OLR Bill Analysis
sSB 950 (File 233, as amended by Senate “A”)*
AN ACT CONCERNING CONSUMER CREDIT LICENSEES.
This bill makes a number of changes regarding consumer credit licensees. It specifies how licenses must be surrendered, allows the commissioner to deny an application for a period after a prior application has been withdrawn, and requires license applicants to provide a history of criminal convictions and allows the commissioner to deny the application on that basis.
The bill broadens those who can be a licensed debt adjuster to include for-profit entities and sets additional consumer-protection type requirements for all debt adjusters. It defines debt negotiation, which includes debt settlement, foreclosure rescue, and short sales, and creates a new license for debt negotiators that tracks the same licensing requirements as for debt adjusters with regard to application procedures, requirements, and enforcement. The bill also:
1. requires money transmitter licensees to notify the commissioner of certain events, requires contracts between them and their and agents, and clarifies the commissioner's enforcement authority;
2. expands the applicability of the small loan lender laws;
3. provides for automatic suspension of certain licenses when the required surety bond is cancelled; and
4. makes minor, technical, and conforming changes.
*Senate Amendment “A” adds the new requirements for debt adjustment agreements. It restores the existing definition of debt adjustment. It makes the definitions of “mortgagor,” “mortgagee,” and “short sale” applicable to the newly added section on debt negotiation, rather than debt adjustment. It also changes the effective date and makes conforming changes.
EFFECTIVE DATE: October 1, 2009, except for the provisions on the following subjects, which are effective on passage:
1. mortgage originators, mortgage servicing, notice of intent to withdraw and surrendering of mortgage licenses;
2. most of the criminal history requirements; and
3. money transmitter definition and contracts, debt adjuster surety bonds, and consumer collection agency license requirements.
LICENSEES IN GENERAL
§ 1 — Surrendering a License
The bill requires any licensee who is surrendering its license to give it to the banking commissioner in person or by registered or certified mail. Current law requires only written notice that the license is surrendered. The bill allows the commissioner to institute a suspension, revocation, or refusal to renew proceeding within one year after any licensee surrenders such a license, even if no proceeding is pending at the time of surrender.
§§ 6- 10, 12, 15, 16, 24, 29, 35 — History of Criminal Convictions in and Denial of Applications
The bill requires that an applicant for a sales finance company, small loan lender, check cashing service, money transmission or payment instrument issuer, debt adjuster, or consumer collection agency license include in its application the history of criminal convictions of the applicant and certain of the applicant's related persons for the 10-year period prior to the date of the application.
The bill also allows the commissioner to deny licenses to these applicants if the commissioner finds that they or certain other related persons of the applicants have been convicted, within the past 10 years, of any misdemeanor involving any aspect of the business for which they seek to be licensed, or any felony. The bill specifies that any denials of a money transmitter or payment instrument issuer license must be in accordance with the statutes governing denials based on a prior conviction.
§§ 3, 7, 8, 9, 24, 35 — Notice of Intent to Withdraw
The bill also allows the commissioner to deny any license application for lenders, brokers, originators, sales finance companies, small loan lenders, and debt adjusters up to one year after he receives a notice of intent to withdraw such application.
MORTGAGE LENDERS, BROKERS, ORIGINATORS
§ 2 — Originators
By law, a mortgage originator's license is tied to the broker or lender with whom the originator is associated and the license is not effective during any period when the originator is not associated with the lender or broker. The bill specifies that the license is also not effective during any period where the lender or broker's license is suspended.
§ 4 — Surrendering a License
The bill specifies that lender, broker, and originator licenses must be surrendered, revoked, or suspended in accordance with the banking statutes, rather than the sections applicable to these specific licensees. The bill also provides that a licensee's withdrawal of an application is effective on receipt of a notice of intent to the commissioner.
MONEY TRANSMITTERS, PAYMENT INSTRUMENT ISSUERS
§ 13 — Definitions
This bill broadens the definition of “licensee” to include a person who is required to be licensed pursuant the Money Transmission Act, rather than just a person who is already licensed. It also broadens the definition of “purchaser” to include a person who has given money or monetary value for current or future transmission.
