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August 2010 : What a Relief! FTC Issues Rules on Debt Relief

by Joseph Sanscrainte, an attorney specializing in telemarketing law..

The FTC issued a rulemaking on August 10th, 2010 regarding the provision of debt relief services. In the context of the Telemarketing Sales Rule, I'm going to say this was unique - the FTC identified a set of practices within one specific industry, and targeted them like a laser. For standard issue capitalists intent on having Adam Smith's "invisible hand" regulate the marketplace, this ruling most assuredly appears like overreaching on the part of the FTC; for consumer advocates, on the other hand, this ruling provides a welcome framework for protecting innocent consumers from the ravages of unscrupulous sales practices.

The rulemaking encompasses 229 pages, so it makes for some tough reading. But the jumping off point is the FTC's definition of the term "debt relief services," to wit, "any service or program 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 person 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 person to an unsecured creditor or debt collector."

The FTC adopted a very broad definition in order to encompass the broad swath of services offered to consumers in the debt relief space. The FTC identifies three such services: 1) debt management programs (DMPs), offered by credit counseling agencies, are monthly payment plans that allow consumers to repay the full amount of their debt under renegotiated terms that make repayment less onerous; 2) debt settlement services offer consumers the potential to obtain lump sum settlements with their creditors for significantly less than the outstanding balance; and 3) debt negotiation services, which offer to obtain interest rate reductions or other concessions to lower the amount of consumers' monthly payment owed to creditors. The new rules apply to all such offers.

The most important, and controversial, change made by the FTC has to do with certain prohibitions on collecting advance fees, i.e., prior to actually providing any sort of debt relief service. The FTC clearly is not in favor of collecting advance fees, but the new rules actually set up the framework under which debt relief providers can in fact collect such fees. Specifically, a debt relief provider cannot collect an advance fee unless three criteria are met: 1) at least one debt has been renegotiated, settled, reduced, or otherwise altered; 2) the customer has made at least one payment to a creditor under the changed plan; and 3) there has to be proportionality between the services rendered and the fee collected (i.e., no more frontloading of all fees prior to the majority of services being rendered.) As the FTC states in the rulemaking: "the Rule prohibits providers from charging any fee in advance of providing the debt relief services. If the provider settles, renegotiates, reduces, or alters debts sequentially, it may collect part of its fee after each individual settlement or other alteration."

The new rule does offer a bit of a workaround to the advance fee prohibitions - debt relief providers are allowed to hold the consumers money (to be used for the provider fees and for payments to creditors) in a dedicated bank account. With such an account, the provider may require payment from the customer up front, but can only collect payment once the standard requirements, above, are met. In addition, as further protection for consumers, in order to collect a fee, the provider must have an executed agreement with the customer (execution can be oral or in writing).

The FTC has also added four debt relief specific disclosures to the standard set of disclosures under the Telemarketing Sales Rule. Debt relief providers must disclose, before the consumer consents to pay, the following: (1) the amount of time required to achieve the represented results; (2) the amount of savings needed before the settlement of a debt; (3) if the debt relief program includes instruction not to make timely payments to creditors, that the program may affect the consumer's creditworthiness; and 4) if a dedicated bank account is to be used, that the consumer may withdraw any monies held therein at any time without penalty.

And finally, lest debt relief providers who only accept inbound calls think they're off the regulatory hook, the FTC has a surprise in store. The TSR does in fact exempt most inbound calls placed by consumers in response to direct mail or general media advertising. However (and this is big however), the new FTC rule explicitly extends coverage of the TSR, and thus these new rules, to inbound calls made to debt relief services as generated by direct mail or general media advertising. As the FTC summarizes: "as a result, virtually all debt relief telemarketing transactions are now subject to the TSR."

There are many who might question why it is necessary for the FTC to micromanage a specific industry's practices. These same folks might ask why the FTC couldn't simply rely on its existing anti-fraud mandates to police the debt relief industry, rather than adopt a set of industry-specific rules. In any event, the die is cast, and the majority of entities offering debt relief services must immediately adopt some sweeping changes to their current practices.

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