By: Eltife S.B. No. 1112
(In the Senate - Filed March 8, 2005; March 21, 2005, read
first time and referred to Committee on Business and Commerce;
April 11, 2005, reported favorably by the following vote: Yeas 9,
Nays 0; April 11, 2005, sent to printer.)
A BILL TO BE ENTITLED
AN ACT
relating to debt management services; providing a penalty.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Chapter 394, Finance Code, is amended by adding
Subchapter C to read as follows:
SUBCHAPTER C. CONSUMER DEBT MANAGEMENT SERVICES
Sec. 394.201. PURPOSE; CONSTRUCTION. (a) The purpose of
this subchapter is to protect consumers who contract for services
with debt management services providers.
(b) This subchapter shall be liberally construed to
accomplish its purpose.
Sec. 394.202. DEFINITIONS. In this subchapter:
(1) "Advertising" means information about a provider
or about the provider's debt management services, communicated in
writing or orally to an individual consumer or the public by
telephone, television, Internet, radio, or other electronic
medium, or by written material sent by mail, posted publicly, or
posted at the provider's business location.
(2) "Certified counselor" means an individual who:
(A) is certified as a debt management counselor
by an independent accreditation organization; or
(B) if the individual has been employed for less
than 12 months, is in the process of being certified as a debt
management counselor by an independent accreditation organization.
(3) "Commissioner" means the consumer credit
commissioner.
(4) "Consumer" means an individual who resides in this
state and seeks a debt management service or enters a debt
management service agreement.
(5) "Creditor" means a person to whom a person owes
money.
(6) "Debt management service" means:
(A) the receiving of money from a consumer for
the purpose of distributing that money to or among one or more of
the creditors of the consumer in full or partial payment of the
consumer's obligations;
(B) arranging or assisting a consumer to arrange
for the distribution of one or more payments to or among one or more
creditors of the consumer in full or partial payment of the
consumer's obligations; or
(C) exercising control, directly or indirectly,
or arranging for the exercise of control over funds of a consumer
for the purpose of distributing payments to or among one or more
creditors of the consumer in full or partial payment of the
consumer's obligations.
(7) "Debt management service agreement" means a
written agreement between a provider and a consumer for the
performance of a debt management service.
(8) "Finance commission" means the Finance Commission
of Texas.
(9) "Person" means an individual, partnership,
corporation, limited liability company, association, or
organization.
(10) "Provider" means a person that provides or offers
to provide to a consumer in this state a debt management service.
(11) "Secured debt" means a debt for which a creditor
has a mortgage, lien, or security interest in collateral.
(12) "Trust account" means an account that is:
(A) established in a federally insured financial
institution;
(B) separate from any account of the debt
management service provider;
(C) designated as a "trust account" or other
appropriate designation indicating that the money in the account is
not money of the provider or its officers, employees, or agents;
(D) unavailable to creditors of the provider; and
(E) used exclusively to hold money paid by
consumers to the provider for disbursement to creditors of the
consumers and to the provider for the disbursement of fees and
contributions earned and agreed to in advance.
(13) "Unsecured debt" means a debt for which a
creditor does not have collateral.
Sec. 394.203. APPLICABILITY. (a) Except as otherwise
provided by this subchapter, this subchapter applies to a provider
regardless of whether the provider charges a fee or receives
consideration for a service.
(b) The business of providing debt management services is
conducted in this state if the debt management services provider
solicits or contracts with consumers located in this state.
(c) This subchapter does not apply to:
(1) an attorney licensed to practice in this state,
unless the attorney holds the attorney's self out to the public as a
provider or is employed, affiliated with, or otherwise working on
behalf of a provider;
(2) a title insurance or abstract company employee or
agent, or other person legally authorized to engage in escrow
business in the state, only while engaged in the escrow business;
(3) a judicial officer or person acting under a court
order;
(4) a person who has legal authority under federal or
state law to act as a representative payee for a consumer, only to
the extent the person is paying bills or other debts on behalf of
that consumer; or
(5) a person who pays bills or other debts owed by a
consumer and on behalf of a consumer, if the money used to make the
payments belongs exclusively to the consumer and the person does
not initiate any contact with individual creditors of the consumer
to compromise a debt, arrange a new payment schedule, or otherwise
change the terms of the debt.