§ 15 — Events Requiring Commissioner Notification
The bill requires a licensee to provide the commissioner with written notice no later than one business day after it has reason to know of the occurrence of the following events:
1. the filing of a petition by or against the licensee under the U. S. Bankruptcy Code for bankruptcy or reorganization;
2. the filing of a petition by or against the licensee for receivership, the commencement of any other judicial or administrative proceeding for its dissolution or reorganization, or the making of a general assignment for the benefit of its creditors;
3. the commencement of a proceeding to revoke or suspend its license to engage in money transmission in another state or foreign country, or other formal or informal regulatory action by any governmental agency against the licensee and the reasons for it;
4. the commencement of any action by the Connecticut attorney general or the attorney general of any other state and the reasons for it;
5. the cancellation or other impairment of the licensee's bond or other security, including notice of claims filed against the licensee's bond or other security;
6. a conviction of the licensee or of a partner, director, trustee, principal officer, member or shareholder owning 10% or more of each class of the licensee's securities for a misdemeanor involving the money transmission business or the business of issuing Connecticut payment instruments, or a felony; or
7. a conviction of its agent for a felony.
§§ 14, 19 — Contracts Between Licensee and Agent
The bill prohibits a money transmitter or payment instrument issuer agent from acting through a subagent, and eliminates all references to subagents.
The bill requires licensees to enter into a contract with each of its agents that (1) requires the agent to operate in full compliance with the Money Transmission Act and (2) provides that appointment of the agent is not effective during any period when the license of the licensee has been suspended. The licensee must provide each agent with policies and procedures sufficient to ensure compliance the Act.
The agent must give all money owing to the licensee in accordance with the terms of the contract between the licensee and the agent and the agent cannot provide money transmission services outside the scope of activity permissible under that contract.
The bill requires a licensee and agent of a licensee to promptly notify the commissioner, in writing, of the termination of the contract between the agent and licensee.
§§ 13 & 20 — Enforcement
The bill allows the commissioner to suspend, revoke, or take any other action in his power if the licensee engages in fraud, intentional misrepresentation, or gross negligence, or engages in an unsafe or unsound practice. The bill defines “unsafe or unsound practice” as a practice or conduct by a licensee its agent that is likely to result in a material loss, insolvency, or dissipation of the licensee's assets or otherwise materially prejudice the interests of purchasers.
By law, whenever it appears that someone has violated, is about to violate, or is currently violating the Money Transmission Act, the commissioner can impose a civil penalty or seek a court order imposing a penalty, injunctive relief, or restitution. The bill allows these enforcement tools to be used when any licensee has:
1. failed to pay a judgment ordered by any court within or outside of this state 30 days after the judgment becomes final or 30 days after the expiration or termination of a stay of execution of the judgment;
2. engaged in fraud, intentional misrepresentation, or gross negligence; or
3. engaged in an unsafe and unsound practice.
It also allows the commissioner to impose cease and desist orders for violations of existing law and the bill.
The bill also allows the commissioner to order the licensee to terminate its agency relationship with any agent if:
1. the agent violated any provision of the Act or its regulations, or any other law or regulation applicable to the conduct of its business;
2. the agent engaged in fraud, intentional misrepresentation, or gross negligence or misappropriated funds or has been convicted of a violation of a state or federal anti-money laundering statute;
3. the competence, experience, character or general fitness of the agent or a manager, partner, director, trustee, principal officer, member or shareholder owning 10% or more of each class of the agent's securities demonstrates that it would not be in the public interest to permit the agent to engage in the business of issuing Connecticut payment instruments or the business of money transmission on behalf of a licensee; or
4. the agent is engaging in an unsafe or unsound practice.
The law already allows the commissioner to do this if the agent refused to allow an examination of its books and records regarding the business of such licensee as required by law.
§§ 23 & 24 — Fees
The bill specifies that receiving, as the debtor's agent, money for the purposes of distributing it to creditors must be done for, or with the expectation of, valuable consideration in order to meet the definition of debt adjustment.
The bill also eliminates current law's restriction limiting debt adjusting in Connecticut to bona fide nonprofit organizations. However, it requires for-profit applicants for initial and renewal licenses to pay a $ 1,600 application fee or an $ 800 fee if the application is filed a year or less before the license's expiration date. The fee for non-profits stays at $ 250.
