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Uniform Debt-Management Services Act - Page 15

SECTION 28. PROHIBITED ACTS AND PRACTICES.

(a) A provider may not, directly or indirectly:

(1) misappropriate or misapply money held in trust;

(2) settle a debt on behalf of an individual for more than 50 percent of the principal amount of the debt owed a creditor, unless the individual assents to the settlement after the creditor has assented;

(3) take a power of attorney that authorizes it to settle a debt, unless the power of attorney expressly limits the provider’s authority to settle debts for not more than 50 percent of the principal amount of the debt owed a creditor;

(4) exercise or attempt to exercise a power of attorney after an individual has terminated an agreement;

(5) initiate a transfer from an individual’s account at a bank or with another person unless the transfer is:

(A) a return of money to the individual; or

(B) before termination of an agreement, properly authorized by the agreement and this [act], and for:

(i) payment to one or more creditors pursuant to a plan; or

(ii) payment of a fee;

(6) offer a gift or bonus, premium, reward, or other compensation to an individual for executing an agreement;

(7) offer, pay, or give a gift or bonus, premium, reward, or other compensation to a person for referring a prospective customer, if the person making the referral has a financial interest in the outcome of debt-management services provided to the customer, unless neither the provider nor the person making the referral communicates to the prospective customer the identity of the source of the referral;

(8) receive a bonus, commission, or other benefit for referring an individual to a person;

(9) structure a plan in a manner that would result in a negative amortization of any of an individual’s debts, unless a creditor that is owed a negatively amortizing debt agrees to refund or waive the finance charge upon payment of the principal amount of the debt;

(10) compensate its employees on the basis of a formula that incorporates the number of individuals the employee induces to enter into agreements;

(11) settle a debt or lead an individual to believe that a payment to a creditor is in settlement of a debt to the creditor unless, at the time of settlement, the individual receives a certification by the creditor that the payment is in full settlement of the debt;

(12) make a representation that:

(A) the provider will furnish money to pay bills or prevent attachments;

(B) payment of a certain amount will permit satisfaction of a certain amount or range of indebtedness; or

(C) participation in a plan will or may prevent litigation, garnishment, attachment, repossession, foreclosure, eviction, or loss of employment;

(13) misrepresent that it is authorized or competent to furnish legal advice or perform legal services;

(14) represent that it is a not-for-profit entity unless it is organized and properly operating as a not-for-profit under the law of the state in which it was formed or that it is a tax-exempt entity unless it has received certification of tax-exempt status from the Internal Revenue Service;

(15) take a confession of judgment or power of attorney to confess judgment against an individual; or

(16) employ an unfair, unconscionable, or deceptive act or practice, including the knowing omission of any material information.

(b) If a provider furnishes debt-management services to an individual, the provider may not, directly or indirectly:

(1) purchase a debt or obligation of the individual;

(2) receive from or on behalf of the individual:

(A) a promissory note or other negotiable instrument other than a check or a demand draft; or

(B) a post-dated check or demand draft;

(3) lend money or provide credit to the individual, except as a deferral of a settlement fee at no additional expense to the individual;

(4) obtain a mortgage or other security interest from any person in connection with the services provided to the individual;

(5) except as permitted by federal law, disclose the identity or identifying information of the individual or the identity of the individual’s creditors, except to:

(A) the administrator, upon proper demand;

(B) a creditor of the individual, to the extent necessary to secure the cooperation of the creditor in a plan; or

(C) the extent necessary to administer the plan;

(6) except as otherwise provided in Section 23(f), provide the individual less than the full benefit of a compromise of a debt arranged by the provider;

(7) charge the individual for or provide credit or other insurance, coupons for goods or services, membership in a club, access to computers or the Internet, or any other matter not directly related to debt-management services or educational services concerning personal finance; or

(8) furnish legal advice or perform legal services, unless the person furnishing that advice to or performing those services for the individual is licensed to practice law.

(c) This [act] does not authorize any person to engage in the practice of law.

(d) A provider may not receive a gift or bonus, premium, reward, or other compensation, directly or indirectly, for advising, arranging, or assisting an individual in connection with obtaining, an extension of credit or other service from a lender or service provider, except for educational or counseling services required in connection with a government-sponsored program.

