Comments on the Governor’s Economic Development Budget proposal amending the Banking Law to permit all types of nonprofit corporations to become licensed budget planners

REPORT

REPORT OPPOSING PROPOSAL TO ALLOW ALL TYPES OF NONPROFITS TO BECOME LICENSED BUDGET PLANNERS

CONSUMER AFFAIRS COMMITTEE AND CIVIL COURT COMMITTEE

This year, the Governor’s Economic Development Budget proposed amending the Banking Law to permit all types of nonprofit corporations to become licensed budget planners. Although the proposal was not enacted, the Civil Court and Consumer Affairs Committees submit these comments in opposition to such any such proposal that the Governor’s office or the Legislature may consider in the future.

BACKGROUND

Budget planning is a form of debt relief, whereby consumers contract with persons or entities to make payments on their behalf to creditors according to a plan.[1] Section 579 of the Banking Law provides that only type B not-for-profit corporations may engage in the business of budget planning. The Governor’s proposal would amend the Banking Law and permit all types of not-profit organizations to become licensed budget planners.

The debt relief sector has a long history of abusive, deceptive, and predatory practices, in part because the consumers who are the target market are often economically distressed, vulnerable, and unsophisticated. The past decade saw a dramatic rise in illegal practices by both the nonprofit and for-profit debt relief sectors, partially because of the advent of the internet. To address abuses by for-profit entities, the Federal Trade Commission (FTC) responded by amending the Telemarketing Sales Rule (TSR) through the Telemarketing and Consumer Fraud and Abuse Prevention Act.[2]

On May 11, 2012, the City Bar issued a comprehensive examination of the debt settlement industry entitled Profiteering from Financial Distress: An Examination of the Debt Settlement Industry.[3] The White Paper provided an overview of the troubled history of the debt relief sector over time for both nonprofit and for-profit entities, including debt management, and delved deeply into debt settlement in the past decade.[4] The Committees concluded, after exhaustive review of the publicly available record and extensive stakeholder interviews, that debt settlement for more than a nominal fee, even with the FTC regulatory reforms—is an inherently flawed model that causes consumers “net financial loss and lasting financial harm.”[5]

The White Paper examined the legislative history of debt relief regulation in New York State and pointed out that:

The New York State Legislature adopted legislation banning for-profit “budget planning” in 1956. The record from the legislative history includes this notation:

The Attorney General reports that debt consultants lure the financially distressed by false and deceptive advertising; that they charge excessive fees; and that they derive the bulk of their revenue from the poorly educated and the people in the lower income groups.[6]

The record goes on to include the following observation about debt adjusters: “[i]t appears these
practices are too common and widespread in the area affected, that the only feasible way to
control them is by prohibiting this type of business . . . .”[7]

While the legislative record does not expressly address the rationale for limiting budget planners to type B not-for-profit corporations, the context makes it clear. Type B not-for-profit corporations may be formed for a variety of purposes, including “charitable [and] educational,” which the Committees believe are most relevant to budget planners.[8] The other types of not-for-profit corporations can be formed for “non-pecuniary purposed” such as “political, social, [and] fraternal”[9] for example, or for “any lawful business purposes to achieve a lawful public or quasi-public objective.”[10] Restricting budget planners to type B not-for-profit corporations makes it more likely that licensed budget planners will be organizations that genuinely engage in services that involve charitable and educational purposes and thus will be best situated to provide professional services to consumers.

In 2004, the New York State Banking Department,[11] which previously oversaw budget planners, issued a detailed Industry Letter regarding the oversight of budget planners and examinations by the Department.[12] The Industry Letter is instructive in the focus on educational activities, the fee structure for services, the disclosures required, among other features of the licensed activities.[13] The Industry Letter further states that “[i]t is imperative that the not-for-profit designation not be abused.”[14]

Limiting budget planners to type B not-for-profit corporations would best ensure that appropriate entities are providing meaningful, professional services for consumers – particularly the economically distressed consumers that seek such services – and would best protect the public from unscrupulous operators.

Respectfully submitted,

Thomas A. Cohn
Chair, Consumer Affairs Committee

Dora Galacatos
Chair, Civil Court Committee

May 2013