(d) The following are not debt management services for
purposes of this subchapter:
(1) an extension of credit, including consolidation or
refinance of a loan; and
(2) bankruptcy services provided by an attorney
licensed to practice in this state.
(e) This subchapter applies to a person who seeks to evade
its applicability by any device, subterfuge, or pretense.
Sec. 394.204. REGISTRATION. (a) A person, regardless of
whether located in this state, may not provide a debt management
service to a consumer in this state unless the person is registered
with the commissioner.
(b) Registration expires on December 31 of the year in which
the registration occurs and must be renewed annually.
(c) An application for an initial registration must be in a
form prescribed by the commissioner and accompanied by:
(1) the appropriate fees set by the finance commission
in an amount necessary to recover the costs of administering this
subchapter;
(2) the surety bond or insurance required by Section
394.206;
(3) a detailed description of the ownership interest
of each officer, director, agent, or employee of the applicant, and
any member of the immediate family of an officer, director, agent,
or employee of the applicant, in a for-profit affiliate or
subsidiary of the applicant or in any other for-profit business
entity that provides services to the applicant or to a consumer in
relation to the applicant's debt management business; and
(4) any other information that the commissioner
requires.
(d) An officer or employee of a person registered under this
subchapter is not required to be separately registered.
(e) Unless the commissioner notifies an applicant that a
longer period is necessary, the commissioner shall approve or deny
an initial registration not later than the 60th day after the date
on which the completed application, including all required
documents and payments, is filed. The commissioner shall inform
the applicant in writing of the reason for denial.
(f) A person may renew a registration by paying the
appropriate fee and completing all required documents.
(g) The finance commission by rule may establish procedures
to facilitate the registration and collection of fees under this
section, including rules staggering throughout the year the dates
on which fees are due.
(h) The commissioner may refuse an initial application if
the application contains errors or incomplete information. An
application is incomplete if it does not include all of the
information required by this section and Section 394.205.
(i) The commissioner may deny an initial application if:
(1) the applicant or any principal of the applicant
has been convicted of a crime or found civilly liable for an offense
involving moral turpitude, including forgery, embezzlement,
obtaining money under false pretenses, larceny, extortion,
conspiracy to defraud, or any other similar offense or violation;
(2) the registration of the applicant or any principal
of the applicant has been revoked or suspended in this state or
another state, unless the applicant provides information that the
commissioner finds sufficient to show that the grounds for the
previous revocation or suspension no longer exist and any problem
cited in the previous revocation has been corrected; or
(3) the commissioner, based on specific evidence,
finds that the applicant does not warrant the belief that the
business will be operated lawfully and fairly and within the
provisions and purposes of this subchapter.
(j) On written request, the applicant is entitled to a
hearing, pursuant to Chapter 2001, Government Code, on the question
of the applicant's qualifications for initial registration if the
commissioner has notified the applicant in writing that the initial
application has been denied. A request for a hearing may not be
made after the 30th day after the date the commissioner mails a
notice to the applicant stating that the application has been
denied and stating the reasons for the denial.
(k) In addition to the power to refuse an initial
application as specified in this section, the commissioner may
suspend or revoke a provider's registration after notice and
hearing if the commissioner finds that any of the following
conditions are met:
(1) a fact or condition exists that if it had existed
when the provider applied for registration would have been grounds
for denying registration;
(2) a fact or condition exists that the commissioner
was not aware of when the provider applied for registration and
would have been grounds for denying registration;
(3) the provider violates this subchapter or rule or
order of the commissioner under this subchapter;
(4) the provider is insolvent;
(5) the provider refuses to permit the commissioner to
make an examination authorized by this subchapter;
(6) the provider fails to respond within a reasonable
time and in an appropriate manner to communications from the
commissioner;
(7) the provider has failed to disburse money to
creditors on behalf of consumers within a reasonable time, normally
30 days;
(8) the commissioner determines that the provider's
trust account is not materially in balance with and reconciled to
the consumer's account; or
(9) the provider fails to warrant the belief that the
business will be operated lawfully and fairly and within the
provisions and purposes of this subchapter.
