I’m just now getting an opportunity to sit down with the entire 229 page FTC document and go through it.
Overall the FTC appears to have placed little to no weight or credence on the testimony or supplied facts of the debt settlements trade associations of The Association of Settlement Companies (TASC) and the United States Organization of Bankruptcy Alternatives (USOBA). I agree with that approach. Neither trade association seems to have assisted in the process of regulation and protection of consumers with anything other than a self-serving interest to protect members, to fight and obstruct the process, and to provide little to no independently substantiated data to support their claims.
If the trade associations decide to band together to challenge the new FTC rules in court, it appears clear it will be seen by regulators and others as nothing more than a desperate attempt of an industry whose members have been labeled as engaging in deceptive and abusive practices to continue those bad acts.
I stand by my previous observation that the debt settlement trade associations did more to close down the debt settlement industry for its members that work as a collaborative partner to embrace regulation of members and protection of consumers.
These final amendments are effective on September 27, 2010, except for § 310.4(a)(5), which is effective on October 27, 2010.
The Rule provisions will:
- prohibit debt relief service providers from collecting a fee for services until a debt has been settled, altered, or reduced;
- require certain disclosures in calls marketing debt relief services;
- prohibit specific misrepresentations about material aspects of the services; and
- extend the TSR’s coverage to include inbound calls made to debt relief companies in response to general media advertisements.
FTC Has the Authority:
Enacted in 1994, the Telemarketing and Consumer Fraud and Abuse Prevention Act (“Telemarketing Act” or “Act”) targets deceptive and abusive telemarketing practices, and directed the Commission to adopt a rule with anti-fraud and privacy protections for consumers receiving telephone solicitations to purchase goods or services. (15 U.S.C. 6101-6108. Subsequently, the USA PATRIOT Act, Pub. L. No. 107–56, 115 Stat. 272 (Oct. 26, 2001), expanded the Telemarketing Act’s definition of “telemarketing” to encompass calls soliciting charitable contributions, donations, or gifts of money or any other thing of value.)
Specifically, the Act directed the Commission to issue a rule defining and prohibiting deceptive and abusive telemarketing acts or practices. In addition, the Act mandated that the FTC promulgate regulations addressing some specific practices, which the Act designated as “abusive.” The Act also authorized state attorneys general or other appropriate state officials, as well as private persons who meet stringent jurisdictional requirements, to bring civil actions in federal district court.
Pursuant to the Act’s directive, the Commission promulgated the original TSR in 1995 and subsequently amended it in 2003 and again in 2008 to add, among other things, provisions establishing the National Do Not Call Registry and addressing the use of pre-recorded messages. The TSR applies to virtually all “telemarketing,” defined to mean “a plan, program, or campaign which is conducted to induce the purchase of goods or services or a charitable contribution, by use of one or more telephones and which involves more than one interstate telephone call.”
The TSR is designed to protect consumers in a number of different ways. First, the Rule includes provisions governing communications between telemarketers and consumers, requiring certain disclosures and prohibiting material misrepresentations.
The TSR requires that telemarketers soliciting sales of goods or services promptly disclose several key pieces of information in an outbound telephone call or an internal or external upsell:
- the identity of the seller;
- the fact that the purpose of the call is to sell goods or services;
- the nature of the goods or services being offered; and
- in the case of prize promotions, that no purchase or payment is necessary to win. 16 CFR 310.4(d); see also 16 CFR 310.2(ee) (defining “upselling”). Telemarketers also must disclose in any telephone sales call the cost of the goods or services and certain other material information. 16 CFR 310.3(a)(1).
In addition, the TSR prohibits misrepresentations about, among other things, the cost and quantity of the offered goods or services. 16 CFR 310.3(a)(2). It also prohibits making false or misleading statements to induce any person to pay for goods or services or to induce charitable contributions. 16 CFR 310.3(a)(4).
Debt Relief Service Providers:
Debt relief providers include credit counselors, debt counselors, debt negotiation companies, debt settlement companies, debt management plan providers, interest reduction companies, balance reduction companies, elimination of contractual relationship schemes, etc.
