From: Laura C. Tharney
Date: October 11, 2011
This Memorandum is intended to supplement the information contained in the
Draft Final Report. Since considerable comment has been received, and considerable
testimony provided on this project, the Memorandum contains excerpts from prior
meetings at which this project was considered in an effort to collect that information in
one place for ease of Commission review. The goal of including the excerpts below is to
allow the Commission to review the Minutes and focus on the substance of the project,
the comments and the decisions made to this time. Minutes excerpts are generally
included below without ellipses or other notations showing where information has been
The Memorandum also summarizes Staff’s discussions with individuals from the
Illinois Department of Financial and Professional Regulation.
I. Minutes excerpts.
November 19, 2009
Ksenia Takhistova provided a general explanation of the history and goals of
NCCUSL’s Uniform Debt Management Services Act, indicating that approximately one-
third of the states are considering or have adopted a version of the uniform Act. Ms.
Tharney indicated that Staff had been contacted by the Department of Banking and
Insurance and that the Department had expressed an interest in the project because New
Jersey’s current law is old and could be improved.
January 21, 2010
Commissioner Pressler asked why the report called for registration, rather than
licensing, as was currently required in New Jersey. Commissioner Pressler noted that
registration is usually a unilateral act, but that licensing requires the approval of the
licensing body. Chairman Gagliardi agreed with Commissioner Pressler that the
language of the draft should be changed to require licensing, rather than registration, but
that it should be made clear that this was done not to effect a substantive change, but to
maintain the effect of the uniform language while including the term as it is more
commonly understood in New Jersey.
Ms. Tharney also raised the issue of the three sections of the report that are
drafted in the alternative, sections 4, 5 and 9. She explained that, as currently drafted, the
Section 4 allows only non-profit entities to participate in the provision of debt-
management services, while 4A allows for-profit entities to do so as well. The same is
DMSANJ – Memorandum – October 11, 2011 – Page 1
true with the alternatives provided for sections 5 and 9. The Commission approved the
inclusion of alternative language for the purpose of eliciting comments on both options.
Commissioner Pressler questioned the differentiation between secured and
unsecured debt. She explained that residential mortgages should not be included in the
Act, but that other forms of secured debt, like appliances and car leases should be
included. Commissioner Pressler stressed the unique nature of residential mortgages,
because of the economic situation and the various techniques being used to salvage them,
but suggested that other forms of consumer debt, secured or not, should be subject to the
September 16, 2010
Ms. Tharney explained that a bill was introduced in the New Jersey Legislature by
Assemblyman Jack Connors that is similar to, but not identical to, the uniform law. Ms.
Tharney said that Staff had spoken with Assemblyman Connors’ office and would be
keeping his office updated regarding this project.
The most significant question to be addressed by the Commission is whether “for
profit” entities should be allowed to participate in debt management services in New
Jersey. They are not currently permitted to do so. Generally, “for profit” and “not-for-
profit” entities offer different services to consumers. Based on the information provided
to this time, it is the understanding of Staff that not-for-profit entities are not allowed to
engage in “debt settlement”, which involves a reduction in the principal amount of the
debt. For-profit entities do offer “debt settlement” services. The “for profit” business
model focuses on the consumer paying a percentage of the principal amount of the debt
owed to the creditor in a lump sum (or over a three or six month period). Funds need to
be accumulated by consumer and then offered to creditors, focusing on the creditors one-
by-one. Not-for-profit entities, on the other hand, focus on paying down the entire
principal amount of the debt, generally over a period of three to five years, after
concessions by the creditors including reduction in interest rates, finance charges, and
fees. Ms. Tharney explained that the information available to this time suggests that the
different business models serve two different segments of New Jersey consumers. About
80% of the states now permit for-profit entities to provide debt management services to
the residents of those states. In 2004, approximately 25 states permitted only not-for-
profit entities to engage in debt management activities.
Commissioner Bunn asked if the Department of Banking and Insurance had a
stand on whether for-profit debt management entities should be allowed in New Jersey.
Ms. Tharney explained that although the Department’s spokesman was not able to attend
the meeting because of a scheduling conflict, the Department was amenable to the
participation of for-profit entities, properly regulated.
David McMillin of Legal Services explained that debt settlement, the business
model used by for-profit entities, is a serious problem for low income New Jersey
consumers and consumers generally, both here and throughout the country. He explained
that the practices involved in debt settlement have received what may be the most
criticism of any current practices in consumer finance marketplace. He added that, at
DMSANJ – Memorandum – October 11, 2011 – Page 2
Legal Services, they have never seen a debt settlement agreement that they liked. He
indicated that Consumer Union had said much the same thing and that while the
arrangement sounds good, it is, in practice, very harmful.
Commissioner Bell asked if Mr. McMillin was referring to for-profit or not-for-
profit entities and Mr. McMillin explained that not-for-profit entities rarely deal in debt
settlement but instead, like Consumer Credit Counseling Services of New Jersey, focus
on providing debt management plans. Ms. Tharney explained that she had been advised
that although not-for-profit entities would like to engage in the principal reduction
aspects of debt settlement, they were precluded from doing so by the impact of federal
law (501 q) on their not-for profit status.
Mr. McMillin explained that in practice, although for-profit entities are not
allowed in New Jersey, they still find New Jersey consumers on TV and the internet.
They have historically charged high up-front fees, so the money that the consumer thinks
is going or will go toward debt reduction is, instead, used as fees to the for-profit entities.
Consumers may remain unaware of this until they get sued by creditors who have not
been paid. Commissioner Bunn asked if the draft act contemplates Department approval
of debt settlement contracts. Ms. Tharney replied that the entities would be required,
under the act, to submit their contracts as a part of their application for licensure. Those
entities would also be required submit information regarding their plans for debt
management activities, to include certain disclosures, and to limit their advertising.
Commissioner Bunn asked if Mr. McMillin supported the licensing requirement.
Mr. McMillin responded that he did not think for-profit entities should be able to deal
with New Jersey consumers. He suggested that in 2009, the Better Business Bureau
determined that for profit debt settlement was an inherently problematic type of business.
