The Uniform Debt-Management Services Act (“UDMSA”) [1] is under consideration in a number of state legislatures and, in less than two months, it has already been enacted by the state of Utah. Its passage puts credit counseling agencies and debt settlement companies on the verge of major changes in how some states regulate their industries.
The National Conference of Commissioners on Uniform State Laws (“NCCUSL”) finalized and issued the UDMSA in July 2005. Nearly every state has already adopted legislation pertaining to such matters as debt adjusting, debt management, debt pooling, debt settlement, and credit counseling – that vary considerably in scope and content. According to NCCUSL, the UDMSA represents the first national effort at providing some uniform rules to govern both credit counseling services and debt settlement services.
The UDMSA regulates providers of debt-management services, which include services provided by credit counseling agencies and debt settlement companies. As drafted by NCCUSL, the UDMSA contemplates that state legislatures can choose from several options on the issue of whether to allow for-profit, taxable not-for-profit, and tax-exempt, not-for-profit entities to register, from allowing all entities to provide all services, to only allowing some entities to provide some services – and variations in between – subject to specified requirements.
In addition, the UDMSA sets forth provisions concerning, among other things, registration, bonding, disclosures, prerequisites for providing services, prohibited acts and practices, and penalties that will impact not just non-profit and for-profit companies engaged in credit counseling and debt settlement, but other entities that have a relation to the industry. The UDMSA also would vest in either an Attorney General’s office or a regulatory agency (which in some states would be a significant departure from the status quo) the responsibility for administering and enforcing the law.
The following is a brief summary of some of the key provisions of the UDMSA generally. However, the UDMSA may be amended and modified throughout the legislative process of a particular state. Pending bills and final state enactments may vary.
I. Applicability.
A. Definition Section.
The definition section describes terms used in the law. The UDMSA generally applies to “providers” that enter into “agreements” with “individuals” for the purpose of serving as an intermediary between, and obtaining “concessions” from, creditors on behalf of the individuals. All persons that fall under the definition of provider must comply with the UDMSA, unless they are exempted (as described below).
Agreement means “an agreement between a provider and an individual for the performance of debt-management services.”
Debt management services means “services as an intermediary between an individual and one or more creditors for the individual for the purpose of obtaining concessions.” It does not include legal services and accounting services if provided by a person licensed by the state or authorized to provide those services, subject to certain requirements.
The trigger for whether or not an entity is engaging in debt-management services is whether that entity is acting an “intermediary” between a debtor and creditor. Thus, the definition of “debt management services” encompasses both credit counseling services and debt settlement services and the entities that provide them. However, according to the comments to the UDMSA, the definition does not include services that consist solely of counseling or education concerning the management of personal finance. Nevertheless, the UDMSA itself regulates the fees of a provider that furnishes an individual with education or counseling but not debt-management services.
With respect to debt settlement services, the relevant definition includes no requirement that money destined for creditors flow through the provider. Thus, the definition includes the services of providers even if the provider does not touch and control consumers’ funds destined for creditors – even when it is in a consumer owned and managed account.
Concessions mean, “assent to repayment of a debt on terms more favorable to an individual than the terms of the contract between the individual and a creditor.”
A plan is defined as “a program or strategy in which a provider furnishes debt-management services to an individual and which includes a schedule of payments to be made by or on behalf of the individual and use to pay debts owed by the individual.”
Provider means “individuals, corporations, and other legal and commercial entities that provide debt management services directly or through others.”
Administrator refers to the agency or entity that is responsible for enforcing the UDMSA.
Other terms that are defined under the law include “affiliate,” “certified counselor,” “good faith,” “person,” “principal amount of the debt,” “settlement fee,” and “trust account.”
The term individual is used in place of the term consumer in the UDMSA but undefined. Therefore, for purposes of this summary we continue this term in the remaining discussion.
