COM M ISSI ON ER OF FIN AN CI AL R EGULATI ON ADVISORY NOTICE 03-0 1 DEBT MANAGEMENT APPLIC ANTS July 24, 2003 On May 22, 2003, Governor Robert L. Ehrlich, Jr. signed into law the Maryland Debt Management Services Act. Debt Management is a newly regulated area in Maryland for both the industry and the Commissioner of Financial Regulation. All prospective licensees are encouraged to review the law in its entirety. An unofficial copy of the law can be accessed in WORD format from our website. The actual Maryland Debt Management Services Act can be found in Financial Institutions Article §12-901 through 12-931 when it is published. The Debt Management Application can be found on our website: www.dllr.state.md.us/finance. Hit the Licensing Button. The purpose of this memo is to outline the major provisions of the law and how the Commissioner will process applications. The application, instructions, criminal background check request forms and surety bond are all located on our website under Debt Management Application. In order to assist us in getting the conditional Debt Management License to applicants on or after October 1, 2003, please mail the application to us as soon as possible once you have completed it. The Commissioner’s staff will begin reviewing applications as soon as they are received. Since it is our experience that certain requirements are time consuming, we encourage all applicants to immediately begin the preparation of the following items: the criminal background check, the surety bond, and the audited financial statements. The Criminal Justice Information Service will not process background checks until after the effective date of the law, October 1, 2003. Once we receive, review and approve the application, the Commissioner will issue conditional licenses on and after October 1, 2003. If the criminal background results come back to us unsatisfactory, we may revoke the conditional license. When we receive satisfactory criminal background results, the permanent license will be mailed to you. Licensing questions can be answered by Suzanne M. Elbon at (410) 230-6073, e- mail firstname.lastname@example.org or Joseph E. Rooney at (410) 230-6107, email@example.com. Rev. 7-24-03 Robert L. Ehrlich, Jr. Department of Labor, Licensing and Regulation James D. Fielder, Jr., Ph.D. Governor Division of Financial Regulation Secretary Michael S. Steele 500 N. Calvert Street, Suite 402 Charles W. Turnbaugh Lt. Governor Baltimore, Maryland 21202-3651 Commissioner ADVISORY 03-01 PAGE 2 Highlights of the Maryland Debt Manage ment Services Act 1. 12-901 Definitions – The definition section describes terms used in the law. Debt management services means, “receiving funds periodically from a consumer under an agreement with the consumer for the purpose of distributing the funds among the consumer’s creditors in full or partial payment of the consumer’s debts”. It also includes those who provide these services on the Internet. 2. 12-903 Information Sharing – The Commissioner may enter into cooperative and information sharing agreements with any federal or state agency that has supervisory responsibility over the debt management services business. Documents and other information can be shared with these agencies. 3. 12-905 Debt Management Services Fund - The law provides that a fund be established to pay for all costs and expenses incurred by the Commissioner that are related to the regulation of the business of debt management. All revenue received through licensing or examination of debt management service providers will be part of the fund. 4. 12-907 & 12-908 Qualifications for Applicants – Some of the more important application requirements are as follows: Net Worth – The net worth requirement has been established between a minimum of $50,000 up to a maximum of $500,000 as determined by the Commissioner. The net worth requirement increases by $10,000 for each location in Maryland. Financial Statement – Applicants must provide an audited financial statement performed by a licensed CPA that indicates the net worth requirement. Application Fees – Fees for licensing new applicants are $2,000 for a two-year license and a $1,000 investigation fee. Renewal licensing fees will be $2,000 for a two-year license. There is a $100 per Maryland location fee for new and renewal applicants. 5. 12-909 FBI Background Checks – The Commissioner must receive FBI background checks on the president of the debt management service provider and any age nt who has access to the trust account where consumer’s money is deposited. The Commissioner may require other individuals to provide the background check. 6. 12-911 Notice to Consumers – The new law requires licensees who provide their service on the Internet or maintain an office in Maryland to disclose and post the following notice in their office and/or website, “The Commissioner of Financial Regulation for the State of Maryland will accept all questions or complaints from Maryland residents regarding (Name & License Number of licensee) at 500 North Calvert Street, Room 402, Baltimore, Maryland 21202, phone number 1- 888 784-0136”. 7. 12-914 Surety Bond Require ments – Surety Bond requirements have been established from a $10,000 minimum to a $350,000 maximum. Bonds must expire December 31, 2005 and ADVISORY 03-01 PAGE 3 have the name and address of the licensee on the bond document. The application contains a guide to establish the initial bond amount. The Commissioner will set the level of the surety bond using five factors: The financial condition and business experience of the licensee or applicant; For an applicant: the projected monthly and annual volume of debt management services provided in the State; For a licensee: The average monthly and annual volume of debt manage ment services provided in the State; The potential loss to consumers who remit funds to the applicant or licensee if the company becomes financially impaired; Any other factor the Commissioner considers appropriate. 8. 12-915 Notice to Commissioner When Changing Control or Moving – If a licensee changes control or moves its office location, the Commissioner must be notified before in writing and the bond changed to reflect the new address. 9. 