CIRCUMSTANCES LEADING TO LEGISLATION Complaints to the Better Business Bureau, the National Legal Aid Society, and court cases in several of the States have indicated that unscrupulous debt poolers, instead of helping the debt-ridden, have actually created additional problems for them. Freqeuntly, creditors have refused to participate in the debt-pooler's plan but the debtor has not been notified of this fact. Sometimes the debt-poolers have paid themselves their entire fee first, and it has been some time before money was available to pay the creditors. Accepting the services of the debt-pooler has not prevented garnishment or repossession of merchandise although contrary promises had been made or implied. Because of these and other abuses the States found it necessary to take legislative action. EARLY LAWS The first two laws dealing with debt pooling as a commercial business were enacted in Minnesota in 1935 and in Wisconsin in 1937. These laws regulate the business by requiring operators to obtain a license, post a bond, and meet other specified requirements. However, until 1955, debt-pooling firms were generally free to operate unhampered. Numerous abuses by some of these firms, followed by indictments in several instances, led to pressure for enactment of laws curbing their activities. That year, Maine, Massachusetts, and Pennsylvania enacted laws prohibiting the business of debt pooling. Similar laws were enacted in Georgia, New York, and Virginia the following year. PRESENT STATUS There are now 34 States with laws prohibiting or regulating the business of debt pooling. The following 22 States prohibit debt pooling as a commercial business": The following 12 States regulate this type of business: Most of the 22 State laws prohibiting the business of debt pooling outlaw debt-pooling activities, as defined, and provide penalties for violations. The laws of Massachusetts, South Carolina, and Virginia differ from the majority in that they provide that the furnishing of advice or services for a debtor in connection with a debt-pooling plan is deemed the practice of law. Thus, debt In addition, the city of Baltimore, Maryland has an ordinance prohibiting the business of debt pooling. In Connecticut a regulatory provision enacted in 1955 as an amendment to the collection agency law was repealed in 1967 and replaced by a separate law, which becomes effective Jan. 1, 1968. The Nebraska law is not effective until Jan. 1, 1969. By addendum subsequently filed with the committee, Iowa should be added to this list. (See p. 168 hereof.) 84-181-67 pooling as a business is prohibited as the unauthorized practice of law. The West Virginia law also differs from the majority. That law makes it unlawful to solicit the rendering of advice and services to a debtor in connection with a debt-pooling plan, and provides that those who are exempt from the law (e.g., attorneys or voluntary associations) who render such service may not charge more than 2 percent of the total money collected pursuant to the plan. Exemptions The most common exemption is that of attorneys, which is found in 19 of the prohibitory laws, i.e., all but the North Carolina, Ohio, and Oklahoma. Five of these States, Delaware, Georgia, Kansas, Virginia, and Wyoming, qualify the exemption by limiting it to the performance of debt-pooling services as an incidence to the regular practice of law. In 10 of these States it is the only exemp tion: Florida, Georgia, Kansas, Maine, Massachusetts, New York, South Carolina. Rhode Island, Virginia, and Wyoming. A few examples of some of the other types of exemptions are: Judicial officers or others acting pursuant to court order are exempted in seven States: Arkansas, Hawaii, Missouri, New Jersey, New Mexico, North Carolina, and Texas. Five States exempt nonprofit organizations. Arkansas exempts such organizations if no charge is made for the service. Delaware and Hawaii permit a nominal charge as reimbursement for expenses. New Mexico exempts such an organization when it is organized as a community effort to assist debtors. Pennsylvania exempts welfare agencies which act as debt poolers on behalf of debtors without compensation or profit. Hawaii and Pennsylvania exempt Legal Aid Bureaus. Five States exempt full-time employees of a debtor who act as an adjuster of his employer's debts: Hawaii, Missouri, New Jersey, New Mexico, and North Carolina. Four States exempt a creditor of the debtor rendering adjustment service without charge: Missouri, New Jersey, New Mexico, and North Carolina. The only exemption in the Ohio law is for a person who was licensed and regulated by the legislative authority of the political subdivision in which such person operated prior to January 1, 1958 (the effective date of the act); and Oklahoma exempts only retail merchants' trade associations and nonprofit groups formed to collect accounts and exchange credit information. Constitutionality Five prohibitory laws, Massachusetts, New Jersey, Pennsylvania, Kansas, and Ohio, have been challenged in the courts. The Supreme Judicial Court of Massachusetts in 1957 held in a declaratory decree that the statute providing that debt-pooling services constitute the practice of law "is not unconstitutional as an interference with the purely judicial function to determine who may practice law but is a valid enactment in aid of the court's powers to make such a determination." 