Banking Department Recommends Regulation of Debt Settlement Companies
Amendment of Article 12-C Would Maintain Stronger Consumer Protection Standards
May 14, 2009
New York, N.Y.: In testimony presented today, Jane Azia, director of non-depository institutions and consumer protection at the New York State Banking Department, recommended that debt settlement companies should be subject to the same regulatory oversight as budget planners under New York State law.
“We believe that consumers who interact with debt settlement companies should be afforded the same consumer protections as those who interact with budget planners,” Azia stated.
In her testimony, delivered before the New York Assembly Committees on Consumer Affairs and Protection, Banks, and Judiciary, Azia discussed the current regulatory scheme and recommendations regarding the Department’s oversight of the industry, as well as proposed model legislation and measures.
The Banking Department is currently responsible for the oversight and regulation of budget planners, which are type B not-for-profit corporations that are under contract to “distribute, supervise, coordinate or control” money on behalf of a consumer.
Budget planners, which are licensed under Article 12-C of New York Banking Law, provide consumers with budgeting, education and counseling services on managing personal finances. Generally, this includes establishing a budget for the consumer and providing financial education. These services are typically performed in conjunction with the establishment of a debt management plan (DMP) to be developed for the consumer in order to assist in paying down unsecured debt. In a DMP the consumer agrees to forward monthly payments to the budget planner, who then distributes the agreed upon payments to creditors, minus any applicable fees.
Entities that don’t directly handle or supervise consumer funds for disbursement, such as debt settlement companies, are not required to be licensed in New York and currently operate outside any regulatory framework. Instead, debt settlement companies negotiate with creditors to settle the debt for a percentage less than the amount of principal. The consumer deposits and accumulates settlement funds and related fees in a bank account they personally control. Settlement does not occur until the consumer has deposited and accumulated sufficient settlement funds and fees.
Azia recommended the amendment, rather than the replacement, of Article 12-C to encompass both the business of budget planning and debt settlement. According to the Banking Department, the standards and requirement in 12-C are in most respects, more comprehensive and stronger than the proposed Uniform Debt Management Services Act (UDMSA). For a chart comparing Article 12-C and the UDMSA, please visit the Banking Department Web site at http://www.dfs.ny.gov/about/press/dscart12c.pdf.
In addition to expanding Article 12-C to include settlement companies, the Banking Department also suggested requiring the improvement of upfront terms and fees disclosures for DMPs and studying the impact of allowing for-profit entities to provide debt management services.
There are currently 76,000 New York debtors enrolled in DMPs through 52 state-licensed budget planners. As a condition for licensing, these budget planners must adhere to strict consumer protection standards:
Every licensee shall provide budgeting, education, and counseling services directly to each consumer.
A written agreement between the budget planner and the consumer must be signed by the consumer and must disclose all fees to be charged, a commencement and termination date, cancellation terms and a monthly payment amount. The payment period shall not exceed 60 months.
A statement must be sent to the consumer at least once every three months showing their payment activity.
Payment to creditors must be made in a timely manner and in accordance with the written agreement.
The licensee must have a toll-free number or a phone number that may be called “collect” by the consumer, in order to assist the consumer with any questions. The Banking Department toll-free number (1-877-226-5697) must also be disclosed in writing in the DMP.
Every licensee shall file with the superintendent a surety bond, or in lieu of such bond pledged assets, in an amount to be determined by the superintendent based upon the licensee’s financial condition, business plan, and the actual or estimated aggregate amount of payments and fees paid by the debtors to the licensee.
TheNew York State Banking Department is the regulator for all state-chartered banking institutions, virtually all of the United States offices of international banking institutions, all of the State’s mortgage brokers, mortgage bankers, check cashers, money transmitters and budget planners. The aggregate assets of the depository institutions supervised by the Banking Department are more than $2.4 trillion.In addition to regulating banking institutions, the Banking Department is active in informing and educating all New Yorkers on banking matters. To contact the Banking Department, please call 1-877-BANK-NYS or visit our Web site at www.banking.state.ny.us.
TheNew York State Banking Department is the regulator for all state-chartered banking institutions, virtually all of the United States offices of international banking institutions, all of the State’s mortgage brokers, mortgage bankers, check cashers, money transmitters and budget planners. The aggregate assets of the depository institutions supervised by the Banking Department are more than $2.4 trillion.
In addition to regulating banking institutions, the Banking Department is active in informing and educating all New Yorkers on banking matters. To contact the Banking Department, please call 1-877-BANK-NYS or visit our Web site at www.banking.state.ny.us.