B. Exempt Agreements and Persons.
The UDMSA does not apply: “(1) to any agreement with an individual who the provider has no reason to know resides in the state at the time of the agreement; (2) to the extent that the provider (i) provides or offers to provide debt-management, educational, or counseling services to an individual who the provider has no reason to know resides [in the state]; or (ii) receives no compensation for debt-management services from or on behalf of the individuals to whom it provides the services or from their creditors.” The UDMSA also does not apply to judicial officers, banks, affiliates of regulated banks, or companies that provide bill-paying services if the provision of debt-management services is “incidental to the bill paying services.”
II. Registration and Tax Status Requirements.
A. Scope of Registration Requirement.
Under the UDMSA, a provider may not provide debt-management services to an individual unless the provider is registered on an annual basis. The UDMSA leaves it up to each state to decide the policy question of whether to permit for-profit entities to provide all kinds of debt-management services, as well as various other combinations. Other options include, among others, allowing only not-for-profit, tax-exempt entities to provide credit counseling services, or only permitting for-profit entities to provide debt-settlement services but not credit counseling services. States are provided instructions and language for whichever policy option is decided upon.
B. Tax Status and Corporate Status Required.
Some versions of the UDMSA, require providers to be tax-exempt under Section 501 of the Internal Revenue Code (the “Code”) in order to register; however, no specific subsection of the Code is specified (although some states may amend this provision to require specifically Section 501(c)(3) status). Assuming a state wishes to permit for-profit entities to allow all kinds of debt-management services, if the applicant is organized as a not-for-profit entity or is exempt from taxation, evidence of not-for-profit and tax-exempt status applicable to the applicant under Code Section 501 is required.
Under the UDMSA, importantly with respect to providers that are organized as not-for-profit entities or have obtained tax-exempt status under Code Section 501(c) the comments to the UDMSA suggest that not-for-profit and tax-exempt agencies may be subject to scrutiny on an ongoing basis by state regulators to ensure that they are operating as a not-for-profit entities under the law of their organization.
C. Registration Procedure and Prerequisites.
Providers that register with the state, must, among other requirements: (1) pay an application fee; (2) obtain a bond ($50,000 or larger or smaller amount based on regulator determination); (3) maintain a trust account; (4) allow inspection on demand of the trust account; (5) provide evidence of insurance in the amount of $250,000; (6) qualify to do business in the state; (7) provide evidence of not-for-profit and tax-exempt status, if applicable; (8) disclose all names the applicant conducts business under; (9) provide the name and address of each officer and director that owns at least 10%; (10) disclose the prior 5-year history of debt-management services; (11) provide audited financial statements; (12) provide evidence of accreditation by an independent accrediting organization approved by the administrator; (13) provide a copy of all consumer agreements and disclosures; (14) provide criminal background checks (of applicants) expense; (15) provide information about compensation of five most highly paid employees; (16) the identify of each director who is an affiliate of the applicant; and (17) any other information that the administrator reasonably requires to perform the administrator duties.
Applicants and registered providers are under a continuing obligation to notify the administrator of a change in the information provided, including with respect to insurance, not-for-profit and tax-exempt status, as applicable, enforcement actions in other states, and forms and fees schedules.
D. Issuance or Denial.
The administrator is directed to issue or deny registration of providers of debt management-services according to criteria set forth in the law.
A provider’s application may be denied if: (1) the application is incomplete; (2) an officer, director, or owner of the applicant has been convicted of a crime or suffered a civil judgment, involving dishonesty or the violation of state or federal securities laws; (3) officers, directors, or owners has defaulted in the payment of money; or (4) the administrators finds that the financial responsibility, experience, character or general fitness of the applicants does not warrant belief that ht business will be operated in compliance with the UDMSA.
Denial of registrations appears to be mandatory if: (1) the fee is not provided; and (2) the applicant’s board of directors is not independent of the applicant’s employees and agents, based on specified criteria.
E. Registration in Another State.
The UDMSA provides for reciprocal use of applications in states that have adopted the UDMSA, only if the law is substantially similar.