(l) The commissioner's order revoking a registration must
include appropriate provisions to transfer existing clients of the
provider to one or more registered providers to ensure the
continued servicing of the clients' accounts.
(m) The commissioner shall maintain a list of registered
providers and make the list available to interested persons and to
the public.
Sec. 394.205. RECORDS. (a) A provider shall keep and use
books, accounts, and other records that will enable the
commissioner to determine if the provider is complying with this
subchapter and maintain any other records as required by the
commissioner. The commissioner may examine the records at any
reasonable time. The records must be kept for at least three years
after the date of the last service on a consumer's debt management
plan.
(b) Each provider shall file a report with the commissioner
at each renewal of the provider's registration. The report must at
a minimum disclose in detail and under appropriate headings:
(1) the assets and liabilities of the provider at the
beginning and end of the period;
(2) the total number of debt management plans the
provider has initiated during that year; and
(3) records of total and average fees charged to
consumers, including all voluntary contributions received from
consumers.
(c) The reports must be verified by the oath or affirmation
of the owner, manager, president, chief executive officer, or
chairman of the board of directors of the provider.
(d) A provider shall file a blank copy of the agreement
described in Section 394.209 and blank copies of the written
information required in Section 394.208(a) with the commissioner
accompanying the initial registration and each renewal of
registration.
(e) The commissioner shall make the information provided
under this section available to interested parties and to the
public.
Sec. 394.206. BOND; INSURANCE. (a) A provider shall, at
the time the provider files an initial or renewal registration
application with the commissioner, file:
(1) a surety bond; or
(2) evidence that the provider maintains an insurance
policy in a form approved by the commissioner.
(b) The bond or insurance must:
(1) run concurrently with the period of registration;
(2) be available to pay damages and penalties to
consumers directly harmed by a violation of this subchapter;
(3) be in favor of this state for the use of this state
and the use of a person who has a cause of action under this
subchapter against the provider;
(4) be in an amount equal to the average daily balance
of the provider's trust account serving Texas consumers over the
six-month period preceding the issuance of the bond, or in the case
of an initial application, in an amount determined by the
commissioner, but not less than $25,000 or more than $100,000;
(5) if an insurance policy:
(A) provide coverage for professional liability,
employee dishonesty, depositor's forgery, and computer fraud in an
amount not less than $100,000;
(B) be issued by a company rated at least "A-" or
its equivalent by a nationally recognized rating organization; and
(C) provide for 30 days advance written notice of
termination of the policy to be provided to the commissioner;
(6) be issued by a bonding, surety, or insurance
company that is authorized to do business in the state; and
(7) be conditioned on the provider and its agents
complying with all state and federal laws, including regulations,
governing the business of debt management services.
(c) In lieu of a bond or insurance, the finance commission
by rule may establish alternative financial requirements to provide
substantially equivalent protection to pay damages and penalties to
consumers directly harmed by a violation under this subchapter.
(d) The commissioner may adjust the amount of the provider's
bond or insurance only when the provider applies for renewal of
registration and requests a review of the bond or insurance amount.
Sec. 394.207. ADVERTISING. A provider may not engage in
false or deceptive advertising.
