Maryland Debt Settlement Services Study Act

1. Maryland Debt Settlement Services Study Act Presentation to the House Economic Matters Committee January 25, 2011 Department of Labor, Licensing and Regulation Division of Financial Regulation Mark Kaufman - Commissioner Anne Balcer Norton, Deputy Commissioner Office of the Attorney General Consumer Protection Division Steve Sakamoto-Wengel –Assistant Attorney General

2. Agenda Background FTC Final Rule – Debt Relief Services Other State Frameworks / Uniform Act Debt Settlement Workgroup Study and Recommendations

3. House Bill 392Effective July 1, 2010 Office of the Commissioner of Financial Regulation (“Commissioner”) and the Consumer Protection Division (“Division”) of the Attorney General mandated to conduct a study of the debt settlement services industry to determine how best to regulate the industry.

4. Timeline: • HB 1223 introduced by Delegate Feldman in 2008 to require licensing of debt settlement companies, impose fee caps and to provide certain disclosures (result: interim study); • HB 1269 introduced by Delegate Bobo in 2009 to prohibit debt settlement companies from operating in Maryland (result: unfavorable report); • HB 392 introduced in the House by Delegate Vaughn to cap fees at 15% of savings, prohibit up front fees and require certain disclosures (result: subject study effective July 1, 2010); • FTC finalized proposed amendments to the Telemarketing Sales Rule on July 29, 2010; • Workgroup agreed to postpone meeting until after FTC finalized the amendments; • Workgroup met on September 23, 2010; • Feedback/comments from participants solicited and included in report to be released on or before December 1, 2010.

5. FTC Final Rule: • Purpose: to protect consumers from deceptive or abusive practices in the telemarketing of debt relief services • Amendments proposed: August 19, 2009 • Final Rule adopted: July 29, 2010 • Final Rule effective date: September 27, 2010 (except § 310.4(a)(5) effective October 27th)

6. 16 C.F.R. Part 310 • Prohibits debt relief service providers from collecting a fee for services until a debt has been settled, altered, or reduced; • Requires certain disclosures in calls marketing debt relief services and prior to entering into an agreement; • Prohibits specific misrepresentations about material aspects of the services; and • Extends coverage to include inbound calls made in response to general media advertisements; • Applies only to for-profit sellers of debt relief services • No general attorney exemption, except: • (1) the TSR applies only to providers who use interstate telemarketing; • (2) providers who meet face-to-face with their customers before signing them up are likely exempt.

7. “Debt Relief Service” • Defined by the FTC Final rule as: any service or program represented, directly or by implication, to renegotiate, settle, or in any way alter the terms of payment or other terms of the debt between a person and one or more unsecured creditors or debt collectors, including but not limited to, a reduction in the balance, interest rate, or fees owed by a person to an unsecured creditor or debt collector.

8. Debt Management v. Debt Settlement: Debt Management: consumer pays all debts in full by working with credit counselor to enter an agreement with creditors to pay debts, typically through a payment plan pursuant, to certain concessions by the creditors. Debt Settlement: consumers settle debts by making lump sum payments, typically after saving for an extended, periodfor less than the full amount of outstanding balance.

9. Advance Fee Ban: • Prohibits providers from charging or collecting fees until they have provided the debt relief services, but (1) permits such fees as individual debts are resolved, and (2) allows providers to require customers to place funds for the provider’s fee and for payment to the consumer’s creditors in a dedicated bank account that meets five specified criteria. • The advance fee ban explicitly sets forth three conditions that must be met before a seller may charge a fee upon settling a consumer’s debt: • (1) consumer must execute a debt relief agreement with the creditor; • (2) consumer must make at least 1 payment pursuant to the agreement; and • (3) fee must be proportional either to the fee charged for the entire debt relief service (if the provider uses a flat fee structure) or a percentage of savings achieved (if the provider uses a contingency fee structure). • Other than the proportional or percentage limitation, the FTC Rule does not place any limitations on the amount of the fees charged.

10. Disclosures/Advertising: • FTC Rule requires 4 specific disclosures: • the amount of time it will take to obtain the promised debt relief; • with respect to debt settlement services, the amount of money or percentage of each outstanding debt that the customer must accumulate before provider will make a bona fide settlement offer; • if the debt relief program entails not making timely payments to creditors, a warning of the specific consequences thereof; and • if the provider requests or requires the customer to place funds in a dedicated bank account, that the customer owns the funds held in the account and may withdraw from the debt relief service at any time without penalty, and receive all funds remitted to the account; • Disclosure must be made prior to entering into the debt settlement agreement

11. Disclosures/Advertising: • The FTC Rule prohibits misrepresentations about material aspects of debt relief services, including success rates and a provider’s nonprofit status. • Savings claims in advertising must be based on actual experience of all customers, including those who dropped out or failed to complete the program. Additionally, savings claims must: • Base the savings on the amount of debt enrolled at the beginning of the program; • Include the impact of fees on the claimed savings; and • Include all debts enrolled, not just those that were settled successfully.

12. Additional Disclosures: • If a consumer is required to set aside funds in a dedicated account to pay fees and settlements: • the account must be held at an insured financial institution; • the consumer owns and controls the funds, including any interest, and must be free to withdraw them at any time; • the debt relief service may not own, control, or have any affiliation with the financial institution; • the debt relief service may not split fees with the financial institution; and • the consumer may stop working with the debt relief service at any time without penalty and any funds must be returned to the consumer within seven business days, minus any fees that have been earned.

