Fair Debt Settlement Practices Act.

Assembly Member Valencia proposes expanding California's Fair Debt Settlement Practices Act to extend consumer-style protections to small commercial borrowers, while strengthening oversight of debt settlement services across both markets. The legislation would apply existing disclosure requirements, fee restrictions, and consumer safeguards to commercial financing recipients borrowing up to $500,000.

The bill mandates that debt settlement providers furnish detailed disclosures about risks and limitations before executing contracts with either consumers or commercial clients. These must explain that results cannot be guaranteed, creditors may still pursue collection, and credit scores could be negatively impacted. Providers must also supply regular accounting statements showing all transactions, fees charged, and settlement amounts.

Under the expanded law, both consumers and commercial borrowers could terminate debt settlement contracts without penalty at any time. Upon cancellation, providers must immediately notify payment processors to close settlement accounts and return remaining balances within seven days. The legislation preserves existing civil remedies, allowing parties to sue for statutory damages between $1,000 and $5,000 per violation, plus actual damages and attorney fees.

The measure maintains exemptions for licensed financial institutions, nonprofit organizations providing free services, and attorneys primarily engaged in legal representation rather than debt settlement. Payment processors would face parallel requirements regarding fee disclosures, accounting statements, and prompt account closure after contract termination.