopted with present intention to identify the person and adopt or accept a record.
(16) “State” means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(17) “Trust account” means an account held by a provider or its designee that is:
(A) established in a state- or federally chartered, insured bank;
(B) separate from the other accounts of the provider or its designee;
(C) designated as a “trust account” or other designation indicating that the money in the account is not the money of the provider, its designee, or the officers, employees, or agents of either; and
(D) used to hold money of one or more individuals for disbursement to creditors of the individuals.
Legislative Note: In paragraph (1) insert the name of the agency or entity that will be charged with enforcement of this Act. States must decide whether to create a new administrative agency or charge an existing entity with enforcement of this Act. If the latter, states must decide which existing entity to select. Logical choices include the attorney general or other entity charged with consumer protection generally (under a little-FTC act or similar statute) or the entity charged with regulation of consumer credit or financial institutions. It may be necessary or desirable to amend that entity’s organic statute to refer specifically to this Act.
Preliminary Comment
On rare occasion, the context of the statutory language may call for a definition not to apply. An example is section 22(a), which uses the phrase “five business days.” Cf. paragraph (7) (defining “day”).
Paragraphs (2)-(3)(affiliate): The term “affiliate” is used at three places in the Act: as a disclosure item in the application for registration (section 6(d)(2)); as a tool to ensure the independence of an agency’s board of directors (section 8(b)(6), (c)); and as a limit on an agency’s ability to engage in self-dealing (section 23(c)-(d)) . The Act does not impose obligations on affiliates that are not also officers or directors, nor does any provision impose liability on them.
The definition in paragraph (2) is drawn from § 9-102(a), but it includes more relatives in the definition. The definition in Article 9 is limited to relatives who live in the individual’s home. This excludes such close relatives as nieces and first cousins unless they live in the individual’s home. The language in subsections (2)(D) and (3)(G) includes those relatives regardless of where they live.
At the Annual Meeting a commissioner objected to the use of “consanguinity” and suggested we look to the Uniform Adoption Act, which lists the specific relatives. At the October 2004 meeting, the Committee adopted this approach.
Paragraph (2)(E) reverts to the approach of Article 9 and uses the phrase, “occupying the residence of” rather than “residing with,” which appeared in the last draft. Is this acceptable?
Another commissioner at the Annual Meeting suggested that there ought not be two definitions of the same word (viz., “affiliate”) and that the Act use “relative” instead. The Committee on Style did not object to the double definition of “affiliate,” and at the October 2004 meeting the Drafting Committee decided to retain it.
The definition in paragraph (3) also is drawn from the definition of “person related to” in UCC § 9-102(a), but adds subparagraph (C). Subparagraph (D) has been modified to declare that a person that receives more than $25,000 from a provider is an affiliate of that provider. Paragraph 3 also stipulates that an owner or director of the recipient is an affiliate. Since the purpose of defining “affiliate” is to require independent boards of directors and prevent self-dealing, the level of ownership necessary to constitute “affiliate” should be relatively low. Is 10 percent the appropriate level of ownership necessary to trigger this status? Similarly, is $25,000 the appropriate level of benefit? Under paragraph (3)(D) a person is not an affiliate until the person of which it is an owner, employee, or director has received $25,001 in the relevant period.
The definition of “affiliate” does not include employees of the entity. Does it suffice that officers are included in “affiliate,” or does the Committee want to expand the definition further?
Paragraph (4)(agreement): This definition does not incorporate any requirement of “written” or “record.” An oral agreement is within this definition. Requirements of form appear in Sections 14-16.
Paragraph (5) (bank): This definition is from UCC Revised Article 1 (§ 1-201(b)(4)).
Former paragraph (6)(debt-management plan) has been deleted. At the October 2004 meeting the Committee decided to define “debt-management plan” broadly, without reference to the payment mechanism or to the kind of concessions the provider seeks to obtain for the individual. Thus the definition includes what are often called debt-settlement programs. The definition of debt-management plan has been replaced by new paragraph (12), which defines “plan” to encompass what the previous draft called “debt-management plan.”
Paragraph (8)(debt-management services): At the October 2004 meeting, the Committee decided to expand the definition to encompass the activity of entities that act as an intermediary between an individual and the individual’s creditors, for the purpose of changing the terms of the original contract between the individual and those creditors. That is, there is no requirement that the individual’s funds flow through the provider. The definition includes credit-counseling agencies and debt-settlement companies even if they do not have control over the individual’s funds, as when they are in an account managed by the individual or a third party.
