Calif. Sen. Majority Leader Ellen Corbett Introduces Debt Settlement Bill

OAKLAND, Calif. — Californians struggling to overcome heavy debt will have greater protections and greater success if a bill by State Sen. Majority Leader Ellen Corbett (D-San Leandro) becomes law.

Debt settlement companies advertise prominently on radio and television that they will reduce debts for pennies on the dollar, aiming to attract consumers dealing with overwhelming debt loads. Yet they typically collect large sums of their clients’ money up-front, have a track record of settling very little debt, and often leave clients worse off than they were before.

“Many Californians are struggling right now with trying to make ends meet in this difficult economy,” said Sen. Corbett, who is authoring the Debt Settlement Consumer Protection Act (SB 708) with support from the Center for Responsible Lending and Consumers Union. “They should not be further victimized by those in the debt settlement business who are seeking to make a profit by exploiting their desperation.”

SB 708 will expand the reach of the Federal Trade Commission’s 2010 telemarketing rule. While that rule was limited to a subset of providers, SB 708 will apply to all debt settlement operations in California, and also put in place common-sense rules that will help prevent companies from taking advantage of consumers burdened with debt.

“Under this bill, debt settlement companies won’t get paid if they don’t deliver on their promises,” said Gail Hillebrand, senior attorney at Consumers Union.  “And if they do deliver, then what they get paid is tied to what they save: if there are no savings to consumer, then the company collects no fee.”

The Debt Settlement Consumer Protection Act would provide Californians with protections from prevalent and dangerous practices in the debt settlement industry by implementing the following key provisions, among others:

• Require screening before enrolling customers. Because enrolling in debt settlement causes harm to consumers as well as potential benefits and may not be the best option for everyone, states should require that providers determine that the program (1) is suitable for the consumer, and (2) that the consumer is likely to benefit more than they pay, given the consumer’s financial circumstances before enrolling them in the program.

• Providers must settle debt before collecting any fees, and those fees are limited to 15% of the difference between the amount paid to settle the debt and the original debt amount. Excessive and up-front fees—with no guarantee of performance—are a standard and abusive feature of the debt settlement industry. SB 708, however, aligns the company’s interests with the consumer’s interests in having the debt settled and ensures that consumers only pay if services are provided.

• Providers must disclose all risks and realities associated with the debt settlement program and make no representation of results. Customers often are unclear on the repercussions of participating in debt settlement programs, and expect the atypical—that all of their debts will settle with steep discounts.

Importantly, these rules will apply to ALL debt settlement providers regardless of form, and all transactions, regardless of method of contact with the borrower. The FTC rule applies only to for-profit entities contacting borrowers via interstate telemarketing. SB 708 will also provide other significant consumer protections, license debt settlement providers and require data reporting so the industry’s services to consumers can be monitored.

“SB 708 will rein in an unregulated industry and help put California back on the map as a state that protects its people—and their wallets,” said Paul Leonard, director of CRL’s California office. “We look forward to making law out of this legislation.”

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation’s largest community development financial institutions.