Washington State

House of Representatives

Office of Program Research

BILL

ANALYSIS

Business & Financial Services Committee

ESSB 5321

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

Brief Description: Concerning licensure of persons providing debt settlement services.

Sponsors: Senate Committee on Financial Institutions & Insurance (originally sponsored by Senators Benton, Mullet, Hobbs, Angel and Fain).

Brief Summary of Engrossed Substitute Bill

  • Creates a licensing and enforcement framework for persons and entities who provide debt settlement services.

  • Provides that persons and entities licensed as provider of debt settlement services are exempt from the provisions that govern debt adjusters.

Hearing Date: 3/18/15

Staff: David Rubenstein (786-7153).

Background:

"Debt adjusting" is defined as: (1) managing, counseling, settling, adjusting, pro-rating, or liquidating a debtor's indebtedness; or (2) receiving funds for distribution among creditors in payment of a debtor's obligations. A "debt adjuster" is a person who engages in debt adjusting for compensation. It includes debt poolers, debt managers, debt consolidators, debt pro-raters, and credit counselors.

The definition of a "debt adjuster" excludes: attorneys, escrow agents, accountants, and investment advisors while performing services solely incidental to the practice of their professions. It also excludes persons doing business that is permitted by law related to banks, credit unions, trust companies, and insurance companies; employees performing credit services for their employer; public officers and persons acting under court order; persons performing services incidental to the dissolution of a business entity; and certain nonprofit organizations.

After a Washington State Supreme Court ruling that held that an entity that received funds into a custodial account and then distributed such funds to creditors was a debt adjuster, the Legislature amended the definition of a debt adjuster to exclude such entities. Under the current definition of a debt adjuster, an independent entity that holds or administers a dedicated bank account for fees and payments to creditors, debt collectors, debt adjusters, or debt adjusting agencies in connection with the renegotiation, settlement, reduction or other alternation of the terms of payment or other terms of a debt is considered a "third party account administrator" and not a debt adjuster.

Debt Adjuster Contracts.

Every contract between the debt adjuster and the debtor must contain various disclosures, including the following:

Debt Adjuster Fees.

The total fee for debt adjusting services is capped at 15 percent of the debtor's total debt. Excess fees, except as a result of an accidental or bona fide error, void the contract.

Before retaining the fee, the debt adjuster must notify all creditors that the debtor has engaged the debt adjuster's services. The debt adjuster must distribute at least 85 percent of the debtor's payments to creditors at least once every 40 days. A debtor's payments to a debt adjuster must be held in a separate trust account.

Prohibited Acts.

A debt adjuster must not do any of the following:

Violation of the Debt Adjusting Act is a misdemeanor offense, and it is an unfair or deceptive act or practice under the Consumer Protection Act (CPA).

Summary of Bill:

A new chapter, to be known as the "Debt Settlement Services Act" (Act) is created in Title 18 RCW.

"Debt settlement services" are services as an intermediary between an individual and one or more unsecured creditors of the individual for the purpose of: (1) obtaining negotiated concessions involving a reduction in principal of the individual's unsecured debt; and (2) securing discharge of the debt after the individual has performed the negotiated concessions. Licensed debt settlement service providers (providers) are exempt from the Debt Adjusting Act.

"Debt adjusting" is redefined to apply only to entities both: (1) managing, counseling, settling, adjusting, pro-rating, or liquidating a debtor's indebtedness; and (2) receiving funds for distribution among creditors in payment of a debtor's obligations.

License Application and Renewal.

A person may not engage in or advertise for debt settlement services in Washington before obtaining a debt settlement services license from the Director of the Department of Financial Institutions (Director). The applicant must apply through the nationwide licensing system and applicants must pay a fee set by rule.

The Director must evaluate the applicant's financial responsibility, character, reputation, integrity, and general fitness to determine whether the applicant will act lawfully, honestly, fairly, soundly, and efficiently in the public interest. The license is effective for a period of one year or less, depending upon the date issued. The license expires December 31 each calendar year in which it was issued, and it is not transferable or assignable.

The following persons or entities are exempt from the provisions governing debt settlement services:

Background checks: In connection with an application for a license or periodically upon license renewal for debt settlement services, each applicant, including officers and directors, must furnish information regarding identity. Such information includes fingerprints for submission to the Washington State Patrol and the Federal Bureau of Investigation for state and national criminal history background checks. If an officer, director, member, or principal has been convicted of a felony involving fraud or financial misconduct in the preceding seven years, the application may be denied. Applicants must also provide personal history, experience, business records, and other pertinent facts as the Director may reasonably require.

Renewal: A provider must obtain a renewal of its license annually. If a provider files a complete application for a renewal of its license before the expiration of the license, the license remains effective until the Department of Financial Institutions (Department) notifies the applicant of a denial and states the reasons for the denial. Otherwise, the license expires. An applicant or a licensee must notify the Department no later than 10 days after a material change in the information provided in an application for licensure or renewal.

Evidence of financial responsibility: If the applicant for a debt settlement services license will receive or hold customer funds, the applicant must provide a fidelity bond providing coverage in the aggregate amount of $150,000 with a deductible no greater than $10,000. The applicant must execute a surety bond in the amount of $10,000 unless the fidelity bond does not have a deductible.

