File No. 912

Senate, May 7, 2009

The Committee on Appropriations reported through SEN. HARP of the 10th Dist., Chairperson of the Committee on the part of the Senate, that the substitute bill ought to pass.

AN ACT CONCERNING DEBT REDUCTION SERVICES.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. Section 36a-700 of the general statutes is repealed and the following is substituted in lieu thereof (Effective July 1, 2009):

(a) As used in this section: [, "credit clinic"]

(1) (A) "Credit clinic" means any person who sells, provides or performs, or who represents that such person can or will sell, provide or perform, a service for the express or implied purpose of correcting, changing or deleting adverse entries on a consumer's credit record, history or rating, [or] providing advice or assistance to a consumer with regard to correcting, changing or deleting adverse entries on a consumer's credit record, history or rating in return for the payment of a fee; [. "Credit clinic"] and (B) "credit clinic" does not include: [(1)] (i) Credit rating agencies as defined in section 36a-695; [(2)] (ii) any person licensed to practice law in this state provided such person renders services [as a credit clinic, as defined in this subsection] described in subparagraph (A) of this subdivision, within the course and scope of his practice as an attorney; or [(3)] (iii) any organization [which] that is exempt from taxation pursuant to Section 501(c)(3) of the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, [as from time to time amended] as amended from time to time;

(2) "Debt reduction service" means the selling, provision or performance of, or the representation that a person can sell, provide or perform, a service for the express or implied purpose of reducing or eliminating a consumer's debt or reducing the interest rate charges on such debt, and includes foreclosure rescue services except when such services are performed by (A) any bank or credit union licensed or chartered by the federal government, the state of Connecticut or any other state; (B) any existing creditor of the consumer when such service relates solely to the debt the consumer owes to such creditor; (C) any debt adjuster licensed pursuant to sections 36a-655 to 36a-665, inclusive, when performing debt adjustment services under such license; or (D) an attorney in the representation of a client;

(3) "Foreclosure rescue services" means services related to or promising assistance in connection with (A) avoiding or delaying actual or anticipated foreclosure proceedings concerning residential property, or (B) curing or otherwise addressing a default or failure to timely pay with respect to a residential mortgage loan obligation and includes, but is not limited to, the offer, arrangement or placement of a residential mortgage loan or other loan when those goods or services are advertised, offered or promoted in the context of foreclosure-related services.

(b) A credit clinic shall provide to each purchaser of the services of a credit clinic a contract which contract shall include, in bold face type a minimum size of ten points, the following statements:

RIGHT TO REVIEW YOUR FILE

The federal Fair Credit Reporting Act gives you the right to know what your credit file contains, and the credit rating agency must provide someone to help you to interpret the data. Sections 36a-695 to 36a-699, inclusive, of the Connecticut general statutes [gives] give you the right to receive an actual copy of your credit report. You will be required to identify yourself to the credit rating agency and you may be charged a small fee. There is no fee, however, if you are seeking a credit report for the first time in twelve months or have been turned down for credit, employment or insurance because of information contained in a report within the preceding thirty days.

INCORRECT INFORMATION

If you notify the credit rating agency that you dispute the accuracy of information, the agency must reinvestigate and modify or remove inaccurate data. The credit rating agency may not charge any fee for this investigation or for modifying or removing inaccurate data. If reinvestigation does not resolve the dispute, you may enter a statement of one hundred words or less in your file [,] explaining why you dispute the accuracy of your record or file. This statement, or a coded version of it, must be included with all reports [which] that the credit rating agency issues on you. If the error is corrected, the credit rating agency must notify any person who requested a report on you during the previous two years for employment purposes and the previous six months for any other purpose.

TIME LIMITS ON ADVERSE DATA

Most kinds of information in your file may be reported for a period of seven years. If you have declared personal bankruptcy, however, that fact may be reported for ten years. After seven or ten years, the information cannot be disclosed by a credit rating agency unless you are being investigated for a credit application of fifty thousand dollars or more, for an application to purchase life insurance of fifty thousand dollars or more, or for employment at an annual salary of twenty thousand dollars or more.

(c) In addition to statements required in subsection (b) of this section with regard to a credit clinic, each contract for a credit clinic or a debt reduction service shall contain a complete, detailed list of services to be performed, [by the credit clinic] the costs of such services and the results to be achieved. [by the credit clinic.] A copy of the consumer's current credit report shall be attached to the contract with the adverse entries to be modified clearly marked. Each debt reduction service contract shall contain (1) a statement certifying that the person offering debt reduction services has reviewed the consumer's debt, and (2) an individualized evaluation of the likelihood that the proposed debt reduction services would reduce the consumer's debt or debt service or, if appropriate, prevent the consumer's residential home from being foreclosed. Each contract shall allow the consumer to cancel or rescind such contract during the three-day period after the date on which the consumer signed the contract. Such contract shall contain a clear and conspicuous caption that shall read, "Buyer'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.".

