[Federal Register Volume 75, Number 153 (Tuesday, August 10, 2010)]
[Rules and Regulations]
[Pages 48458-48523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-19412]
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Part III
Federal Trade Commission
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16 CFR Part 310
Telemarketing Sales Rule; Final Rule
Federal Register / Vol. 75, No. 153 / Tuesday, August 10, 2010 /
Rules and Regulations
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FEDERAL TRADE COMMISSION
16 CFR Part 310
Telemarketing Sales Rule
AGENCY: Federal Trade Commission (``Commission'' or ``FTC'').
ACTION: Final rule amendments.
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SUMMARY: In this document, the Commission adopts amendments to the
Telemarketing Sales Rule (``TSR'' or ``Rule'') that address the
telemarketing of debt relief services. These amendments define debt
relief services, prohibit debt relief providers from collecting fees
until after services have been provided, require specific disclosures
of material information about offered debt relief services, prohibit
specific misrepresentations about material aspects of debt relief
services, and extend the TSR's coverage to include inbound calls made
to debt relief companies in response to general media advertisements.
The amendments are necessary to protect consumers from deceptive or
abusive practices in the telemarketing of debt relief services.
DATES: These final amendments are effective on September 27, 2010,
except for Sec. 310.4(a)(5), which is effective on October 27, 2010.
ADDRESSES: Requests for copies of these amendments to the TSR and this
Statement of Basis and Purpose (``SBP'') should be sent to: Public
Reference Branch, Federal Trade Commission, 600 Pennsylvania Avenue NW,
Room 130, Washington, D.C. 20580. The complete record of this
proceeding is also available at that address. Relevant portions of the
proceeding, including the final amendments to the TSR and SBP, are
available at (http://www.ftc.gov).
FOR FURTHER INFORMATION CONTACT: Alice Hrdy, Allison Brown, Evan
Zullow, or Stephanie Rosenthal, Attorneys, Division of Financial
Practices, Bureau of Consumer Protection, Federal Trade Commission, 600
Pennsylvania Avenue NW, Room NJ-3158, Washington, D.C. 20580, (202)
326-3224.
SUPPLEMENTARY INFORMATION:
I. Overview and Background
A. Overview
This document states the basis and purpose for the Commission's
decision to adopt amendments to the TSR that were proposed and
published for public comment on August 19, 2009.\1\ After careful
review and consideration of the entire record on the issues presented
in this rulemaking proceeding, including public comments submitted by
321 interested parties,\2\ the Commission has decided to adopt, with
several modifications, the proposed amendments to the TSR intended to
curb deceptive and abusive practices in the telemarketing of debt
relief services. The Rule provisions will: (1) prohibit debt relief
service providers\3\ from collecting a fee for services until a debt
has been settled, altered, or reduced; (2) require certain disclosures
in calls marketing debt relief services; (3) prohibit specific
misrepresentations about material aspects of the services; and (4)
extend the TSR's coverage to include inbound calls made to debt relief
companies in response to general media advertisements.
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\1\ TSR Proposed Rule, 74 FR 41988 (Aug. 19, 2009). The TSR is
set forth at 16 CFR 310.
\2\ The comments and other material placed on the rulemaking
record are available at (http://www.ftc.gov/os/comments/tsrdebtrelief/index.shtm). In addition, a list of commenters cited
in this SBP, along with their short citation names or acronyms used
throughout the SBP, follows Section V of this SBP. When a commenter
submitted more than one comment, the comment is also identified by
date.
\3\ Throughout the SBP, the Commission uses the term
``providers'' to refer to ``sellers and telemarketers'' as defined
in the TSR. ``Seller'' is defined as ``any person who, in connection
with a telemarketing transaction, provides, offers to provide, or
arranges for others to provide goods or services to the customer in
exchange for consideration.'' 16 CFR 310.2(aa). ``Telemarketer'' is
defined as ``any person who, in connection with telemarketing,
initiates or receives telephone calls to or from a customer or
donor.'' 16 CFR 310.2(cc).