Sec. 394.208. REQUIRED ACTIONS BY PROVIDER. (a) A
provider may not enroll a consumer in a debt management plan unless:
(1) the provider is a nonprofit organization exempt
from taxation under Section 501(c)(3), Internal Revenue Code of
1986; and
(2) through the services of a counselor certified by
an independent accreditation organization, the provider has:
(A) provided the consumer individualized
counseling and educational information that at a minimum addresses
the topics of managing household finances, managing credit and
debt, and budgeting;
(B) prepared an individualized financial
analysis and an initial debt management plan for the consumer's
debts with specific recommendations regarding actions the consumer
should take;
(C) determined that the consumer has a reasonable
ability to make payments under the proposed debt management plan
based on the information provided by the consumer;
(D) a reasonable expectation, provided that the
consumer has provided accurate information to the provider, that
each creditor of the consumer listed as a participating creditor in
the plan will accept payment of the consumer's debts as provided in
the initial plan;
(E) prepared, for all creditors identified by the
consumer or identified through additional investigation by the
provider, a list, which must be provided to the consumer in a form
the consumer may keep, of the creditors that the provider
reasonably expects to participate in the plan; and
(F) provided a written document to the consumer
in a form the consumer may keep that clearly and conspicuously
contains the following statements:
(i) that debt management services are not
suitable for all consumers and that consumers may request
information about other ways, including bankruptcy, to deal with
indebtedness;
(ii) that the nonprofit or tax-exempt
organization cannot require donations or contributions; and
(iii) that some of the provider's funding
comes from contributions from creditors who participate in debt
management plans, except that a provider may substitute for "some"
the actual percentage of creditor contributions it received during
the most recent reporting period.
(b) If the provider discusses its services with a consumer
primarily in a language other than English, the provider must
provide the debt management agreement in that language.
(c) A consumer must give at least 10 days' notice to the
provider to cancel a debt management services agreement. The
provider must cancel a debt management services agreement within 10
days after the date the provider receives the notice from the
consumer. The provider must continue making disbursements to the
consumer's creditors if money has been paid to the provider under
the agreement until the expiration of the 10-day period, unless
otherwise agreed in writing by the consumer and the provider.
(d) A provider may provide the information required by
Subsections (a)(2)(B), (E), and (F) through its Internet website if
the provider:
(1) has complied with the federal Electronic
Signatures in Global and National Commerce Act (15 U.S.C. Section
7001 et seq.);
(2) informs the consumer that, on electronic,
telephonic, or written request the provider will make available to
the consumer a paper copy or copies; and
(3) discloses on its Internet website:
(A) the provider's name and each name under which
it does business;
(B) the provider's principal business address
and telephone number; and
(C) the names of the provider's principal
officers.
(e) A provider, including a provider that does business only
or principally through the Internet, shall maintain a telephone
system staffed at a level that reasonably permits a consumer to
access a counselor during ordinary business hours.
(f) A provider shall provide each consumer for whom it
provides debt management services a written report accounting for:
(1) the amount of money received from the consumer
since the last report;
(2) the amount and date of each disbursement made on
the consumer's behalf to each creditor listed in the agreement
since the last report;
(3) any amount deducted from amounts received from the
consumer; and
(4) any amount held in reserve.
(g) The provider shall provide the report under Subsection
(f):
(1) at least once each calendar quarter; and
(2) not later than the 10th business day after the date
of a request by a consumer.
Sec. 394.209. WRITTEN DEBT MANAGEMENT SERVICES AGREEMENT.
(a) A debt management services provider may not prepare a debt
management services agreement before the provider has fully
complied with Sections 394.208(a) and (b).
(b) Each debt management services agreement must:
(1) be dated and signed by the consumer;
(2) include the name and address of the consumer and
the name, address, and telephone number of the provider;
(3) describe the services to be provided;
(4) state all fees, individually itemized, to be paid
by the consumer;
(5) list in the agreement or accompanying document, to
the extent the information is available to the provider at the time
the agreement is executed, each participating creditor of the
consumer to which payments will be made and, based on information
provided by the consumer, the amount owed to each creditor and the
schedule of payments the consumer will be required to make to the
creditor, including the amount and date on which each payment will
be due;
(6) state the existence of a surety bond or insurance
for consumer claims;
(7) state that establishment of a debt management plan
may impact the consumer's credit rating and credit score either
favorably or unfavorably, depending on creditor policies and the
consumer's payment history before and during participation in the
debt management plan; and
(8) state that either party may cancel the agreement
without penalty at any time on 10 days' notice and that a consumer
who cancels an agreement is entitled to a refund of all money that
the consumer has paid to the provider that has not been disbursed.