He also mentioned the recently adopted Federal Trade Commission Rule through which
the FTC substantially expanded its telemarketing sales rule and jurisdiction to address
problems in the area of debt settlement and related businesses. The Rule, effective
September 27th, bans the imposition of advance fees and, without including a specific
dollar amount, limits the amount of the fees that can be charged. The Rule applies only
to for-profit entities and only to those whose business practices involve at least one
interstate telephone call. The uniform law does not include these fee limitations since
they did not exist at the time it was drafted.
Mr. McMillin also made reference to the study by the United States General
Accountability Office study that was not favorable regarding debt settlement companies.
He strongly urged the Commission to put this project on hold and not recommend it, or to
substantially increase the consumer protections. Commissioner Bunn asked if the
application of the FTC rule more broadly to non-telephone solicitations would be the sort
of broader protection called for by Mr. McMillin, and Mr. McMillin replied that such an
expansion would be a good step and that the Commission should watch after the FTC
Rule takes effect to see how it works.
Mr. McMillin pointed out that Illinois is the state that adopted a debt settlement
law most recently and that it contains a much stronger fee cap provision. He added that
the Department of Banking and Insurance has a good fee regulation that applies to
DMSANJ – Memorandum – October 11, 2011 – Page 3
consumer counseling and debt management plans and is similar to what Illinois recently
Commissioner Bell asked if internet communications were covered by the FTC
Rule and Ms. Tharney indicated that the Rule only applies in situations involving at least
one interstate telephone call.
Commissioner Bunn explained that he would prefer to hear from the Department
of Banking and Insurance before proceeding with this project. He suggested that he
wanted to wait for the FTC Rule implementation and look at what was done in Illinois.
Ms. Tharney explained that Staff had reviewed the FTC Rule documents,
including the comments associated with the rulemaking process and had also looked at
the GAO study referred to by Mr. McMillin. She explained that although there were
stories of consumers in dire circumstances that fell victim to predatory actors of both the
for-profit and not-for-profit variety, there were also for-profit entities operating in other
states that have an A rating from the Better Business Bureau with very few complaints
reported. Ms. Tharney also explained that since the current law in New Jersey, which is
more than 30 years old, did not protect consumers as well as it could, and since
legislation in this area has been introduced, action by the Commission might be useful at
this time. Commissioner Bertone said that she would like to see the statute drafted in the
alternative, so that the Commission can consider the for-profit/not-for-profit issue in
more detail. Commissioner Bunn suggested that Staff look closely at the Illinois statute
concerning fee limitations.
Commissioner Bell asked if there was any state that successfully regulated for-
profit entities and any independent body that has indicated that such a state provides good
service. He suggested that if there is no state that successfully regulated for-profit
entities, and no model that successfully protects New Jersey consumers, there is no point
in allowing them to operate in New Jersey. Commissioner Bunn expressed a concern that
New Jersey consumers not be left without assistance, and Ms. Tharney said that, based on
the information Staff had received, not-for-profit entities would like to be able to engage
in the principal reduction model. She suggested that the desire of not-for-profits to be
able to offer this service indicated that it might be a beneficial service for New Jersey
consumers if done correctly.
October 21, 2010
The Compliance Manager from Novadebt/Garden State Consumer Credit
Counseling, Inc., wrote to express general support for the modifications to the draft, and
to propose a specific suggestion for an additional change to the fee provision. Carol
Johnson from AOC’s Committee on the Unauthorized Practice of Law expressed concern
that any attempt to require additional licensure for attorneys could be viewed as an
impermissible interference with an area controlled by the New Jersey Supreme Court.
Ms. Tharney also said that informal comments she had received from the Attorney
General’s office recommended modifications to the attorney exemption and the deletion
of language stating that the law does not apply if the provider has no reason to know the
individual resides in New Jersey. The Attorney General’s office also proposed a
DMSANJ – Memorandum – October 11, 2011 – Page 4
modification to Section 21, dealing with advertising and marketing, so that a provider of
debt management services cannot imply that it has a governmental affiliation if it does
Mary Beaumont, the Director of Legislation and Regulation for the Department of
Banking and Insurance (DOBI), appeared along with Tom Hunt, Director of Consumer
Finance for DOBI. Ms. Beaumont explained that DOBI appreciated the work the
Commission was doing to mold UDMSA to the New Jersey structure and they would be
available to provide answers and expertise in this area. She said that the draft could
greatly enhance consumer protection in New Jersey.
Tom Hunt explained that, with regard to “for profits”, for more than 30 years New
Jersey Debt Adjuster Act has taken a position of protecting the public from potentially
rapacious debt adjusters by limiting the pool to nonprofits. In the past two or three years,
with the foreclosure and financial crisis, there has been a recognition that another aspect
of consumer protection is provided to people in financial trouble by nonprofits and “for
profits”, pursuant to a comprehensive statutory and regulatory scheme.
Commissioner Burstein sought clarification from Mr. Hunt that there is a gap with
regard to some New Jersey consumers who are indebted and could benefit from a
settlement of those debts in a manner not currently permitted by law. Mr. Hunt explained
that, in recent years, the demand has grown exponentially but the pool of services has
remained static because of the regulatory regime limiting the pool to nonprofits.
Commissioner Bunn asked whether DOBI had seen an increase in complaints for the debt
adjustment services. Mr. Hunt said that they had, noting that with the growth of the
industry and the need for the services has come a growth of complaints.
Michael Croxson, of CareOne Services, Inc., in Columbia, Maryland, explained
that his company operated in 42 states, and is licensed in most of those states, although
some states require registration and not licensure. He said that an important aspect of this
issue is that the consumer who has unsecured debt falls onto a continuum consisting of
four services ranging from a consumer who just needs help with a budget and credit
counseling to those for whom bankruptcy is the most appropriate solution. CareOne
offers credit counseling, debt management and, in some states, debt settlement.
