The Federal Trade Commission today told the U.S. Senate Committee on Commerce, Science, and Transportation that the FTC has made it a top priority to protect financially distressed American consumers from deceptive debt relief schemes.
With Americans continuing to feel the effects of the economic downturn, the FTC has stepped up efforts to stop fraudulent financial schemes that exploit consumers, according to the testimony, which was presented by Alice Saker Hrdy, Assistant Director in the FTC’s Division of Financial Practices. Hrdy described the FTC’s law enforcement actions in this area, a new FTC rule to combat deceptive and abusive telemarketing of debt relief services, and the FTC’s ongoing work to educate consumers about debt relief options and how to avoid scams.
In the past seven years, the FTC has brought 23 lawsuits against credit counseling firms that are sham nonprofits, debt settlement services, and debt negotiators. These cases have helped more than 500,000 consumers who have been harmed, and additional investigations are under way. The FTC works closely with state attorneys general and state banking departments to leverage its resources to protect consumers in this and other areas.
The testimony also described how the FTC recently amended its Telemarketing Sales Rule to further combat deceptive and abusive debt relief practices. The Rule now prohibits for-profit companies that sell debt relief services over the telephone from collecting fees before delivering the services they promise. In addition, the Rule requires telemarketers to make certain disclosures and prohibits them from making false claims.
In addition, the testimony described the FTC’s many educational campaigns to help consumers manage their finances, avoid deceptive and unfair practices, and be aware of emerging scams, including a major initiative regarding mortgage loan modification and foreclosure rescue scams. The FTC has focused outreach efforts on issues affecting people in financial distress, such as federal stimulus money scams.
Text of the Testimony
Senator McCaskill and members of the Committee, I am Alice Saker Hrdy, Assistant Director in the Division of Financial Practices at the Federal Trade Commission (“FTC” or “Commission”). I appreciate the opportunity to appear before you today, and the Commission thanks this Committee for its interest in the work of the FTC to protect consumers from deception and abuse in the sale of debt relief services.
The Commission has a long history of protecting consumers of financial products and services offered by entities within the agency’s jurisdiction. With Americans continuing to feel the effects of the economic downturn, the Commission has stepped up its efforts to stop fraudulent financial schemes that exploit consumers who are particularly vulnerable as a result of financial distress.
Stopping deceptive debt relief practices is one of our highest consumer protection priorities. Providers of debt relief services purport to help people who cannot pay their debts by negotiating on their behalf with creditors. Debt settlement companies, for example, market their ability to dramatically reduce consumers’ debts, often by making claims to reduce debt by specific and substantial amounts, such as “save 40 to 60 percent off your credit card debt.” In many instances, consumers pay hundreds or thousands of dollars for these services but get nothing in return.
The FTC utilizes its four principal tools to protect consumers of debt relief services: law enforcement, rulemaking, consumer education efforts, and research and policy development. To halt deceptive and abusive practices and return money to victimized consumers, the Commission has brought 23 lawsuits in the last seven years against credit counseling firms, debt settlement services, and debt negotiators. These cases have helped over 500,000 consumers harmed by deceptive and abusive practices. The Commission continues to actively investigate debt relief companies and pursue aggressive enforcement in this arena. As the Commission’s law enforcement experience has shown, victims of these schemes often end up more in debt than when they began. Especially in these difficult economic times, when so many consumers are struggling to keep their heads above water, this is unacceptable.
Over the past decade, the Commission and state enforcers have brought a combined 259 cases to stop deceptive and abusive practices by debt relief providers that have targeted consumers in financial distress. Despite these sustained efforts, consumer complaints continued to increase as did problematic advertising and telemarketing of these services. To ] strengthen the agency’s ability to stop deception and abuse in the provision of debt relief services, the Commission proposed amendments to the Telemarketing Sales Rule (“TSR”). On July 29, 2010, after a thorough and careful review of the rulemaking record, the Commission announced its final amendments to the TSR. The Rule now bans debt relief providers from collecting fees in advance of performing promised services, prohibits them from making misrepresentations, and requires them to make several important up front disclosures.
