Florida Attorney General Bill McCollum today announced that he has co-sponsored a letter to the Federal Trade Commission (FTC), asking it to amend a federal rule that would require debt relief service companies to provide services before collecting any fees. The letter was also sponsored by the Attorneys General of Illinois, Maryland, and Washington.
Debt relief is an umbrella term that applies to any service offering to negotiate, settle or in any way adjust a consumer’s debt, including interest rate reduction services, debt management and debt settlement services. The FTC’s proposed amendments would regulate debt relief agencies under the Telemarketing Sales Rule by, among other things, prohibiting deceptive trade practices and misleading statements concerning fees and success rates, and requiring clear and conspicuous disclosures regarding how they perform their services and the length of time it will take to provide debt relief and the cost.
Attorney General McCollum and his colleagues have also urged the FTC to prohibit the charging of advance fees, as proposed, a prohibition the states believe will prevent substantial monetary losses suffered by consumers, discourage unscrupulous operators from flocking to this industry, and facilitate efficient and timely enforcement. The States view the eradication of unfair and deceptive practices in the debt relief industry, and the harm caused to consumers and the marketplace by these practices, as a consumer protection priority.
Last week, the Attorney General’s Office filed two lawsuits on behalf of Florida consumers against five debt settlement-related companies. According to the lawsuits, the businesses promised consumers they could pay off their debts for a fraction of the amount owed, but instead collected large up-front fees and left customers with little or no money to pay creditors. The lawsuits and the letter to the federal authorities continues the Attorney General’s consumer protection initiative targeting abuses within the debt services industry.
The Letter Sent
The Attorneys General of Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Guam, Hawaii, Idaho, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Vermont, Washington, West Virginia, and Wyoming (“the States”), submit the following 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 of debt relief services.
On August 19, 2009, the FTC published its Notice of Proposed Rulemaking (NPRM)1 in which it considers amending the TSR to address the sale of debt relief services. The States applaud the FTCs undertaking this rulemaking because, as detailed below, the actions of debt relief companies have resulted in substantial increases in consumer complaints being filed with the States across the country. Further, the severity of the harm complained of by consumers is reflected in the fact that over the past five years, twenty-one states have brought at least 128 enforcement actions against debt relief companies.
The States’ enforcement actions provide ample evidence of the types of unfair and deceptive practices that financially distressed consumers encounter when they seek credit solutions via debt relief services. The primary consumer protection problem areas that have given rise to the States’ actions include: (1) unsubstantiated claims of consumer savings; (2) deceptive representations about the length of time necessary to complete a debt relief program; (3) misleading or failing to adequately inform consumers that they will be subject to continued collection efforts, including lawsuits, and that their account balances will increase due to extended nonpayment under the program; (4) deceptive disparagement of consumer credit counseling; (5) deceptive disparagement of bankruptcy as an alternative for debtors; (6) lack of screening and analysis to determine suitability of debt relief programs for individual debtors; (7) the collection of substantial up-front fees so the debt relief company gains even if it fails to perform; (8) lack of transparency and information for consumers as to payment of fees, status of accounts, and communications with creditors; (9) significant delays in active negotiation or engagement with creditors, coupled with prohibitions on direct consumer communications with creditors; and (10), in the case of debt settlement companies, basing savings claims (and settlement fees) not on the original account balance, but on the inflated amount due (including late fees and default rates of interest) at the time of settlement.
The States submit that the wide range of unfair and deceptive practices described herein can be best and most efficiently addressed by taking the well tailored, but comprehensive, approach reflected in the FTC’s proposal.
II. THE STATES SUPPORT A BROAD DEFINITION OF DEBT RELIEF SERVICES
Debt relief services, as defined in the proposed rule, include what is commonly referred to as debt management, debt settlement, and debt negotiation.
Consumers who purchase debt management services pay down debts through a monthly payment plan established through agreements with creditors. The debt management service provider typically negotiates a reduction in interest rates, late fees and minimum payments in order to reduce consumers’ monthly payments to a manageable amount. Debt management plans are offered by nonprofit consumer credit counseling services throughout the country. In the recent past, a number of for-profit debt management companies engaged in deceptive practices in the marketing and collection of fees for their programs. However, due to action by the States, the FTC, and the Internal Revenue Service, debt management abuses have been greatly reduced.