Mr. Croxon explained that debt management plans are the traditional territory of
nonprofit credit counselors. Such plans involve payment, by the debtor, of 100% of the
principal amount of the debt over a period of 60 months, with concessions by the
creditors like reduction of certain fees or charges. The upfront fee would be set at about
$35 to $50, plus a monthly fee to cover the ongoing support to the consumer during the
period of the plan. Debt settlement is different from debt management because it
involves the repayment of less than the full principal balance owed and may be
appropriate in cases in which the consumer cannot afford a debt management plan, but
may be too solvent to pass the means test to qualify for bankruptcy. Traditionally, “for
profits” entities provide this service and, historically, they charged substantial up-front
fees. Bankruptcy is the end of the continuum, but an attorney is needed to provide this
DMSANJ – Memorandum – October 11, 2011 – Page 5
Mr. Croxson explained that though his company operates in 42 states, they offer
settlement services only in nine states. The states in which they offer debt settlement
services are those that that have passed the uniform act, or in states like North Carolina
which have absolutely prohibited upfront fees and where no fee can be charged until
services are rendered. CareOne was a strong advocate for the FTC Rule. CareOne has had
1.5 million consumers contact them for counseling and has facilitated the payment of
more than $165 million between consumers and their creditors. They talk to 650,000 new
consumers every month. CareOne has had fewer than 30 Better Business Bureau
complaints in a twelve month period and has an A-plus rating. Mr. Croxson suggested
that there is really no qualitative difference between the services provided by the licensed
service providers located in New Jersey and those same services provided by companies
located elsewhere, whether they be not-for-profit or for-profit. The only difference is that,
as a for-profit entity, his company pays taxes. A reason to allow for-profit entities to
offer services in New Jersey is that when a consumer presents to an entity, he or she can
be anywhere along the continuum he explained at the beginning of his presentation.
Offering only one product is not a solution.
Mr. Croxson stated that consumers should be allowed to choose the services they
receive…people need to be served in different ways and that figuring out how people are
going to be best served is the right approach.
Commissioner Bell asked how debt settlement services work and how companies
persuade creditors to reduce principal amount of loans. Mr. Croxson replied that
typically, the consumer is delinquent on outstanding debt and the creditor has charged the
debt off. The creditor is either going to write it off or give it to an internal debt collector
or to a collection agency. The key is negotiating with creditors and having the necessary
knowledge to do so, either by systematizing it or basing it on relationships with creditors.
The provider tells the creditors that the consumer can only afford to pay “x”, either in
lump sum or installments, that “y” is what the company has in escrow and that the debtor
is willing to settle at, say, 50 cents on the dollar, take it or leave it, and if you don’t want
it, I am going to the next debtor. The provider will then receive a fee based on the savings
to the consumer. If the provider saves the consumer $5,000 on a $10,000 debt, it will get
30% of that $5,000. There is no reason to engage in debt settlement unless the consumer
will see a net benefit. Mr. Croxson recommended that the law require that the provider
state upfront the maximum amount that the services will cost the consumer.
Commissioner Bunn asked if, in the other states where CareOne does work, but
not debt-settlement work, CareOne is doing the same things that non-profits do. Mr.
Croxson said yes.
With debt management, creditors have standard reductions for consumers on a
plan. It is not a negotiation; the deal is the same for each consumer. For example, 9.9% is
one credit issuer’s standard offer; 11.3% is another entity’s standard. There is no
negotiation in debt management plans and that is why debt settlement requires higher
fees, because it takes more work to settle – it costs approximately four times more to
engage in debt settlement than in debt management.
Wesley Young, representing The Association of Settlement Companies (TASC),
DMSANJ – Memorandum – October 11, 2011 – Page 6
explained that TASC is an association of about 150 members that was started in 2005,
coinciding with the enactment of the Bankruptcy Reform Act. Mr. Young said that the
gap in the middle of the continuum is the consumer who does not qualify for bankruptcy
but cannot afford debt management. He explained that TASC imposes mandatory
standards for its members and has a third-party accreditation. They also “secret shop”
their members by calling them and posing as consumers in need of assistance in order to
make sure members are following TASC’s standards. TASC has experience with the
uniform act, and supports it. TASC’s members offer the product for the middle-range
consumer, the product between debt management and bankruptcy which is not being
addressed by nonprofits. The IRS and federal law tie non-profit status to non-profit
activities which, in the debt-relief world, means the educational component. If the
primary purpose of a non-profit provider is debt management, the organization will lose
its tax-exempt status. Since non-profits cannot overdo debt management activities, there
is a gap between what they can do and what a consumer needs. Last year TASC members
settled approximately $1 billion worth of debt. In 2009, banks wrote off $90 billion in
credit card debts. Based on the responses to its FOIA requests to the FTC, TASC
reviewed materials and determined that debt settlement companies comprise
approximately 20% of companies on the list of the 100 most complained about
companies in the area of debt settlement/debt negotiation, but only 5% of the complaints.
The first debt settlement company with a complaint against it is number 24 on the list.
Alan Franklin, the president of American Credit Alliance, Inc., a non-profit,
501(c)(3) that has been in operation since 1992, said that there are about 500 companies
that provide nonprofit service. Mr. Franklin’s company operates in-state by either face-
to-face or telephonic counseling. Approximately five years ago, when the bankruptcy law
changed, creditors realized that, under rules in force at that time, a debt had to be on the
books for 180 days before it could be written off. He said that when the debt settlement
industry started, it was like the “wild west”. Consumers stopped calling non-profit debt
management companies and started going to the debt settlers. Then, with the onslaught of
complaints, the FTC started to look at the debt-settlement industry. A problem is that
people who go to debt-settlement companies do not get what they think they are getting.
Mr. Franklin suggested that the FTC got it right by outlawing large upfront fees.
Mr. Franklin objected to the argument that “for profits” (debt-settlement) have to
do a lot more work than nonprofits (debt-management). As he explained it, in the typical
debt settlement plan, there are six or seven credit cards for which debt is owed, one may
be charged off, and the purchaser of the account is contacted and a plan is set up. When
the settlement balance reaches 50% of the debt, the amount gets paid to the creditor. It is
very rare that a debt settlement plan can be set up for all six creditors because if the debt
is still an asset on the books, it cannot be written off. In a typical settlement, a person
goes in to negotiate. The debtor sets up a bank account to have the money to disburse to
the creditor and, once one is paid, moves on to other creditors. Mr. Franklin stated that
the fees for debt management and debt settlement have to be on parity. A debt
management company cannot set up a debt plan for $50. The debt management company
cannot compete with a debt settlement company that charges $500 up-front fees. The
non-profit industry is static and it does not advertise.