6 The Pennsylvania Supreme Court in 1960 unheld the decision of the Superior Court that the State law (Act 224, L. 1955) prohibiting the business of budget planning is an unconstitutional exercise of the police power, notwithstanding that the planner's activity in collecting and distributing the debtor's money may afford the planner the opportunity to defraud the public. Following the court's decision, the Governor recommended and the legislature enacted a new law in 1961. It differs from the earlier law in that it does not outlaw budget planning, but only debt pooling for a fee. The new law has not been challenged. The New Jersey Superior Court in 1961 upheld the constitutionality of the State law. The court implied its agreement with the decision of the Massachusetts court and disagreement with the decision reached by Pennsylvania, in what were apparently similar laws. The U.S. District Court for the District of Kansas found that the State law prohibiting the business of debt adjusting was unconstitutional. In a decision issued April 22, 1963, the U.S. Supreme Court reversed the lower court." The Court said that Kansas statute does not violate the due process clause of the 14th amendment; that States have power to legislate against injurous practices 5 Home Budget Service, Inc. v. Boston Bar Association, 335 Mass. 228, 139 N.E. 2d (387) (1937). Commonwealth v. Stone, 191 Pa. Super 117; 155 A. 2d (453) (1960). 7 American Budget Corp. v. Furman, 170 A. 2d 63 (1961). Skrupa v. Sanborn, 210 F. Supp. 200 (1961). Ferguson v. Skrupa, d/b/a Credit Advisors, 372 U.S. 726 (1963). in their internal affairs, so long as their laws do not conflict with a Federal constitutional provision or law; the statute's exception of lawyers is not a denial of equal protection of the law to nonlawyers. The Court said further that there are arguments showing that the business of debt adjusting has social utility, but such arguments should be addressed to the legislature rather than the courts. The Ohio Supreme Court upheld its law, in a case decided March 10, 1965.10 LAWS REGULATING THE BUSINESS OF DEBT POOLING The States which enacted laws prohibiting the business of debt pooling did so because it was believed that regulating the activities of such businesses would prove too difficult; that the only way to cope with the unethical practices of such firms was to outlaw their activities completely. Other States believed the business could be regulated. An example of such a State is California. Until 1957, California had no law relating to debt poolers, as such, but covered them, by interpretation, under its law regulating collection agencies. However, an increasing stream of complaints from businessmen and the general public led the California Senate to create an Interim Committee which was directed "to gather facts regarding collection agencies, debt liquidators, and private detectives, the regulation thereof, and the enforcement of all laws relating thereto." The Interim Committee held hearings in several cities, and reported, in part, that: "*** As for the debt liquidators and proraters, the chief malpractices in their field seemed to involve misleading advertising and doubling as collection agencies. "False advertising, especially on television and radio, has been used to make the debt-ridden think the proraters can prevent wage attachments, loss of jobs, and repossessions. Phrases like 'No Security,' 'No Co-signers,' and 'Our Low Rates' give the impression that the prorater pays creditors from his own funds, asking only that the debtor repay him with reasonable interest. The facts are that the prorater does not 'consolidate' the debts and pay off creditors with his own money; the debtor continues to owe each and every creditor severally, regardless of the plan the operator purports to offer. The unscrupulous prorater attracts the debt-ridden into his office largely for the purpose of collecting fees from them. "The committee also learned that several firms operate a debt-liquidation agency and a collection agency under the same roof with identical personnel. The prorater end of the business acquires from the client a list of his creditors. Then, acting as collectors, the agency solicits the creditors to assign it the accounts for collection. The creditor who refuses to hand over the account generally finds himself at the end of the line when the debtor's payments are prorated." " As a result California passed a law regulating the debt-pooling business, completely separate from the law regulating collection agencies; the two laws are administered in different departments. The regulatory laws are separate laws, applicable only to debt-pooling firms, except in Idaho where it is a part of the collection agency law. Licenses and investigations All of the regulatory laws require an applicant to obtain a license, renewable annually. (See Table 1, p. 7.) As a prerequisite to the issuance of a license, the applicant must be investigated for financial responsibility and good moral character. Usually the applicant pays the cost of the investigation. If. following investigation, the applicant is denied a license, the license fee is returned to him, but not the investigation fee. Most of the laws provide that an applicant may appeal the denial of a license; if he does, a hearing must be held. Final appeal is usually to the courts. Bond Each law requires the operator to post a bond. The amount of the bond varies from $5,000 to $25,000. Some of the laws permit an operator to make a cash deposit in lieu of posting a bond. 10 State ex rel. Clark v. Brown, Secretary of State, 205 N.E. 2d 377 Supreme Court of Ohio (1965). 11 Report of the Senate Interim Committee on Collection Agencies, Private Detectives, and Debt Liquidators. (Senate Resolution No. 155, 1957, California.) 