This past weekend I held a meeting titled the “Rally in Raleigh” where a number of debt relief companies, and some guest regulators got together to talk openly and honestly about the current state of the debt relief industry. We wound up focusing more on debt settlement since it is a subset of the debt relief industry that is going through a lot of change at the moment.
Of interest were the discussions of attorney model debt settlement companies that feel they can continue to charge up-front fees to offer debt settlement services.
Apparently some debt settlement companies feel there are loopholes and exemptions to the recently enacted Federal Trade Commission telemarketing sales rules that gives them a free pass to continue the advanced fee models of debt settlement services.
These advanced fee models have continued, not because they provide better service to consumers, but because they allow companies and affiliates to feel they can collect fees for services up-front before services are delivered. Time and time again that model has been proven to earn a quick profit for debt settlement companies that follow that business model but do not treat consumers fairly.
In fact I would say that the advanced fee model resulted in a tremendous regulator focus of the industry since consumers were complaining they paid fees for services not received and the debt settlement companies would not give them a refund of those fees. When debt relief companies don’t act fairly, regulators are forced to step in.
During our meeting one of our guests was Allison Brown from the Federal Trade Commission. Allison is involved on the front lines of the FTC debt settlement effort and is intimately familiar with what led up to the new regulation and what the FTC sees as problem loopholes that people are attempting to take advantage of, but that do not really exist.
For example, some companies are hiring local representatives to meet with consumers face-to-face at local Starbucks to get them to sign contracts and agreements for debt relief services. That’s just not going to be an accepted practice.
In her sharing of information with the attendees she said the FTC has their eyes on companies that are doing the following:
- Attorney Models – Not a loophole approach in mass marketed debt settlement services using affiliates and distant marketers. If a local attorney is a “small town player” sitting down face-to-face with a local consumer and has established a traditional attorney client relationship then that is a different matter. But, if an attorney model debt settlement company is using marketers, telemarketers and runners to sell debt relief services, these attorneys and/or firms are NOT exempt under the FTC TSR.
- The Runner – Companies that are doing the sales pitch for debt relief services over the phone or with internal representatives and then sending out a “runner” to visit the consumer in their home or place of business, typically at a Starbucks, are NOT exempt from the FTC TSR and “will fail as a loophole”, said Allison Brown from the FTC.
- Debt Relief Services Other Than Debt Settlement – Companies selling debt relief services or alteration of debt such as contract validation or Fair Debt Collection Practices Act trip-up suits, that are not local attorneys representing local clients, is NOT a loophole and is fully covered by the FTC TSR regulations.
- Bundled Products – Selling products or services other than debt relief services in order to then offer debt relief services is NOT a loophole. The FTC has a long history of targeting the bundled product approach and has specific written guidance covering these activities from their experience in going after credit repair services.
- Marketers – The FTC is planning to take action against companies that market debt relief services using unsubstantiated claims on the web, over the phone or via mail. Enforcement actions are already in the works. These will be against companies that collect leads, prepare mailers, and otherwise attract consumers for debt relief services.
Allison Brown mentioned that they already have a number of companies on their radar that are operating as “loopholers” and will begin enforcement actions soon.
I asked Allison Brown what companies should do to not be on the enforcement radar of the FTC and avoid massive fines. Her response was that companies need to pay close attention to their advertising and marketing material. Ms. Brown said,
We’ve seen so many companies that over-promise and under deliver. Some claims that raise red flags are “become debt free”, we’ll be asking companies to substantiate that the typical customer becomes debt free. Another one is save 60% off your credit card debt, we have not seen a company that can substantiate that for the typical consumer across the board.
The next few months will be very interesting as enforcement actions against advanced fee debt settlement companies of all types will begin to roll out.
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