To:Commission
From:Laura C. Tharney
Re:DMSANJ
Date:October 11, 2011
M E M O R A N D U M
This Memorandum is intended to supplement the information contained in the Draft Final Report. Since considerable comment has been received, and considerable testimony provided on this project, the Memorandum contains excerpts from prior meetings at which this project was considered in an effort to collect that information in one place for ease of Commission review. The goal of including the excerpts below is to allow the Commission to review the Minutes and focus on the substance of the project, the comments and the decisions made to this time. Minutes excerpts are generally included below without ellipses or other notations showing where information has been deleted.
The Memorandum also summarizes Staff’s discussions with individuals from the Illinois Department of Financial and Professional Regulation.
I.Minutes excerpts.
November 19, 2009
Ksenia Takhistova provided a general explanation of the history and goals of NCCUSL’s Uniform Debt Management Services Act, indicating that approximately one-third of the states are considering or have adopted a version of the uniform Act. Ms. Tharney indicated that Staff had been contacted by the Department of Banking and Insurance and that the Department had expressed an interest in the project because New Jersey’s current law is old and could be improved.
January 21, 2010
Commissioner Pressler asked why the report called for registration, rather than licensing, as was currently required in New Jersey. Commissioner Pressler noted that registration is usually a unilateral act, but that licensing requires the approval of the licensing body. Chairman Gagliardi agreed with Commissioner Pressler that the language of the draft should be changed to require licensing, rather than registration, but that it should be made clear that this was done not to effect a substantive change, but to maintain the effect of the uniform language while including the term as it is more commonly understood in New Jersey.
Ms. Tharney also raised the issue of the three sections of the report that are drafted in the alternative, sections 4, 5 and 9. She explained that, as currently drafted, the Section 4 allows only non-profit entities to participate in the provision of debt-management services, while 4A allows for-profit entities to do so as well. The same is true with the alternatives provided for sections 5 and 9. The Commission approved the inclusion of alternative language for the purpose of eliciting comments on both options.
Commissioner Pressler questioned the differentiation between secured and unsecured debt. She explained that residential mortgages should not be included in the Act, but that other forms of secured debt, like appliances and car leases should be included. Commissioner Pressler stressed the unique nature of residential mortgages, because of the economic situation and the various techniques being used to salvage them, but suggested that other forms of consumer debt, secured or not, should be subject to the Act.
September 16,2010
Ms. Tharney explained that a bill was introduced in the New Jersey Legislature by Assemblyman Jack Connors that is similar to, but not identical to, the uniform law. Ms. Tharney said that Staff had spoken with Assemblyman Connors’ office and would be keeping his office updated regarding this project.
The most significant question to be addressed by the Commission is whether“for profit” entities should be allowed to participate in debt management services in New Jersey. They are not currently permitted to do so. Generally, “for profit” and “not-for-profit” entities offer different services to consumers. Based on the information provided to this time, it is the understanding of Staff that not-for-profit entities are not allowed to engage in “debt settlement”,which involves a reduction in the principal amount of the debt. For-profit entities do offer “debt settlement” services. The “for profit” business modelfocuses on the consumer paying a percentage of the principal amount of the debt owed to the creditor in a lump sum (or over a three or six month period). Funds need to be accumulated by consumer and then offered to creditors, focusing on the creditors one-by-one. Not-for-profit entities, on the other hand, focus on paying down the entire principal amount of the debt, generally over a period of three to five years, after concessions by the creditors including reduction in interest rates, finance charges, and fees. Ms. Tharney explained that the information available to this time suggests that the differentbusiness models serve two different segments of New Jersey consumers. About 80% of the states now permit for-profit entities to provide debt management services to the residents of those states. In 2004, approximately 25 states permitted only not-for-profit entities to engage in debt management activities.
Commissioner Bunn asked if the Department of Banking and Insurance had a stand on whether for-profit debt management entities should be allowed in New Jersey. Ms. Tharney explained that although the Department’s spokesman was not able to attend the meeting because of a scheduling conflict, the Department was amenable to the participation of for-profit entities, properly regulated.
David McMillin of Legal Services explained that debt settlement, the business model used by for-profit entities, is a serious problem for low income New Jersey consumers and consumers generally, both here and throughout the country.He explained that the practices involved in debt settlement have received what may be the most criticism of any current practices in consumer finance marketplace. He added that, at Legal Services, they have never seen a debt settlement agreement that they liked. He indicated that Consumer Union had said much the same thing and that while the arrangement sounds good,it is, in practice, very harmful.