The definition includes credit-counseling agencies even if the concessions offered by creditors are not subject to negotiation. It does not, however, encompass a creditor that compromises a claim with its debtor. Although the creditor may receive money from an individual, it is not for the purpose of “distributing” that money to a creditor. And the definition does not encompass entities that provide only educational or counseling services concerning management of personal finance.
Former paragraph (9)(debt-management-services provider) has been deleted. The relevant definition now appears in paragraph (13)(provider).
Former paragraph (10)(debt-settlement services) has been deleted. The definition of “debt-management services” encompasses the former definition of “debt-settlement services.”
Paragraph (9)(employee): The purpose of this definition is to prevent evasion of the Act by resort to outsourcing the services necessary for running a debt-management business. The phrase “related to debt-management services” is critical, because it has the effect of excluding from the definition, e.g., an individual who makes emergency repairs to the agency’s plumbing system. “Services related to debt-management services” would include such things as marketing, customer service, education, counseling, interaction with creditors, processing of payments by individuals, and any other services provided by the agency to the individual.
The definition encompasses all persons who provide the specified services, regardless of who signs the paycheck and regardless of whether the employee works on-site at the provider’s place of business or elsewhere (e.g., the individual’s home or the site of an entity to which the provider has outsourced the services). The definition does not apply in Section 4, which excludes from the scope of the Act specified persons and their employees.
Paragraph (11)(person): This definition conforms to the Conference’s standard definition. The definition encompasses for-profit, not-for-profit, and tax-exempt entities.
Paragraph (12)(plan): At the October 2004 meeting, observers representing debt-settlement companies informed the Committee that they do not form plans. Instead, they provide programs. The new definition of “plan” is designed to encompass both what now are typically called “debt-management plans” and the “programs” established by debt-settlement companies. This enables the operative provisions of the Act to use the term “plan” to apply to both types of providers. To be a plan, the program or strategy need not encompass all the debts of the individual. E.g., debt-management plans by traditional credit-counseling agencies have not typically included secured debt or debts owed utilities. No provision of this Act requires that a provider deal with all the creditors of an individual to whom it provides debt-management services.
Paragraph (13)(provider): This definition replaces former paragraph (9)(debt-management-services provider), thereby enabling reference throughout the Act to “provider,” rather than its more cumbersome predecessor. The purpose of limiting the definition to persons that provide or offer to provide debt-management services to more than three individuals is to exclude from the scope of this Act persons who informally assist their friends or relatives by, for example, accessing the individual’s checking account to pay the individual’s bills. A person is not subject to the constraints placed on providers until it has provided or offered to provide debt-management services to the fourth individual. Thereafter, the person must comply with this Act. The definition does not include an entity that merely offers to provide debt-management services; the entity must provide those services to more than three individuals. Once an entity is within the definition, however, its advertising and other sales practices are subject to the rules of the Act.
The definition encompasses both a non-resident entity that serves individuals in this state and a resident entity that serves individuals in other states. Under Section 3, however, the Act does not apply to non-resident entities that serve only non-resident individuals, even if their method of solicitation (e.g., via the Internet) reaches individuals in this state.
Paragraph (14)(record): This definition appears in UCC Revised Article 1 (§1-201(b)(31)).
Paragraph (15)(signed): The definition of “signed” is drawn from UCC Revised §§ 1-201(b)(37) and 9-102(a)(7), and UETA § 2(8).
SECTION 3. APPLICATION: RESIDENTS AND NON-RESIDENTS. This [act] applies to a person if:
(1) its principal business office is located in this state or if it is formed under the laws of this state;
(2) by any means, including electronic communication, it solicits individuals located in this state to obtain debt-management services; or
(3) it enters into an agreement with an individual whom it should reasonably know to be located in or a resident of in this state.
Preliminary Comment
At the October 2004 meeting, the Committee questioned whether subsection (1) was too broad, to the extent it referred to “agents.” The purpose of this subsection is to enable the state to regulate businesses that are located or operating within its borders, regardless of the location of their customers. A state should be able to regulate those entities that are physically present within its borders, as well as those that are incorporated there but not otherwise present. Subsection (1) has been revised accordingly and no longer refers to employees and agents. Subsection (2) focuses on the location of the provider’s customers, regardless of the location of the entity, e.g, an independent call center, that does the soliciting. Subsection (3) also focuses on the customer’s location, but the location as it is known or should be known by the provider.