13. Other State Legislation/Regulation: • Seven states bar debt settlement by for profit entities • Six states have adopted the Uniform Debt Management Services Act • Twenty-six states cap the fees that may be charged • While some states exempt attorneys who are licensed to practice in the state, others only exempt attorneys where the debt settlement is incidental to the practice of law.

14. Uniform Act: • The Uniform Debt Management Services Act provides for licensing of debt settlement providers • The Act caps fees that may be charged at 30% of the principal saved • States that have adopted the Act also allow, as an alternative, between 17% and 20% of the total debt enrolled at the inception of the plan

15. Recommendations Registration/Licensing Internet and Intrastate Application Nonprofit Providers Lead Generators Fee Caps Disclosures Attorneys engaged in debt settlement services

16. Interim Registration

17. Comments - 5 commenters supported registration - 2 did not oppose and 1 opposed “MCRC, CJ and Maryland Cash Campaign support an interim registration period…” – MCRC “Until licensing can be properly evaluated, registration should be required…at minimum an annual reporting requirement to include audited financial statements, number of clients served and the dollars deposited and fees charged – CCCS of MD “Given the dramatic changes wrought by the FTC TSR, we agree that registration…on an interim basis with plans for subsequent re-evaluation, together with a grant of enforcement and investigative authority to the MD Commissioner is a sensible approach – CareOne ”…registration, as it applies to attorneys, is both unnecessary and unworkable.” - Persels “[Supports] a short registration with a nominal fee.” - Debt Shield “provide a framework for DLLR to more accurately assess the state of the debt settlement industry and the need…to regulate…” Debt Management Associates

18. Internet, Face to Face and Intrastate Application of the FTC Rule

19. Comments 4 commenters agreed with extending the FTC protections to Internet, face-to-face and intrastate activities. 3 did not explicitly disagree, but rather expressed the view that services would not be provided in this manner “It is unlikely that a transaction without any personal interaction would succeed…” – TASC “Internet, face-to-face meeting and intrastate exemptions are becoming increasingly difficult to qualify for and comply with.” - USOBA “Because of jurisdictional limitations and the idiosyncrasies of federal law, the FTC was unable to make the TSR protections apply across the board. We believe that MD should mandate the consumer protections provided by the TSR should apply as well to transactions that are exempt” - CareOne

20. Non Profit Providers

21. Comments All commenters agreed that the FTC rule should be extended to cover non-profit providers of debt settlement services. One commenter specified that the rule should be extended to any entity providing the services. “Debt Shield supports a level playing field and the importance of including non-profit debt relief providers. – Debt Shield “…Banks, mortgage brokers and lenders, and other professional licensees that engage in the business of debt settlement (outside of discharging debts that they own) should be covered” – MCRC “The Firm agrees that non-profits should be subject to the same rules” - Persels

22. Lead Generators

23. Comments 3 commenters agreed that “lead generators” should be covered 3 commenters indicated that while appropriate, the coverage already exists making a Maryland provision unnecessary. “The concerns regarding lead generation are not debt settlement specific. Either existing regulation or new regulation specific to marketing practices used by lead generation companies for all industries, products or services is more appropriate.” TASC “The FTC Final Rule covers ‘any person who knowingly or recklessly provides substantial assistance…shall be deemed in violation” – Persels “We agree that all parties who receive compensation from a consumer related to debt settlement services should be covered” - CareOne

24. Fee Cap

25. Comments 3 commenters supported fee caps 5 opposed fee caps, arguing the FTC rule provided adequate protection • “30% seems high.” CCCS • “A fee that is based on 15 percent of the amount a consumer saved provides a positive incentive for a debt settlement provider to settle.” MCRC • “All previous fee cap discussions need to be re-evaluated in light of the FTC rule. TASC opposes a fee cap at this time. The FTC Rule already provides protection… • The Fees must be clearly and conspicuously disclosed • No Fees are chargeable until a settlement is reached • The consumer has another opportunity to reject the fees by rejecting the settlement • The consumer not only must approve the settlement but must affirm that approval by making a payment toward settlement TASC • “We feel that the FTC Final Rule was correct in not restricting the amount that a Debt Settlement Services Provider can charge.” Debt Management Associates • “The setting of fee restrictions should the proposed regulation be applicable to attorneys would present significant constitutional issues.” Persels • “We believe that the settlement fee authorized by the [Uniform Act - 30%], should be adopted by Maryland as its fee cap.” CareOne

26. Disclosures

27. Comments Comments on disclosure varied widely and are difficult to characterize • “After much study and investigation, the FTC concluded that [those in the Final Rule] were the important disclosures.” - Debt Shield • “Creditor compensation to debt settlement companies should be disclosed.” - CCCS • “MCRC proposes…a standard form to provide parity among providers and clearly inform potential clients.” - MCRC • “TASC has always supported disclosures [noting that] the FTC supported fewer, more focused disclosures.” - TASC • “Although we see overlap in some of the disclosures in last year’s proposed legislation with the FTC’s Final Rule disclosures, we are not opposed to including some additional disclosures that were previously proposed” - Debt Management Associates

28. Treatment of Attorneys

29. Comments • “[L]awyers are providing services that the non-lawyer competitors are not and cannot provide. They should not be ruled by the same regulatory scheme. ” Persels • [I]mplicit in the FTC’s ‘guidance’ is a clear indication of the FTC’s view that the Final Rule applies to attorneys and law firms that provide debt relief services to clients.” Debt Shield • “To date, all [states] have taken a conservative approach in deferring to the attorney’s own licensing requirements.” TASC • “Lawyers who run or principally run, debt settlement firms should be required to follow the same rules and regulations as any other individual or entity.” MCRC

30. Other Violation of any proposed debt settlement law should be deemed a violation of the Maryland Consumer Protection Act.