Commissioner Bell asked if Mr. McMillin was referring to for-profit or not-for-profit entities and Mr. McMillin explained that not-for-profit entities rarely deal in debt settlement but instead, like Consumer Credit Counseling Services of New Jersey, focuson providing debt managementplans. Ms. Tharney explained that she had been advised that although not-for-profit entities would like to engage in the principal reduction aspects of debt settlement, they were precluded from doing so by the impact of federal law (501 q) on their not-for profit status.
Mr. McMillin explained that in practice, although for-profit entities are not allowed in New Jersey, they still find New Jersey consumers on TV and the internet. They have historically charged high up-front fees, so the money that the consumer thinks is going or will go toward debtreduction is, instead, used as fees to the for-profit entities. Consumers may remain unaware of this until they get sued by creditors who have not been paid. Commissioner Bunn asked if the draft act contemplates Department approval of debt settlement contracts. Ms. Tharney replied that the entities would be required, under the act, to submit their contracts as a part of their application for licensure. Those entities would also be required submit information regarding their plans for debt management activities, to include certain disclosures, and to limit their advertising.
Commissioner Bunn asked if Mr. McMillin supported the licensing requirement. Mr. McMillin responded that he did not think for-profit entities should be able to deal with New Jersey consumers. He suggested that in 2009, the Better Business Bureau determined that for profit debt settlement was an inherently problematic type of business. He also mentioned the recently adopted Federal Trade Commission Rule through which the FTC substantially expanded its telemarketing sales rule and jurisdiction to address problems in the area of debt settlement and related businesses. The Rule, effective September 27th, bans the imposition of advance fees and, without including a specific dollar amount, limits the amount of the fees that can be charged. The Rule applies only to for-profit entities and only to those whose business practices involve at least one interstate telephone call. The uniform law does not include these fee limitations since they did not exist at the time it was drafted.
Mr. McMillin also made reference to the study by the United States General Accountability Office studythat was not favorable regarding debt settlement companies. He strongly urged the Commission to put this project on hold and not recommend it, or to substantially increase the consumer protections. Commissioner Bunn asked if the application of the FTC rule more broadly to non-telephone solicitations would be the sort of broader protection called for by Mr. McMillin, and Mr. McMillin replied that such an expansion would be a good step and that the Commission should watch after the FTC Rule takes effect to see how it works.
Mr. McMillin pointed out that Illinois is the state that adopted a debt settlement law most recently and that it contains a much stronger fee cap provision. He added that the Department of Banking and Insurance has a good fee regulation that applies to consumer counseling and debt management plans and is similar to what Illinois recently adopted.
Commissioner Bell asked if internet communications were covered by the FTC Rule and Ms. Tharney indicated that the Rule only applies in situations involving at least one interstate telephone call.
Commissioner Bunn explained that he would prefer to hear from the Department of Banking and Insurance before proceeding with this project. He suggested that he wanted to wait for the FTC Rule implementation and look at what was done in Illinois.
Ms. Tharney explained that Staff had reviewed the FTC Rule documents, including the comments associated with the rulemaking process and had also looked at the GAO study referred to by Mr. McMillin. She explained that although there were stories of consumers in dire circumstances that fell victim to predatory actors of both the for-profit and not-for-profit variety, there were also for-profit entities operating in other states that have an A rating from the Better Business Bureau with very few complaints reported. Ms. Tharney also explained that since the current law in New Jersey, which is more than 30 years old, did not protect consumers as well as it could, and since legislation in this area has been introduced, action by the Commission might be useful at this time. Commissioner Bertone said that she would like to see the statute drafted in the alternative, so that the Commission can consider the for-profit/not-for-profit issue in more detail. Commissioner Bunn suggested that Staff look closely at the Illinois statute concerning fee limitations.
Commissioner Bell asked if there was any state that successfully regulated for-profit entities and any independent body that has indicated that such a state provides good service. He suggested that if there is no state that successfully regulated for-profit entities, and no model that successfully protects New Jersey consumers, there is no point in allowing them to operate in New Jersey. Commissioner Bunn expressed a concern that New Jersey consumers not be left without assistance, and Ms. Tharney said that, based on the information Staff had received, not-for-profit entities would like to be able to engage in the principal reduction model. She suggested that the desire of not-for-profits to be able to offer this service indicated that it might be a beneficial service for New Jersey consumers if done correctly.
