Definitions of “Debt Settlement Providers” and “Payment Processors”
“Debt settlement provider” means a person who, for compensation and on behalf of a consumer, provides debt settlement services.
“Debt settlement services” means any of the following:
(1) Providing advice, or offering to act or acting as an intermediary, including, but not limited to, offering debt negotiation, debt reduction, or debt relief services between a consumer and one or more of the consumer’s creditors, if the primary purpose of that advice or action is to obtain a settlement for less than the full amount of the debt.
(2) Advising, encouraging, or counseling a consumer to accumulate funds in an account for future payment of a reduced amount of debt to one or more of the consumer’s creditors.
“Payment processor” means a person who provides payment processing services.
“Payment processing services” means accepting, maintaining, holding, or distributing funds, or facilitating the acceptance, maintenance, holding, or distribution of funds, on behalf of a consumer for the purpose of facilitating debt settlement services.
Other defined terms in the Act are “settlement account,” “consumer,” “person,” “creditor,” and “debt.”
Unfair, Abusive, or Deceptive Acts or Practices
The Act prohibits debt settlement providers and payment processors from engaging in unfair, abusive, or deceptive acts or practices (as defined in the Act) when providing debt settlement services or payment processing activities.
Contract Requirements
The Act requires debt settlement providers to provide consumers with various disclosures and an unsigned copy of the written contract no less than three days prior to execution.
Required disclosures include, but are not limited to: (i) a statement that there is no guarantee that the consumer’s debt will be reduced, eliminated, or settled; (ii) the impact of a consumer not paying any creditor; (iii) the potential negative impact to a consumer’s credit score; (iv) bankruptcy as an alternative; (v) an estimate of the number of months to resolve all enrolled debts; and (vi) whether the debt settlement provider pays or receives referral fees.
The Act also requires contracts between a consumer and a debt settlement provider to include certain information, which includes but is not limited to: (i) the amount of the debt to be serviced; (ii) timelines for how long it will take to accumulate the amount required to settle all debts and achieve the desired results; (iii) how the debt settlement provider will calculate fees and charges; and (iv) debt settlement provider contact information.
Monthly Statements
The Act requires:
•Payment processors to provide monthly statements of the amounts deposited in and withdrawn from the consumer’s settlement account
•Debt settlement providers to provide monthly statements on the status of settled debts and the fees collected by the debt settlement provider from the consumer’s settlement account
•Both monthly statements shall be provided as physical copies if requested by the consumer
Contract Cancellation and Termination
The Act authorizes and requires disclosure of the consumer’s ability to terminate the debt settlement contract at any time without a fee or penalty. The notice of termination is effective immediately if the consumer provides notice electronically or orally. If the termination notice is provided via mail, it is effective upon receipt if provided by certified mail and upon 7 calendar days from the date of mailing if the notice is sent by noncertified mail.
Upon termination, debt settlement providers must terminate the contract and notify the payment processor.
Payment processors are required to provide cancellation notices, stop accumulating service fees, and provide the consumer with a balance of the settlement account, among other things.
Ban on Collecting Advance Fees
Under the Act, a debt settlement provider is prohibited from collecting any fees for debt settlement services until all the following conditions are met:
(i) the debt settlement provider has renegotiated, settled, reduced, or otherwise altered the terms of at least one debt pursuant to a settlement agreement approved and executed by the consumer;
(ii) the consumer has made at least one payment pursuant to the settlement agreement; and
(iii) the fees must bear the same proportional relationship to the total fee for renegotiating, settling, reducing, or altering the terms of the entire debt balance or represent a percentage of the amount saved (as defined by the Act) as a result of the renegotiation, settlement, reduction, or alteration.
To the extent that debts enrolled in a debt settlement service are negotiated, settled, or modified individually, the fee or consideration must either:
(i) Bear the same proportional relationship to the total fee for renegotiating, settling, reducing, or altering the terms of the entire debt balance as the individual debt amount bears to the entire debt amount. The individual debt amount and the entire debt amount are those owed at the time the debt was enrolled in the service; or
(ii) Represent a percentage of the amount saved as a result of the renegotiation, settlement, reduction, or alteration. The percentage charged cannot change from one individual debt to another. The amount saved is the difference between the amount owed at the time the debt was enrolled in the service and the amount agreed pursuant to the settlement agreement between the consumer and the creditor to satisfy the debt.