F. Bond or Substitute.
Surety Bond requirements have been established from $50,000 or at a larger or smaller amount that the administrator determines is warranted. The administrator will set the level of the surety bond using four factors:
- The financial condition and business experience of the provider;
- The history of the provider in performing debt-management services,
- The risk to individuals; and
- Any other factor the administrator considers appropriate.
In place of a bond, a provider may have up to three other alternatives: procure insurance; or with the administrator’s approval, obtain a letter of credit or debt instruments.
III. Prerequisites, Written Agreement and Fees.
A. Customer Service.
The UDMSA requires registered providers to provide a toll-free phone staffed during normal business hours that permits an individual to speak to a certified counselor or customer service representative.
B. Prerequisites for Providing Debt Management Services.
The UDMSA includes several prerequisites for providers of debt-management services, including: (1) registered providers must give individuals an itemized list of goods and services and the charges for each, including setting forth, the set-up fee, monthly service fee, settlement fee (if applicable); (2) provide through certified counselors reasonable education about the management of personal finance; and (3) make specific disclosures to potential plan participants, including warnings regarding potential credit and tax consequences.
C. Form and Contents of Agreement.
An individual must enter into an executed written debt-management services agreement that describes the services to be performed by the provider. The agreement must include a number of specified items such as:
- Be signed and dated by the provider and the individual;
- The name, address, and phone number of the individual;
- The name, address, phone number, and license number of the provider;
- A description of the debt-management services to be provided to the individual and fees to be charged to the individual for the debt-management services;
- A disclosure of the existence of the surety bond required;
- The name and address of the financial institution in which funds, paid by the individual to the provider for disbursement to the consumer's creditors, will be held;
- A notice of the right of the individual to the debt-management services agreement to rescind the agreement by giving written notice of rescission to the provide before the end of three days after an agreement that complies with the statute is formed or 30 days if the agreement calls for certain prohibited conduct;
- A notice of the right of the provider to cancel for good faith;
- A notice of the right of the individual to cancel the agreement at any time; and
- A schedule of payments that the consumer must make to the debt-management services provider.
Further, the UDMSA prohibits a number of contractual provisions including: (1) an agreement may not provide for the application of the law of any jurisdiction other than the state; or (2) contain a provision that modifies or limits rights, including the right to class action, as specified.
Agreements that do not include required provisions are subject to administrative and private enforcement action. By law, provisions that are required, but omitted, are made part of the agreement. Contractual clauses that violate the provisions that are prohibited are void.
D. Debt Settlement Provisions.
Under the UDMSA, the agreement can confer the provider with the power of attorney to settle debts for 50 cents on the dollar. For settlements less favorable, the provider must obtain the permission of the individual after the creditor has agreed to a settlement. In addition, debt-settlement companies may receive a limited portion of the forgiven debt. Upon termination by either the provider (for good cause) or by the individual, a debt settlement provider is required to refund 65% of the set-up fee collected taking into account fees already credited as specified..
E. Language.
Disclosures and documents required under the UDMSA must be in English, unless modified by the state regulator.
F. Trust Account.
All money paid to a provider for distribution to creditors must be held in a trust account. The UDMSA makes clear that this money is property of the individuals and not the provider.
G. Fees and Other Charges.
The UDMSA establishes limitations on the fees and other charges that may be imposed directly or indirectly on the receipt of money from or on behalf of individuals for debt-management services. The administrator is instructed to review the fees annually. Specifically, as set forth in the UDMSA, the initial fee limitations are as follows:
- Basic education and counseling are to be provided at no charge; however, the administrator may allow charges in certain circumstances.
- Providers may charge for government sponsored programs that require persons to receive education or counseling as a condition of eligibility for a program.
- A provider may charge a set-up fee and a monthly service fee. For all providers a monthly fee is permitted of $10 per creditor remaining in the plan at the time assessed not to exceed $50 total.
- If the provider is a credit counseling agency a set-up fee of $50 is allowed.
- If the provider is a debt settlement company a set-up fee not-to-exceed 4% of the principal amount of the debt in the plan at inception, is allowed, but no more than $400 may be charged.
