SENATE BILL REPORT

SB 5147

BYSenators von Reichbauer, Rasmussen, Johnson, Smitherman, McMullen, McCaslin and West

Revising definition of credit services organization.

Senate Committee on Financial Institutions & Insurance

Senate Hearing Date(s):January 13, 1989; January 24, 1989; February 14, 1989

Majority Report:  That Substitute Senate Bill No. 5147 be substituted therefor, and the substitute bill do pass.

      Signed by Senators von Reichbauer, Chairman; Johnson, Vice Chairman; McCaslin, McMullen, Rasmussen, Sellar, Smitherman, West.

Senate Staff:Benson Porter (786-7470)

                  February 16, 1989

AS REPORTED BY COMMITTEE ON FINANCIAL INSTITUTIONS & INSURANCE, FEBRUARY 14, 1989

BACKGROUND:

In 1986, the Legislature adopted the Credit Services Organization Act (Act).  For a fee, these businesses generally offer to assist individuals in obtaining credit.  Typical services include offering to improve a customer's credit, obtaining an extension of credit for the customer, or providing related advice.

The Act requires a credit service organization offering assistance for a fee to meet certain financial and disclosure requirements.  A credit service organization is prohibited from charging or receiving any money prior to full and complete performance of the services it has agreed to perform for the buyer, unless, the organization has obtained a surety bond for $10,000.  All contracts must be in writing and specify cancellation rights, terms of payment, and a full description of the services to be performed. 

The Act also grants an individual a "cooling off" period of five days during which he or she may cancel the contract.  Any contract provision waiving the rights granted under the Act is prohibited.  Certain exemptions are made from the Act, including various lenders, real estate brokers, securities broker-dealers, and attorneys.  A violation of this Act constitutes a gross misdemeanor.

A relatively new business has surfaced which offers similar services as a credit service organization but is not subject to the Act.  The organizations, called foreclosure relief companies, offer advice and assistance in exchange for a fee.  Often fees are collected up front and range from $400-$500.  Critics claim that the services provided involve questionable techniques which fail to fulfill the company's promise to halt, prevent or delay foreclosure proceedings.

SUMMARY:

The definition of a credit service organization is expanded to include organizations offering to save or preserve a person's credit or to stop, prevent, or delay the foreclosure of a deed of trust, mortgage, or other security instrument.  In this way, foreclosure relief companies would be made subject to the Act.

Attorneys who have an interest in or work as an independent contractor for a credit service organization must comply with the provisions of the Act.

EFFECT OF PROPOSED SUBSTITUTE:

The surety bond is payable to the state or purchaser of services from a credit service organization.  The liability of the surety is limited to the face value of the bond.  The bond must be continuous and remain unimpaired throughout its term.  Provisions for claims and notification to the surety are established.

Appropriation:    none

Revenue:    none

Fiscal Note:      none requested

Senate Committee - Testified: Ron Luber, The Consultants