(e) Unless a person supplies goods, services, or facilities generally and supplies them to the provider at a cost no greater than the cost the person generally charges to others, a provider may not purchase goods, services, or facilities from the person if an employee or a person that the provider should reasonably know is an affiliate of the provider:

(1) owns more than 10 percent of the person; or

(2) is an employee or affiliate of the person.

Comment

1. Paragraphs (2) and (3) of subsection (a) limit the extent to which a debt-settlement entity may settle a debt without the individual’s contemporaneous assent. Paragraph (2) prohibits a provider from settling a debt, through the use of a power of attorney or otherwise, to authorize the provider to settle debts on whatever terms the provider deems desirable, or an any terms other than those specified here. Under paragraph (3) a power of attorney may authorize the provider to settle debts for 50 percent or less of the amount of the debt at the time the individual assented to the plan. See section 2(14) for the definition of “principal amount of the debt.” For settlements less favorable to the individual than that, a power of attorney is prohibited and ineffectual. These paragraphs supplement section 19(e), which imposes similar limits on the terms that a provider may include in an agreement, and they negate the permissibility of using a separate document to obtain greater authorization than section 19 permits.

2. Paragraph (4) makes it a violation of the Act for a provider to attempt to exercise a power of attorney after an individual has terminated an agreement. It supplements section 19(d)(1)(C), which requires the agreement to provide that a power of attorney is automatically revoked if the individual terminates the agreement.

3. A credit-counseling entity may have access to its customers’ checking accounts, for the purpose of withdrawing money to pay the customers’ creditors and to pay the entity its monthly fee. Similarly, a debt-settlement entity may have its customers establish accounts with banks or other persons for the purpose of accumulating money until it is paid to creditors, and the entity may initiate transfers out of these accounts to pay monthly service fees and settlement fees, as well as perhaps to pay creditors. Paragraph (5) prohibits a provider from initiating transfers to itself or to creditors after the individual has terminated an agreement. It also prohibits a provider from initiating transfers that are not properly authorized by the agreement and the Act. Section 23 limits the amount of the fees.

4. Paragraph (6) prohibits compensation to an individual, but it does not prohibit a provider from reducing its normal fees for individuals who cannot afford them, so long as the reduction is in good faith and pursuant to the provider’s established practices. It does prohibit such come-ons as “reduced price good for today only.”

The Bankruptcy Code, 11 U.S.C. §111(c)(2)(B), requires credit-counseling entities within its purview to “provide services without regard to ability to pay the fee.” The Internal Revenue Code extends this requirement to all entities exempt from taxation under section 501(c)(3). This Act does not require providers to reduce or waive fees for those who cannot afford them, but neither does it interfere with a provider’s compliance with any federal or other state law that requires a reduction or waiver of fees.

5. Paragraph (7) prohibits certain referral fees. Payment of referral fees may be an efficient way to attract business and achieve economies of scale, but it creates a risk of deception. If a creditor, for example, suggests that an individual consult a particular provider, the individual is likely to perceive this as an endorsement by a creditor that is seeking to help the individual. The same is true if the creditor supplies the individual’s name to a provider and the provider contacts the individual, telling the individual that the creditor suggested the communication. In fact, the referral may be driven by identification of which provider is willing to pay the highest price for the referrals.

The prohibition against paying referral fees does not preclude payment for sales leads or lists of prospective customers, if the person making the referral has no stake in the outcome of a plan or if the provider does not reveal the identity of the person that supplied the list. A creditor is one example of a person that has a financial interest in the outcome of debt-management services. Another is a person whose compensation varies depending on whether the individual it refers completes a plan or reaches some other milestone.

The vice here is misleading the individual into believing that an entity with which the individual has a relationship (e.g., one of the individual’s creditors) is disinterestedly recommending that the individual seek the services of the provider. Hence, neither the provider nor the creditor (or other person supplying the individual’s name to the provider) may reveal to the individual that the person making the referral is in any way connected to the reason the provider is communicating with the individual. If the source of the list is identified to the individual by either the provider or the source, paragraph (7) prohibits the provider from paying for it.