This testimony provides an overview of the three common types of debt relief services, as well as the Commission’s law enforcement efforts with respect to each. The testimony then describes the Commission’s amendments to the TSR5 and discusses the FTC’s ongoing efforts to educate consumers about debt relief options and how to avoid scams.
II. The Commission’s Authority
The Commission enforces Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices in or affecting commerce, as well as the Telemarketing and Consumer Fraud and Abuse Prevention Act (“Telemarketing Act”) and the associated TSR that prohibit certain deceptive and abusive telemarketing practices. The Commission has used this authority to challenge debt relief providers within its jurisdiction who have engaged in deceptive or abusive practices. In addition, the Commission works to protect consumers from a wide range of other unfair and deceptive practices in the marketplace, such as credit-related and government grant scams, mortgage loan modification scams, deceptive marketing of health care products, deceptive negative option marketing, and business opportunity and work-at home schemes. The FTC works closely with many state attorneys general and state banking departments to leverage resources in consumer protection.
III. Overview of Debt Relief Services and FTC Law Enforcement Efforts
Debt relief services have proliferated over the past few years as greater numbers of consumers struggle with debts they cannot pay. A range of nonprofit and for-profit entities – including credit counselors, debt settlement companies, and debt negotiation companies – offer to help consumers facing debt problems. As detailed below, consumers have complained of deceptive and abusive practices in all of these services, and in response, the FTC and state enforcement and regulatory bodies have brought numerous cases.
- Credit Counseling Agencies
Credit counseling agencies (“CCAs”) historically were nonprofit organizations that worked as liaisons between consumers and creditors to negotiate “debt management plans” (“DMPs”). DMPs are monthly payment plans for the repayment of credit card and other unsecured debt that enable consumers to repay the full amount owed to their creditors but under renegotiated terms that make repayment less onerous. Credit counselors typically also provide educational counseling to assist consumers in developing a manageable budget and avoiding debt problems in the future. Beginning in the late 1990s, however, some CCAs registered as nonprofit organizations with the Internal Revenue Service, but in reality were operating as for profit companies and engaging in aggressive and illegal marketing practices. Other CCAs incorporated and openly operated as for-profit companies.
Since 2003, the Commission has filed six cases against credit counseling providers for deceptive and abusive practices. In one of these cases, the FTC sued AmeriDebt, Inc., at the time one of the largest CCAs in the United States. On the eve of trial, the FTC obtained a $35 million judgment as part of a settlement agreement. Thus far, the Commission has collected and distributed $12.7 million in redress to 287,000 consumers. In AmeriDebt and other credit counseling cases, the FTC charged that the agencies engaged in deceptive conduct in violation of Section 5 of the FTC Act and the TSR, including:
- misrepresentations about the benefits and likelihood of success consumers could expect from the services, including the savings they would realize;
- misrepresentations regarding fees, including false claims that the CCAs did not charge upfront fees;
- deceptive statements regarding their purported nonprofit nature; and
- violations of the TSR’s provisions that require certain disclosures and prohibit misrepresentations, as well as the requirements of the TSR’s Do Not Call provisions.
In addition, over the last several years, in response to abuses such as these, the IRS has
challenged a number of purportedly nonprofit CCAs – both through enforcement of existing
statutes and new tax code provisions – resulting in the revocation, or proceedings to revoke, the nonprofit status of 41 CCAs. In addition, state authorities have brought at least 21 cases
against CCAs under their own statutes and rules.
- Debt Settlement Services
Debt settlement companies purport to obtain from consumers’ unsecured creditors lump sum settlements for significantly less than the full outstanding balance of the consumers’ debts. Unlike a traditional DMP, the goal of a debt settlement plan is to enable the consumer to repay only a portion of the total debt owed. Debt settlement providers heavily market through Internet, television, radio, and print advertising. The advertisements typically make claims about the company’s supposed ability to reduce consumers’ debts to a fraction of the full amount owed, and then encourage consumers to call a toll-free number for more information. During the calls, telemarketers repeat and embellish many of these claims.