Under this section the Act does not apply to: (1) a provider that is not located in this state and that does not solicit or contract with individuals in this state; (2) a provider whose web site is accessible by residents of this state if the provider declines to do business with residents of this state, in which event the provider is not soliciting individuals located in this state; (3) an individual who, while living in another state, forms an agreement with a non-resident provider and later moves to this state; or (4) a resident of this state who forms an agreement with a provider located in another state while the individual temporarily is in that other state, if the provider has no reason to know that the individual resides in this state.
Section 16(a)(3) requires the agreement between a provider and an individual to state the individual’s address. If the individual supplies an address outside this state, the provider may have no reason to know that the individual is a resident of this state. The Act applies, however, if the individual is physically present in this state when the agreement is formed, if the provider has reason to know that fact.
This Act uses the term “individual” rather than “consumer.” The purpose of this usage is to enlarge the usual meaning of that term (viz., one who acquires goods or services for personal, family, or household purposes) to encompass individuals who have incurred debt for business purposes, including farming.
Subject to the limitations stated in this section, the intention is for the Act to have as expansive a reach as is constitutionally permissible. Common criteria for determining whether there is a sufficient jurisdictional nexus for an Internet-based business include the business’ targeting a specific jurisdiction and the presence of a customer of a business in the jurisdiction. Some observers have objected that the Act ought not apply to providers located in other states and that it is unconstitutional for a statute to provide otherwise. A cursory review of legislation reveals that statutes regulating debt-management services often apply to non-resident providers that do business with residents of the state. E.g., Connecticut (Ct. Gen. Stat. § 36a-656(a)); Illinois (205 Ill. Comp. Stat. Ann. § 665/2); Maryland (Md. Fin. Inst. Code Ann. § 12-924(D)); Michigan (Mich. Comp. Laws § 451.412(j)); New York (N.Y. Gen. Bus. Law § 455(1)); and Virginia (Va. Code Ann. § 6.1-363.3)). In addition, the U.S. District Court for the District of Kansas has upheld the constitutionality of applying the Kansas statute to a Massachusetts agency. Cambridge Credit Counseling Corp. v. Foulston, 303 F. Supp. 2d 1188 (D. Kan. 2003).
The Act applies to “persons,” not just “providers.” But persons other than providers need not register. Almost all of the prohibitions and other constraints apply to “providers.” But see section 18 (“agreements” by persons that are not registered under this Act are voidable) and section 27 (liability of persons who cause or aid violations of the Act).
SECTION 4. EXEMPT PERSONS. This [act] does not apply to the following persons, or their employees, when the person or its employee is engaged in the regular course of its business or profession:
(1) a judicial officer, a person acting under a court order, or an assignee for the benefit of creditors;
(2) a state- or federally chartered bank;
(3) a title insurer, escrow services company, or other person that provides bill-paying services if the provision of debt-management services is incidental to the bill-paying services;;
(4) an attorney at law licensed by this state if the provision of debt-management services is incidental to the attorney’s practice; [or]
(5) an accountant licensed by this state if the provision of debt-management services is incidental to the accountant’s practice[; or
(6) a person licensed under Section ____ as a (money transmitter)].
Legislative Note: In paragraph (6) insert the citation to any statute requiring money transmitters to be licensed, conform the parenthetical to the terminology of that statute, and delete the parentheses. If there is no such statute, the bracketed language should be omitted.
Preliminary Comment
In the March 2004 draft, the exemption in this section applied to the enumerated persons only when providing debt-management services is incidental to the regular course of the business or profession of the person and its employees. In this draft, except for bill-paying services, attorneys, and accountants, the exemption applies even if debt-management services constitute a majority of the entity’s business. Most of the exempt entities are extensively regulated by the state or federal government (paragraphs (1), (2), (4), (5), (6)).
The exemption for banks in subsection (2) extends to subsidiaries of banks.
A debate arose at the Annual Meeting concerning whether attorneys should be exempt. Attorneys are governed by a code of conduct and elaborate disciplinary structure. On the other hand, this structure is not always effective to protect clients. A law firm operating as a provider in New York and Vermont recently inflicted substantial injury on indebted consumers. As originally enacted, the federal Fair Debt Collection Practices Act contained an exemption for lawyers. When it became clear that some attorneys were abusing this exemption, Congress amended the Act to remove the exemption altogether. The sentiment of the Committee at the October 2004 meeting was to exempt attorneys only if debt-management services are incidental to the attorneys’ overall practice.A correspondent, whose letter to the Committee is posted on the Committee’s web site (www.nccusl.org/Update/CommitteeSearchResults.aspx?Committee=222) questions the soundness of the reasoning underlying this decision. The correspondent makes a good point, and the Committee may wish to reconsider.