12-916 Consumer Plan/Agreement – A consumer must enter into an executed written debt management service agreement that describes the services to be performed by the licensee. The agreement may be rescinded by either party by giving written notice. The agreement must be in at least 12 point type and contain at least the following; Be signed and dated by the licensee and the consumer; The name, address, and phone number of the consumer; The name, address, phone number, and license number of the licensee; A description of the debt management services to be provided to the co nsumer and any fees to be charged to the consumer for the debt management services; A disclosure of the existence of the surety bond required under § 12-914 of this subtitle; The name and address of the financial institution in which funds, paid by the consumer to the licensee for disbursement to the consumer's creditors, will be held; A notice of the right of a party to the debt management services agreement to rescind the debt management services agreement by giving written notice of rescission to the other party; A schedule of payments that the consumer must make to the debt management services provider, including: 1. The amount of each payment and the date on which each payment is due; and 2. An itemization of the maintenance fees that will be retained by the debt management services provider, and the amount of money that will be paid to the consumer's creditors, from each payment the consumer makes to the debt management services provider; A list of: 1. A. Each participating creditor of the consumer to which payments will be made under the debt management services agreement; B. The amount owed to each creditor; and ADVISORY 03-01 PAGE 4 C. A schedule of payments that the debt management services provider will make to each participating creditor from the consumer's payments, including the amount of each payment and the date on which each payment will be made; and 2. Each creditor that the licensee reasonably expects not to participate in the management of the consumer's debt under the debt management services agreement; A disclosure that the licensee also may receive compensation from the consumer's creditors for providing debt management services to the consumer; A disclosure that the licensee may not, as a condition of entering into a debt management services agreement, require a consumer to purchase for a fee a counseling session, an educational program, or materials and supplies; A disclosure that the licensee may not require a voluntary contribution from a consumer for any service provided by the licensee to the consumer; A disclosure that, by executing the debt management services agreement, the consumer authorizes any financial institution in which the licensee has established a trust account for deposit of the consumer's funds to disclose to the Commissioner any financial records relating to the trust account during the course of any investigation or examination of the licensee by the Commissioner; A disclosure that execution of a debt management services agreement may impact the consumer's credit rating and credit scores; and The following notice: "THE COMMISSIONER OF FINANCIAL REGULATION FOR THE STATE OF MARYLAND WILL ACCEPT QUESTIONS AND COMPLAINTS FROM MARYLAND RESIDENTS REGARDING (NAME AND LICENSE NUMBER OF THE DEBT MANAGEMENT SERVICE PROVIDER) AT 500 N. CALVERT STREET, ROOM 402, BALTIMORE, MD 21202-3651 PHONE 1-888-784-0136. DO NOT SIGN THIS AGREEMENT BEFORE YOU READ IT. YOU MUST BE GIVEN A COPY OF THIS AGREEMENT." 10. 12-917 Trust Account – Licensees must maintain a trust account in which consumer’s funds must be deposited within two (2) business days. Operating funds of the licensee may not be commingled with the consumer’s funds. Disbursement of consumer’s funds from the trust account to the creditors must be made within eight (8) business days of rece ipt of the funds from the consumer. 11. 12-918 Consumer Fees – A debt management service provider may charge a one-time consultation fee not to exceed $50 and/or a monthly maintenance fee not to exceed $8 for each creditor with the total not exceeding $40 per month. All fees must be clearly disclosed in the debt management services agreement with the consumer. ADVISORY 03-01 PAGE 5 12. 12-919 Reports to Cons umers – Licensees must provide reports to consumers on a quarterly basis or upon cancellation or termination of the agreement. The reports must disclose the amount of money received from the consumer and to whom the money was paid and when the money was forwarded to the creditors. 13. 12-920 Prohibited Activities – This section lists several prohibitions including making false or misleading representations to consumers. Other prohibitions are listed below. A licensee may not: Purchase any debt of a consumer; Lend money to a consumer; Obtain a mortgage for a consumer; Operate as a Collection Agency; Offer an incentive, including a gift, bonus, premium, reward, or other compensation to a consumer for executing a debt management services agreement with the licensee; Charge for or provide credit insurance. 14. 12-921 Reporting Requirements – Annual reporting requirements to the Commissioner have been established and have a due date of April 30 th of each year for activities of the previous calendar year. The annual report to the Commissioner must contain the following: A copy of the licensee’s audited financial statement prepared in accordance with GAAP. An alphabetical list of all debt management counselors who worked for the licensee during the preceding year. The number of Maryland consumers who signed new debt management agreements with the licensee during the year. The highest number of Maryland consumers who were enrolled in the licensee’s programs during the previous year. Special reports to the Commissioner are required within 15 days if any of the following events occur to the licensee: Bankruptcy of the licensee, Suspension or revocation of the licensee’s license in any other state, Felony indictment or conviction of the licensee’s officers, directors, or counselors, Any civil action by a consumer or material litigation filed against a licensee, officer, director, and counselor. 15. 12-922 Records Retention – This section outlines which records must be kept and for how long. The records include; general ledgers, bank statements, consumer agreements, etc. These retention schedules also apply to records in possession of subsidiaries, affiliates or other persons. These records must be made available within seven (7) days upon written request by the Commissioner. 16. 12-923 & 12-924 Investigations/Examinations – The Commissioner has the authority to investigate and conduct regular examinations of licensees, subsidiaries, affiliates or other persons that relate to the debt management services business. Licensees must pay all ADVISORY 03-01 PAGE 6 reasonable costs for the examination. The Commissioner may accept the report of examination performed by another state. 17. 12-925 License Number – Licensees must include their debt management license number in any advertisement that could reach Maryland consumers. 18. 12-926, 12-927 & 12-928 Enforcement Provisions, Hearings – The Commissioner has the authority to suspend or revoke a license for a variety of reasons. The law allows the Commissioner to issue Cease and Desist Orders for fraud, dishonesty, unsafe or unsound practices, deceptive advertising, etc. Licensees and applicants have the right to a hearing on all administrative actions taken by the Commissioner. 19. 12-929 Penalties – The penalty for violating the statute is a fine not to exceed $1,000 for the first violation and $5,000 for each subsequent violation. The violation of the statute is a felony with jail terms not to exceed five years.