The FTC determined that the typical debt settlement sales approach was:
Debt settlement companies typically advertise through the Internet, television, radio, or direct mail. The advertisements generally follow the “problem-solution” approach – consumers who are over their heads in debt can be helped by enrolling in the advertiser’s program. Many advertisements make specific claims that appeal to the target consumers – for example, claims that consumers will save 40 to 50 cents on each dollar of their credit card debts or will become debt-free. The advertisements typically then urge consumers to call a toll-free number for more information.
Consumers who call the specified phone number reach a telemarketer working for or on behalf of the debt settlement provider. The telemarketer obtains information about the consumer’s debts and financial condition and makes the sales pitch, often repeating the claims made in the advertisements as well as making additional ones. If the consumer agrees to enroll in the program, the provider mails a contract for signature. Providers sometimes pressure consumers to return payment authorization forms and signed contracts as quickly as possible following the call.
I did have to laugh when the FTC reported that “According to industry representatives, debt settlement providers assess each consumer’s financial condition and, based on that individualized assessment and the provider’s historical experience, calculate a single monthly payment that the consumer must make to both save for settlements and pay the provider’s fee.” In my experience and having made numerous undercover calls to debt settlement companies, that qualification process of assessing the consumer financial condition seemingly never happens.
Consumer protection concerns raised under the current debt settlement model:
- the provider will or is highly likely to obtain large debt reductions for enrollees, e.g., a
50% reduction of what the consumer owes;
- the provider will or is highly likely to eliminate the consumer’s debt entirely in a specific time frame, e.g., 12 to 36 months;
- harassing calls from debt collectors and collection lawsuits will cease;
- the provider has special relationships with creditors and expert knowledge about available techniques to induce settlement; and
- the provider’s service is part of a government program, through the use of such terms as “credit relief act,” “government bailout,” or “stimulus money.”
Many providers also tell consumers that they can, and should, stop paying their creditors, while not disclosing that failing to make payments to creditors may actually increase the amounts consumers owe (because of accumulating fees and interest) and will adversely affect their creditworthiness.
“In the context of the widespread deception in this industry, the advance fee model used by many debt settlement providers causes substantial consumer injury.”
Summary of the Final Rule:
The Commission has carefully reviewed and analyzed the entire record developed in this proceeding. The record, as well as the Commission’s own law enforcement experience and that of its state counterparts, shows that amendments to the TSR are warranted and appropriate. (The Commission’s decision to amend the Rule is made pursuant to the rulemaking authority granted by the Telemarketing Act to protect consumers from deceptive and abusive practices. 15 U.S.C. 6102(a)(1) and (a)(3).) As discussed in detail in this SBP, the Final Rule addresses deceptive and abusive practices of debt relief service providers and includes the following elements:
- Defines the term “debt relief service” as proposed in the NPRM; (Notice of Proposed Rulemaking)
- Prohibits providers from charging or collecting fees until they have provided the debt
relief services, but
- permits such fees as individual debts are resolved on a proportional basis, or if the fee is a percentage of savings, and
- allows providers to require customers to place funds in a dedicated bank account that meets certain criteria;
- Requires four disclosures in promoting debt relief services, in addition to the existing disclosures required by the TSR:
- the amount of time it will take to obtain the promised debt relief;
- with respect to debt settlement services, the amount of money or percentage of each outstanding debt that the customer must accumulate before the provider will make a bona fide settlement offer;
- if the debt relief program entails not making timely payments to creditors, a warning of the specific consequences thereof; and
- if the debt relief provider requests or requires the customer to place funds in a dedicated bank account, that the customer owns the funds held in the account and may withdraw from the debt relief service at any time without penalty, and receive all funds remitted to the account.
- Prohibits misrepresentations about material aspects of debt relief services, including success rates and a provider’s nonprofit status; and
- Extends the TSR to cover calls consumers make to debt relief services in response to advertisements disseminated through any medium, including direct mail or email.