A second issue concerning this exemption which needs further attention is whether the exemption should be limited to attorneys who are licensed in this state. In connection with creating an exemption for attorneys, the Conference does not ask each enacting state to make a judgment whether that state’s system of self-regulation by attorneys is effective. Rather, the Conference indulges in a presumption that it is. This suggests that the Conference should not ask a state to make that judgment about another state’s system. It probably is desirable for the exemption to encompass attorneys who are licensed in any jurisdiction. If the Committee agrees, paragraph (4) could read, “a person who is licensed by a jurisdiction in the United States to practice law.” Cf. section 23(b)(9)(prohibited acts include furnishing legal advice unless the person furnishing the advice “is licensed to practice law”). A similar issue exists with respect to accountants.
An earlier version of this section exempted a creditor that negotiates or receives settlement of a debt an individual owes it. The definition of “debt-management services” speaks of “acting as an intermediary between an individual and one or more creditors.” With this language in place, it is not necessary for an exemption for creditors to appear in this section, since a creditor acting on its own behalf is not acting as an intermediary.
Paragraph (3) exempts entities that provide bill-paying services if negotiation of the terms of payment is incidental to the services generally provided by the entity. Examples of exempt entities include mortgage loan servicers, athletes’ agents, artists’ agents, financial planners, executors of estates, and personal representatives of decedents. These entities are exempt so long as negotiation of payment amounts with individual creditors is incidental to their overall services.
(a) Except as otherwise provided in subsection (c), a person may not provide debt-management services to more than three individuals per year unless the person is registered under this [act]. Registration is valid for one year.
(b) A provider must renew its registration every year.
(c) If a person is registered under this [act], the registration requirement of subsection (a) does not apply to the officers, employees, or agents of the person.
(d) The administrator shall maintain and make public the names of all persons registered as providers under this [act].
Preliminary Comment
Subsection (a) requires persons providing debt-management services to be registered under this Act. Under Section 3 this requirement extends to providers located in other states, if they serve individuals who reside in this state.
Subsection (b): Section 2(13) defines “provider” as “a person that . . . has provided debt-management services to more than three individuals” in a year.
Subsection (d): The objective of this subsection is to enable individuals and creditors to ascertain whether a given provider is registered. Posting on the Internet web site of the administrator (or other appropriate official site) is the preferred method, because the information is instantaneously and continuously available. To “maintain” the list, the administrator must update it regularly.
SECTION 6. APPLICATION FOR REGISTRATION: FORM AND CONTENTS.
(a) An application for registration must be in a form prescribed by the administrator.
(b) An application for registration must be accompanied by:
(1) the fee established by the administrator;
(2) the bond or other assurance required by Section 12;
(3) identification of all trust accounts required by Section 19; and
(4) evidence of insurance against the risks of dishonesty, fraud, theft, or other malfeasance or misconduct on the part of an employee or agent of the applicant in the amount of $250,000; [and]
(5) proof of compliance with Section _______[; and
(6) evidence of tax-exempt status under Section 501(c) of the Internal Revenue Code, 42 U.S.C. §501(c), as amended].
(c) An application for registration must be signed under oath and include[, as applicable]:
(1) the applicant’s name, principal business address and telephone number, all other business addresses in this state, electronic mail addresses, and Internet web site addresses;
(2) all names under which the applicant conducts business;
(3) the address of each location in this state at which the applicant will provide debt-management services, unless the applicant will have no such location, in which event it shall disclose that fact;
(4) the name and home address of each officer or director of the applicant and each person that owns more than 10 percent of the applicant;
(5) identification of every jurisdiction in which the applicant or any of its officers or directors has been licensed or registered or has accepted individuals for debt-management services during the five years immediately preceding the application;
(6) a statement describing, to the extent it is known or after reasonable investigation should be known, any material civil or criminal judgment or litigation, and a statement describing, to the extent it is known or after reasonable investigation should be known, any material administrative or enforcement action by a government agency in any jurisdiction against the applicant or against any of its officers, directors, or owners or any person with authority to access the trust account required by Section 19;
(7) the applicant’s audited financial statements for each of the two years immediately preceding the application or for each year of its existence if it has not been in operation for the two years preceding the application, unless the applicant does not have audited financial statements, in which event, unaudited financial statements;
(8) evidence that, within 12 months after their initial employment, each of the applicant’s counselors is a certified counselor;
(9) a description of the three most commonly used educational programs that the applicant provides or intends to provide to individuals and copies of any materials used or to be used in those programs;
(10) a description of the applicant’s financial analysis and initial budget plan, including any form or electronic model, used to evaluate the financial condition of individuals;
(11) a copy of each current form of agreement that the applicant will use with residents of this state;
(12) the current schedule or schedules of fees and charges that the applicant will use with individuals who are residents of this state;
(13) at the applicant’s expense, the results of a criminal records check, including fingerprints, conducted within the immediately preceding 12 months, on every officer and on every employee or agent of the applicant who is authorized to have access to the trust account required by Section 19 or, if an applicant has submitted this information to another state, a copy of the report from the background check conducted for that state; and
(14) any other information that the administrator reasonably requires.