Most debt settlement companies charge consumers hundreds, or even thousands, of dollars in upfront fees, in many cases with the entire amount of fees due within the first few months of enrollment and before any debts are settled. An increasing number of providers spread their fees over a longer period – for example, 12 to 18 months – but consumers generally still pay a substantial portion of the fees before any of their payments are used to pay down their debt. Most consumers drop out of these programs before completion, and they typically forfeit all of the money they paid to the debt settlement company, regardless of whether they received any settlements from their creditors.
Since 2004, the Commission has brought nine actions against debt settlement providers, alleging that they deceived consumers about key aspects of their programs. The defendants’ misrepresentations included claims that:
- the provider will, or is highly likely to, obtain large reductions in debt for enrollees, e.g., a 50 percent reduction or elimination of debt in 12 to 36 months;
- the provider will stop harassing calls from debt collectors as well as collection lawsuits;
- the provider has special relationships with creditors and is expert in inducing creditors to grant concessions;
- the consumer will not have to pay substantial upfront fees, and
- the consumer will be able to obtain a refund if the provider is unsuccessful.
The Commission also has alleged that debt settlement companies encouraged or instructed consumers to stop paying their creditors, while not disclosing that failing to make payments to creditors may actually increase the amount owed (because of accumulating fees and interest) and would harm their credit rating. In addition to the FTC cases, state attorneys general and regulators have filed over 125 law enforcement actions against debt settlement providers under state statutes that, among other things, ban unfair or deceptive practices.
- Debt Negotiation
Debt negotiation companies assert that they can obtain interest rate reductions or other concessions from creditors to lower consumers’ monthly payments. Such companies often market debt negotiation services through so-called automated “robocalls.” Like debt settlement companies, many debt negotiation providers charge significant upfront fees and promise specific results, such as a particular interest rate reduction or amount of savings.32 In some cases, the telemarketers of debt negotiation services refer to themselves as “card services” or a “customer service department” during calls with consumers in order to mislead them into believing that the telemarketers are associated with the consumer’s credit card company.
The FTC has brought nine actions against defendants alleging deceptive debt negotiation practices. In each case, the Commission alleged that defendants (1) misrepresented that they
could reduce consumers’ interest payments by specific percentages or minimum amounts,
(2) falsely purported to be affiliated, or have close relationships, with consumers’ creditors, and (3) violated the TSR’s Do Not Call provisions, among other TSR violations.
Our law enforcement colleagues at the state level also have focused attention on bogus
debt negotiation companies. The states have brought at least 14 cases against such firms, and the FTC will continue to work closely with our state partners on these and related issues.
IV. The Commission’s Amendments to the Telemarketing Sales Rule
On July 29, 2010, the Commission announced final amendments to the TSR governing providers of debt relief services (“Final Rule”), based on its determination that such revisions to the TSR are necessary to protect consumers from deceptive and abusive practices in the telemarketing of debt relief services. The Commission developed the Final Rule after considering an extensive rulemaking record, including over 300 public comments, and information gathered during a November 2009 public forum. At that forum, representatives of all the major stakeholders discussed the key consumer protection issues and problems that are present in the debt relief industry and possible solutions for them. The Final Rule:
- prohibits any telemarketer or seller of debt relief services from requesting or receiving payment until it produces the promised services and provides proof documenting this fact to the consumer;
- mandates certain additional disclosures and prohibits misrepresentations in the telemarketing of debt relief services; and
- extends the existing protections of the TSR to inbound debt relief calls, i.e., those where consumers call a telemarketer in response to a general media or direct mail advertisement.
As to its scope, the Final Rule covers telemarketers of for-profit debt relief services, including credit counseling, debt settlement, and debt negotiation services. Because the FTC Act exempts nonprofit entities from the agency’s jurisdiction under that Act, and the Telemarketing Act incorporates the FTC Act exemptions, the TSR generally does not apply to such entities. However, companies falsely claiming nonprofit status are subject to both the FTC Act and the TSR.
The Final Rule specifies that fees for debt relief services may not be collected until:
- the debt relief provider successfully renegotiates, settles, reduces, or otherwise changes the terms of at least one of the consumer’s debts;
- there is a written settlement agreement, debt management plan, or other agreement between the consumer and the creditor, and the consumer has agreed to it; and
- the consumer has made at least one payment to the creditor or debt collector as a
result of the agreement negotiated by the debt relief provider.