DMSANJ – Memorandum – October 11, 2011 – Page 7
Russell Graves of Consumer Credit and Budget Counseling, a non-profit
counseling entity, supports the draft act because, he explained, regulation is needed in
New Jersey now more than ever. He said that he sees debt settlement ads in the phone
book even though for-profit entities are not permitted by law to operate here. He pointed
out that TASC only covers 20% of the industry and that a law is needed to protect
consumers from the other 80% of the industry. He explained that five years ago non-
profits were adequate to get the job done, but now, the problems are bigger. He said that
he supports a level playing field so long as New Jersey citizens are being helped.
Commissioner Bunn asked both Alan Franklin and Wesley Young whether they
supported the Commission’s draft New Jersey act. Mr. Young said that he did, adding
that he has been in contact with Ms. Tharney about certain sections. TASC supports the
uniform act and the new FTC rule. He acknowledged the problems with un-licensed
providers. Mr. Franklin also supports the draft except for distinctions made between the
kinds of debt that is managed because he thinks they are the same. He also wants to see
parity on upfront fees. He added that 501(c)(3) requires that nonprofits get no more than
50% of their funding from debt management plan services. Commissioner Burstein
asked whether creditors were receptive to working out a plan. Mr. Franklin replied that if
the accounts are not yet charged off, the creditors are constrained by rules and cannot
really work out a deal. In the case of debt settlement, the new debt buyer has paid a huge
discount for the debt, and Mr. Franklin asked why this discount should not be offered to
Commissioner Bell asked how much debt is the result of medical expenses. Mr.
Croxson replied that the percentage is substantial, perhaps 25 to 40%. Mr. Franklin said
that medical debt is generally owned by a hospital or medical group that retains the paper
in-house. It is carried for 90 days and then written off as bad debt. The debt is then sold
to a collection agency. Mr. Young suggested that a point that has been missing from this
discussion so far is that non-profits receive a “fair share” payment from creditors. For
every payment received by the creditor, the provider gets a cut. The fair share payment
used to be higher, but is now more like 4%. Mr. Croxson said that nonprofits have to
acknowledge that they are a dual agent. With a debt management plan, there is no
negotiating since it is a cookie cutter transaction, so there is not really a conflict of
interest. With debt settlement, on the other hand, Mr. Croxson suggested that a company
cannot try to get the best deal for the consumer if it is also being paid by the creditor. Mr.
Croxson suggested that language be put in place to avoid fees being paid by creditors and
David McMillin said that he did not feel that a fair and balanced picture had been
provided because the availability of credit counseling in New Jersey has increased and he
did not see a significant gap between what debt settlement companies provide and what
bankruptcy provides and bankruptcy is less expensive for the consumer. He said that he
has yet to see a consumer who has had a good experience with a debt settlement company
and, nationally, a huge number of regulatory agencies were finding problems with the
debt settlement industry. Mr. McMillin said that although “for profits” were not
supposed to be operating here, they operate on a nationwide basis, and if someone
contacts them by phone or internet, the companies will not necessarily inform the
DMSANJ – Memorandum – October 11, 2011 – Page 8
consumer that they are not authorized to operate under New Jersey law. Mr. McMillin
said that with the new FTC ruling, consumers were better protected but he added that
consumers can get the same deal from creditors as a debt settlement company can.
Commissioner Bunn asked whether DOBI has authority to regulate this and Mr.
Hunt replied that the Department’s jurisdiction has certain restrictions. It can take action
against the brick-and-mortar operation, but the online transactional services with New
Jersey consumers poses the same issues as telephone services. Ms. Tharney explained
that since entities not authorized to operate here do not have bonds or insurance in place,
even if the Department can pursue them, victory may be on paper only, because a
judgment might be nearly impossible to collect. She explained that Staff was layering
protections in the draft; looking at the consumer protection available in the existing law
and adding on to those protections based on what other states were doing.
November 18, 2010
TASC, in its written comments, thanked the Commission for allowing its
participation. It stated that the rate of completion for a Chapter 13 bankruptcy plan was
33%, the rate of completion of debt-settlement for TASC members was approximately
34%, and the success rate for not-for-profit debt relief was 21-26%. With regard to the
issue of fees, TASC suggested that fees be set by statute, not regulation, and explained
that Illinois is not a good statutory model because TASC anticipated that debt-settlement
companies will not be able to operate there since the fees allowed are much less than
those allowed for not-for-profits and do not even cover the costs of providing the service.
The materials supplied by TASC provided a breakdown of complaints made against debt-
settlement companies and explained that: (1) debt-settlement clients are not usually low
income individuals; (2) consumers cannot negotiate their own deals as effectively as a
third party can; (3) debt-settlement does not cause timely payers to default on debt; and
(4) there are consumers who are helped by debt-settlement.
David McMillin, Esq., from Legal Services of New Jersey, submitted comments
in writing to raise some new points and to develop comments made previously. He
provided citations to source material which were reviewed by Staff in advance of the
meeting, and he made contact with Ronald LeVine, Esq., who then discussed various
issues with Staff. Mr. McMillin made a number of specific comments regarding the draft
statutory language, and stressed that it was vitally important to prevent for-profit entities
from doing business in New Jersey. He explained that because it has limited resources,
Legal Services of New Jersey can only deploy its people on issues and projects it
considers particularly problematic and this is one such project. He suggested that
something that he anticipated seeing more of in New Jersey was a lawyer referral model
of debt-settlement in which firms that engage exclusively in debt-settlement act through
New Jersey attorneys. Finally, he recommended that the draft clarify the power of the
Department of Banking and Insurance to enforce the act outside of New Jersey.