(d) The application also must include, [if the applicant is organized as a non-profit entity under Section _____ or has obtained tax-exempt status under Section 501(c) of the Internal Revenue Code, 42 U.S.C. § 501(c), as amended,]:
(1) the employers of each director during the ten years immediately preceding the application;
(2) a description of any ownership interest equal to or greater than 10 percent of an officer, director, owner, or employee of the applicant in any affiliate of the applicant or in any other entity that provides products or services to the applicant or any individual relating to the applicant’s debt-management services;
(3) the compensation of the applicant’s five most highly compensated employees for each of the three years immediately preceding the application; and
(4) if the applicant is organized as a non-profit entity under Section _____ or has obtained tax-exempt status under Section 501(c) of the Internal Revenue Code, 42 U.S.C. § 501(c), as amended:
(A) evidence of tax-exempt status under Section 501(c) of the Internal Revenue Code; and
(B) the identity of each director who is an affiliate, as defined in the paragraphs of Section 2 other than paragraph (3)(C), of the applicant.
(e) The applicant or registered provider shall notify the administrator within 10 days after a change in its name, principal business address, principal telephone number, or the information specified in subsections (b)(4) or (c)(1), (3), (6), (11), or (12), or (d)(4) .
Legislative Note: In subsection (b)(5), insert the citation to the statute specifying the prerequisites for an entity to do business in this state. If the state has no such statute, it may substitute the following for subsection (b)(5):
(5) a record consenting to the jurisdiction of this state containing:
(A) the name, address, and other contact information of its registered agent in this state for purposes of service of process; or
(B) the appointment of the [administrator or other state official] as agent of the provider for purposes of service of process.
If the state wishes to permit for-profit entities to provide debt-management services, the bracketed language containing subsection (b)(6) should be deleted. If the state wishes to limit debt-management services to non-profit entities, the brackets should be deleted.
In subsection (d)(introduction), insert the citation to the statute that authorizes the formation of not-for-profit corporations. If the state does not permit for-profit entities to provide debt-management services, the bracketed language should be deleted.
In states in which the constitution does not permit the phrase “as amended” when federal statutes are incorporated into state law, the phrase should be deleted in subsections (b)(6), (d)(introduction), and (d)(4).
Preliminary Comment
Subsection (a): “Form” encompasses format, and the administrator by rule may require or permit all or part of the application to be submitted electronically.
Subsections (b)(2) and (3) refer to items “required by” other sections. If those other sections do not require the item as to a particular applicant, then the application need not contain proof of the item.
Subsection (b)(4) requires insurance in the amount of $250,000 against the risk of employee misconduct, including theft of funds from the trust account. It is not common under existing state law to require both this kind of insurance and also a bond of the type required by section 12. The two requirements, however, protect against different risks. The insurance required by this section protects against the risk of employee dishonesty. The proceeds of the insurance policy would be payable to the provider and would enable it to continue operating. The bond required by section 12 protects against the risk of violation of any provision of this Act. The proceeds would be paid to or for the benefit of the administrator and the customers of the provider.
The purpose of subsection (b)(5) is to facilitate subjecting a non-resident business to the jurisdiction of this state. If the applicant is a resident, so that the statute referenced in this subsection does not apply to it, the applicant complies with this subsection by indicating that fact. If existing statutes leave doubt about the mechanism for serving process on the provider and the state has chosen not to enact the language suggested in the Legislative Note, the administrator can promulgate a rule requiring the applicant to appoint a state official as the provider’s agent for purposes of service of process.
Subsection (c): At the October 2004 meeting, the Committee decided that paragraph (1) should require disclosure only of business addresses in this state. Other than the principal business address, it is not necessary for the applicant to list business addresses outside this state.
Paragraph (3) contemplates disclosure of the address of all facilities like call centers and back-office operations, that are part of the provider’s operations. It does not, however, require disclosure of the addresses of employees who work from home. If the applicant has no physical presence in this state, that must be disclosed.
