A boom in consumer indebtedness and the number of companies using questionable practices to help them manage that debt has prompted California to revise regulations governing debt management, debt settlement and credit counseling services.

Effective Jan. 1 2003, AB-2293 amends "The Check Sellers, Bill Payers and Proraters Law" and is deemed model legislation designed to weed out grifters, fast-buck operations and other predators who prey on vulnerable consumers in debt.

The improved regulations protect consumers from high fees and mandates that non-profit debt counseling, management and settlement services doing business in California register their operations, provide certain consumer disclosure statements and post surety bonds, among other regulations. The move brings non-profit services under existing regulations that govern for profit services in the Golden State.

"This law significantly strengthens existing consumer protection and it is very likely the legislation will become a template for equivalent legislation in other states," says Peter Lake CEO, of the Consumer Credit Counseling Service of Los Angeles.

Lake chaired the Coalition For Quality Credit Counseling (comprised of California members of the NFCC-National Foundation For Credit Counseling and members of AICCC-Association of Independent Credit Counseling Agencies).

The group spearheaded the drive for improved regulations to stop operations out to fleece consumers who may have gone too far credit-wise or are simply down on their financial luck.

No matter how they arrived at their precarious financial predicament, many consumers are so far in over their heads, their home ownership also is at risk.

Good, bad services

Ethical debt and credit management and counseling services typically offer consumers debt and credit counseling and education while working with creditors (to accept minimum payments while reducing interest rates and lowering and waiving fees) to help consumers consolidate and pay off debt, perhaps with an extra job, but without additional credit and little if any harm to their credit standing.

After working out an agreement with creditors, debt management services collect from client consumers one monthly lump sum which is divided among creditors in an agreed-upon debt-repayment plan.

Conversely, debt settlement services work with creditors to get them to forgive a portion of a consumer's debt.

In both cases, ethical services rely upon education, consumers' will power and partnerships with creditors to get the job done.

The new law, however, indicates not all services are ethical or even legal and the soft economy's impact on households has spurred the growth in questionable services.

Lake says 10 years ago fewer than 100 credit counseling services existed in California. Today there are more than 1,000.

"(Among questionable service providers) It's common to price services on the front end. Some would take the client's first month disbursement as a donation, which is contrary to accepted practices," said Lake.

Many questionable service providers also don't offer face-to-face counseling, as required by NFCC membership, and instead operate only on the Internet or by phone. NFCC also requires other ethical practices, many of which were worked into the new law.

New regulations

"The new law includes criteria NFCC uses as a condition of membership. All genuine non-profit agencies are already in compliance with the old and the new law. If not, lose membership" says Lake.

Among other provisions, the law removes some confusion by defining debt management plans and debt settlement activities: A debt management plan is a method of paying a debtor's obligations in installments on a monthly basis; A debt settlement plan is a method of paying a debt in a single negotiated amount for each creditor. Both services typically offer counseling.

New regulations require credit counseling, debt management and debt settlement organizations to all establish limits on fees for counseling and education at $50 for clients entering a debt management program.

It also limits debt management plan fees to $20 or 6.5 percent of the monthly payments, whichever is less.

For debt settlement services -- a service more likely than debt management services to create credit report dings -- the fees will be limited to 15 percent maximum of the amount of debt forgiven. The payment is required only once when the debt is successfully settled.

In some cases some debt settlement services were charging consumers periodic payments until the service had collected enough to make a settlement offer with creditors, according to The Institute of Consumer Financial Education (ICFE), a nonprofit consumer financial education organization.

Under the new regulations, all nonprofit consumer credit counselors, debt management or debt settlement organizations doing business in California must also be incorporated as a nonprofit; maintain audited accounting records; keep client money in a non-interest bearing trust account; disburse a client's first debt management payment within six weeks of implementing the program; disburse client funds to creditors within 15 days of receipt using electronic payment processing when available; obtain a $25,000 surety bond; report account information to the client upon request or every three months; obtain proper accreditation and certification; provide disclosure statements in writing about how to file complaints and respond to complaints within five days; do not require clients to utilize additional ancillary services; provide debt management programs without regard to the client's ability to pay or amount of the client's debt.

Violators of the new regulations face penalties of up to $10,000 in fines, plus attorney's fees and costs, damages and other costs.

Published: January 2, 2003

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.