In contrast to debt management plans in which consumers make monthly payments to creditors, the debt settlement business model generally requires that a consumer stop making regular payments to creditors. Instead, the consumer makes payments directly to the debt settlement company or into a separate account arranged by the settlement company. The consumer continues to pay into the account until the debt settlement company believes there are sufficient funds to attempt to negotiate and settle the consumer’s debts. Debt settlement companies do not disburse regular payments to consumers’ creditors. Presumably, withholding all payments from the creditor increases the company’s bargaining position. Almost all debt settlement companies charge a large portion of their fees in advance before they perform any significant services on behalf of the consumer. It is this business model which has been reported to be growing rapidly and has come under increased scrutiny by the media, regulators, consumer advocates, and federal, state and local enforcement agencies.
In March 2005, the National Consumer Law Center (“NCLC”) issued a report entitled An Investigation of Debt Settlement Companies: An Unsettling Business for Consumers. The report raised serious questions as to the value of debt settlement services and demonstrated how the debt settlement industry has harmed consumers. The NCLC concluded that debt settlement companies use “a business model that is inherently harmful to consumers” because consumers are required to pay high fees for debt settlement programs that they are unable to complete, resulting in increased collection efforts and growing debts while their creditors continue to pile on fees and interest accrues. Id. at pgs. 1 – 3. The States share the NCLC’s concerns regarding the debt settlement business model described above.
The third type of debt relief business encompassed by the proposed rules is a relatively new breed: the debt negotiation model. These companies often represent that they can negotiate dramatic and immediate interest rate reductions on behalf of consumers and that the re-negotiated credit terms will save the consumers thousands of dollars in a matter of months. Debt negotiation companies further claim that their counselors are specially trained and possess industry-insider knowledge and that consumers will not achieve similar results working directly with their credit card companies. The written agreements between debt negotiation companies and consumers, however, typically disavow the debt negotiation companies’ ability or obligation to secure reduced interest rates and merely promise to “show” consumers savings of thousands of dollars. After the consumer completes a financial profile, debt negotiation companies typically “show” the promised savings in an accelerated payment schedule. The “savings” are usually based on assumed interest rate reductions and increased monthly payments, which the debt negotiation companies’ customers usually cannot afford to pay. Like the debt settlement model, most debt negotiation companies charge all of their fees in advance, before any services are performed on behalf of the consumer.
Any business model that requires cash strapped consumers to pay substantial up-front fees raises significant consumer protection concerns. The States would caution that the history of this industry reflects that it is constantly evolving and all enforcement agencies must be prepared to adapt to the ever-changing landscape of debt relief. As such, any definition encompassing “debt relief” should be as broad as possible to capture any future evolutions of the industry. In that vein, the States submit that the FTC should consider including debt relief “products” in its definition. This would preempt unscrupulous operators from attempting to circumvent TSR requirements that cover only debt relief “services” by offering a debt relief product such as a kit or software program.
While these comments focus primarily on debt settlement, this should not suggest that the States’ concerns are limited to that industry. Rather, recent complaints and enforcement actions demonstrate that particularly abusive practices have been found in the debt settlement industry. Given the evolving history of debt relief services however, it should be noted that these same concerns exist throughout all forms of debt relief, and will be present for those to come.
III. CONSUMERCOMPLAINTSFILEDWITHTHESTATESAND ENFORCEMENT ACTIONS TAKEN BY THE STATES
REFLECT THAT UNFAIR AND DECEPTIVE ACTIVITY WITHIN THIS INDUSTRY IS WIDESPREAD
The number of complaints the States have received against debt relief companies, particularly debt settlement companies, have consistently been rising and have more than doubled since 2007.
Consumers who complained to the States received either minimal or no debt relief after paying substantial amounts to debt relief companies. As a result of consumer complaints that are increasing in number and growing in severity, and the growing realization that the debt relief industry is charging consumers large fees for services that are often not provided, both the FTC and the States have taken significant enforcement actions against debt relief companies. Over the past five years, 21 States have brought 128 enforcement actions against 84 debt relief companies for unfair and deceptive trade practices.
Debt settlement companies, in particular, seek to attract consumers by promising to reduce consumers’ debts by 50% or more, stop harassing collection calls from debt collectors, and prevent lawsuits. However, consumers who complained to the States relate that collection calls and letters do not stop and, because their creditors are not being paid, their debt situation becomes worse, not better.
I signed up for the [company’s] program to let them negotiate my credit card debt. They set up a payment plan of $304.43 per month beginning in November. I have been making my payments as scheduled, but [the company] has not contacted any of my creditors to make any arrangements. Late fees and over limit fees continue to build up and I am still getting creditor phone calls. My initial contact with [the company] said that they could reduce or stop the phone calls and that they worked with my creditors to settle the debts for approximately 30% of the balances due. Now all but one of my credit cards has been turned over to collection agencies. Wednesday, February 16, I called [the company] to cancel my enrollment because I just can’t continue to make these payments and not have any help with my creditors. GA Consumer (2005).
