41 Attorneys General Say to FTC, Ban Debt Settlement Advance Fees Damnit

Here is a letter that was sent to the FTC from the National Association of Attorneys General in support of banning advance fees for debt settlement programs.

Damon Day - Pro Debt Coach

Federal Trade Commission
Office of the Secretary
Room H-135 (Annex T)
600 Pennsylvania Avenue, NW
Washington, DC 20580

Re: Telemarketing Sales Rule – Debt Relief Amendments Matter No. R411001

Dear Secretary Clark:

The Attorneys General of Alaska, Arkansas, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Vermont, Washington, West Virginia, and Wyoming submit the following supplemental comments on the Proposed Rulemaking to amend the Federal Trade Commission’s (“FTC”) Telemarketing Sales Rule (“TSR”), 16 C.F.R. Part 310, to address the sale o f debt relief services.

We previously submitted comments on October 23, 2009 on behalf of the attorneys general of 41 jurisdictions in support of the proposed amendments to the TSR to protect consumers of debt relief services. In those comments the States made the following recommendations regarding the proposed rules:

  • A prohibition on advance fees for debt settlement services is the most essential element of the proposed Rule. An advance fee ban will prevent debt settlement companies from profiting even when they obtain no benefit for consumers, an all too common practice in the debt settlement industry. Moreover, consumers seeking the assistance of a debt settlement company can ill-afford the significant up-front fees charged by these companies. Much of the harm alleged by consumers complaining to the States is due to consumers’ inability to save significant amounts of money in the first several months of the program as a result of advance fees. As a result, consumers experience the increased collection efforts, lawsuits, etc., that would be diminished if they were allowed to save money for settlements on the front end through an advance fee ban. An advance fee ban is consistent with State and Federal regulation of other debt-related services that have been characterized by abusive consumer practices, such as credit repair, loan brokering and foreclosure relief. We see no reason to treat debt relief services differently.
  • The TSR should be amended to cover inbound calls to debt relief companies.
  • The TSR should be amended to prohibit deceptive telemarketing acts or practices by debt relief companies.

Our brief comments below are intended to provide additional information as well as reiterate our strong support for comprehensive and effective regulation of debt relief services. Since the rulemaking was announced in July 2009, debt settlement companies have continued to propagate their misleading and unsubstantiated claims of debt relief. Our citizens have diverted millions of dollars to debt settlement companies and have too often ended up deeper in debt with no relief in sight. We urge the Commission to act promptly and to put into effect a final rule substantially similar to the proposed rule as soon as is reasonably possible.


We previously commented that the number of consumer complaints the States have received against debt relief companies, particularly debt settlement companies, have consistently risen. This trend has continued. For example, in Illinois complaints against debt settlement companies increased by 55% between 2008 and 2009.

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The consumer complaints have highlighted some of the deceptive marketing practices employed by the debt settlement industry. Some of the advertisements suggest an affiliation with purported government programs, using terms like “stimulus act” or “credit relief’ act, and even using the FTC seal. Attached as Exhibit 1 are examples of some recent debt settlement advertising materials.

As consumer complaints continue to rise, enforcement actions continue to be filed. For example, on February 10, 2010 Illinois brought four actions against debt settlement companies located in Texas, Arizona, Florida, and California. Later that same month, Minnesota brought seven actions against debt settlement companies. Over the past 7 months since our original comments were filed, states have brought an additional 42 enforcement actions against 36 debt relief companies alleging unfair and deceptive practices and violations of state debt settlement licensing statutes.

States have also recognized the need for enhanced regulation of the debt settlement industry and have responded with legislation similar to the FTC’s proposed amendments to the TSR. For example, Illinois recently passed HB 4781, the Debt Settlement Consumer Protection Act, a collaborative effort of the Office of the Attorney General and the Illinois Treasurer’s Office. This bill now awaits the Governor’s signature. HB 4781 will protect consumers by:

  • Prohibiting debt settlement companies from charging up-front fees, except a one-time $50 emollment fee;
  • Prohibiting monthly fees;
  • Allowing debt settlement companies to collect a success fee, of up to 15% of the savings achieved for the consumer, when the company delivers on its promise;
  • Prohibiting deceptive advertising;
  • Requiring written disclosures and warnings; and
  • Requiring licensing and bonding.

The State Attorneys General participated in a hearing on the debt settlement industry conducted by the Senate Commerce Committee on April 22, 2010. We reported on the anti­­ consumer practices prevalent in the industry and reiterated our support for strong regulation at the national level. As part ofthe hearing, the Government Accountability Office (GAO) released an investigative report entitled “Debt Settlement: Fraudulent, Abusive, and Deceptive Practices Pose Risk to Consumers.” The GAO’s covert testing revealed that debt settlement companies frontloaded their fees, advised consumers to cease paying on their debts, guaranteed specific debt reduction percentages, represented unsubstantiated past success rates, and claimed affiliations with government programs. The GAO findings are consistent with our experience, based on consumer complaints we have received and investigations we have conducted.

In closing, we believe that the Federal Trade Commission’s proposed changes to the TSR will provide much needed nationwide protections for consumers of debt relief services. We strongly support the proposed amendments as drafted in the NPRM and hope that the FTC finds our comments useful in achieving its consumer protection goals.

Exhibit 1


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