If the applicant will not hold or receive consumer funds, a surety bond in the aggregate amount of $50,000 is required. The surety bonds required under this provisions of the Act must be conditioned on the basis that the licensee will faithfully conform to and abide by the provisions of the chapter governing debt settlement services and the rules adopted. If the Director determines, and the Office of the Insurance Commissioner concurs, that the bonds are not reasonably available, the Director may waive the requirements for one or both of the bonds for a fixed period of time.

A "fidelity bond" is a primary commercial blanket bond which provides coverage for any fraudulent or dishonest acts committed by one or more officers, partners, sole practitioners, and employees of the applicant.

Annual report: A licensee must pay an annual assessment, as established in rule by the Director and with it must submit an accurate annual report in a form and in a medium prescribed by the Director in rule. As part of the annual report, the Director may require a copy of the licensee's most recent audited annual financial statement or any other information that the Director deems necessary.

Disclosure Requirements.

Before a consumer consents to pay for goods or services offered, a provider must disclose truthfully, in a clear and conspicuous manner, the following:

Separate Account.

A provider may request or require that a customer place funds in an account to be used for payment of the provider's fees and for payments to creditors if:

If the provider receives money from a customer, it must hold the funds in a separate trust account at a state-chartered, federally insured financial institution in Washington. The provider may not commingle its own money with customer funds.

Prohibitions.

The provider is prohibited from misrepresenting, directly or by implication, any material aspect of any debt settlement services, including:

A provider is prohibited from directly or indirectly employing any scheme, device, or artifice to defraud or mislead consumers or to defraud any person, and from engaging in any unfair or deceptive practice toward any person.

Fees and Payment.

A provider may not receive payment of any fee or consideration for services until and unless:

If the fee is based on a percentage of the amount saved, it must not exceed 20 percent of the total debt listed in the contract, and the fee collected on any one payment may not exceed 20 percent of the payment.

Statement of Accounting.

A statement of accounting (statement) must be distributed at least once per month on or before the fifth business day after a consumer demands a statement. Where a provider permits electronic access to a consumer's account information 24 hours per day and seven days per week, the provider satisfies the requirements regarding the distribution of the statement.

A statement must contain:

Secured Debt.

Unless authorized under another chapter of the Revised Code of Washington, a provider may not provide services for compensation as an intermediary between a customer and one or more secured creditors to obtain a reduction in the principal or interest of a customer's secured debt.

Agreements and Provider Duties.

If a provider is not licensed as required when a customer enters into an agreement for debt settlement services, the agreement may be voided by the customer. If the provider is licensed, the customer may withdraw from the agreement at any time without penalty

A provider must act in good faith in all matters regarding the provision of debt settlement services and the statutory and administrative requirements. If a licensee delegates a duty or obligation under the Act, the licensee is liable for any conduct of the delegate if he or she violates an agreement or legal or administrative requirement.

Examination and Investigation by Director.

The Director may at any time examine and investigate the business and examine the books, accounts, records, and files of any licensee or person who the Director has reason to believe is engaging in the business of providing debt settlement services. The Director may require testimony under oath regarding the business or subject matter of the investigation.

The Director may apply for and obtain a superior court order approving and authorizing a subpoena in advance of its issuance. The application may be made in the county where the subject of the subpoena resides or in Thurston County and must adequately specify the documents, records, evidence, or testimony sought. The Director or his or her designee must include a declaration under oath that an investigation is being conducted for a lawfully authorized purpose within the Department's authority.

The Director may issue a statement of charges upon a licensee if, in the opinion of the Director, the licensee or a director or officer of the licensee is engaging in, has engaged in, or is about to engage in an unsafe or unsound financial practice in conducting a business governed under the Act if the licensee omits material information during a response to an examination, violates any written agreement with the Director, fails to pay a fee required by the Director, or commits fraud or a crime involving moral turpitude, financial misconduct, or dishonest dealings.

Sanctions.

As a sanction, the Director may deny, revoke, suspend, or condition a license. The Director may also order a licensee or person to cease and desist from practices that violate the debt settlement services provisions; impose a fine not to exceed $100 per day per violation; order restitution; and remove from office or ban from participation any director, officer, sole proprietor, partner, or employee in the affairs of the licensee.

Upon application by the Director or any other interested party and upon a showing that the interest of creditors or consumers requires it, the superior court may appoint a receiver to take over, operate, or liquidate any licensee.

Unless prohibited by other statutes, the Director may informally settle complaints or enforcement actions.

Privacy and Confidentiality of Records.

The requirements under any federal law or laws of another state regarding the privacy, confidentiality, or privilege regarding any information or material provided to the Department continues to apply to the information or material after the information or material has been disclosed to the Department.

Adoption of Rules.

The Director must adopt rules for the implementation, administration, and enforcement of the Act and must establish reasonable fees by rule sufficient to cover the costs of administering the Act.

Consumer Protection Act.

Any violation of this Act is a violation of the CPA.

Public Disclosure Act.

Information obtained by the Department that identifies individuals who have agreements with a provider of debt settlement services is exempt from public inspection.

Appropriation: None.

Fiscal Note: Available.

Effective Date: January 1, 2016