§§ 25-27 — Debt Adjustment Agreements
The bill requires debt adjuster licensees to:
1. provide the debtor with a written agreement that sets forth the services the licensee will provide and any related fees;
2. provide free individualized credit counseling and budgeting assistance to the debtor before entering into a written agreement with the debtor;
3. determine that the debtor has the financial ability to make the payments stated in the written agreement, which must be suitable for the debtor; and
4. contact each debtor's creditors to determine if they will accept the payments contemplated by the written agreement.
The bill also requires the written statement of the debtor's account that the licensee is required to provide to the debtor to be given at least quarterly, rather than within a reasonable time after the debtor requests it.
The bill prohibits licensees from directly or indirectly requiring the debtor to purchase other services or materials as a condition to entering a written service agreement.
Finally, the bill provides that a debt adjustment agreement is voidable by the debtor if (1) the licensee imposes a fee or other charge or receives money or other payments not specified in the written agreement with the debtor or (2) any person is not licensed as required by the debt adjustment statutes. If a debtor voids a written agreement, the licensee does not have a claim against the debtor for breach of contract or for restitution.
§ 29 — Definition
The bill defines “debt negotiation” as assisting a debtor in negotiating or attempting to negotiate on behalf of a debtor the terms of a debtor's obligations with one or more of the debtor's mortgagees or creditors for or with the expectation of valuable consideration. The bill specifies that a “debtor” is any individual who has incurred indebtedness or owes a debt for personal, family, or household purposes. A “mortgagee” is the original lender under a mortgage loan secured by residential property, or its agents, successors or assigns. A “mortgagor” is the owner-occupant of a one-to-four family residential property located in the state who is also the borrower under a mortgage encumbering the residential property. Finally, “residential property” is one-to-four family owner-occupied real property.
The bill specifies that debt negotiation includes the negotiation of short sales of residential property or foreclosure rescue services. The bill defines a “short sale” as the sale of residential property by a mortgagor for an amount less than the outstanding balance owed on the loan secured by the property where, prior to the sale, the mortgagee or his or her assignee agrees to accept less than the outstanding loan balance in full or partial satisfaction of the mortgage debt and the proceeds of the sale are paid to the mortgagee or his or her assignee. It defines “foreclosure rescue services” as those services related to or promising assistance in connection with (1) avoiding or delaying actual or anticipated residential foreclosure proceedings or (2) curing or otherwise addressing a default or failure to timely pay with respect to a residential mortgage loan. The term specifically includes the offer, arrangement, or placement of a mortgage loan secured by residential property or other extension of credit when those services are advertised, offered, or promoted in the context of foreclosure related services.
§§ 29 & 31 — People Required to Obtain a License
The bill requires a person to obtain a license before engaging or offering to engage in debt negotiation in the state. The bill specifies that a person is engaging in debt negotiation in the state if the person has (1) a place of business located within the state; (2) a place of business located outside of this state and the debtor is a resident of the state who negotiates or agrees to the terms of the services contract in person, by mail, by telephone, or via the Internet while physically present in this state; or (3) a place of business located outside of this state and the contract concerns a debt that is secured by property located in the state (see COMMENT).
The bill specifies that the following are exempt from the licensing requirements: (1) any attorney admitted to the practice of law in this state, when engaged in such practice; (2) any bank, out-of-state bank, Connecticut credit union, federal credit union, or out-of-state credit union, provided subsidiaries of such institutions other than operating subsidiaries of federal banks and federally-chartered out-of-state banks are not exempt from licensure; (3) any person licensed as a debt adjuster under the banking statutes, while performing debt adjuster services; (4) any person acting under the order of a court; or (5) any bona fide nonprofit organization organized under IRS Code § 501(c)(3) or any subsequent corresponding section.
§ 29 — Licensing Requirements
The license must be obtained for each location where debt negotiation will be conducted. The bill does not define the term “location. ” Applicants and licensees must notify the commissioner of any business change that differs from that stated in the license application.
The bill prohibits the commissioner from issuing a license unless he finds that the applicant is solvent and has had no proceeding in bankruptcy, receivership or assignment for the benefit of creditors commenced against the applicant and the financial responsibility, character, reputation, integrity and general fitness of the (1) applicant; (2) partners thereof, if the applicant is a partnership; (3) members, if the applicant is a limited liability company or association; and (4) officers, directors and principal employees, if the applicant is a corporation, are such as to warrant belief that the business will be operated soundly and efficiently, in the public interest and consistent with the debt negotiation law.
