Congress is poised to enact financial regulatory reform that will more than likely result in a new regulator of consumer financial products and services, including credit counseling. While it will be months, if not years, from the date of creation of the new agency to the actual issuance of regulations by the agency, there are a number of legal issues looming over the industry, most notably those surrounding the potential scope, breadth and depth of new regulations that such a federal regulator may propose.
Of critical importance is how this new federal agency may seek to regulate the credit counseling industry. At the same time, Congress, the Obama Administration, the Federal Trade Commission (“FTC”), state Attorneys General, and others are taking an active interest in the workings of the industry and in protecting consumers from false and misleading advertising related to debt relief services – including credit counseling.
July 21, 2010 marks the fifth anniversary of the approval of the Uniform Debt-Management Services Act1 (“UDMSA”), which offered credit counseling agencies the promise of consistent state regulation of debt management plans. After years of work, the UDMSA was approved by the National Conference of Commissioners on Uniform State Laws in 2005, and Utah2 became the first state to adopt the Act in 2006. Since then, the UDMSA has been adopted in six additional jurisdictions, Colorado3, Delaware4, Nevada5, Rhode Island6, Tennessee7, and the U.S. Virgin Islands.8
The UDMSA requires registration, provides specified disclosures in agreements, and authorizes enforcement authority. In each of the jurisdictions that have enacted the UDMSA, the requirements have generally been stiffer than the prior requirements for credit counseling agencies. All but Colorado and the Virgin Islands had existing regulatory requirements, although some exempted tax-exempt nonprofit credit counseling agencies from these requirements (e.g., Nevada).
The UDMSA was originally drafted to address consumer protection issues that arose in the ten-year period prior to the drafting sessions and to enable the states to take a uniform approach to the regulation of the credit counseling and debt settlement industries. Consumer groups and many in the nonprofit credit counseling industry agreed with the sprit of the requirements based on these promises and the belief that the UDMSA would remove unnecessary regulatory burdens and establish a baseline for consumer protection.
Five years later, credit counseling agencies are left wondering, “What happened to the promise of uniformity?” Debt management plan services are now regulated in virtually every state by one or more state-specific statutes. Looking back on what we know now, it may be that the UDMSA was based on a laudable premise, but attempted to do too much without considering the practical impact on those already in compliance with the law. Moreover, since its availability for consideration by the states, adoption of the law has been spotty despite an increase in the scope and breadth of statutes that regulate the industry. .
Overall, today 49 states have what we consider to be a debt adjusting statute, which are the primary state laws that regulate the industry. In 2005, out of the states that had debt adjusting statutes, about 25 required licensing. That number has since risen to about 37. Moreover, the number and diversity of proposals for additional reforms currently being considered in state legislatures are too numerous to detail here, but over the last five years easily number in the hundreds. In 2010 alone, for example, various versions of the UDMSA have been introduced in at least half-dozen states, and there are additional proposals that take other approaches to regulating the industry.
While the existing state laws are far from uniform, these laws include provisions that cover such areas as licensing/registration, fee restrictions, written agreement requirements, certification requirements, consumer education requirements, prohibitions on various activities including offering “other services” and most compensated referrals. These laws also frequently include enforcement provisions that provide for a private right of action – something that is extremely significant and should not be understated.
Unlike the harm that the UDMSA sought to prevent, it is much harder to quantify the impact of the UDMSA and whether its goals have been realized. One justification for regulation is often that instituting a more complex regulatory framework can weed out bad actors. Indeed, a number of companies – both credit counseling and debt settlement entities – have likely been forced to cut back on the number of states in which they work as a result of the institution of the UDMSA. Those that have decided to operate in UDMSA states must adhere to the requirements of the statute or otherwise risk enforcement actions and/or private (including class action) lawsuits. While we are aware of a number of enforcement actions and non-public investigations that have resulted in settlements (e.g., Colorado), we are not aware of any private lawsuits yet under the UDMSA in states in which it is effective. We also are not aware of any reported court decisions yet involving the statute. There almost certainly will be, in time, of course. That is not to say, however, that there have not been any unintended consequences for credit counseling agencies.
As a result of the rush by the states to regulate debt management services of all types in the face of the economic downturn, the increase in state debt adjusting law requirements has resulted in increased costs of doing business for many credit counseling agencies. Five or ten years ago, credit counseling agencies did not require much in the way of dedicated in-house compliance staff. The adoption of the UDMSA and registration requirements, along with other state debt adjusting laws, however, created more of a need for dedicated compliance staff to ensure that the various state requirements are satisfied and to stay abreast of industry developments. When you take into account the legal and reputational risk of non-compliance with the UDMSA requirements, most would argue that such costs become money well spent.
So where are we? Today, the UDMSA provides legislatures and policymakers with a model approach to regulating debt-management services. Other states, state Attorneys General, and other state regulators looking for “best practices” in regulating debt management have, directly or indirectly, used the model law as a reference. In contrast, before 2005, enforcing credit counseling regulations was not as high a priority with some state regulators and state Attorneys General. In states with the UDMSA, the profile of debt management regulation has been raised to a new level. Moreover, the consumer protection issues widely written about in the years leading up to the UDMSA no longer permeate the credit counseling industry. Instead, it seems as if the debt settlement industry is now the leader when it comes to reports of consumer protection issues, while the credit counseling industry is considered a “white knight” to a number of those companies’ former customers.