- The advance fee ban provision now explicitly sets forth three conditions before a
telemarketer or seller may charge a fee: (1) the consumer must execute a debt relief agreement with the creditor; (2) the consumer must make at least one payment pursuant to that agreement; and (3) the fee must be proportional either to the fee charged for the entire debt relief service (if the provider uses a flat fee structure) or a percentage of savings achieved (if the provider uses a contingency fee structure);
- Notwithstanding the advance fee ban, the Final Rule allows providers to require consumers to place funds for the provider’s fee and for payment to consumers’ creditors or debt collectors into a dedicated bank account if they satisfy five specified criteria; and
- The Final Rule eliminates three of the proposed disclosures that the Commission has
determined are unnecessary, and it adds one new disclosure.
The FTC did listen to commenters and recognized that the new rules did not apply equally to nonprofits and other organizations. But regardless of what the FTC felt they wanted to regulate, the FTC Act limits their supervision and regulation of “bona fide” nonprofit organizations. But the FTC is correct in noting that nonprofits are under strict IRS and state laws which keep them in check regarding fees and deceptive practices.
The rules also do not cover routine communications between consumers, collectors and creditors. The FTC made an important distinction that when it comes to debt relief, these groups do not try to sell a product or service to consumers to relive their debt.
What is a Debt Relief Services
Some money coaches or budget coaches were concerned the new rules would sweep up their activities since they communicate with consumers about debt and creditors but it seems clear this was not the intention of the FTC. The definition of a debt relief service is “any service or program represented, directly or by implication, to renegotiate, settle, or in any way alter the terms of payment or other terms of the debt between a person and one or more unsecured creditors or debt collectors, including, but not limited to, a reduction in the balance, interest rate, or fees owed by a person to an unsecured creditor or debt collector.”
To me it seems clear the intention is to rein in entities that are selling or trying to sell a service to consumers to provide these services for the consumer. It also captures lead generators and sites or services that attempt to capture and sell leads.
The definition of debt relief services does not cover things like this site, self-help books, or instruction without intervention.
Where the FTC missed the target was when they said the new rules did not apply to secured debt because they felt “There is no evidence in the record of deceptive or abusive practices in the promotion of services for the relief of non-mortgage secured debt” but they appear to have missed the recent influx of auto loan modification companies that are springing up.
Coverage of Attorneys
The issue of attorneys offering debt relief services was a sticky point. Some, like the American Bar Association, wanted a hands off approach but most people see a need to protect consumers from attorneys selling debt settlement services, with some minor exceptions.
Even The Association of Settlement Companies (TASC) wanted attorneys covered by the rules. “Consumers should be entitled to the same protections whether or not their provider is an attorney”, TASC said in testimony.
Ultimately the TSR already cover attorneys who engage in telemarketing so there was no reason to provide a blanket exemption for attorneys from the new rule since they were already covered by the old one.
The casual local attorney that may provide debt settlement services appears to be safe from the TSR. It seems clear that if an attorney is not attempting to solicit consumers to sell them a plan, program or debt settlement service, the attorney would not be engaged in telemarketing. Additionally, attorneys typically meet a consumer face-to-face before selling them a service and those services would not be covered by the TSR.
Additionally, state bar rules already provide quite a bit of regulation regarding the ways attorneys can market their services, for example, prohibiting making outbound calls to sell services. The state bar provisions of providing competent legal services and charging reasonable fees would also blanket many of the attorney fronted debt settlement companies. I can’t see how a state bar association would not be able to overlook the selling of services by attorneys that are already defined elsewhere as deceptive.
One argument I’ve heard before is that attorneys charge in advance for their services so debt settlement attorneys would be entitled to carry on that business model.
However, reality is different that the perception. While an attorney can charge a retainer, they also can’t take that retainer as income until they earn the funds with actual work. Any unearned funds help in a client trust account are returned to the client, and not pocketed as with the typical debt settlement business model.
Attorneys who fail to exercise competent supervision, discretion and supervision of non-attorney affiliates or marketing companies do not escape coverage of the TSR. Oregon stated, “Attorneys who join companies that “do not contemplate the lawyer ever meeting or speaking with the client . . . risk violating the duties of competence, diligence and communication.” And, “the Ohio Supreme Court has sanctioned attorneys hired by a foreclosure “rescue” company for, inter alia, failing to engage in adequate preparation and failing to properly pursue clients’ individual objectives. In so doing, it noted that the attorneys relegated responsibility for meeting with clients to non-attorneys at the company and “did not as a rule meet with [the company’s] clients.”