The bill specifies that the licenses are not transferable and that any change of license location requires prior written notice to the commissioner. Additionally, the bill prohibits a licensee from using any name unless it has been approved by the commissioner. If the commissioner fails to make such findings, the commissioner shall not issue a license and shall notify the applicant of the reasons for such denial.
§ 29 — Fees
The bill sets the initial and renewal debt negotiation license fee at $ 1,600, which must be paid at the time of the application. However, if the license will expire in one year or less, the applicant only has to pay $ 800. Licenses expire at the close of business on September 30th of the odd-numbered year following its issuance unless they are renewed. Each licensee must, on or before September 1st of the year in which the license expires, file a renewal application as the commissioner may require. The bill imposes an additional $ 100 processing fee for renewal applications for licenses that expire less than 60 days before the application filing.
The bill requires the commissioner to automatically suspend a license or a renewal license that has been issued but is not yet effective when he determines that a check filed with him to pay an application fee has been dishonored. He must give the licensee notice of the automatic suspension pending proceedings for revocation or refusal to renew and an opportunity for a hearing on such actions in accordance with the banking statutes.
Finally, the bill specifies that there is no abatement of the license fee if the license is surrendered, revoked, or suspended prior to the expiration of the period for which it was issued. Additionally, the application fee is nonrefundable. It is unclear if the additional processing fee is also nonrefundable.
§ 30 — Surety Bond
The bill requires applicants to file a surety bond in the aggregate amount of $ 40,000 for all licensed locations in order for a license or renewal to be granted. The surety bond must be written by a surety authorized to write such bonds in this state. The attorney general must approve the surety bond's form.
The bill specifies that any filed surety bond must be conditioned upon the licensee faithfully performing any and all written agreements with debtors and conducting such business consistent with the debt negotiation laws. Any debtor who may be damaged by failure to perform any written agreements or by conduct inconsistent with the debt negotiation law can proceed on any such surety bond against the principal or surety thereon, or both, to recover damages. The commissioner can proceed on any such surety bond against the principal or surety thereon, or both, to collect any civil penalty imposed on the licensee pursuant to the banking statutes. The proceeds of any bond, even if commingled with other assets of the licensee, must be deemed by operation of law to be held in trust for the benefit of such claimants against the licensee in the event of bankruptcy of the licensee and must be immune from attachment by creditors and judgment creditors. The bond must be maintained during the entire period of the license granted to the applicant, and the aggregate liability under any such bond must not exceed the principal amount of the bond.
The bill specifies that the surety has the right to cancel the bond at any time by a written notice to the licensee stating the effective date of the cancellation. The notice must be sent by certified mail to the licensee at least 30 days before the cancellation date. The bond cannot be cancelled unless the surety provides written notification to the commissioner at least 30 days before the effective date of cancellation.
The bill prohibits licensees from using, attempting to use, or making either direct or indirect reference to any word or phrase that states or implies that the licensee is endorsed, sponsored, recommended, bonded, or insured by the state.
§ 32 — Debt Negotiation Contract
A debt negotiator must provide each debtor with a contract that must include a complete, detailed list of services to be performed, the costs of such services, and the results to be achieved. Each debt negotiation service contract must contain (1) a statement certifying that the person offering debt negotiation services has reviewed the consumer's debt and (2) an individualized evaluation of the likelihood that the proposed debt negotiation services would reduce the consumer's debt or debt service or, if appropriate, prevent the consumer's residential home from being foreclosed.
Each contract must allow the consumer to cancel or rescind it within three business days after the date the consumer signed the contract. It must contain a clear and conspicuous caption that reads: “Debtor's three-day right to cancel”, along with the following statement: “If you wish to cancel this contract, you may cancel by mailing a written notice by certified or registered mail to the address specified below. The notice shall state that you do not wish to be bound by this contract and must be delivered or mailed before midnight of the third business day after you sign this contract. ” Business day has the same meaning as in the Home Solicitation Sales Act. That is, any calendar day except Sunday or any of the following business holidays: New Year's Day, Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, or Christmas Day.
The bill prohibits a person offering debt negotiation services from receiving valuable consideration for the performance until the services are fully performed. A person offering debt negotiation services can receive reasonable periodic payments as services are rendered, provided such payments are clearly stated in the contract. The bill allows the commissioner to establish a schedule of maximum fees that a debt negotiator may charge for specific services. It provides that any contract that does not comply with all of these requirements is voidable by the consumer.
