Table of Contents
SourceAs of September 27, 2010, debt settlement and debt relief companies are going to have to provide data to consumers when enrolling new clients or when promoting results.
These facts are are part of the “Good Faith Estimate” and will help consumers to select the company they wish to work with.
The Federal Trade Commission says that they have determined some specific disclosures must be made to consumers along with the necessary time and money to complete the promised service.
Generally speaking, claims must be supported by competent and reliable evidence. The reasonable basis test is an objective standard; an advertiser’s good faith belief that its claim is substantiated is insufficient. See, e.g., FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020, 1029 (7th Cir. 1988); FTC v. U.S. Sales Corp., 785 F. Supp. 737 (N.D. Ill. 1992). Similarly, the existence of some satisfied customers does not constitute a reasonable basis. See, e.g., FTC v. SlimAmerica, Inc., 77 F. Supp. 2d 1263, 1274 (S.D. Fla. 1999); In re Brake Guard Products, 125 F.T.C. 138, 244-45 (1998). – Source
The purpose of these estimates is, as the Federal Trade Commission says, to “ensure that consumers are not deceived and have the information they need to make informed decisions.” – Source
Who These Estimates and Disclosures Apply To
The good faith estimates and details of the program are not the responsibility of the end provider to supply. All vendors and contractors that are actively involved in the sales process have a duty to disclose this information. This applies to:
- Companies that gather and/or sell sales leads to debt relief companies.
- Back-office providers of services to debt relief and debt settlement companies.
- Front-end affiliates and marketers of debt relief services.
- Escrow companies that provide dedicated client accounts to consumers in debt relief programs.
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.
It’s illegal to provide “substantial assistance” to another company providing debt relief services if you know they’re violating the Rule or if you remain deliberately ignorant of their actions.
The Key Elements a Debt Settlement Company Must Tell a Consumer
A debt negotiation, for profit credit counseling and debt settlement company must now disclose the following key bits of information to consumers before a consumer is enrolled in a debt relief program.
- How Much the Service Costs.
- How Long it Will Take to Achieve Results Promoted in Advertising or Sales Messages.
- How Much Money a Client Must Save Before Settlement Offers Will be Made to Creditors.
- The Consequences if the Consumer Does Not Make a Timely Payment in the Program.
- The Client’s Rights Regarding any Third-Party Escrow Account.
How Much the Service Costs.
Before someone signs up for your service, you must disclose all fees. If you charge a specific dollar amount, you must disclose that amount. If you charge a percentage of the amount a customer would save as a result of your program, you have to disclose both the percentage and the estimated dollar amount it represents for that customer. In addition, before someone signs up, you must disclose any material restrictions, limitations or conditions on your services. If the sales presentation includes a statement about your company’s refund policy, you must also include a clear and conspicuous disclosure of all terms and conditions of the policy. If you don’t give refunds, the Rule requires you to tell people that before they sign up for your service.
A debt settlement company, Company G, charges a service fee of 10% of any debt reduction it gets for its customers. Adam signs up for the program with a single credit card debt of $5,000. Based on its experience with that credit card company, Company G estimates it can settle Adam’s debt for $3,000 – a reduction of $2,000. Under the new Rule, before Adam signs up for the program, Company G must disclose that it will charge him 10% of the amount of debt reduction, or an estimated $200 (10% of $2,000).
How Long it Will Take to Achieve Results Promoted in Advertising or Sales Messages
Messages or statements about expectations to be achieved in the program can not be estimated. They must be made based upon the actual performance data of the company providing the services. For example”
- State the savings based on the customer’s debt when he or she signs up for the program. You may not inflate savings figures or percentages by including interest and fees the credit card company adds after a customer signs up for your program.
Andy signs up with a debt relief service offered by Company H, owing $10,000 on his credit card. One year later, following negotiations with the credit card company, Company H negotiates a settlement allowing Andy to pay $6,000 to resolve the debt. However, since Andy enrolled, the credit card company has charged him interest and late fees totaling $2,000, so that Andy now owes $12,000. By getting a settlement for $6,000, Company H has saved Andy $4,000 ($10,000 minus $6,000) or 40% of the debt at the time of enrollment. It would be deceptive for Company H to claim to have saved Andy $6,000 ($12,000 minus $6,000) or 50% of his debt.