(c) A debt management services agreement may contain a
voluntary consumer arbitration provision or a voluntary mediation
provision.
(d) A provider may deliver the debt management services
agreement through the Internet if the provider:
(1) has complied with the federal Electronic
Signatures in Global and National Commerce Act (15 U.S.C. Section
7001 et seq.);
(2) sends the consumer a paper copy of the agreement
not later than the seventh day after the date of a request by a
consumer to do so; and
(3) discloses on a prominent page of its Internet
website:
(A) the provider's name and each name under which
it does business;
(B) the provider's principal business address
and telephone number; and
(C) the names of the provider's principal
officers.
(e) If the provider discusses its services or negotiates
with a consumer primarily in a language other than English, the
provider may not begin performance of a debt management plan until
the provider and consumer sign a copy of the written agreement,
provided by the debt management services provider, in that language
and a copy is made available to the consumer.
Sec. 394.210. PERMITTED FEES. (a) With respect to the
provision of a debt management plan service, a provider may not
impose a fee or other charge on a consumer, or receive payment from
a consumer or other person on behalf of a consumer, except as
allowed under this section.
(b) For the purposes of this section, fees or charges
include both voluntary contributions and any other fees charged to
or collected from a consumer or on behalf of the consumer.
(c) Any fee charged by a provider must be fair and
reasonable given the value of the products and services provided to
the consumer, including consideration of the amount subject to debt
management and the number of anticipated payments. A fee or a
portion of a fee that is specifically related to a debt management
plan may not be charged until the provider has complied with
Sections 394.208(a) and (b) and 394.209.
(d) A provider may charge a monthly maintenance fee if the
fee is fair and reasonable.
(e) A fee charged for a service other than a debt management
service must be fair and reasonable.
Sec. 394.211. TRUST ACCOUNT. (a) A provider must use a
trust account for the management of all money paid by or on behalf
of a consumer for disbursement to the consumer's creditor. A
provider may not commingle the money in a trust account established
for the benefit of consumers with any operating funds of the
provider. A provider shall exercise due care to appropriately
manage the funds in the trust account.
(b) The trust account must at all times be materially in
balance with and reconciled to the consumers' accounts. Failure to
maintain that balance is cause for a summary suspension of
registration under Section 394.204.
(c) If a trust account does not contain sufficient money to
cover the aggregate consumer balances, and the provider has not
corrected the deficiency within 48 hours of discovery, the provider
shall notify the commissioner by telephone, facsimile, electronic
mail, or other method approved by the commissioner, and provide
written notice including a description of the remedial action
taken.
Sec. 394.212. PROHIBITED ACTS AND PRACTICES. (a) A
provider may not:
(1) purchase a debt or obligation of a consumer;
(2) receive or charge a fee in the form of a promissory
note or other negotiable instrument other than a check or a draft;
(3) lend money or provide credit to the consumer;
(4) obtain a mortgage or other security interest in
property owned by a consumer;
(5) engage in business with an entity described by
Section 394.204(c)(3) without prior consent of the commissioner,
except that unless denied, consent is considered granted 30 days
after the date the provider notifies the commissioner of the intent
to engage in business with an organization described by Section
394.204(c)(3);
(6) offer, pay, or give a gift, bonus, premium,
reward, or other compensation to a person for entering into a debt
management services agreement;
(7) represent that the provider is authorized or
competent to furnish legal advice or perform legal services unless
supervised by an attorney as required by State Bar of Texas rules;
(8) use an unconscionable means to obtain a contract
with a consumer;
(9) engage in an unfair, deceptive, or unconscionable
act or practice in connection with a service provided to a consumer;
or
(10) require or attempt to require payment of an
amount that the provider states, discloses, or advertises to be a
voluntary contribution from the consumer.