- An individual that does not enter into a plan may be charged for educational and counseling services a fee not exceeding $100 or a greater amount as approved by the administrator.
- A provider that provides both debt-management and debt settlement services may not charge more than one set-up fee (based certain specified criteria) and up to the maximum monthly fee allowed, as specified.
- A debt settlement provider may charge a settlement fee of 30% of the excess of the principal amount of the debt over the amount paid the creditor, but, subject to specified criteria, it must be off set by the setup fee and monthly fees already charged the individual.
- A provider may not solicit a voluntary contribution for any service, and may only accept such contributions after 30 days after completion or termination of a plan, and the aggregate amount received may not exceed the total amount the provider may charge the individual.
- If applicable under the Bankruptcy Code or by virtue of tax-exempt status, providers are required to provide services without regard to the ability of individuals to pay the fee.
IV. Prohibited Acts and Practices.
A. Provider Prohibitions.
The UDMSA lists several acts and practices that are violations of the law. These prohibited acts and practices include that the provider generally may not:
- Misappropriate funds held in trust.
- Take power of attorney that authorizes or settle a debt for more than 50 percent of the principal amount owed a creditor, unless the individual agrees to the settlement after the creditor agrees.
- Exercise the power of attorney after an individual has terminated the agreement.
- Compensate an individual for executing an agreement.
- Compensate a person for referring a prospective customer, if the person making the referral has a financial interest in the outcome, unless neither the provider nor the person making the referral communicates to the prospective customer the identity of the source of the referral.
- Receive a bonus or commission, or other benefit for referring an individual to a person.
- Compensate employees on the basis that includes the number of individuals enrolled into agreements.
- Perform legal services.
- Settle a debt unless, at the time of settlement, the individual receives a certification by the creditor that the payment is in full settlement of the debt.
B. Prohibitions in Connection with Furnishing Debt-Management Services.
The UDMSA also lists several prohibited acts and practices that apply if a provider furnishes debt-management services to an individual. These prohibited acts and practices include that the provider generally may not:
- Purchase a debt or obligation of the individual.
- Lend money or provide credit to the individual, except as a deferral of a settlement fee at no additional expense to the individual
- Obtain a mortgage or other security interest from any person in connection with the services provided to the individual.
- 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:
- the administrator, upon proper demand;
- a creditor of the individual, to the extent necessary to secure the cooperation of the creditor in a plan; or
- the extent necessary to administer the plan.
In addition, the UDMSA prohibits providers from receiving compensation for performing certain specified services for a third party and, subject to set criteria, from purchases from affiliates of the provider under certain conditions.
V. Other Notable Provisions.
A. Advertising.
The UDMSA requires providers to make certain disclosures when advertising. The required disclosures include the impact of debt-management services on credit ratings and the likelihood of collection efforts in an easily comprehensible manner. Under the UDMSA, a third party advertiser on behalf of a provider is viewed as an agent, and the provider can be liable if the advertisement fails to comply with these requirements.
B. Liability for the Conduct of Other Persons.
The provisions of the UDMSA impose duties and obligations on providers and on independent contractors, if they fall under the definition of provider, or as a person that caused the provider to violate the UDMSA.
C. Enforcement and Private Action.
The administrator may enforce the UDMSA by one or more of the following actions: (1) cease and desist order; (2) corrective action order; (3) imposing civil penalties; (4) prosecuting a civil action to enforce and order or obtains restitution and an injunction; and (5) intervene in a private action. Individuals may take a private civil action against providers, as well. If an act or practice of a provider violates the statute and the state unfair and deceptive trade practices act / consumer protection act, the individual may not recover under both statutes.
D. Application to Existing Transactions.
The default language of the UDMSA permits a provider to continue operating in conformance with previously applicable law for transactions made before the effective date of the UDMSA. However, the statute also allows providers to comply with the statute even with respect to transactions entered before the law takes effect, but if prior law prohibits a transaction, nothing in the UDMSA validates it.