- Include the impact of your fees on the claimed savings. You may not inflate your savings claims by excluding the fees your customers paid you.
Betty owes $10,000 on her credit card, and signs up with Company J’s debt relief service. Company J gets a settlement allowing Betty to pay $5,000 to resolve the debt. However, at the time of settlement, Company J charges Betty a $1,000 fee for its work. It would be deceptive for Company J to claim to have saved Betty $5,000 – or 50% of her debt – because Betty also had to pay $1,000 in fees. Instead, Company J may truthfully state Betty’s savings as $4,000 ($5,000 minus $1,000) or 40% of Betty’s debt.
- In calculating the results you’ve achieved over time, you must include customers who dropped out or otherwise failed to complete the program. Don’t base your savings claims only on customers who successfully completed your program.
Company K had 10 customers signed up for its service. Each one had $10,000 in unpaid credit card debt for a total of $100,000. Five of the customers completed the program, and each saved $5,000 – for a total savings of $25,000. The remaining five customers dropped out of the program, each one still owing the $10,000 they owed when they signed up with the program. Taken together, Company K has saved its customers $25,000 – or 25% – of the total $100,000 debt they had when they signed up with the program. It would be deceptive for Company K to exclude the drop-outs and claim that it saved its customers 50% of their debt.
- Include all debts enrolled by your customers, not only those that have been settled successfully. In calculating your savings claim, you may not exclude accounts you failed to settle, even if the failure was due to customers dropping out of your service.
Company L has 10 customers, and each of them enrolls two $1,000 debts in the program – totaling 20 debts or $20,000. Company L is able to settle 10 of the 20 debts, each for $500. However, it was unable to settle the remaining 10 debts before those customers either completed or dropped out of the program. Thus, Company L has saved its 10 customers $5,000 or 25% of their debts in the program. It would be deceptive for Company L to exclude the 10 accounts that weren’t settled and claim a savings rate of 50%.
How Much Money a Client Must Save Before Settlement Offers Will be Made to Creditors
You must tell potential customers how much money or what percentage of each outstanding debt they must accumulate before you’ll make an offer to each creditor that’s likely to result in a settlement. If you’re estimating, you must have a reasonable basis for your estimate. For example, if someone owes $10,000 to a creditor and your data shows that this creditor is likely to settle the debt for $6,000, you must tell the potential customer before he or she signs for your program that he or she will have to save about $6,000 to settle the debt.
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The Consequences if the Consumer Does Not Make a Timely Payment in the Program
If you ask your customers to stop making timely payments to their creditors – or if your program relies on that practice – you must tell them about the possible consequences of doing so, including:
- damage to their credit report and credit score;
- that creditors may sue them or continue with the collections process; and
- that they may accrue new fees and interest, which will increase the amount they owe.
The Client’s Rights Regarding any Third-Party Escrow Account
Under the new Rule, you may require your customers to set aside your fee and funds to pay debts in a dedicated account as long as:
- the account is held at an insured financial institution;
- the customer owns the funds (including any interest accrued), controls them, and can withdraw them at any time;
- you don’t own or control the company administering the account or have any affiliation with it;
- you don’t split fees with the company administering the account; and
- the customer can stop working with you at any time without penalty. If the customer decides to end the relationship with you, you must return the money in the account to the customer within seven business days (minus any fees you’ve earned from the account in compliance with the TSR).
The independent company that administers the account may charge the customer a reasonable fee, but it may not transfer any of the customer’s funds to you – directly or indirectly – until you have renegotiated, settled, reduced, or otherwise changed the terms of at least one of your customer’s debts and met all the related requirements in the Rule.
This is Not All a Debt Relief Company Must Disclose in Their Good Faith Estimate
Any facts that a debt relief or debt settlement company makes either explicitly or by implication must be based on substantiated and verifiable data. The facts and statements covered by this rule cover more than I’ve listed above, they cover and fact or statement that may influence the consumer to sign up for the service.
For example the following items may be material and relevant to consumers enrolling as well:
- If you will have a dedicated account representative assigned to you.
- If you have an attorney assigned to your case and if so the type of representation they will provide you. Will they represent you in court?
- If you may be sued, the percentage of clients that have been subject to a summons or suit while in the program.
- If statements are made that information can be removed from the credit report, real data about how often that happens with all reported items of all clients.
- Actual data about refund requests and percentage of money returned to consumers.
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