While many debt settlement companies were running to find an attorney to front their operation before the TSR was released, after reading the TSR it does not seem to make much sense and does not provide a blanket exception to debt settlement operations. The FTC noted that attorneys are already covered by the TSR when it comes to things like the Credit Repair Organizations Act (CROA) so including attorneys under this rule is nothing new.
The final determination of the FTC was that an attorney engaged in selling debt relief services using telemarketing should be covered under the TSR.
Advance Fee Ban
The advance fee ban is probably the primary rule profiteering debt settlement companies did not want to see released.
The advance fee ban prohibits debt relief companies from charging a consumer for debt relief services until the service has been delivered. In order for a fee to have been earned and collected the debt relief company must:
- the consumer must execute a debt relief agreement with the creditor or debt collector;
- the consumer must make at least one payment pursuant to that agreement; and
- the fee must be proportional, i.e., the same fraction of the total fee as the size of the debt resolved is of the total debt enrolled, or, alternatively, the fee collected must be based on a percentage of savings that the debt relief company achieves for the consumer.
While the TSR says that debt relief providers may require the consumer to place funds in a dedicated bank account a larger issue will arise when the providers of such banking services, like NoteWorld and Global Client Solutions, will have a specific duty to make sure they are working only with debt relief providers that comply with the TSR.
I would not be surprised to see NoteWorld and Global Client Solutions drop a number of debt settlement or debt relief companies because they are uncertain of the compliance of services these companies deliver to the public. If the escrow companies wanted to jeopardize being sucked into any additional legal action by standing behind a relatively unknown fly-by-night debt relief provider, that would be stupid.
The Federal Trade Commission specifically came to the conclusion that collecting advance fees for services plagued with deception is an abusive practice and that’s not a good thing for service providers. Especially when the FTC has said “If you work with debt relief companies, review their policies, procedures and operations to make sure they’re complying with the Rule. Willful ignorance isn’t a defense.”
In reaching this conclusion, the Commission has applied the unfairness analysis set forth in Section 5(n) of the FTC Act, (The Telemarketing Act authorizes the Commission to promulgate Rules “prohibiting deceptive telemarketing acts or practices and other abusive telemarketing acts or practices.” 15 U.S.C. 6102(a)(1) (emphasis added). In determining whether a practice is “abusive,” the Commission has used the Section 5(n) unfairness standard. See TSR Amended Rule, 68 FR at 4614.) finding that this practice:
- causes or is likely to cause substantial injury to consumers that
- is not outweighed by countervailing benefits to consumers or competition and
- is not reasonably avoidable. (S 15 U.S.C. 45(n) (codifying the Commission’s unfairness analysis, set forth in a letter from the FTC to Hon. Wendell Ford and Hon. John Danforth, Committee on Commerce, Science and Transportation, United States Senate, Commission Statement of Policy on the Scope of Consumer Unfairness Jurisdiction, reprinted in In re Int’l Harvester Co., 104 F.T.C. 949, 1079, 1074 n.3 (1984)) (“Unfairness Policy Statement”).)
Based on my experience in covering stories about debt settlement abusive practices it seems like the advance fee ban initiated by the FTC goes a long way to protect consumers but is not so hard and fast that there are not some small allowances given to debt relief providers. For example, a debt relief company may collect a fee owed it for debt settlement services once the consumer has made at least one payment under the creditor agreed terms. That was a gift to the debt relief industry as far as I’m concerned.
The Debt Settlement Success Rates Got Slammed
In reading the FTC documentation it appears they had no patience for the lack of information supplied by debt settlement trade associations to support the services their members were selling to consumers. Repeatedly the FTC noted the data was incomplete and limited.
“TASC sent the survey questionnaires only to the 20 largest TASC members, representing approximately 80% of the debt settlement consumers served by TASC members. TASC (Mar. 15, 2010). The survey included data on over 43,000 consumers who had enrolled in a debt settlement plan offered by one of the 12 firms that responded to the survey.”