6. Paragraph (8) is the converse of paragraph (7). Its purpose is to eliminate the economic incentive for a provider to refer individuals to persons who provide loans, goods, services, facilities, or other products of any kind. The protection of financially stressed, vulnerable individuals justifies discouraging a provider, motivated by self-interest, from recommending products provided by others. The prohibition in paragraph (8) precludes a provider from including on its website a link to the website of an entity providing other services or products and receiving payment from that entity, whether a flat fee or a fee based on the number of times individuals hit that link. Although this appears to be a form of advertising, for the purposes of this Act it is indistinguishable from payment for referrals. Placing a link on the provider’s website amounts to an endorsement of or referral to the owner of the linked website. It should not matter whether the referral is by electronic link or verbal recommendation. The provider is free, of course, to place the link on its website, just as it is free to make an oral referral, so long as it does not directly or indirectly receive compensation or other benefit from the person to whom the individual is referred. This distinguishes disinterested advice from referrals motivated by the provider’s self-interest.

For restrictions on the manner in which a provider may make a permissible referral, see subsection (b)(5) and Official Comment 16.

7. The practice of many providers has been to compensate their employees on the basis of how many individuals they can enroll in plans. This provides an incentive to the employees to engage in deceptive and coercive sales pitches. Paragraph (10) seeks to curb the deception and coercion by barring this method of compensating employees. The Bankruptcy Code, 11 U.S.C. § 111(c)(2)(F), contains a similar prohibition for the credit-counseling entities within its purview. Courts and the administrator should be vigilant to attempts to evade the prohibition of this paragraph.

8. If a plan contemplates settlement of a debt for less than the full principal amount of the debt, paragraph (11) prohibits a provider from paying, or directing an individual to pay, a creditor unless the individual receives formal acknowledgment from the creditor that the debt is satisfied. This acknowledgement may come in at least two forms. The creditor may assent to a settlement in a communication offering to settle the debt in exchange for specified performance by the individual, typically payment of a specified amount by a specified date. This communication often is called a settlement offer and may be sent to the individual or the provider. After the individual renders the specified performance, the creditor may send a communication stating that the debt is satisfied. This communication often is called a satisfaction letter. This paragraph requires transmission of the settlement offer to the individual in all cases. If the creditor sends a satisfaction letter to the provider, the obligation of good faith requires the provider to forward that to the individual as well. In the case of either a settlement offer or a satisfaction letter, the creditor’s certification may be passed on by the provider or come directly from the creditor.

9. Paragraph (11) also prohibits a provider from misleading an individual into believing that a payment will settle a debt. To violate the paragraph, a misrepresentation does not have to be express. If a settlement contemplates that a creditor will be accepting installment payments, the provider must make it clear to the individual that the initial installment does not settle the debt.

10. Paragraph (12) applies not only to statements made specifically to an individual; it also applies to advertising. Subparagraphs (B) and (C) prohibit certain representations that sometimes are used to entice individuals to sign up for plans. They are prohibited here even when they are true because they too often are untrue.

11. Not-for-profit is a status under state law. An entity may qualify for that status without also being tax-exempt under federal law. For a provider to represent that it is a nonprofit or notfor- profit entity, it is not enough that the provider was organized under a statute authorizing notfor- profits. Paragraph (14) requires that the provider also must be properly operating as a not-forprofit. Nor does it suffice that the provider has been granted tax-exempt status under the Internal Revenue Code. If it is not operating in a manner consistent with the law under which it was formed, a representation that it is a nonprofit entity violates this section.

12. Paragraph (15) prohibits the use of cognovit clauses or other procedural devices by which a provider is authorized to confess judgment against an individual.

13. Paragraph (16) prohibits false or misleading representations whether or not the provider knows of the deception. In accord with existing statutes prohibiting unfair or deceptive acts or practices, the risk of falsity or deception is on the person that makes an express statement. On the other hand, the paragraph prohibits omissions only if the omitted facts are known to the provider and are material. The prohibition applies to all stages of a transaction between a provider and an individual, including, at the back end, a provider’s attempt to collect a debt owed to it or to another person. At the front end, it applies to a provider’s attempt to divert the individual’s attention away from, or minimize the importance of, the disclosures required by sections 17 and 19 or to secure the individual’s assent to the purchase of the education services permitted by section 23(c) and (d). The standards of unfairness, unconscionability, and deception should be the same under this Act as they are under the state’s other statutes protecting consumers.

14. Paragraph (3) of subsection (b) prohibits a provider from extending credit to an individual to whom it provides debt-management services. Often, however, an individual has enough money to effect a settlement with a creditor but not enough to pay the fee associated with that settlement. This paragraph does not prohibit a provider from deferring collection of that fee, so long as there is no charge for the deferral in addition to the agreed-upon set-up, monthly service, and settlement fees authorized by section 23.