Paragraph (5) (identification of states in which the applicant has done business or has been registered or licensed to provide debt-management services) has been restored, to enable the administrator to investigate the applicant and to coordinate enforcement efforts with administrators in other states.
Paragraph (6) requires disclosure of material judicial and administrative proceedings in any jurisdiction against the officers, directors, owners, and persons authorized to access the trust account containing customers’ funds. The administrator by rule can elaborate on what proceedings are material. This paragraph does not impose any disclosure requirement with respect to proceedings of which the applicant is reasonably unaware.
Paragraph (7) requires audited financial statements only if the applicant has them. If the applicant is not in the practice of obtaining audited statements, this paragraph does not require them. This is contrary to many existing statutes, which require an applicant to supply audited financial statements.
Paragraph (8): To obtain registration, a provider must employ counselors who are certified within 12 months of their initial employment. This requirement applies only to employees who act as counselors and educators. It does not apply to such other employees as customer service representatives. Section 14 prohibits a plan unless a certified counselor has done specified things. The reason for requiring an applicant to produce evidence that its counselors are certified is to assure the administrator that the provider will be able to comply with section 14.
Paragraph (9): As used in this paragraph, “programs” encompasses both a course of instruction, which may be entirely oral, and computer software.
Paragraph (11): An agency, whether located in this state or elsewhere, need supply only the documents that it will use with residents of this state. Section 26(c)(1) empowers the administrator to investigate the activities in another jurisdiction of a provider that is located in or doing business in this state. Under that section the administrator may obtain documents used in other jurisdictions.
Paragraph (12): As with paragraph (11), an applicant, whether located in this state or elsewhere, need supply only the schedules of fees and charges for residents of this state. For purposes of this paragraph, “fees and charges” includes all costs, however denominated (e.g., “voluntary contribution”), to be paid by customers of the applicant. This information will enable the administrator to monitor the industry’s practices in the state. It should assist the administrator in determining whether an individual agency is gouging individuals, as well as whether to encourage the legislature to raise the fee cap when the passage of time or changed circumstances make it too low.
Paragraphs (11) and (12) require information that is current as of the time of the application. An applicant is free to modify the forms or the fees without prior approval, unless the administrator adopts a rule to the contrary. Subsection (e) of this section requires the provider to notify the administrator within 10 days of any changes in specified information required by this section, including the information required by paragraphs (11) and (12).
Paragraph (13): In some jurisdictions the mechanics and procedures for obtaining fingerprints are quite burdensome. This paragraph attempts to reduce the burden by permitting an applicant that has gone through this process in one state to use the results of the process for a period of 12 months in other states, too. The 12-month limitation applies to the criminal-records check, not the time of submission to the other state. The criminal-records check must include a check of fingerprints, but the fingerprints need not have been obtained during the 12-month period.
Former paragraph (16), which required an applicant to provide an irrevocable consent giving the administrator access to the trust account, has been deleted. In its place is new subsection 26(c)(4), empowering the administrator to obtain the funds, as well as all books and records, from the bank holding the trust account.
Paragraph (14): The administrator may require additional information either by rulemaking procedure applicable to all applicants or by specific request in response to a specific application.
Subsection (d) collects in one place additional disclosures for non-profit entities. An observer at the October 2004 meeting suggested that these disclosures be required of all entities, so as not to make the requirements for non-profits more onerous than for for-profits. The reporter’s notes from that meeting fail to reflect any decision by the Committee with respect to this suggestion. Pending review by the Committee, this draft incorporates the suggestion. (If the Committee’s decision is to require these disclosure only of non-profits, the brackets will come off in the introductory clause, and the reference to non-profits in paragraph (4) will be deleted.)
Subsection (e): The cross-referenced sections require evidence of insurance against employee misconduct and disclosure of the name of the applicant, the addresses at which it operates, enforcement action against the applicant in another state, the applicant’s fee schedule and standard forms, and tax-exempt status. Subsection (e) requires immediate notification of any change in this information, and since it applies to the “applicant or registered provider,” this requirement of notification applies both before and after the administrator has issued a certificate of registration. Notification of change in other required information is governed by Section 10 (Renewal of Registration), which requires notification at the time of renewal of registration.
SECTION 7. APPLICATION FOR REGISTRATION: PUBLIC INFORMATION.
(a) Except as otherwise provided in this section, the administrator shall make available to the public the information in an application for registration.
(b) The administrator shall preserve the confidentiality of the information required by Section 6(c)(7) and (13) and the addresses required by Section 6(c)(4). .