The TASC survey methodology has several limitations. First, the survey is not representative of the entire industry’s performance. Only 12 debt settlement companies reported sufficient data to determine a three-year dropout rate, a very small number relative to the hundreds of operating debt settlement providers. These companies may not be representative of the industry as a whole and, in fact, may have been comparatively more successful. Indeed, it is unlikely that providers that have low success rates would identify themselves by participating in a survey the results of which will be provided to a federal agency with enforcement authority over them. Second, many of the consumers counted as “completed” had significant debts left after exiting the program. Third, TASC members themselves reported the data to an accountant hired by the organization; neither the accountant nor any other entity validated that the data were complete or accurate.
Savings Rates and Claims
For those of us that have seen advertisements for debt settlement services, the claims made by the companies is unsubstantiated and generally a lie. Companies in business for only a short time have made claims about the percentage savings of their clients for an average program they say takes longer than they have been around.
The numbers are also bastardized by not including consumers that dropped from the program or who had enrolled debts that have not settled. It also does not take into account the growing balances in a debt settlement program from additional interest and fees that build while the consumer attempts to pay advance fees and save money to settle or the cost of the debt settlement service provided.
For example, if the provider charges $3,000 in fees to consumers with $10,000 in debt and represents that the consumers will obtain a 40% reduction, consumers who expected to be debt-free with the payment of $6,000 actually must pay $9,000, not counting possible penalties and interest. The actual percentage savings would be 10%, putting aside the other issues. Although consumers likely presume the provider charges some fees, it is unlikely they would realize that the fees are so substantial that they exceed savings for many consumers, especially because debt settlement advertisements and websites generally do not disclose the fees
Even the executive director of USOBA, Jenna Keehnen is quoted as saying “I have seen every kind of (fee) model you can think of . . . . It’s very confusing.”
The bottom line of saving claims is that it needs to be an accurate statement and not a fictitious myth. The underlying data must support the claim and must include the actual company performance of all clients it initially enrolled and incorporate the cost of the service in the savings equation.
The USOBA First Amendment Argument
I did have a nice chuckle over the assertion by USOBA that the advance fee ban would run afoul of the First Amendment.
“The association stated that the ban targets protected speech, preventing debt relief providers from receiving fees for speaking to their customers and providing educational, coaching, and counseling information.”
The Commission concludes that the advance fee ban adopted here is permitted under the First Amendment. The advance fee ban does not restrain advertising, educational services, or other forms of communications, but is simply a restriction on the timing of payment. In denying a similar challenge to an advance fee ban in the TSR for certain offers of credit, a federal court found that it merely regulated “when payment may be collected” and did not impair the sale of educational materials produced by the company.
Even assuming the advance fee ban were a restriction on speech, it would be scrutinized under the commercial speech test. Commercial speech is communication related solely to the economic interests of the speakers, in this case for-profit debt relief companies. The First Amendment accords a lesser degree of protection to commercial speech than to other constitutionally guaranteed expression.
The Impact of Stopping Payments to Creditors
The FTC appears to have a clear understanding of the implications for consumers when they are instructed to stop making payments to their creditors and to pay the debt settlement companies instead.
“Debt settlement providers often encourage consumers to stop paying creditors, or consumers stop on their own because they simply cannot afford simultaneously to make monthly payments to their creditors, set aside funds for settlements, and pay fees to the debt settlement company. The record shows, however, that consumers’ credit ratings are harmed, often substantially, as a result of not making payments to creditors. Lower credit scores raise the cost of obtaining credit – or make it more difficult to obtain it at all. Another serious and negative consequence that may result from a consumer’s decision to enter a debt relief plan in which he or she stops paying creditors is the accrual of late fees or interest on the accounts, which can significantly increase the consumer’s ultimate obligation. Finally, if a consumer stops making payments, his likelihood of being sued by creditors will increase. Indeed, even while a consumer is enrolled in a debt relief program, creditors and debt collectors may continue to make collection calls pending resolution of the consumer’s debts and may proceed with lawsuits and subsequent enforcement of any judgments, such as through garnishment of wages. Disclosure of these potentially serious negative consequences is necessary to prevent deception and the consumer injury that arises from consumers enrolling in debt relief plans and ceasing to pay creditors.”