(d) Any contract [which] that does not comply with the provisions of subsections (b), [and] (c) and (e) of this section shall be void and the credit clinic or debt adjuster shall return to the consumer any payments made by the consumer [to the credit clinic] under the voided contract.

(e) No credit clinic or person offering debt reduction services may charge a fee or receive any money or other valuable consideration for the performance of any service the credit clinic or person offering debt reduction services has agreed to perform for any consumer until the credit clinic or person offering debt reduction services has fully performed such service. No person may sell, provide, perform or represent that such person can or will sell, provide or perform a debt reduction service unless such person is an organization exempt from taxation under Section 501(c)(3) of the Internal Revenue Code of 1986 or any subsequent corresponding internal revenue code of the United States, as amended from time to time.

(f) The Banking Commissioner may review any fees or charges assessed by the credit clinic or the person offering debt reduction services and order the reduction of such fees or charges or repayment of such amount of the fees or charges that the commissioner deems excessive, taking into consideration the fees that other credit clinics or other persons performing similar debt reduction services charge for such services and the financial benefit to the consumer of such services. In conducting an investigation pursuant to this subsection, the commissioner shall have the same authority as specified in section 36a-17.

(g) The provisions of this section shall apply to any credit clinic or debt reduction service contract if the consumer signing the contract is a resident of this state or maintains a domicile in this state and such consumer 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.

[(f)] (h) A violation of any provision of this section shall be deemed an unfair or deceptive trade practice pursuant to section 42-110b.

Sec. 2. (NEW) (Effective July 1, 2009) Notwithstanding any provision of the general statutes, moneys received or collected by the Banking Commissioner on account of, or derived from, assessments or fees pursuant to section 36a-65 of the general statutes shall be allocated by the Secretary of the Office of Policy and Management to the Department of Consumer Protection and the State Comptroller in the amounts necessary for funding oversight of persons providing debt reduction services or foreclosure rescue services, as defined in section 36a-700 of the general statutes, as amended by this act, or providing services as a credit clinic, as defined in said section 36a-700.

The following Fiscal Impact Statement and Bill Analysis are prepared for the benefit of the members of the General Assembly, solely for purposes of information, summarization and explanation and do not represent the intent of the General Assembly or either chamber thereof for any purpose. In general, fiscal impacts are based upon a variety of informational sources, including the analyst's professional knowledge. Whenever applicable, agency data is consulted as part of the analysis, however final products do not necessarily reflect an assessment from any specific department.

OFA Fiscal Note

State Impact:

Note: BF=Banking Fund

Municipal Impact: None

Explanation

The bill results in a cost to the state of approximately $185,000 due to the need for a Special Investigator and an Accountant in the Department of Consumer Protection (DCP) plus fringe benefits. The bill would have the DCP responsible for regulating debt reduction services & foreclosure rescue services and for ensuring the provision of consumer protection contracts that provide a 3-day right of cancellation for these services. The DCP would be in charge of oversight for any companies that provide these services but are not licensed by the State Department of Banking. Funding for this program would come from the Banking Fund which is currently projected to have a balance of $17.5 million as of June 30, 2009.

The contract disputes with these entities could become Connecticut Unfair Trade Practices Act (CUTPA) complaints and entail consumer restitution and therefore result in a potential revenue gain to the state.

The Out Years

The annualized ongoing fiscal impact identified above would continue into the future subject to inflation.

OLR Bill Analysis

sSB 705

AN ACT CONCERNING DEBT REDUCTION SERVICES.

SUMMARY:

This bill (1) defines, regulates, and requires certain actions of debt reduction services, similar to current law's requirements for credit clinics, and (2) requires debt reduction services to be tax-exempt nonprofit entities, as defined under federal law, to operate in the state.

It creates a three-day period during which a consumer may break a debt reduction contract without consequence, and extends this to credit clinic service contracts.

The bill applies to contracts of a credit clinic service or debt reduction service, which includes certain foreclosure rescue services, when the consumer who signs the contract is a Connecticut resident or maintains a home in the state and negotiates or agrees to the contract terms in person, by mail or telephone, or via the Internet while physically present in the state.

Under the bill, the banking commissioner may review any fees or charges a credit clinic or person offering debt reduction services assesses. He has the same investigative powers for these purposes as with other banking issues.

Violations under the bill, as with current law concerning credit clinics, are an unfair trade practice.

The bill also provides funding for oversight of these services. Specifically, it requires that some funds the Banking Department receives or collects from assessments or fees that the law requires credit unions and banks pay to fund the department be used for oversight of people providing debt reduction, foreclosure rescue, or credit clinics services. It requires the Office of Policy and Management secretary to allocate enough of the Banking Department funds to the Department of Consumer Protection (DCP) and the state comptroller for this oversight.

The bill also makes conforming and technical changes.