Preliminary Comment
This preserves the confidentiality of home addresses, financial statements, and the report on the criminal records check. This section prohibits the administrator from disclosing the specified information. It has no effect on the use of judicial process in connection with civil or criminal litigation.
SECTION 8. CERTIFICATE OF REGISTRATION: ISSUANCE OR DENIAL.
(a) Except as otherwise provided in subsection (b), the administrator shall issue a certificate of registration to a person that complies with Section 6.
(b) The administrator may deny registration if:
(1) the application is not accompanied by the fee established by the administrator;
(2) the application contains information that is materially erroneous or incomplete;
(3) an officer, director, owner, or employee of the applicant has ever been convicted of a crime or suffered a civil judgment involving violation of state or federal securities laws, moral turpitude, or dishonesty;
(4) the applicant or any of its officers, directors, owners, or employees has ever defaulted in the payment of money collected for others;
(5) the administrator finds that the financial responsibility, experience, character, or general fitness of the applicant or its officers, directors, owners, employees, or agents is not such as to warrant the belief that the business will be operated in compliance with this [act]; or
(c) [With respect to non-profit or tax-exempt applicants,] the administrator shall deny registration if the board of directors is not independent of the applicant’s officers, employees, and agents.
(d) A board of directors is not independent for purposes of subsection (c) if more than one-fourth of its members:
(1) are affiliates of the applicant as defined in the paragraphs of Section 2 other than paragraph (3)(C); or
(2) within 10 years after first becoming a director of the applicant, were employed by or directors of a person that receives or received from the applicant more than $25,000 in either the current year or the preceding year.
Legislative Note: If the state limits registration to non-profit entities, the bracketed language in subsection (c) should be deleted. If the state permits for-profit entities, the brackets should be deleted.
Preliminary Comment
Subsection (b): Some conduct justifies a lifetime ban from the debt-management-services industry. Examples include some of the conduct described in paragraphs (3) and (4). Other conduct can be readily corrected, e.g., paragraphs (1) and (2). The introductory language of the subsection (administrator “may” deny) gives the administrator discretion to consider the importance of various items of adverse information about an applicant, such as the precise nature and timing of past criminal conduct. Paragraph (5) gives the administrator discretion to consider other relevant information, such as the fact of and reasons for any suspension or revocation of the applicant’s right to provide debt-management services in another state.
Subsection (c) replaces former subsection (b)(6). It requires that the board of directors of a non-profit provider be independent of the management of the agency and independent of the creditors for whom the agency is, in a sense, acting as collection agent. If the board of directors is not independent, the administrator must deny registration. Under former subsection (b)(6), denial of registration was discretionary.
Subsection (d): Since the definition of “affiliate” includes directors, the board of directors could not possibly be independent. Hence paragraph (1) excludes directors from the definition of affiliates for purposes of determining the independence of the board.
SECTION 9. CERTIFICATE OF REGISTRATION: TIMING.
(a) The administrator shall approve or deny an initial registration within 60 days after an application is filed. In connection with a request pursuant to section 6(c)(14) for additional information, the administrator may extend the 60-day period for up to 60 days. [If the administrator does not act on the application before the expiration of the period, the application is denied.] Within seven days after denying an application, the administrator, in a record, shall inform the applicant of the reasons for the denial.
(b) If the administrator denies an applicant’s application for registration [or fails to act on an application within the time specified in subsection (a)], the applicant, before the expiration of [30] days after receiving notice of denial, may appeal and request a hearing pursuant to Section ____.
Legislative Note: In subsection (b) insert the citation to the appropriate section of the Administrative Procedure Act or other statute governing administrative procedure, and conform the number in brackets to the period specified in that Act.
Preliminary Comment
Subsection (a) requires the administrator to act on an application in an expeditious manner. If the administrator needs additional information, the administrator may extend the period, but only for a limited time. Four approaches are possible for dealing with the administrator’s failure to act on an application within the specified time. The first approach is to treat the failure to act promptly as an approval of the application. This remedy operates to the detriment of the public, and the Committee rejected it at the October 2004 meeting.
The second approach is the converse of deeming the application approved: the application is deemed to be denied, and the applicant may exercise its right of appeal under subsection (b). To implement this alternative, one would add the bracketed sentence in subsection (a). This is the cleanest of the alternatives.
In the third approach, the bracketed sentence in subsection (a) is omitted and the bracketed clause in subsection (b) is added. Subsection (b) then would authorize a judicial appeal if the application is denied or if the administrator fails to act in a timely manner.
The fourth approach is to delete the bracketed material in both subsections and implicitly leave the entire matter to be handled by judicial procedure, such as mandamus.