What is a Deceptive Act?
I think the definition of a deceptive act is one of those things that you know it when you see it but the FTC said that an act or practice is deceptive if:
- there is a representation or omission of information that is likely to mislead consumers acting reasonably under the circumstances; and
- that representation or omission is material to consumers.
Personally I like that definition since it gives consumer advocates a wide latitude to call many acts and practices of debt relief companies, deceptive. For example, if a debt relief company is making claims and representations that their service will provide X benefit but they fail to mention critical considerations of that service, that would be deceptive.
Debt settlement companies have been notorious for selling their services by not providing facts about other debt solutions they mention.
It is not uncommon to see debt settlement sites make claims that debt settlement is faster, cheaper and preferential to bankruptcy without giving consumers the facts about bankruptcy in order to make an informed decision.
The intention for the omission of these facts is to induce the consumer to purchase debt settlement service through the intentional omission of information.
For debt relief providers that think they will be able to make savings claims in general, that’s not going to fly. The FTC says “When a debt relief service makes only general savings claims (e.g., “we
will help you reduce your debts”), without specifying a percentage or amount of debt reduction,
these claims are likely to convey that consumers can expect to achieve a result that will be
beneficial to them, and that the benefit will be substantial.”
Debt relief providers would be wise to avoid such broad statements without already having the underlying supporting data based on their specific services to back up all claims. And that data used to make such claims must include the experience of ALL enrolled consumers and not just a subgroup that provides a sample that is not representative.
Some Real Problems For Groups in the Rule
The final rule contains some gotchas that participants and providers must be aware of.
- Assisting and facilitating. It is a deceptive telemarketing act or practice and a violation of
this Rule for a person to provide substantial assistance or support to any seller or
telemarketer when that person knows or consciously avoids knowing that the seller or
telemarketer is engaged in any act or practice that violates §§ 310.3(a), (c) or (d), or
§ 310.4 of this Rule. [This can easily apply to entities like NoteWorld, Global Client Solutions, lead generators, affiliates, and others involved in supplying information or assistance in the sale or delivery of debt relief services.]
- Nothing in § 310.4(a)(5)(i) prohibits requesting or requiring the customer to place funds in an account to be used for the debt relief provider’s fees and for payments to creditors or debt collectors in connection with the renegotiation, settlement, reduction, or other alteration of the terms of payment. [There is nothing that would allow a debt relief company to dictate the place funds are deposited or to prevent a consumer from selecting the insured financial institution in which to deposit funds.]
- In the event of any dissolution or termination of the seller’s or telemarketer’s business, the
principal of that seller or telemarketer shall maintain all records as required under this
section. In the event of any sale, assignment, or other change in ownership of the seller’s
or telemarketer’s business, the successor business shall maintain all records required
under this section. [This would seemingly imply that the principal for the debt relief business that goes out of business must be identified and reachable for two years after so access to the records may be granted.]
Companies wishing to circumnavigate these rules by only engaging in internet communications, avoiding the use of the telephone or trying to only talk to consumers via some sort of communication not involving telephones will not be rewarded for cleverness.
I think groups that engage in those behaviors will be seen for exactly what they are, intentionally trying to avoid regulations to protect consumers so they can engage in activities that have already been defined as deceptive and/or abusive. Those actions will only make those debt relief companies prime targets for state regulators and Attorneys’ General actions. Not to mention the new Consumer Financial Protection Bureau with it’s razor sharp new teeth. Attempting to be clever to avoid implementing these rules would be foolish.
The Federal Trade Commission appears that overall they got the rule right. It is contemplative, encompassing, and supported with facts and experience. My hat goes off to the staff there that had a hand in the creation of this rule. Good job.
My Review of the New FTC 16 CFR Part 310 Telemarketing Sales Rule for Debt Relief Services by Steve Rhode
I can always use your help. If you have a tip or information you want to share, you can get it to me confidentially if you click here.