VI. Conclusion.
It is not possible to cover every aspect of UDMSA in a short summary. This summary highlights some important aspects. The adoption of this statute by states will drastically alter the landscape for everyone involved in providing debt-management services (including both credit counseling agencies and debt settlement companies). Other than certain specified differences with respect to fees and certain operational practices, the UDMSA will not impose obligations on debt settlement companies (when permitted) that are any different from those placed on credit counseling agencies. Every company should be aware of its provisions.
That said, not every state will adopt the UDMSA and those that do may modify it as they wish. Nevertheless, the UDMSA remains very important, because it provides states with a model approach to regulating debt-management services. Moreover, other states, regulators and state Attorneys General looking for "best practices" in regulating debt management will have a new source of reference.
There clearly is much to be considered in UDMSA, both by credit counseling agencies and debt settlement companies, as well as the legislators who are considering it this year and in the years that follow. By its terms, the UDMSA is comprehensive – there is no question that credit counseling agencies, debt settlement companies, bankruptcy attorneys, creditors, and consumers will all be impacted by the UDMSA. For those in the regulated industries, the key will be to understand the rules and proactively structure your operations accordingly.
General Highlights of the Uniform Debt-Management Services Act
The Uniform Debt-Management Services Act (“UDMSA”) [2]:
- provides definitions related to the UDMSA;
- contemplates that state legislatures can choose from several options on the issue of whether to allow for-profit, taxable not-for-profit, and tax-exempt, not-for-profit entities to register, from allowing all entities to provide all services, to only allowing some entities to provide some services -- and variations in between -- subject to specified restrictions.
- provides for an exemption for certain agreements and persons;
- establishes application for registration requirements and obligations;
- requires the administrator to issue a certificate of registration or deny registration;
- establishes criteria for the certification or denial of registration;
- addresses renewal procedures and authorization in another state;
- provides for rulemaking with regard to authorization in another state;
- requires a provider to file a surety bond or substitute, act in good faith, and maintain a toll-free customer-service communications system;
- establishes prerequisites for providing debt-management services;
- allows for communication by electronic or other means and establishes consumer consent requirements;
- sets out the form and content requirements for debt-management agreements;
- provides for cancellation of an agreement within 30 days when notice is given to provider;
- requires disclosures and documents to be in English, unless provider primarily communicates with the individual in another language;
- requires providers to maintain trust accounts and determines how funds in trust accounts shall be disbursed and reconciled;
- allows for the imposition of fees and other charges;
- prohibits the provider from soliciting voluntary contributions and provides for the
acceptance of other certain voluntary contributions; - permits an agreement to be voidable in certain instances;
- allows for termination of agreements;
- requires periodic reports and retention of records;
- sets out prohibited acts and practices;
- requires notification to the administrator when a provider is served with a notice of civil action;
- provides that the provider is liable for any delegated duty or obligation under an agreement;
- addresses advertising;
- establishes the power and duties of an administrator and administrative remedies;
- out conditions under which the administrator may suspend, revoke, or deny renewal of a provider's registration, and seek a court order authorizing seizure of any or all money in a trust account;
- provides for private enforcement to individuals against providers who violate the UDMSA;
- provides a statute of limitations;
- addresses violation state consumer protection laws;
- requires uniformity of application and construction;
- modifies, limits, and supersedes certain provisions of the federal Electronic Signatures in Global and National Commerce Act; and
- provides a transitional provision; and provides a severability clause.
For more information, contact Jeffrey S. Tenenbaum, Esq. or Jonathan L. Pompan, Esq. at 202/344-4000, or at jstenenbaum@venable.com or jlpompan@venable.com.
This material is not intended, and should not be relied on, as legal advice.
[2] UDMSA is a work of the National Conference of Commissioners on Uniform State Laws(NCCUSL), available at http://www.nccusl.org. The UDMSA has been introduced in a number of state legislatures across the country for consideration. State enactments may vary.