New Jersey Citizen Action explained that it is the largest citizen watchdog
coalition in New Jersey and that it works to expand and protect the rights of individuals
and families. The NJCA representatives who spoke with Staff indicated that for-profit
DMSANJ – Memorandum – October 11, 2011 – Page 9
entities are notorious for wide-spread abuses and that, since 2007, debt-settlement and
debt-management companies generated the most complaints received by the BBB. The
NJCA representatives expressed concern with the FTC Rule because it did not limit the
fees that could be charged, nor did it tie the fees to any financial benefit on the part of the
consumer. They suggested that New Jersey law protects its citizens by banning for-profit
entities and that DMSA would remove that protection.
Ronald LeVine, Esq., an attorney since 1972, has a practice that focuses on
bankruptcy, but includes the provision of other services as well. Mr. LeVine, during a
telephone conference with Ms. Tharney, said that he sees about 1,000 clients a year in his
practice and that 10-20% of them have dealt with a debt-settlement company without any
success. Based on the information available to him, it was a uniformly bad experience for
all. He explained that there is a fairly active consumer debtors’ bar that will do debt-
settlement on the rare occasions on which it is warranted. Mr. LeVine opined that there
will be no legitimate attorney doing debt-settlement as a significant part of their practice
because the business model is inherently predatory. It cannot be implemented in a non-
predatory way since mass-merchandisers have to spend so much on advertising and there
is a very narrow sliver of people for whom it is the best option though it is marketed to
everyone. Mr. LeVine said that attorneys who are serious bankruptcy practitioners do
debt settlement work as an adjunct to that practice because there is a percentage of the
population for whom it is the best solution. One benefit of an attorney providing the
service is that the attorney can challenge the basis for the debt, which may be determined
not to be legally enforceable. Attorneys also look to the “charge off” balance as a starting
point in order to get the best outcome for their clients. Mr. LeVine said that most
consumers are not emotionally equipped to negotiate for themselves, so there is a benefit
to working with an intermediary. He added that New Jersey is a progressive state that
offers legal protections to citizens that are not offered in other states.
Gail Hillebrand, the Senior Attorney in the West Coast office of Consumer Union,
who manages the credit and financial advocacy team and was involved in the FTC
rulemaking process, explained that if New Jersey allowed for-profit entities to operate,
the provisions proposed by this project -- such as the layering of protections and
incorporating the requirements imposed by the FTC and other states -- would offer
protection to consumers. As it stands now, however, New Jersey consumers have some of
the best protection in the nation because New Jersey is one of the few states that does not
allow for-profit entities to do business. Ms. Hillebrand recommended retaining the not-
for-profit requirement for a few years, suggesting that states that allow for-profits to
operate, like Maine and Illinois, are imposing stricter limits and that the FTC rule change
might result in more limitations being imposed by other states. She explained that she has
not yet seen a happy customer of a for-profit entity. Ms. Hillebrand recognized that,
theoretically, debt-settlement is a beneficial model, but the segment of consumers for
whom it is suitable is small and it is marketed to everyone, including people for whom it
is completely inappropriate and financially dangerous. She said New Jersey should not
expose 100% of its consumer population to predatory practices when only something like
3% of them would benefit from the debt-settlement model. She acknowledged that it is
true when for-profit entities say “no one will do this if we don’t” but suggested that they
DMSANJ – Memorandum – October 11, 2011 – Page 10
hurt far more people then they help, so a cost-benefit assessment does not support
allowing them in the state.
Ms. Tharney mentioned that less than a decade ago, not-for-profits were
considered bad actors in this area and that, starting in 2002, the IRS intensified its
scrutiny of claims for tax-exempt status by not-for-profits. Between 2004 and 2006, the
IRS audited 63 credit counseling agencies representing one-half of the revenue in the
industry. In the audits of the 41 of those entities representing more than 40% of the
industry revenue, all audits resulted in the revocation, proposed revocation or other
termination of the entities’ tax exempt status. The Pension Protection Act of 2006
included section 501(q) of the Code to impose additional requirements on credit
Gail Hillebrand indicated that debt-settlement is an inherently flawed business
model in which the companies are not likely to be able to do what they promise.
Companies sign up people who cannot meet the program and, if they cannot do so, the
consumers are substantially harmed. The FTC Rule controls the timing of the initial
payment, not the amount, and once the first payment is made, the company qualifies for a
fee, so there is an incentive to put customers in a plan they cannot meet. Ms. Hillebrand
added that once a debtor stops paying creditors, he or she is subject to increased and more
vigorous enforcement actions. She said that the only way to make the for-profit model
work is to limit fees by tying them to consumer savings, defined as the difference
between what they brought to the table and what they paid to the creditor. For Ms.
Hillebrand, a key question is whether any consumers actually “net” out ahead under a
for-profit debt-settlement model, when the unsettled debts (which may have ballooned as
a result of non-payment), the fees paid, and the payments made on debts settled are all
Ms. Tharney explained that a critical decision remained to be made by the
Commission, and that is whether or not to allow for-profit entities to do business in New
Jersey. Bad for-profit entities already victimize New Jersey consumers and the draft
could help clarify the powers of enforcement against such entities and increase the
penalties. It is also recognized that debt-settlement is the best option for some segment of
the consumer population. As long as there are consumers in need, it is anticipated that
more, not less, debt-settlement will take place in this State, and this draft offers more
protection than the current law.
Commissioner Burstein asked if there was any analysis available to Staff as to
what portion of New Jersey’s population is underserved by not having for-profits in the
State. Ms. Tharney explained that she did not know if the 3% figure provided by Ms.
Hillebrand was an actual figure, or simply one used to demonstrate how small a
percentage of the consumer population would truly benefit from this service.
Commissioner Bunn expressed concern about the percentage of the population that has
no other optimal service available. Ms. Tharney explained that based on the information
available to her, that would include people who have sufficient assets or an income
stream such that they can accumulate funds for a lump sum payment, who do not qualify
DMSANJ – Memorandum – October 11, 2011 – Page 11
for a Chapter 7 bankruptcy because of the means test, and who have a house that they do
not want to risk losing by pursuing a Chapter 13 bankruptcy.