Where the UDMSA perhaps succeeds most is as a benchmark for what potential federal regulation could look like under a new regulator for financial products and services. Alternative approaches also are available, and some may argue that the full UDMSA at the federal level may not be needed if state legislatures continue to advance reforms targeted at debt settlement and for-profit providers. The results of the FTC’s pending rulemaking covering for-profit providers of debt relief services9 and whether the debt settlement industry overhauls its practices to comply with what will almost certainly be stricter requirements also will weigh into the analysis.
Nevertheless, if the promise of the UDMSA is to be realized, the industry will need to focus on several key areas going forward:
- Examine the Scope and Restrictions. The “off-the-shelf” version of the UDMSA would allow for-profit and nonprofit corporations to provide debt management plans and debt settlement services. How will that change in the coming years? Are you able to provide the types of services that consumers in financial distress need? For example, the UDMSA prohibits the sale of a number of products and services, but some of these products and services may be needed by consumers. Should states that consider the UDMSA allow for-profit companies to provide debt management services? Should state regulation address “counseling-only” or housing counseling services10?
- Watch Out for Lawsuits and Consider the Costs. While we are not aware of any reported cases brought by private plaintiffs under the UDMSA yet, a private right of action is permitted under the UDMSA. The cost of defending private (particularly class action) lawsuits by clients en masse could literally cripple credit counseling agencies that already are operating on slim budgets. Which raises the question, considering the costs to comply with the UDMSA, should states consider alternatives to the enforcement mechanisms provided in the UDMSA? Should the private right of action be removed?
- Impossible Compliance Requirements. Certain aspects of the UDMSA are considered by some to be virtually impossible to comply with or outright overkill. States reviewing the UDMSA should consider the UDMSA from the standpoint of the risks it seeks to control and not imagined concerns that could, but have never, occurred in the industry. For example, do only providers that obtain compensation from creditors truly need to be covered by the statute, which is its current scope? What about zero-deductible insurance policies? Is the UDMSA superior to the existing state regulatory scheme?
- Uniform Administration and Interpretation. With seven jurisdictions enforcing the UDMSA, there is no good reason why there are seven different registration applications and interpretations, rather than a uniform registration process and uniform interpretations. (Years ago, state Attorneys General created a uniform registration form for the state charitable solicitation registration process; that would be an excellent model to follow here.) Further, the legislative comments to the UDMSA – which the drafters of the UDMSA put enormous time and thought into – are rarely followed or even acknowledged by state regulators. Policymakers and regulators should communicate with each other and with the industry on these issues, and vice versa.
As we mark this fifth anniversary and reflect on the intent initially raised by the UDMSA, it is time that credit counseling agencies renew their efforts to ensure that state debt adjusting laws are reasonable and focused on consumer protection. Despite the lack of widespread adoption, the impact of the UDMSA has been significant. If the collective efforts of consumer advocates and other supporters (including some credit counseling agencies) are successful, the UDMSA may very well become the law in other states. Policymakers should be mindful though of making it overly difficult for credit counseling agencies to serve consumers. Credit counseling agencies, for their part, must be mindful that there are both enforcement and litigation risks, as well as complex compliance requirements, and should continue to dedicate staff to compliance efforts and dedicate resources for legal review. Finally, it is safe to predict that as the credit counseling industry continues to evolve, the legal and regulatory landscape also will continue to evolve. Accordingly, credit counseling agencies should continue to actively participate in the legislative and regulatory process at both the state and federal levels. As Congress, possible future federal regulators, and additional states consider how to police the industry, they might just be looking at the UDMSA.
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Jonathan Pompan, an attorney in the Washington, DC office of Venable LLP, represents nonprofit credit counseling agencies and others in a wide variety of areas including regulatory compliance, as well as in connection with federal and state investigations and law enforcement actions. For more information, please contact Mr. Pompan at 202.344.4383 or email@example.com.
For more information about this and related industry topics, see www.venable.com/ccds/publications.
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 a specific fact situation.
1 The UDMSA is available at: http://www.nccusl.org/. For additional information, see “Summary of Provisions in the Uniform Debt-Management Services Act” available at: http://www.venable.com/summary-of-provisions-in-the-uniform-debt-management-services-act-03-24-2006/#_ftn1.
2 Utah Code § 13-42-101 et seq. (effective January 1, 2007).
3 Colo. Rev. Stat. § 12-14.5-201 et seq. (effective January 1, 2008).
4 Del Code tit. 6 § 2401A et seq. (effective January 17, 2007).
5 Nev. Rev. Stat. § 676A (effective July 1, 2010).
6 R.I. Gen. Laws § 19-14.8 (effective July 1, 2007).
7 Tenn. Code Ann § 47-18-5401 et seq. (effective July 1, 2010).
8 V.I. Code Ann tit. 12A (effective June 27, 2010).
10 In the last several years, a new breed of state regulation has been adopted in about half of the states to address mortgage foreclosure consultants. Many of these statutes reference and exempt licensed “debt adjusters”, but these statutes are not all uniform and do not always easy to reconcile with other statutes within the same state.
This article appeared in the June 2010 issue of The Independent Counselor, published by The Association of Independent Consumer Credit Counseling Agencies.