§ 33 — Enforcement
The bill specifically allows the commissioner to suspend, revoke, or refuse to renew any license or take any other action, in accordance with the applicable banking statutes, for any reason that would be sufficient grounds for the commissioner to deny application for a license under the debt negotiation laws, or if the commissioner finds that the licensee or the licensee's proprietor, director, officer, member, partner, shareholder, trustee, employee, or agent has: (1) made any material misstatement in the application, (2) committed any fraud or misappropriated funds, (3) violated any law or regulation applicable to the conduct of its business, or (4) failed to perform any agreement with a debtor.
Additionally, the commissioner may take action against the person or licensee in accordance with his general powers under the banking statutes whenever it appears that (1) the person or licensee has violated, is violating, or is about to violate the debt negotiation laws or (2) any licensee or his or her proprietor, director, officer, member, partner, shareholder, trustee, employee, or agent has committed any fraud, misappropriated funds, or failed to perform any agreement with a debtor.
The bill allows the commissioner to, upon complaint, review any fees or charges assessed by a person offering debt negotiation services and order a reduction or repayment of the amount of the fees or charges that the commissioner deems excessive, taking into consideration the fees that other people performing similar debt negotiation services charge for such services and the benefit to the consumer of the services. He can do this under his general power to conduct investigations.
§§ 40 & 41 — SMALL LOAN LENDERS
The bill expands the restrictions of the small loan lending laws to those who (1) make, offer, broker, or assist a borrower in Connecticut to obtain such a loan or (2) in whole or in part, arrange such loans through a third party or act as an agent for a third party, regardless of whether approval, acceptance, or ratification by the third party is necessary to create a legal obligation for the third party, through any method, including mail, telephone, internet, or any electronic means. Under current law, the provisions apply only to those who engage in the business of making loans of money or credit.
By law, no person, unless authorized under the small loan lender laws, can directly or indirectly charge, contract for, or receive any interest, charge, or consideration greater than 12% annually on the loan, use, or forbearance of money or credit of the amount or value of $ 15,000 or less.
Under the bill, this provision applies to any loan made or renewed in this state if the loan is made to a borrower who resides in or maintains a domicile in this state and the borrower:
1. negotiates or agrees to the terms of the loan in person, by mail, by telephone or via the Internet while physically present in this state;
2. enters into or executes a loan agreement with the lender in person, by mail, by telephone or via the Internet while physically present in this state; or
3. makes a payment of the loan in this state.
The bill defines the term “payment of the loan” to include a debit on an account the borrower holds in a branch of a financial institution or the use of a negotiable instrument drawn on an account at a financial institution. It defines “financial institution” to mean any bank or credit union chartered or licensed under the laws of this state, any other state, or the United States and having its main office or a branch office in this state.
The bill also allows the commissioner, whenever it appears to him that any person has violated these provisions, to investigate, take administrative action, or assess civil penalties and restitution.
§§ 5, 17, 28, 30, 36 — SURETY BOND REQUIREMENT
For mortgage lender and broker, money transmission, debt adjuster, and consumer collection agency licensees, the bill requires an automatic suspension of the license upon cancellation of the required bond, unless the bond has been reinstated or replaced, or the licensee has ceased business and has voluntarily surrendered the license. Before the automatic suspension, the bill requires the commissioner to give written notice to the licensee of the date the cancellation will take effect.
The bill also requires the commissioner to give the licensee notice of the automatic suspension pending proceedings and an opportunity for a hearing. It authorizes the commissioner to require the licensee whose license has been automatically suspended to take or refrain from taking certain actions consistent with the purposes of the statutes involved.
The bill increases the bond for consumer collection agencies from $ 5,000 to $ 25,000.
§§ 22, 34 — MISCELLANEOUS ENFORCEMENT PROVISIONS
The bill specifically allows the commissioner to issue cease and desist orders against any person who has violated, is violating, or is about to violate the laws governing creditor collection practices.
It also specifically allows the commissioner to impose civil penalties against any mortgage servicing company that violates the relevant statute.
Engaging in Debt Negotiation
The bill appears to imply that any person with a place of business located within the state is engaged in debt negotiation, regardless of their actual business.
Joint Favorable Substitute