Commissioner Burstein suggested that the burden should be on the for-profits to
show the public need, and said he did not believe that they had done that. Ms. Tharney
explained that the materials supplied by TASC attempted to do so. The Department of
Banking and Insurance had also commented about exploding consumer demand, but
Legal Services had suggested that it was not a problem.
Chairman Gagliardi said that if the project is viewed as based on consumer
protection, the question is whether the consumer in New Jersey is better off without
access to the for-profit entities or with access. Ms. Tharney mentioned that one of the key
reasons for beginning with this project is that New Jersey’s current law is more than 30
years old and DMSA provides more protections to consumers generally. Chairman
Gagliardi asked if there was an entity other than TASC that encouraged the expansion of
the law in New Jersey to include for-profit entities. Ms. Tharney said that both CareOne
(a for-profit provider) and DoBI supported the inclusion of for-profits as well.
Commissioner Bell expressed a concern that the current state of New Jersey law was a
bar to entry to all for-profits except the scofflaws, and suggested that it may not be useful
to restrict the people engaging in the activity to the “worst-of-the-worst”.
December 16, 2010
Ms. Tharney explained the recent developments regarding this project to the
Commission, including her appearance and testimony before the Assembly committee,
and the fact that bill A1949 was ultimately held with the goal of redrafting to address
commenter’s concerns and returning the bill to the committee for consideration and
January 20, 2011
Ms. Tharney explained that since Staff had been asked to work with
Assemblyman Connors and provide its most recent draft on the project, additional work
on the project had ceased in December. Commissioner Burstein suggested that it would
be useful to see another report on this project for the February meeting highlighting areas
in which the Commission still needs to make decisions so that those issues can be
resolved and a report issued regardless of what may happen in the Legislature.
February 17, 2011
Gail Hillebrand, of Consumer Union, sent a letter to Assemblyman Connors in
December of 2010 recommending that New Jersey maintain the status quo of only non-
profit debt-management in the State. That letter suggested that for-profit actors had a
dismal record, that debt-settlement is not likely to be suitable for consumers in financial
distress, that the industry is in a state of flux as a result of the FTC Rule change, and that
if for-profit entities are to be allowed to conduct business in New Jersey, a strong fee cap
should be tied to actual savings on completed settlements. David McMillin, of Legal
DMSANJ – Memorandum – October 11, 2011 – Page 12
Services, could not attend the meeting because of a scheduling conflict, but expressed
concerns regarding the advance fee and fee cap provisions, indicating that these were a
high priority for Legal Services. CareOne also wished to be heard on the fee issue,
suggesting that a fee cap of 15% was not sustainable and advising that Staff check Illinois
and Maine (two states with 15% fee caps) to see if any for-profit entities were providing
services there. The one-page summary of services provided during debt-settlement was
supplied in support of CareOne’s position that debt-settlement is a more expensive
service to provide than debt-management.
Ms. Tharney explained that, in an effort to obtain additional information for the
Commission, she had contacted the Bureau of Consumer Credit Protection in Maine. The
representative with whom she spoke indicated that several years ago, Maine decided to
regulate the act, not the actor, and opened the state to the participation of for-profit
entities. Maine imposes a fee cap of 15% but it is based on the amount of the debt at the
time the debt is settled. If $7,000 of debt is enrolled in a plan in Maine, and it grows to
$10,000 during the course of the plan, but is settled for $5,000, the debt-settlement
provider is permitted to take 15% of the $5,000 “saved” rather than 15% of the $2,000
difference between the amount initially enrolled and the amount paid. By the end of this
year, Maine expects to have about six registered debt-settlement companies (they have a
population of approximately 1.2 million people). As it was explained to Ms. Tharney,
Maine already had (as New Jersey does) bad actor debt-settlement companies engaging in
predatory business practices. By allowing for-profit entities to operate there legally,
Maine offers consumers an option with the protection of the bond required to be posted.
Phyllis Salowe-Kaye asked whether action was being taken this evening,
explaining that New Jersey Citizen Action considers this project an abomination and is
glad that the Commission seems to be waiting before moving forward. Commissioner
Bell explained that in New Jersey, currently, scofflaws essentially have a monopoly
because there are no state-approved for-profit entities. He also explained that the
Commission discussed whether the risk of spill-over to people who do not need the
services is worth it, and that it was the sense of the Commission that the matter should
Ms. Tharney added that she heard from the Maine representative that if entities
register (in New Jersey, licensure would be required), the damage from bad actors can be
limited because the state has a physical address, a bond, and other protections.
Commissioner Bell suggested that Maine might be a good state to look at.
No determination was made regarding the applicability of the Act to attorneys
pending receipt of information from the State Bar, which Staff hopes to receive in late
April. Ms. Tharney clarified that in the current draft, attorneys are not subject to dual
licensure but that attorneys engaging in a business that regularly provides debt-
management services or with the principal purpose of providing debt-management
services, the remainder of the provisions of the Act applies.
April 28, 2011
DMSANJ – Memorandum – October 11, 2011 – Page 13
Laura Tharney explained that one commenter, Ellen Harnick of the Center for
Responsible Lending, was planning to attend the meeting but her plane was delayed in
Raleigh. A letter submitted by Ms. Harnick was included in the packet of information
distributed to the Commission members at the beginning of the meeting.
When the Commission asked Staff for more information regarding the language
calling for a bonding company to have an “A” rating, Staff asked DOBI about the
requirement. DOBI advised that it recommended the elimination of any reference to the
insurer’s rating. The DOBI representative indicated that there was no such requirement in
New Jersey law. The current law requires only that the surety company be authorized by
law to do business in this State.
Commissioner Burstein suggested that there was a significant difference between
the rating requirement currently in the draft and a simple requirement that a company be
authorized to do business in the State. Mere authorization does not address the entity’s
fiscal responsibility; it simply requires the filing of a piece of paper. Ms. Tharney
mentioned the concern expressed by DOBI previously that limiting the Act to companies
that have an A rating might eliminate some entities that would conduct themselves
appropriately. She noted that the original draft included language calling for either an A
rating or a finding by the administrator that the entity is satisfactory. The Commission
elected to retain that language.