We became involved with [the company] in February 2005. Since that time the account has grown to $9,010.00 and no creditors have been settled with. We continue to be inundated with phone calls from creditors and have been served with court papers and others are pending.
Since [the company’s] personnel did not fully disclose all the facts about the company and their ability or inability to deal with creditors, our debt situation has deteriorated severely. Creditors have advised us that they can deal directly with us to lower interest and minimum payments to facilitate reaching our original goal, to get our debt to a manageable level. OR Consumer (2005).
A. Debt Settlement Companies Charge and Collect Fees Before Providing Services, and in Many Instances, Without Providing Services.
Debt settlement firms may require consumers to pay fees from 14 to 20 percent of the total debt enrolled in the program before any negotiations with creditors occur. At the same time, consumers stop paying their creditors. As a result, their balances grow due to late fees and higher interest rates and their creditworthiness deteriorates. Moreover, advance fees impede the purported goal of the debt settlement firms to accumulate sufficient funds to pay off unsecured debts with a lump sum payment. The States frequently receive complaints from consumers stating they paid thousands of dollars to debt settlement companies, but have not obtained any settlements and in some cases are being sued by creditors. In addition, some consumers report that their creditors have obtained judgments and their wages are being garnished.
We were told that they would reduce our credit card debt. They took all their money ($6,500.00) before they did anything. They kept $6,500.00 for the settlement of three accounts which they didn’t settle. They told us to quit paying the credit card bills which we did and that has cost us at least $1,200.00 in interest. They did not get in touch with the credit card companies and we were called from 8:00 a.m. to 9 p.m. every day, even after we sent the letter they provided to the credit card companies. We had to go to court and still owe all the money on one credit card. They didn’t even help us when we received the summons. We are retired and on a fixed income. Please do what you can for us. IL Consumers (2008).
It is often at this point that complaining consumers decide to cancel their agreement with the debt settlement company, only to be told that the significant fees they paid are non-refundable. Since the consumers were already in financial distress when they enrolled, they can ill afford to lose thousands of dollars in fees, incur increased balances, see their creditworthiness eroded, and in some cases defend themselves in court.
B. Debt Settlement Companies May Mislead Consumers About the Likelihood of A Settlement.
Although debt settlement companies market their services by touting their past successes, often their claims are unsubstantiated. For example, in one recent case it was alleged that over 80% of the debts enrolled with a debt settlement company were not settled.7 In another action, a Frederick, Maryland debt settlement company could not substantiate its claim that it could reduce consumers’ debts by as much as 70%. In its report, the NCLC, citing a Robb Evans & Associates, LLC report, found that one national debt settlement company had only 1.4% of its customers complete their debt settlement plan.
Consumer complaints received by the States also tell a different story:
I contacted [the company] regarding debt settlement. I was told that phone calls from creditors would stop, as well as being told they could get a debt in my name and my soon to be ex-wife converted to my name only for divorce settlement purposes. After paying in excess of $3000, creditors still were calling, and the only option was to make other settlement arrangements. My account is currently cancelled and I am seeking a full refund. They are offering 30%, saying they have performed work on the account, and the issues with the creditor calls was my fault. MO Consumer (2005).
The States have had the same difficulties experienced by the FTC and consumer advocates in obtaining reliable statistics from the debt settlement industry to substantiate its claimed success rates. At times, when the States have requested data concerning the settlement rates advertised by debt relief companies, that data has not been forthcoming. In January 2008, the State of Maryland was provided a report from The Association of Settlement Companies (TASC) that reported industry completion rates ranging from 35% to 60%. See The Association of Settlement Companies, Preliminary Study (January 2008), p. 1. The reliability of the statistics reported by TASC is questionable because: (i) the Report is characterized as “Preliminary” with no “Final” report having been provided; (ii) the Report does not explain how the survey was conducted, what percentage of the industry TASC represents, and how many TASC members participated; and (iii) some of the participants in the study included in their “completion rates” accounts where only 50% to 80% of the consumers’ debts were actually settled.