To ensure that debt relief providers do not front-load their fees if a consumer has enrolled multiple debts in one debt relief program, the Final Rule specifies how debt relief providers may collect the fee for each settled debt. First, the provider’s fee for a single debt must be in proportion to the total fee that would be charged if all of the debts had been settled. Alternatively, if the provider bases its fee on the percentage of what the consumer saves as result of using its services, the percentage charged must be the same for each of the consumer’s debts.
Another new provision of the Final Rule will allow debt relief companies to require that consumers set aside their fees and savings for payment to creditors in a “dedicated account.” However, providers may only require a dedicated account as long as five conditions are met:
- the dedicated account is maintained at an insured financial institution;
- the consumer owns the funds (including any interest accrued);
- the consumer can withdraw the funds at any time without penalty;
- the provider does not own or control or have any affiliation with the company administering the account, and
- the provider does not exchange any referral fees with the company administering the account.
In addition, the Final Rule requires that providers must make several disclosures when telemarketing their services to consumers. Before the consumer signs up for any debt relief service, providers must disclose how long it will take for consumers to obtain results, how much it will cost, the negative consequences that could result from using debt relief services, and key information about dedicated accounts if they choose to require them. In addition, the TSR mandates general disclosures for all telemarketers, including the total cost and any material restrictions or limitations of the service.
The Final Rule also prohibits misrepresentations about any debt relief service, including savings rates and whether the provider is a nonprofit entity. The Commission’s Statement of Basis and Purpose, which accompanies the Final Rule, provides extensive guidance about the evidence providers must possess before they make specific claims about the amount of debt
reduction they will obtain for consumers. First, providers must account for the additional debt and costs consumers incur as a result of interest, late fees, and other charges imposed by the creditors or debt collectors during the course of the program. Second, providers must account for the fees consumers pay to the provider in calculating the savings. Third, providers must include in their calculation of savings those consumers who dropped out or were otherwise unable to complete the program. Finally, providers must account for individual accounts that were not settled successfully. Thus, providers may not exclude debts that they have failed to settle – including those associated with consumers who dropped out of the program – from their calculations of the average savings percentage or amount of consumers’ debt reduction. The amendments become effective on September 27, 2010, except for the advance fee ban, which becomes effective on October 27, 2010. To help businesses comply with the new debt relief rules, the FTC staff issued a compliance guide describing the key changes to the TSR affecting debt relief services.
V. Efforts to Educate Consumers
To complement its law enforcement and rulemaking, the Commission has made significant efforts to educate consumers about debt relief services and alert them to possible deceptive practices. This past spring, the agency released a brochure entitled “Settling Your Credit Card Debts,” which offers struggling consumers tips on seeking assistance with their debts and spotting red flags for potential scams.42 This brochure, along with additional educational materials on debt relief,43 is available at an FTC web page, www.ftc.gov/MoneyMatters.
In addition, the Commission has conducted numerous educational campaigns designed to help consumers manage their financial resources, avoid deceptive and unfair practices, and become aware of emerging scams. For example, the FTC has undertaken a major consumer education initiative related to mortgage loan modification and foreclosure rescue scams, including the release of a suite of mortgage-related resources for homeowners. Moreover, the agency has focused outreach efforts on a number of other issues faced by people in economic distress, including stimulus scams, rental scams, church “opportunity” scams, offers for bogus auto warranties, and solicitations for phony charities that exploit the public’s concern for the welfare of our troops and public safety personnel in a time of crisis.
The Commission encourages wide circulation of all of its educational resources and makes bulk orders available free of charge, including shipping. We provide FTC materials to state attorneys general and other local law enforcement entities, consumer groups, and nonprofit organizations, who in turn distribute them directly to consumers. In addition, media outlets – online, print, and broadcast – routinely cite our materials and point to our guidance when covering debt-related news stories.
The FTC appreciates the opportunity to describe its work to protect consumers from deceptive and abusive conduct in the marketing of debt relief services. Stopping the marketers of debt relief services who prey on consumers facing financial hardship is among the FTC’s highest priorities, and we will continue our aggressive law enforcement and educational programs in this area. – Source
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