15. Paragraph (4) bans security interests altogether, in the property of any person. A provider may not take a security interest in property of an individual to whom it furnishes debtmanagement services or in the property of a family member or other person. The prohibition must be read in the context of the language introducing the subsection (“if a provider furnishes debt-management services to an individual”) so that the phrase, “in connection with the services provided to the individual” means “in connection with the debt-management services provided to the individual.” Hence this paragraph does not prohibit an entity from taking a security interest in connection with extending credit or providing other kinds of services to persons to whom it does not provide debt-management services.

16. Paragraph (5) preserves the privacy of information about an individual with whom a provider has an agreement. It is intended to complement federal and other state law restrictions on the dissemination of personal information. So long as the provider strips out the individual’s identifying information, however, it is free under this Act to disclose information for purposes of academic research or construction of a scoring system. If the identifying information is present, this paragraph prohibits disclosure of any of the information, except as permitted by the three specified exceptions. To the extent that other law restricts the disclosure of information about an individual, the provider may be able to comply with that law by obtaining the individual’s consent to the disclosure. But this paragraph makes no provision for authorizing the provider to release information with the individual’s consent.

The only permissible purpose for a disclosure to a creditor of the individual is to secure its cooperation. Disclosure to other persons (other than the administrator) is permitted only if disclosure is necessary for the administration of a plan. For example, a provider may delegate to a third party its duty to administer a trust account or its duty to provide periodic reports. To the extent necessary to enable the third party to perform the tasks that have been delegated to it, the provider may disclose information concerning its customers.

On the other hand, if a provider wants to refer an individual to another person for other goods or services (which subsection (a)(8) permits, so long as the provider receives no compensation for the referral), it must do so by providing the individual with the identity of the third person. This paragraph prohibits the provider from disclosing the identity of the individual to the third person for the third person to contact.

17. The cross-referenced section paragraph (6) permits debt-settlement companies to receive a portion of the forgiven debt. Other entities are not permitted to receive any portion of any forgiven debt, but this paragraph should not be interpreted to prohibit the receipt of any fees permitted by this Act.

18. Paragraph (7) is intended to prohibit the sale to individuals of insurance and other products that in other contexts have been a means of evading statutory regulation. The catch-all at the end of the paragraph is intended to thwart the exercise of ingenuity in generating new ideas to evade the limits imposed by the Act. It should be interpreted accordingly. The administrator may adopt rules specifying items that fall into the catch-all.

19. Subsection (a)(13) prohibits misrepresentations that a provider is authorized or competent to provide legal services. Paragraph (8) of subsection (b) prohibits the performance of those services, unless the person is a licensed attorney. A provider does not violate this subsection if the person providing legal services is licensed in a state, even if not this state. It may, however, violate other law that prohibits the unauthorized practice of law in this state.

20. Section 17(d) requires providers to answer questions about how to deal with indebtedness, and the Act generally contemplates that providers act as intermediaries between individuals and their creditors. Subsection (c) of this section makes it clear that the Act does not authorize providers or their employees to practice law. The Act does not, however, attempt to draw the line between the practice of law and the services required or permitted by the Act. Rather, it contemplates that the courts will continue to develop and apply the rules concerning the unauthorized practice of law.

21. Subsection (d) prohibits a provider from receiving compensation for performing specified services for a third party, a technique used in other contexts to evade regulation. The prohibition supplements subsection (a)(8) (prohibiting referral fees). It is broader, in that it attempts to prevent evasions of subsection (a)(8) through the ruse of performing services for the lender or service provider.

The purpose of the exception is to accommodate programs of governmental agencies that require counseling in connection with reverse mortgages, first-time homebuyers programs, or other financial services products.

22. Subsection (e) prohibits insider transactions unless the transactions are bona fide market transactions. The purpose of the subsection is to prohibit the use of a provider to channel money to related entities. Not-for-profit or tax-exempt providers may do this in an attempt to evade restrictions on entities with that status. For-profit providers may do this in an attempt to establish a high cost of doing business, which they then might use to persuade the legislature to increase the permissible fees and charges. Ordinarily a provider will know whether a person with whom it deals is its affiliate. The “should reasonably know” language is to protect a provider when its ignorance of that relationship is reasonable.

The subsection sets a minimum standard, but it does not displace other law governing not-for-profit entities. That other law may impose more stringent standards on engaging in transactions that benefit persons related to the not-for-profit entity.