(b) A provider does not have a claim:
(1) for breach of contract against a consumer who
cancels an agreement pursuant to this subchapter; or
(2) in restitution with respect to an agreement that
is void under this subchapter.
(c) A provider may not include any of the following
provisions in a disclosure related to debt management services or
in a debt management services agreement:
(1) a confession of judgment clause;
(2) a waiver of the right to a jury trial, if
applicable, in an action brought by or against a consumer;
(3) an assignment of or order for payment of wages or
other compensation for services; or
(4) a waiver of a provision of this subchapter.
Sec. 394.213. DUTIES OF PROPER MANAGEMENT. A provider has a
duty to a consumer who receives debt management services from the
provider to ensure that client money is managed properly at all
times.
Sec. 394.214. ADDITIONAL ENFORCEMENT POWERS. (a) The
finance commission may adopt rules to carry out this subchapter.
(b) The commissioner may:
(1) investigate the activities of a person subject to
this subchapter to determine compliance with this subchapter,
including examination of the books, accounts, and records of a
provider; and
(2) require or permit a person to file a statement
under oath and otherwise subject to the penalties of perjury, as to
all the facts and circumstances of the matter to be investigated.
(c) Failure to comply with an investigation under
Subsection (b) is grounds for issuance of a cease and desist order.
(d) The commissioner may receive and act on complaints, take
action to obtain voluntary compliance with this subchapter, and
refer cases to the attorney general for prosecution.
(e) The commissioner may enforce this subchapter and rules
adopted under this subchapter by:
(1) ordering the violator to cease and desist from the
violation and any similar violations;
(2) ordering the violator to take affirmative action
to correct the violation, including the restitution of money or
property to a person aggrieved by the violation;
(3) imposing an administrative penalty not to exceed
$1,000 for each violation as provided by Subchapter F, Chapter 14;
or
(4) rejecting an initial application or revoking or
suspending a registration as provided by Section 394.204.
(f) In determining the amount of an administrative penalty
to be imposed under this section, the commissioner shall consider
the seriousness of the violation, the good faith of the violator,
the violator's history of previous violations, the deleterious
effect of the violation on the public, the assets of the violator,
and any other factors the commissioner considers relevant.
(g) The commissioner, on relation of the attorney general at
the request of the commissioner, may bring an action in district
court to enjoin a person from engaging in an act or continuing a
course of action that violates this chapter. The court may order a
preliminary or final injunction.
Sec. 394.215. PRIVATE REMEDIES. (a) An agreement for debt
management services between a consumer and a person that is not
registered under this subchapter is void.
(b) A consumer is entitled to recover all fees paid by the
consumer under a void agreement, costs, and reasonable attorney's
fees.
(c) In addition to any other remedies provided by this
subchapter, a consumer who is aggrieved by a violation of this
subchapter, a rule adopted by the finance commission under this
subchapter, or by any unfair, unconscionable, or deceptive act or
practice may recover:
(1) actual damages;
(2) punitive damages for acts or practices under a
void agreement; and
(3) the costs of the action, including reasonable
attorney's fees based on the amount of time involved.
(d) An aggrieved consumer may sue for injunctive and other
appropriate equitable relief to stop a person from violating this
subchapter.
(e) The remedies provided in this section are not intended
to be the exclusive remedies available to a consumer nor must the
consumer exhaust any administrative remedies provided under this
subchapter or any other applicable law.
SECTION 2. Subchapter B, Chapter 394, Finance Code, is
repealed.
SECTION 3. A person is not required to be registered under
Section 394.204, Finance Code, as added by this Act, before January
1, 2006.
SECTION 4. This Act takes effect September 1, 2005.
* * * * *