EFFECTIVE DATE: July 1, 2009

DEBT REDUCTION SERVICES AND CREDIT CLINICS

Debt Reduction Services

The bill defines “debt reduction services” as the selling, providing, or performing of, or representation that a person can sell, provide, or perform, a service for the express or implied purpose of reducing or eliminating a consumer's debt or reducing the interest rate charges on that debt. The definition includes foreclosure rescue services, but it excludes services preformed by any:

1. federally or state-licensed or chartered bank or credit union;

2. existing creditor of the consumer when the service relates solely to the debt the consumer owes that creditor;

3. debt adjuster licensed under Connecticut law, when performing debt adjustment services under such a license; or

4. attorney representing a client.

Under the bill, “foreclosure rescue services” means those related to or promising assistance with:

1. avoiding or delaying actual or anticipated foreclosure proceedings of residential property or

2. fixing a default or failure to pay a residential mortgage loan obligation on time, including the offer, arrangement, or placement of a residential mortgage loan or other loan when those goods or services are advertised, offered, or promoted in as foreclosure-related services.

The bill requires that debt reduction services be 501(c)(3) tax-exempt organizations. By law, nonprofit organizations may not operate credit clinics. By law, a “credit clinic” is a business that offers services to correct, change, or delete adverse credit entries other than credit rating agencies, attorneys, and certain tax-exempt organizations.

Credit Clinics

For credit clinics' contracts, the law requires certain information in bold face type (at least a 10 point font size) that states there is no fee for a credit report for a person who has been turned down for credit, employment, or insurance due to information in a credit report within the preceding 30 days. The bill adds to the required contract language that there is no fee for people seeking a credit report for the first time in 12 months.

Other Requirements and Prohibitions for Credit Clinics and Debt Reduction Service Companies

The bill prohibits debt reduction services from charging or being paid in advance for their services and requires them to disclose certain information about their services and charges, similar to the law for credit clinics.

By law, each contract for a credit clinic must contain a complete, detailed list of services to be performed by the clinic and the results the clinic will achieve. A copy of the consumer's current credit report must be attached to the contract with the adverse entries to be modified clearly marked. The bill extends these requirements to debt services, including foreclosure rescue services.

It requires these services' contracts to contain:

1. a statement certifying that the person offering debt reduction services has reviewed the consumer's debt and

2. an individualized evaluation of the likelihood that the proposed debt reduction services would reduce the consumer's debt or debt service or, if appropriate, prevent the consumer's residential home from being foreclosed.

The bill requires each contract to allow the consumer to cancel or rescind the contract during the three-day period after the date on which the consumer signed the contract. The contract must contain a clear and conspicuous caption stating: “Buyer's three-day right to cancel.” It must also state:

“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.”

By law, a credit clinic contract that does not contain the provisions current law requires is void and the credit clinic must return any payments the consumer made under the voided contract to the consumer. The bill makes void any debt reduction service contracts, including foreclosure rescue services, that do not contain the bill's requirements (e.g., three-day cancellation clause), and stipulates that such services must also return a consumer's payments in such a case.

Banking Commissioner's Powers

The commissioner may order debt reduction services to reduce or repay portions of the fees or charges that he deems excessive, taking into consideration the fees that other credit clinics or similar debt reduction services charge for their services and the financial benefit of the services to the consumer.

BACKGROUND

Unfair Trade Practices

The Connecticut Unfair Trade Practice Act allows the DCP commissioner to issue regulations defining what constitutes an unfair trade practice, investigate complaints, issue cease and desist orders, order restitution in cases involving less than $ 5,000, enter into consent agreements, ask the attorney general to seek injunctive relief, and accept voluntary statements of compliance. It also allows individuals to sue. Courts may issue restraining orders; award actual and punitive damages, costs, and reasonable attorneys fees; and impose civil penalties of up to $5,000 for willful violations and $25,000 for violation of a restraining order.

Legislative History

On April 22, the Senate referred the bill to the Appropriations Committee. On April 27, the committee favorably reported the substitute that adds funding from the Banking Department for DCP and comptroller oversight of the debt reduction, foreclosure rescue, and credit clinic services.

COMMITTEE ACTION

Housing Committee

Joint Favorable Substitute

Banks Committee

Joint Favorable

Appropriations Committee

Joint Favorable Substitute

¹ The fringe benefit costs for state employees are budgeted centrally in the Miscellaneous Accounts administered by the Comptroller on an actual cost basis. The following is provided for estimated costs associated with additional personnel. The estimated non-pension fringe benefit rate as a percentage of payroll is 25.43%. Fringe benefit costs for new positions do not initially include pension costs as the state's pension contribution is based upon the 6/30/08 actuarial valuation for the State Employees Retirement System (SERS) which certifies the contribution for FY 10 and FY 11. Therefore, new positions will not impact the state's pension contribution until FY 12 after the next scheduled certification on 6/30/2010.