The Committee discussed these alternatives at the October 2004 meeting, but did not decide which one to adopt. Which approach does the Committee prefer?
SECTION 10. RENEWAL OF REGISTRATION.
(a) An application for renewal of registration must be in a form prescribed by the administrator. It must:
(1) be filed no more than 60 and no fewer than 30 days before the registration expires;
(2) be accompanied by the fee established by the administrator and the bond or other assurance required by Section 12;
(3) be signed under oath;
(4) contain the matter required for initial registration by Section 6(c)(8)and a financial statement of the kind required by Section 6(c)(7) for the applicant’s fiscal year immediately preceding the application;
(5) disclose any changes in the information contained in the applicant’s application for registration or its immediately previous application for renewal, as applicable;
(6) supply evidence of insurance against risks of dishonesty, fraud, theft, or other malfeasance or misconduct on the part of an employee or agent of the provider, in an amount equal to the highest daily balance in the trust account required by Section 19 during the six-month period immediately preceding the application;
(7) disclose the total amount of money received by it or its designee during the preceding 12 months from or on behalf of individuals who reside in this state and the total amount of money distributed to creditors of those individuals during that period; and
(8) disclose the total amount of money accumulated during the preceding 12 months pursuant to plans by or on behalf of individuals who reside in this state and with whom it has agreements; and
(9) provide any other information that the administrator reasonably requires.
(b) Except for the information specified in Section 7(b), the administrator shall make available to the public the information in an application for renewal of registration.
(c) The administrator shall approve or deny an application for renewal of registration within 30 days after receiving it. The administrator may extend the 30-day period, but the registration remains effective until the administrator, by record, notifies the applicant of a denial and states in the record the reasons for the denial.
(d) If the administrator denies an application for renewal of registration, the applicant, within 30 days after receiving notice of the denial, may appeal and request a hearing pursuant to Section ____. Until the appeal process is final, the applicant may continue to provide debt-management services. Thereafter, subject to the administrator’s order and subject to Section 29(c), the applicant may continue serving its existing customers until, with the approval of the administrator, it transfers them to another registered provider.
Legislative Note: In subsection (d) insert the citation to the appropriate section of the Administrative Procedure Act or other statute governing administrative procedure.
Preliminary Comment
Subsection (a): The cross-referenced provision in paragraph (4) requires proof of counselor certification. The financial statement required by section 6(c)(7) is not necessarily an audited statement. Does the Committee want to impose a requirement that, once registered, providers must obtain audited financial statements?
Paragraphs (7) and (8) require disclosure of amounts paid or accumulated by individuals with whom the applicant has agreements. These amounts determine the size of the bonds required by section 12. Paragraph (7) refers to providers and their agents that receive and distribute the individual’s money. Paragraph (8) is new; it applies to providers that do not take possession of those funds.
Subsection (b): The home addresses, financial statements, and criminal-records check, as disclosed in an application for registration or in an application for renewal, remain exempt from public disclosure.
Subsection (c): The grounds for denial of an application to renew registration appear in Section 29. The administrator has 30 days to act on the application. The 30-day period starts running upon receipt of an application, not receipt of a proper application. The latter date might never occur, in which event the registration would remain effective forever.
Subsection (d): When a provider’s registration ends, section 5(a) prohibits it from providing debt-management services. An abrupt end to the provider’s activity, however, may adversely affect its customers who are in the middle of a plan. Consequently, this subsection authorizes the administrator to permit or compel the entity to continue providing services to existing customers.
SECTION 11. REGISTRATION IN ANOTHER STATE. A person that has submitted an application for, and holds a certificate of, registration or renewal of registration as a provider in another state may submit a copy of that application and certificate in lieu of an application in the form prescribed by Section 6(a) and (c) or Section 10(a). The administrator shall accept the application and the certificate from the other state as an application for registration or for renewal of registration, as appropriate, in this state if:
(1) the application to the other state contains information substantially similar to or more comprehensive than that required in an application submitted in this state; and
(2) the applicant, under oath:
(A) certifies that the information contained in the application is current; or
(B) provides current information.
Preliminary Comment
This section provides for reciprocal use of applications in states that have adopted this Act. It simplifies registration in states that have substantially similar laws, thereby easing the burden placed on providers that operate in multiple states. This benefit is available, however, only if the law of the other state is substantially similar to this Act. As a practical matter, a provider can comfortably rely on this section only if the other state has also adopted this Act.
(a) Except as otherwise provided in subsection (h), every provider shall file a surety bond with the administrator.
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