October 21, 2010
The Compliance Manager from Novadebt/Garden State Consumer Credit Counseling, Inc., wrote to express general support for the modifications to the draft, and to propose a specific suggestion for an additional change to the fee provision. Carol Johnson from AOC’s Committee on the Unauthorized Practice of Law expressed concern that any attempt to require additional licensure for attorneyscould be viewed as an impermissible interference with an area controlled by the New Jersey Supreme Court. Ms. Tharney also said that informal comments she had received from the Attorney General’s office recommended modifications to the attorney exemption and the deletion of language stating that the law does not apply if the provider has no reason to know the individual resides in New Jersey. The Attorney General’s office also proposed a modification to Section 21, dealing with advertising and marketing, so that a provider of debt management services cannot imply that it has a governmental affiliation if it does not.
Mary Beaumont, the Director of Legislation and Regulation for the Department of Banking and Insurance (DOBI), appeared along with Tom Hunt, Director of Consumer Finance for DOBI. Ms. Beaumont explained that DOBI appreciated the work the Commission was doing to mold UDMSA to the New Jersey structure and they would be available to provide answers and expertise in this area. She said that the draft could greatly enhance consumer protection in New Jersey.
Tom Hunt explained that, with regard to “for profits”, for more than 30 years New Jersey Debt Adjuster Act has taken a position of protecting the public from potentially rapacious debt adjusters by limiting the pool to nonprofits. In the past two or three years, with the foreclosure and financial crisis, there has been a recognition that another aspect of consumer protection is provided to people in financial trouble by nonprofits and “for profits”, pursuant to a comprehensive statutory and regulatory scheme.
Commissioner Burstein sought clarification from Mr. Hunt that there is a gap with regard to some New Jersey consumers who are indebted and could benefit from a settlement of those debts in a manner not currently permitted by law. Mr. Hunt explained that, in recent years, the demand has grown exponentially but the pool of services has remained static because of the regulatory regime limiting the pool to nonprofits. Commissioner Bunn asked whether DOBI had seen an increase in complaints for the debt adjustment services. Mr. Hunt said that they had, noting that with the growth of the industry and the need for the services has come a growth of complaints.
Michael Croxson, of CareOne Services, Inc., in Columbia, Maryland, explained that his company operated in 42 states, and is licensed in most of those states, although some states require registration and not licensure. He said that an important aspect of this issue is that the consumer who has unsecured debt falls onto a continuum consisting of four services ranging from a consumer who just needs help with a budget and credit counseling to those for whom bankruptcy is the most appropriate solution. CareOne offers credit counseling, debt management and, in some states, debt settlement.
Mr. Croxon explained that debt management plans are the traditional territory of nonprofit credit counselors. Such plans involve payment, by the debtor, of 100% of the principal amount of the debtover a period of 60 months, with concessions by the creditors like reduction of certain fees or charges. The upfront fee would be set at about $35 to $50, plus a monthly fee to cover the ongoing support to the consumer during the period of the plan. Debt settlement is different from debt management because it involves the repayment of less than the full principal balance owed and may be appropriate in cases in which the consumer cannot afford a debt management plan, but may be too solvent to pass the means test to qualify for bankruptcy. Traditionally, “for profits” entities provide this service and, historically, they charged substantial up-front fees. Bankruptcy is the end of the continuum, but an attorney is needed to provide this service.
Mr. Croxson explained that though his company operates in 42 states, they offer settlement services only in nine states. The states in which they offer debt settlement services are those that that have passed the uniform act, or in states like North Carolina which have absolutely prohibited upfront fees and where no fee can be charged until services are rendered. CareOne was a strong advocate for the FTC Rule. CareOne has had 1.5 million consumers contact them for counseling and has facilitated the payment of more than $165 million between consumers and their creditors. They talk to 650,000 new consumers every month. CareOne has had fewer than 30 Better Business Bureau complaints in a twelve month period and has an A-plus rating. Mr. Croxson suggested that there is really no qualitative difference between the services provided by the licensed service providers located in New Jersey and those same services provided by companies located elsewhere, whether they be not-for-profit or for-profit. The only difference is that, as a for-profit entity, his company pays taxes. A reason to allow for-profit entities to offer services in New Jersey is that when a consumer presents to an entity, he or she can be anywhere along the continuum he explained at the beginning of his presentation. Offering only one product is not a solution.