At the last meeting, the Commission also asked Staff to find out how quickly
DOBI generally acted when issuing or denying an application for licensure. Ms. Tharney
explained that DOBI had expressed concerns regarding the imposition of a short time
period to act on a large number of license applications if the law was changed. The
preference expressed by DOBI was for no deadline to be included in the statute. Ms.
Tharney explained that the UDMSA provided for a 120 day period with a 60 day
extension of the time. Commissioner Bertone recommended incorporating that UDMSA
language and the Commission agreed.
With regard to the issue of private enforcement of the Act, Ms. Tharney explained
that the language in this section of the draft had been modified to authorize an award of
treble damages in an expanded group of cases (more cases than included in the UDMSA)
but that it stopped short of saying any violation of the Act can result in treble damages.
She explained that some violations are administrative in nature, for example, failing to
provide documentation regarding the certification of a counselor. She explained that Staff
had focused on provisions that were consumer protective in nature, and made those
subject to treble damages. The Commission agreed with the course taken by Staff.
David McMillin said that he had commented on this project a number of times
and appreciates the time that the Commission and Ms. Tharney have paid to this issue.
He explained, however, that as currently drafted, the language differs from that found in
any comparable consumer protection statutes in New Jersey. He expressed his concern
with a statutory statement characterizing obtaining remedies pursuant to two different
DMSANJ – Memorandum – October 11, 2011 – Page 14
statutory schemes as inherently duplicative, since it is not clear whether those remedies
would fully or partially overlap. One statute may, for example, provide for treble
damages, while another allows recovery for expert fees. Receiving an award pursuant to
both of those statutes is not necessarily duplicative. Mr. McMillin said that courts are
used to lawyers bringing multiple claims based on same underlying conduct and, as a
matter of course, preclude duplicative recoveries. He recommended that the statute not
suggest that remedies awarded pursuant to different statutes are inherently duplicative,
but allow the courts to make those determinations. Ms. Tharney indicated that removing
the language pertaining to double recovery would appear to address the issue raised by
Mr. McMillin. Chairman Gagliardi agreed, suggesting that doing so would advance
With regard to powers of attorney, Ms. Tharney explained that, initially, the
UDMSA permitted an individual to confer on a provider a power of attorney authorizing
the provider to settle the individual’s debt for no more than 50% of principal amount of
debt. The revised UDMSA does not permit an individual to do so. Ms. Tharney explained
that she had heard that this change poses a problem because, according to CareOne, in
approximately 36% of cases, they cannot reach the individual consumer to obtain
authorization within the five day period set by the creditor for the conclusion of the deal.
As a result, an individual may be offered a beneficial settlement by a creditor, which
requires confirmation in five days, and it might take 11 or more days to hear from
customer, so the deal is lost. The power of attorney does not permit the providers to
randomly settle debts, but it did allow them to settle debts for less than 50% of the
amount of the debt, which has been described as a useful tool beneficial to the individual
consumer. Ms. Tharney explained that it had been suggested that this modification to the
language of the UDMSA might have resulted from an erroneous interpretation of the
FTC Rule change. If there is a concern that a power of attorney might be used by
unscrupulous providers to collect fees before they are legally entitled to them, then there
may be a way to address that without putting settlements at risk.
With regard to fees, Ms. Tharney explained that the selection of the appropriate
amount of fees is difficult and indicated that Mr. McMillin had comments on this area as
well. First, she explained that the FTC Rule change dealt with the issue of when fees
could be taken. Previously, a consumer dealing with a predatory provider would pay
hundreds or thousands of dollars with the expectation that that money would be used to
pay creditors. Later, those consumers would be told that those funds were instead used to
pay the provider’s fee, and that no payments had yet been made to any creditor. The FTC
Rule change addressed this issue for certain providers by stating that the entity could not
charge or receive a fee until an agreement had been reached with at least one creditor and
at least one payment had been made in accordance with that agreement. The
Commission’s draft is stricter than that because it applies to anyone engaging in debt-
settlement. The amount of the fee is still in issue. In the UDMSA, and in bill A1949, a
provider could collect 30% of the savings an individual realized as result of the efforts of
the for-profit provider.
DMSANJ – Memorandum – October 11, 2011 – Page 15
Other states, like Maine and Illinois, set the fee at 15% of the savings realized by
the consumer. Ms. Tharney indicated that there seems to be some agreement about the
fact that tying the fee to the consumer savings is a useful tool that keeps the interests of
the provider and the consumer aligned. For-profit entities, however, say that they cannot
work for less than 30% of savings. It was suggested that Staff look at Maine, since it was
claimed that no for-profit providers operate there. When Ms. Tharney spoke with the
Maine office that handles this aspect of consumer protection in Maine, she was told that
there were providers operating there. Ms. Tharney cannot state that they are actually
operating, and not just registered. Ms. Tharney said that the fact that 15% works in Maine
is no guarantee that it will work here, and she noted that Maine’s 15% fee is different
from the one appearing in the New Jersey draft. Maine’s fee is based on amount of debt
at time it is settled.
When discussing fees, for-profit entities say that the work that they do is more
labor-intensive than the work of not-for-profits. Not-for-profits disagree. Consumer
protective groups, like those for which Ms. Harnick submitted comments, say that even if
a fee is set at 15% of savings as in the New Jersey proposal, unless 80% of the consumer
debt is settled (which is rare – TASC indicated that that only 34.4% of its customers
settled 75% of their debts) the consumer will derive no benefit from debt settlement. Ms.
Tharney suggested that since New Jersey’s version of 15% of savings represents a
smaller amount than Maine’s 15%, the Commission may wish to consider a number
between 15% and, perhaps, 20% percent of savings. She indicated that a chart had been
provided by CareOne, identifying the states in which they are unable to operate because
of fees that are too low. Chairman Gagliardi noted that some states had a 20% fee rate.
Ms. Tharney clarified that figure represented 20% of the enrolled debt (the debt brought
to the table by the consumer at the time the agreement is signed), not of savings.
