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This article is part of the May 2009 Credit Counseling and Debt Settlement Alert, which provides a broad survey of some recent notable legislative initiatives, federal and state regulatory actions, and other developments affecting providers of debt relief services—including financial counseling and education, debt management plans, and debt settlement.

From the U.S. Congress

In addition to pending bills to reform credit card lending practices, there are several other proposals of importance to the counseling and debt settlement industries. Below we highlight just a sampling of the many proposals that are under consideration by Congress:

Bill Introduced to Direct the FTC to Regulate the Debt Settlement Industry; Hearing Held

On May 7, 2009, the Consumer Credit and Debt Protection Act (H.R. 2309) was introduced in the U.S. House of Representatives to provide authority to the Federal Trade Commission (“FTC” or the “Commission”) to conduct rulemakings on an expedited basis concerning consumer credit or debt, specifically directing the Commission to promulgate rules with regard to debt settlement (broadly defined). The bill also would expand the FTC’s enforcement powers by allowing it to seek civil penalties in connection with unfair and deceptive acts or practices relating to consumer credit or debt. 

A hearing on the bill by the House Energy and Commerce Subcommittee on Commerce, Trade and Consumer Protection was held on May 12, 2009. The bill is authored by Subcommittee Chairman Rep. Bobby Rush (D-IL) who previously held a hearing on this topic in March 2009. [1]

Over the last several months, the FTC and others have requested that Congress provide the Commission with expanded rulemaking authority and enforcement powers related to consumer credit and debt, as provided for in this bill. The bill does not, however, specifically direct the Commission to consider regulations for any specific consumer credit and debt-related products or services—other than debt settlement services and automobile sales.

In its present form, the bill would have a significant impact on the debt settlement industry and providers of other forms of consumer financial services, including credit counseling agencies that offer less-than-full balance repayment plans. 

Moreover, the bill would enable the Commission to play a greater role in the oversight of consumer financial services related to consumer credit or debt. The Commission would be permitted to use this expedited rulemaking authority to issue rules covering the entire range of consumer financial products and services within its jurisdiction, either directed at consumer financial products/services in general or specific industry subsets (e.g., payday lending, mortgage servicing, credit counseling agencies, credit card marketers and advertisers, and credit repair companies). In addition, the bill would enhance the Commission’s ability to prosecute cases against such companies.

The Consumer Credit and Debt Protection Act contains several specific provisions of interest to providers of consumer financial products and services, including:
  • Permitting the FTC to employ notice and comment procedures to establish rules pursuant to the Federal Trade Commission Act that set forth unfair or deceptive acts and practices relating to consumer credit or debt, rather than rulemaking processes that are more burdensome on the Commission.
  • Directing the FTC to examine the practices of “debt settlement service” providers and to establish such rules as the Commission determines necessary to prevent unfair and deceptive acts or practices of such providers. The bill also requires the Commission to consider adopting rules that specifically:
    • “prohibit the charging of fees to consumers prior to any debt settlement service being fully rendered and limiting fees that may be charged after a settlement with a creditor is reached”; and
    • “require disclosures before a contract is signed regarding the fee structure, expected time frames for a successful settlement, success rate of debtors in settling their debts, information about creditor participation in settlement plans, and the potential impact on a consumer’s credit score.”
  • Defining the term “debt settlement service” (broadly) as “a commercial service provided to assist consumers in managing and repaying consumer debt, including the offering of advice or acting as an intermediary between a debtor and one or more of the debtor’s creditors, where the primary purpose of the advice or action is to obtain a settlement for less than the full amount of debt owed.”
  • Requiring that the specified required rulemakings be commenced within six months of the date of enactment of this bill.
  • Authorizing the FTC to obtain civil penalties for unfair or deceptive acts or practices relating to consumer credit and debt, and providing authority for the FTC to bring suit in its own right in federal court to obtain civil penalties.
  • Authorizing States to initiate civil action on behalf of their residents to enforce the provisions of the FTC Act (or any other Act enforced by the FTC) to obtain penalties and relief provided under such laws, whenever the attorney general of the State has reason to believe that the interests of the residents of the State have been or are being threatened or adversely affected by a violation of a FTC rule relating to consumer credit or debt.