1 The Connecticut law becomes effective 1/1/68. The administrator is authorized to require a larger bond if he determines it is warranted by the business circumstances of the licensee. 2 In Idaho and Wisconsin, the applicant must pay the entire cost of the investigation. • For each office. In Minnesota, investigation is required but the law does not require the applicant to pay the cost. • No provision. Exemptions The usual exemptions in these laws are for: (1) attorneys; (2) banks, fiduciaries, financing, and lending institutions duly authorized and admitted to transact business in the State; (3) title insurers and abstract companies while doing an escrow business; (4) employees of licensees when acting in the normal course of their employment; (5) judicial officers or others acting pursuant to court order; (6) nonprofit, religious, fraternal, or cooperative organizations offering debt-pooling services for their members; and (7) employers offering debt-pooling services exclusively for their employees. The exemption of attorneys under the laws of California, Colorado, Connecticut, Illinois, Michigan, Nebraska, Utah, and Washington is applicable only when the debt pooling occurs in the normal course of their practice; in Oregon it is applicable to attorneys who do not specialize in the business of debt pooling. There are no exemptions in the Wisconsin law. Consent of creditors Unless the creditors consent to the debt-pooling plan, such a plan is useless. The laws of California, Michigan, and Utah require that consent must be obtained from the holders of at least 51 percent of the total amount of the indebtedness and of the total number of creditors listed in the contract between the licensee and the debtor. The Connecticut law is similar, except that a "majority" is stipulated, rather than 51 percent. Colorado requires the consent of 80 percent of the creditors listed in the contract, and Illinois requires that a majority of the creditors listed must agree to the plan. Unlike any of the other laws, Connecticut grants creditors or their attorneys access to all records relative to such consent for verification. Before making any charges, Oregon and Washington require the debt-pooling firm to notify all of the debtor's creditors that the debtor has engaged the services of the licensee. The laws of Idaho, Minnesota, Nebraska, and Wisconsin are silent on this point. Fees Fees charged by debt-pooling businesses are based on a percentage of the indebtedness as listed by the debtor. Ten of the 12 regulatory laws (all but Michigan and Minnesota) fix the maximum fee which may be charged, ranging from 10 to 15 percent. All of the regulatory laws except Idaho provide that the fee of the licensee must be agreed upon and stated in the contract, and that a copy of the contract must be furnished to the debtor. The laws of California, Oregon, and Washington require the contract to set forth in precise terms the amount of the payments, which must be within the ability of the debtor to pay. California and Washington also require disclosure to the debtor of the approximate number and amount of installments required to pay the debts in full. The laws of Colorado, Connecticut, Illinois, Michigan, Nebraska, and Utah require the fee of the licensee to be amortized over the life of the contract, while Oregon prohibits the debt pooler from taking his fee at a faster rate than the rate of distribution to any unescured creditor who is willing to accept payment. TABLE 2.-Maximum fees established by law or by administrative authority 12 percent for the first $3,000 of indebtedness; California Colorado Connecticut Idaho Illinois Michigan Nebraska Oregon Utah Washington Wisconsin 11 percent for the next $2,000; 10 percent for any of the remaining payments distributed to creditors. 122 percent of the total indebtedness of the debtor. 10 percent of the amount required to pay the indebtedness when the plan of payment is for a period of 10 months or less; 12% percent when the plan of payment is for more than 10 months but less than 18 months; 15 percent when the plan of payment is for a period of 18 months or more. 15 percent of the amount received at any one time from the debtor. 10 percent of the amount required to pay the indebtedness when the plan of payment is for a period of 10 months or less; 12% percent when the plan of payment is for more than 10 months but less than 20 months; 15 percent when the plan of payment is for a period of 20 months or more. No specific maximum. No provision. 15 percent of the amount of money agreed to be paid through the licensee. 15 percent of the amount actually paid to creditors. 10 percent of the payments actually distributed to creditors. 15 percent of the total debts listed by the debtor. 10 percent of the total indebtedness. Report to debtors; remittances to creditors Most of the laws require the debt-pooling agency to keep the debtor informed of his account. Remittances to creditors must be made by the agency within a specified period after receipt of funds from debtors for this purpose. As shown in Table No. 3, this period of time varies from "promptly" upon receipt of funds in Illinois to at least once each 40 days in Washington. TABLE 3.-Permissible time lapse between remittance from debtor and disbursement by debt pooler Once each month. Within 2 working days. Within 10 days. Within 30 days after close of each calendar month. Within 15 days. Within 35 days. Within 15 days, or 7 days if funds are in the form of cash. Within 30 days after close of each calendar month. Within 15 days. At least once each 40 days. Within 5 days. |