Beginning July 1, 2022, the Act prohibits a payment processor from facilitating the distribution of payment of any fee or consideration for debt settlement services before the requirements set forth above have been met.
The advance fee ban is like the ban under the federal Telemarketing Sales Rule (TSR). Neither the new California law nor the TSR limits the amount of fees that may be collected, although each does specify how fees may be calculated.
Application and Exemptions from Coverage
The Act applies to persons providing payment processing services, debt settlement services, and persons purporting to engage in debt settlement services. Exemptions from the Act are available to, among other entities, banks, credit unions, tax-exempt nonprofit business organizations that do not receive compensation from the consumer for providing debt settlement services, and attorneys and law firms that meet certain criteria.
To be exempt, attorneys and law firms cannot charge for services regulated under the Act or, directly or indirectly, share fees and disbursements with a debt settlement provider. In addition, attorneys and law firms must meet one of the following requirements: they must (i) be retained by a consumer for the purpose of legal representation in consumer debt litigation; (ii) provide debt settlement services pursuant to representation by retainer for a debt collection matter that does not involve consumer debt; or (iii) be retained by the consumer primarily for purposes other than the settlement of consumer debt.
Civil Enforcement
The Act provides consumers with a private right of action and statutory damages of up to $5,000, actual damages, injunctive relief, and other relief deeded appropriate by the court.
If the cause of action is successful, the Act requires courts to award costs of the action and reasonable attorney’s fees. On the other hand, if the court finds that the cause of action was not in good faith, the court may award reasonable attorney’s fees to a prevailing debt settlement provider or payment processor.
A consumer may bring a cause of action within four years of (i) the last payment by or on behalf of the customer; or (ii) the date on which the consumer discovered or reasonably should have discovered the facts giving rise to the consumer’s claim.
Relationship to Proraters Law and California Consumer Financial Protection Law
Notably, this law’s provisions are located in the Civil Code, similar to other programs that address consumer financial products or services, such as the Consumer Legal Remedies Act, the Fair Debt Buying Practices Act, the Student Borrower Bill of Rights, and check cashers law.
The Act does not amend the existing Check Sellers, Bill Payers, and Proraters Law, administered by the Department of Financial Protection and Innovation (DFPI), which requires a prorater to be licensed by DFPI (Financial Code Section 12000 et seq.).
In addition, the California Consumer Financial Protection Law (CCFPL), administered by the DFPI, defines “financial product or service” to include a service to assist a consumer with debt management or debt settlement, or modifying the terms of any extension of credit (Financial Code Section 90005 (k)(8)(B)). The CCFPL permits the DFPI to act against a covered person or service provider that engages, has engaged, or proposes to engage in UDAAPs (unfair, deceptive, or abusive acts and practices) with respect to consumer financial products or services. The CCFPL also empowers the DFPI to enforce consumer financial laws with respect to covered persons, service providers, and persons who knowingly or recklessly provide substantial assistance to a covered person or service provider in violating consumer financial law.
Governor Newsome signed A.B. 1405 on October 4, 2021.
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For more information, contact Jonathan L. Pompan at 202.344.4383, or at jlpompan@Venable.com.
Jonathan L. Pompan, a partner in the Washington, DC office of Venable LLP, co-chairs the firm's Consumer Financial Services Practice Group. His practice focuses on providing comprehensive legal advice and regulatory advocacy to a broad spectrum of clients, such as nonbank financial products and services providers, nonprofit organizations, and trade and professional associations, before the CFPB, the FTC, state attorneys general, and regulatory agencies.
Paula Vigo Marqués is an associate in the Washington, DC office of Venable LLP. Her practice focuses on helping bank and non-bank clients navigate compliance with state and federal consumer protection laws for mortgages, installment loans, and other financial products. This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can be provided only in response to specific fact situations.