    • Congress Considers Legislative Solutions for Preventing Loan Modification and Foreclosure Rescue Fraud

      In the wake of the announcement of a coordinated state and federal crackdown on fraudulent foreclosure rescue schemes (see From the Federal Agencies), the House Subcommittee on Housing and Community Opportunity, a subcommittee of the House Committee on Financial Services, held a hearing on the Foreclosure Rescue Fraud Act of 2009 (H.R. 1231). [2] This measure is aimed at curbing loan modification and foreclosure relief scams. The Committee heard testimony from the Federal Trade Commission, the U.S. Department of the Treasury, the Massachusetts Attorney General, the National Consumer Law Center, the Mortgage Bankers Association, the National Association of Realtors, and the State Bar of California. [3]

      Sponsored by Congresswoman Gwen Moore (D-WI), H.R. 1231 would prohibit foreclosure consulting companies from collecting certain fees before completing delivery of services.  At present, the legislation carves out exemptions for licensed lawyers (with some restrictions), licensed real-estate brokers, HUD-approved counseling agencies, and certain others. 

      Several witnesses at the hearing told the Subcommittee that lawyers should not be widely exempted from the fee restrictions, citing a number of examples of abuses by lawyers and former mortgage brokers charging high upfront fees. The proposal places enforcement power for violations with the FTC and state attorneys general. 

      If enacted into law, the Act would not preempt any state or local law respecting any foreclosure consultant, residential mortgage loan, or residential real property that provides equal or greater protection to homeowners than what is provided under the Act.

      Senator Herb Kohl (D-WI) is sponsoring the companion proposal in the U.S. Senate, S. 117, also titled the Foreclosure Rescue Fraud Act of 2009. [4] H.R. 1231 and S. 117 are modeled after various state foreclosure consultant statutes that exist in about twenty-five jurisdictions. These state laws contain similar conduct prohibitions, stiff money penalties, private rights of action, and criminal provisions. [5]

      Mortgage Reform and Anti-Predatory Lending Act

      The Mortgage Reform and Anti-Predatory Act (H.R. 1728) [6] was reported out of the House Financial Services Committee on April 29, 2009, and was approved by the full House of Representatives on May 7, 2009. Title IV of the bill, entitled the “Expand and Improve Home Ownership Through Counseling Act,” would create an Office of Housing Counseling within the Department of Housing and Urban Development.  This new HUD office will be given oversight over the following:
      • Counseling procedures;
      • Grants for housing counseling assistance;
      • Requirements to use HUD-certified counselors under HUD programs;
      • Studies of defaults and foreclosures;
      • Definitions for counseling-related programs;
      • Updating and simplifying mortgage information publications; and
      • Home inspection counseling.

      [1] On March 24, 2009, the U.S. House Committee on Energy and Commerce’s Subcommittee on Commerce, Trade, and Consumer Protection held a hearing on the subject of the role of the Federal Trade Commission in protecting the public, specifically in the area of consumer credit and debt.  For more information, see our article “FTC Emphasizes Increased Enforcement Against Debt Relief Companies at Congressional Consumer Protection Hearing,” available at http://www.venable.com/ftc-emphasizes-increased-enforcement-against-debt-relief-companies-at-congressional-consumer-protection-hearing-03-26-2009/.

      [2] H.R. 1231, 111th Cong. (2009).

      [3] Legislative Solutions for Preventing Loan Modification and Foreclosure Rescue Fraud:  Hearing before the Subcomm. on Housing and Community Opportunity of the House Comm. on Financial Services, 111th Cong. (2009).

      [4] S. 117, 111th Cong. (2009).

      [5] See also, “Marketing Foreclosure Assistance to Homeowners?  Watch Out for Mortgage Rescue Fraud Protection Acts”, available at http://www.venable.com/marketing-foreclosure-assistance-to-homeowners-watch-out-for-mortgage-rescue-fraud-protection-acts-09-15-2008/.

      [6] H.R. 1728, 111th Cong. (2009).

       

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      For more information, please contact Jonathan L. Pompan at 202.344.4383 or .

       

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      For more information about this and related industry topics, see www.venable.com/ccds/publications.

      For more information about Venable’s credit counseling and debt settlement practice, see www.venable.com/ccds.

      This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to specific fact situations.