The settlement rates reported by TASC are contrary to what the States have seen repeatedly in the enforcement actions they have taken and in the consumer complaints they have received – which is that settling multiple debts can be a long process and consumers, faced with high fees for the service, growing debts, and increased collection efforts from their creditors, realistically should never have been offered the debt settlement service to begin with. Moreover, at the FTC’s 2008 workshop entitled “Consumer Protection and the Debt Settlement Industry,” representatives of the American Bankers Association and American Express reported that consumers are paying debt settlement companies excessive fees unnecessarily, since most consumers can settle their debts on their own by contacting their credit card issuers directly.
C. Debt Settlement Companies May Mislead Consumers About The Settlement Process And Its Adverse Effect On Their Credit Rating.
In complaints to the States, consumers report that their experiences with debt settlement companies do not match the representations made by advertising and telemarketing by sales representatives.
There is a clear discrepancy between the representative’s statements, the agreement, and what actually happens. The fact of the matter is Company X represented one thing and did another. Instead of providing debt relief, Company X takes your money, prevents communication with the creditor, and allows the consumer’s credit score to be negatively effected. Regardless of whether any settlement negotiation occurs, by the time it does damage is already done. IL Consumer (2006).
The States, through their investigations and enforcement actions, have found that, through advertising and telemarketing, consumers may be led to believe debt settlement is a relatively risk free process with little or no negative consequences, when in fact consumers risk growing debt, deteriorating credit scores, collection actions, and lawsuits that may lead to judgments and wage garnishments. Typical of such advertising are the claims contained on the web site of a company recently investigated by the State of Texas, which stated: “You’ll avoid bankruptcy, put an end to harassing phone calls from creditors, and allow your credit score to dramatically improve.”
IV. THE STATES’ RECOMMENDATIONS REGARDING THE PROPOSED RULE
A. Prohibiting the Charging of Advance Fees Will Prevent the Substantial Monetary Losses Complained of By Consumers and is Consistent With State And Federal Precedent.
As detailed in the preceding discussion, many of the consumer complaints received by the States allege that many consumers enroll in a debt relief program, pay thousands of dollars in up-front fees but were unable to have any of their debts settled.
The fundamental principle behind a ban on advance fees is clear – it will simply require debt relief companies to render promised services before collecting their fees. Currently, there is minimal incentive for debt relief companies charging up-front fees to perform services because they collect these substantial fees regardless of whether they negotiate anything for the consumer, succeed in settling any of the consumer’s debts for a reduced amount, or take any action at all on behalf of the consumer. Further, the value of the service that a debt settlement company offers a consumer is speculative because, at the time that the company enrolls a consumer and collects an initial fee and obligates the consumer to pay other fees, the company does not know what terms, if any, it will be able to negotiate on behalf of the consumer. In a worse case scenario, the company collects the up-front fee and then – by virtue of either circumstance or design – shuts its doors.
It is well recognized that due to a variety of marketplace factors, the debt relief industry has grown exponentially and in the current economic climate and will continue to do so. The States are concerned that the current regulatory regime – in which collection of substantial up- front fees is not prohibited – is such that increasing numbers of unscrupulous operators will flock to this industry. Moreover, the low set up costs, when coupled with the large fees that can be made, often leads to the promotion of debt settlement as a cheap business opportunity that is easy to enter.
Prohibiting the collection of up-front fees would provide regulators and enforcement authorities a bright line means of readily identifying unscrupulous entities that merit immediate investigation and prosecution. Moreover, a regulatory scenario in which up-front fees are not prohibited places those debt relief providers who prefer not to require consumers to pay substantial up-front fees at a competitive disadvantage.
The debt settlement companies examined by the States cannot demonstrate any justification for their substantial advance fees based on the effort required to set up an account. In fact, the industry’s own reports suggest that it is marketing, lead generation and referral costs that drive the debt settlement industry’s zeal for up-front fees. In its 2008 Preliminary Report, TASC acknowledged that the primary costs incurred by settlement companies are not service related, but rather are marketing and other costs to acquire clients. From the complaints received and the cases brought, the States have seen little evidence that debt settlement companies provide any other useful services such as credit counseling, debtor education, or getting interest rates reduced before settlement negotiations are initiated, which can take several months, or even years.
There is state and federal precedent for an approach prohibiting the collection of up-front fees. States have established solid precedent for restricting advance fees for debt-related services that have a history of complaints regarding unfair and deceptive practices resulting in consumers not receiving the services for which they paid. North Carolina already bans debt settlement companies from charging fees until all promised services have been performed. Numerous states have recently enacted laws prohibiting advance fees for foreclosure assistance or mortgage loan modification services. Under the federal Credit Repair Organizations Act, 15 U.S.C. § 1679b(b), and many similar state laws, a credit repair business is prohibited from charging or receiving money or other valuable consideration prior to full and complete performance of the agreed upon credit repair services. Similarly, the TSR (16 C.F.R. § 310.4(a)(4)) prohibits advance fees in the area of loan brokering, another activity in which the service to be provided and results are speculative and lend themselves to false promises and minimal performance.
