On July 30, 2009, the Federal Trade Commission released a proposal to amend the Telemarketing Sales Rule to expand the Rule’s application to “debt relief services.” The FTC is accepting public comments responding to its proposal through October 9, 2009, and the Commission will host a public forum following the close of the comment period. If the FTC’s proposal is adopted, the amended TSR would dramatically change the marketing and delivery of debt relief services. Stakeholders in the debt relief services industry and other interested parties should strongly consider commenting to ensure that the Commission considers all possible perspectives regarding its proposal.
The proposed Rule amendment would define “debt relief service” as “any service represented, directly or by implication, to renegotiate, settle, or in any way alter the terms of payment or other terms of the debt between a consumer and one or more unsecured creditors or debt collectors, including, but not limited to, a reduction in the balance, interest rate, or fees owed by a consumer to an unsecured creditor or debt collector.”
It is important to recognize that the current TSR already regulates the use of outbound telemarketing to offer these services. As a result, the current Rule’s disclosure requirements, prohibited misrepresentations, do-not-call provisions, and all other components already apply. The FTC’s proposal, however, would expand the application of the Rule to consumers’ inbound calls placed in connection with the offering of debt relief services. Currently, such inbound calls can qualify for an exemption when consumers call in response to general media advertising or a direct mail solicitation. The FTC’s proposal would eliminate these exemptions for calls placed by consumers interested in debt relief services.
The most significant new regulation of the debt relief services industry proposed by the FTC would be a ban on any up-front fees. Debt relief service providers would be prohibited from requesting or receiving payment of any fee from a person for any debt relief service until the provider has given the customer documentation that a debt has been renegotiated, settled, reduced, or otherwise altered. This proposal would therefore ban charges to set up a customer’s account as well as monthly fees to administer the account.
No matter what one’s position is on debt relief services, most would agree that this is a severe proposal, and the current TSR applies this type of fee restriction only to sellers offering credit repair and “recovery room” services (i.e., where a company offers to help a consumer get money back from a prior telemarketing scheme). The current TSR also imposes this fee restriction on advance-fee loan offers, but only when a company has guaranteed or represented a high likelihood of success in obtaining or arranging an extension of credit for the consumer. In its request for comments, the FTC specifically seeks information on whether the more limited fee restriction in the advance-fee loan context would be appropriate for debt relief services.
The proposal would also require telemarketers offering debt relief services to provide a specific set of disclosures before a consumer pays for the services and before the services are performed. These disclosures would include: (1) the amount of time necessary to achieve the represented results; (2) the amount of money or the percentage of each outstanding debt that the customer must accumulate before the service provider will make a bona fide settlement offer; (3) that not all creditors or debt collectors will accept a debt relief settlement offer; (4) that creditors or debt collectors may continue to pursue collection efforts while the consumer participates in a debt relief program; (5) that use of a debt relief service will likely adversely affect the customer’s creditworthiness, may result in lawsuits filed by creditors or debt collectors, and may increase the amount the customer owes; and (6) that the amounts saved by debt relief customers may be taxable income. These proposed required disclosures would be in addition to the set of disclosures required by the current Rule. The FTC’s proposal would also prohibit misrepresentations of this information.
The FTC’s proposal to amend the TSR is accompanied by justifications supporting the proposed changes. One striking feature of this document is the FTC’s apparent frustration with the debt relief services industry’s perceived refusal to provide the Commission with information establishing that there is a valid market for these services separate and apart from outlier law violators.
Most of the FTC’s proposals are supported by references to the Commission’s enforcement history regarding debt relief services. The FTC seems to be taking the position that the targets of its enforcement actions can be considered representatives of the industry as a whole. For example, the FTC states: “[B]ased on the current record available, the prevailing debt settlement business model requires consumers to pay in advance for services that, according to available data, in most cases, are never provided to the vast majority of consumers.” Commenters looking to scale back the FTC’s proposed restrictions will likely need to provide the Commission with a substantially revised picture of how the debt relief services industry operates.
In addition to supplementing the FTC’s understanding of the debt relief services industry with data about bona fide service providers, commenters can also respond to specific questions posed in the Commission’s proposal. For example, the proposal arguably treats as a “debt relief service” a creditor negotiating with its own customer about an existing debt. That is likely an unintended error. Commenters could note that error when responding to the question asking whether any entities encompassed by the definition of “debt relief service” should be excluded or exempted from the definition.
As another example, commenters who believe that the ban on up-front fees is unwarranted could make that case in response to the question asking whether this ban would prevent harm to consumers that would not be eliminated by the proposed disclosure requirements and misrepresentation prohibitions.
As a general matter, interested members of the public should accept the FTC’s invitation to build the record in this proceeding and should not feel obligated to limit their comments to answering the FTC’s specific questions. The FTC’s rulemaking process depends on a robust public record.
Finally, readers following the federal bill to create a Consumer Financial Protection Agency may wonder how that bill could affect the FTC’s proposal to regulate debt relief services under the TSR. The CFPA bill does not expressly address debt relief services or the Telemarketing and Consumer Fraud and Abuse Prevention Act, the TSR’s enabling legislation. However, debt relief services arguably meet the bill’s definition of “consumer financial product or service” and, therefore, providers of those services arguably meet the bill’s definition of “covered persons.” Under that interpretation, the new CFPA would have general rulemaking, enforcement, and examination authority over the debt relief services industry, but the CFPA and the FTC would share authority to enforce the TSR with respect to the industry.
Michael Goodman is a partner in the Washington, D.C., office of Hudson Cook, LLP. Basis Points readers can Michael at 202-327-9704 or by email at mgoodman@hudco.com.