Chairman Gagliardi asked if any state had a 15% fee like we are proposing. Ms. Tharney
said that Illinois did, and she did not yet have information regarding how the new fee
limitation was working in that state. Connecticut limits fees to 10% of savings, and
CareOne has indicated that it cannot do business there. Commissioner Burstein asked if
there was some potential mid-ground between applying the percentage to enrolled debt
and applying to savings – perhaps some kind of sliding scale akin to the manner in which
consumer debt is handled by the commercial law bar. Ms. Tharney asked if he was
referring to a different fee amount depending on the amount of the debt, such as “x” fee
for debt up to $20,000; a different fee for debts between $20,000 - $50,000, etc.
Commissioner Burstein confirmed that was what he was referring to, like the manner in
which the Commercial Law League used to handle such matters. Commissioner Bertone
said that if the fee is set too low, it discourages real competition between companies and
discourages companies from entering New Jersey, leaving only the scofflaws operating in
the state. Chairman Gagliardi asked Staff to look at other states with low limits to see
what is happening in those states.
Mr. McMillin explained that a consumer could benefit from a debt-settlement
agreement only if the fee is set at 15% of savings. He added that low income individuals
in relatively wealthy states like New Jersey and Connecticut had incomes just as low as
individuals in other areas of the country and a fee cap protects the most vulnerable
DMSANJ – Memorandum – October 11, 2011 – Page 16
consumers. Mr. McMillin noted that the Commission had heard from a number of other
consumer protective organizations, all of whom had raised serious concerns about having
for-profit providers in first place, and all had urged the Commission to use the Illinois
15% percent of savings fee cap to provide consumer protection. He suggested that this
was a strong aspect of the current report and indicated that the override provision
allowing DOBI to change the fee amount is not appropriate.
Ms. Tharney indicated that she had removed language tying the effective date of
the Act to the promulgation of regulations by DOBI because she did not want a delay in
adoption of regulations to derail the implementation of the Act. Instead, the draft will
provide for a six month delay in the effective date of the statute to allow DOBI time to
adopt regulations if it chooses to do so.
Commissioner Burstein indicated that he was still concerned with the
participation of for-profit entities and that part of the Commission agreed to include them
in the draft was in reliance on the comments of representatives of DOBI. He said he did
not wish to undo the work done, but to consider it in the context of the remaining issues
that the Commission is wrestling with. Ms. Tharney indicated that New Jersey is one of
the only states that does not allow for-profit entities to participate and that regulating for-
profits affords New Jersey consumers more protection than the current situation where
scofflaws have a monopoly. She also noted that ULC had removed the provisions making
for-profit participation optional from its latest drafts in recognition of the fact that almost
every state allows for-profits to operate. She added that the representative from Maine
had suggested that Maine was, five years or so ago, where New Jersey is today and that,
from his perspective, the state does not regret its decision to allow for-profits to
participate. So far, Maine’s experience has been that to extent companies register, a bond
is posted, insurance is available, there is someone to contact in the event of a problem,
and the company usually tries to settle rather than disappear in the night. The
Commission agreed to release the project as a tentative report.
II. Meeting in Illinois.
The meeting with representatives of the Illinois Department of Financial and
Professional Regulation was very helpful and informative.
Based on the information received in Illinois, it appears that the application of the
bulk of the substantive DMSA provisions to attorneys may be a useful tool. As the
Commission has heard from other sources, the use of law firms as “fronts” for debt-
settlement companies is one way in which unlicensed/unregistered companies are able to
“fly under the radar” in Illinois, damaging consumers and leaving them with no recourse.
The Illinois representatives explained that they were seeing law firms engaged in
predatory business practices in various ways, and that it was increasingly difficult to
determine exactly “who is doing what”. It was also explained that, in Illinois, some
debt-settlement companies have specialized, targeting small businesses, rather than
individuals. Staff elected to retain the more limited UDMSA language which focuses on
DMSANJ – Memorandum – October 11, 2011 – Page 17
debt incurred for consumer purposes, but is certainly willing to broaden the language of
the draft act if the Commission wishes to do so.
Illinois has two separate statutes (and sets of regulations) pertaining to debt-
management companies and debt-settlement companies in an effort to avoid confusion
because the business models are very similar. Staff elected to follow the UDMSA draft
and its unified treatment of this area of the law in response to comments suggesting that
such an approach was preferable and less confusing (particularly, for example, when a
single business entity engages in both types of debt-reduction activities).
One of the recommendations made during the meeting that Staff implemented
was the recommendation that the DMSA apply not only to debt-management companies
doing business in New Jersey, regardless of where they are located, but also to companies
based in New Jersey or having an office here even if they claim not to be conducting any
A provision of Illinois law that was incorporated in the draft as a result of the
meeting was the creation of a consumer protection fund to serve as a source of restitution
for consumers who suffer injury as a result of the actions of debt-management entities
and for whom there is no other recourse. The money in the fund is to be derived from
entities that operate in the State without a license. The Illinois representatives suggested
that consideration be given to allowing monies from that fund to be used for enforcement
or relevant special projects (a “sting” operation or dedicated investigations, for example)
rather than solely for restitution. Staff has not modified the draft to incorporate that
suggestion, and seeks input from the Commission on this issue.
Another recommendation made during the meeting that Staff incorporated was a
modification of the language of the draft to clarify that enforcement can be undertaken by
both the Department of Banking and Insurance and the Attorney General’s office. Since
manpower or funding considerations could impact the ability of one or the other of those
entities to enforce the various provisions of the act, allowing enforcement by both could
increase the likelihood of viable enforcement efforts.
A provision of the Illinois law that is not found in the draft is one that includes
receivership and liquidation provisions. Staff has not incorporated those provisions and
seeks guidance from the Commission on this issue.
Other recommendations made during the meeting included a provision allowing
the enforcing agency to pursue bad actors both within and outside of the State of New
Jersey, which the draft does, and the need to have provisions in the draft identifying the
circumstances under which a contract between a provider and an individual is void or
voidable, which the draft also contains. Finally, I was advised that, at the time of our
meeting in August, there were no licensed for-profit entities operating in Illinois,
although there was one company whose application for a license was under review.
DMSANJ – Memorandum – October 11, 2011 – Page 18