In urging the FTC to prohibit the charging of advance fees, the States submit that a prohibition on advance fees will prevent the substantial monetary losses suffered by consumers, level the playing field, discourage unscrupulous operators from flocking to this industry and facilitate efficient and timely enforcement.
B. The TSR Should be Amended to Cover Inbound Calls to Debt Relief Companies.
The States agree that the TSR should be amended so that its protections will apply to both outbound telemarketing calls by debt relief companies and inbound debt relief calls in response to direct mail or general media advertisements. It has been the States’ experience that most (if not all) debt relief companies advertise their services primarily through television, radio, direct mail and/or the Internet. These advertisements often require consumers to call a toll free number to obtain additional information or to enroll in a program. If the TSR were not applied to inbound debt relief calls made by consumers in response to direct mail or general media advertisements, then the vast majority of consumers who purchase debt relief services would not be protected.
C. The TSR Should be Amended to Prohibit Deceptive Telemarketing Acts or Practices by Debt Relief Companies.
The enforcement actions taken by the States and complaints the States have received from consumers have shown that consumers have been misled concerning the effectiveness of debt relief services, the cost of the services, alternatives to debt relief services, and the impact the services will have on their financial well being. The States also recognize that many of the consumer complaints they have received reflect a misunderstanding by consumers as to how their debt settlement program will work. Section 310(a)(1)(viii), as amended, will ensure that before consumers sign any contracts with or make any payments to a debt relief company, they will be informed of pertinent material facts including, among other things: (i) how long it will take to settle each debt; (ii) the cost to settle each debt; (iii) that the service will not stop harassing creditor calls or other collection efforts; (iv) that results are not guaranteed, and (v) that the settlement program may adversely impact the consumer’s credit rating. While disclosures alone may not be sufficient means to protect consumers in this area, clearly consumers are entitled to this basic information so they can make better informed decisions about debt relief alternatives.
The proposed amendments contained in §310(a)(2)(x) make it an unfair and deceptive trade practice for a debt relief company to misrepresent any material aspect of its services including, but not limited to, the time it will take for the debt relief company to settle the consumers’ debts, the cost of the services, the impact on a consumers’ creditworthiness, the debt relief company’s prior success rates, and the status of the debt relief company (i.e., as a non-profit). The States believe the practices prohibited under §310(a) are already prohibited by the FTC Act and state unfair and deceptive trade practices statutes. However, codifying these disclosures under the TSR will create a more defined bright line standard for enforcement purposes and will leave little or no doubt as to what obligations debt relief companies have to inform their customers.
The States have also reviewed complaints and brought enforcement actions against debt settlement companies making exaggerated and unsubstantiated savings claims to consumers. Consistent with the FTC’s advertising substantiation doctrine, any rules that are promulgated should make clear that it is a violation of the TSR for a debt relief company to make any savings claims to consumers that are not substantiated by data that exists at the time the claim is made. The same principle applies to other misleading claims, such as that the companies can stop creditor calls or collection lawsuits.
Finally, it is important that the rules cover the various entities that play critical roles in the sale and delivery of debt relief services. The States have observed several companies that attempt to divide each stage of the debt settlement business process – marketing and solicitation, contract origination and closing, payment collection, maintenance of consumer accounts, and actual debt negotiation – among different companies. This segmentation of services creates consumer confusion, as well as added complexity for law enforcement. The States recommend that all parties actively engaged in the sale and delivery of debt relief services be prohibited from engaging in unfair and deceptive trade practices in the telemarketing of debt relief services, either directly or under §310.3 of the TSR, which applies to those who knowingly assist or support deceptive telemarketing acts or practices.
V . CONCLUSION
The States view the eradication of unfair and deceptive practices in the debt relief industry – and the harm caused to consumers and the marketplace by these practices – as a consumer protection priority. Thus, the Attorneys General of the States, as the chief law enforcement officers of their respective states, will continue to investigate and take enforcement actions against unscrupulous operators in the industry. The States, however, submit that the comprehensive bright line approach reflected in the proposed rules would substantially aid law enforcement agencies in addressing the harms that have been caused to consumers by unscrupulous practices in the debt relief industry.