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Beginning on September 27, 2010, sellers and telemarketers of debt
relief services will be required to comply with the amended TSR
requirements, except for Sec. 310.4(a)(5), the advance fee ban
provision, which will be effective on October 27, 2010.
B. The Commission's Authority Under the TSR
Enacted in 1994, the Telemarketing and Consumer Fraud and Abuse
Prevention Act (``Telemarketing Act'' or ``Act'') targets deceptive and
abusive telemarketing practices, and directed the Commission to adopt a
rule with anti-fraud and privacy protections for consumers receiving
telephone solicitations to purchase goods or services.\4\ Specifically,
the Act directed the Commission to issue a rule defining and
prohibiting deceptive and abusive telemarketing acts or practices.\5\
In addition, the Act mandated that the FTC promulgate regulations
addressing some specific practices, which the Act designated as
``abusive.''\6\ The Act also authorized state attorneys general or
other appropriate state officials, as well as private persons who meet
stringent jurisdictional requirements, to bring civil actions in
federal district court.\7\
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\4\ 15 U.S.C. 6101-6108. Subsequently, the USA PATRIOT Act, Pub.
L. No. 107-56, 115 Stat. 272 (Oct. 26, 2001), expanded the
Telemarketing Act's definition of ``telemarketing'' to encompass
calls soliciting charitable contributions, donations, or gifts of
money or any other thing of value.
\5\ 15 U.S.C. 6102(a).
\6\ 15 U.S.C. 6102(a)(3).
\7\ 15 U.S.C. 6103, 6104.
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Pursuant to the Act's directive, the Commission promulgated the
original TSR in 1995 and subsequently amended it in 2003 and again in
2008 to add, among other things, provisions establishing the National
Do Not Call Registry and addressing the use of pre-recorded
messages.\8\ The TSR applies to virtually all ``telemarketing,''
defined to mean ``a plan, program, or campaign which is conducted to
induce the purchase of goods or services or a charitable contribution,
by use of one or more telephones and which involves more than one
interstate telephone call.''\9\ The Telemarketing Act, however,
explicitly states that the jurisdiction of the Commission in enforcing
the Rule is coextensive with its jurisdiction under Section 5 of the
Federal Trade Commission Act (``FTC Act'').\10\ As a result, some
entities and products fall outside the scope of the TSR.\11\
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\8\ TSR and Statement of Basis and Purpose and Final Rule (``TSR
Final Rule''), 60 FR 43842 (Aug. 23, 1995); Amended TSR and
Statement of Basis and Purpose (``TSR Amended Rule''), 68 FR 4580
(Jan. 29, 2003); Amended TSR and Statement of Basis and Purpose
(``TSR Amended Rule 2008''), 73 FR 51164 (Aug. 29, 2008).
\9\ 16 CFR 310.2(cc) (using the same definition as the
Telemarketing Act, 15 U.S.C. 6106(4)). The TSR excludes from the
definition of telemarketing:
the solicitation of sales through the mailing of a catalog
which: contains a written description or illustration of the goods
or services offered for sale; includes the business address of the
seller; includes multiple pages of written material or
illustrations; and has been issued not less frequently than once a
year, when the person making the solicitation does not solicit
customers by telephone but only receives calls initiated by
customers in response to the catalog and during those calls takes
orders only without further solicitation.
Id.
\10\ 15 U.S.C. 6105(b).
\11\ See 15 U.S.C. 44, 45(a)(2), which exclude or limit from the
Commission's jurisdiction several types of entities, including bona
fide nonprofits, bank entities (including, among others, banks,
thrifts, and federally chartered credit unions), and common
carriers, as well as the business of insurance.
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In addition, the Rule wholly or partially exempts several types of
calls from its coverage. For example, the Rule generally exempts
inbound calls placed by consumers in response to direct mail or general
media advertising.\12\
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However, there are certain ``carve-outs'' from some of the TSR's
exemptions that limit their reach, such as the carve-out for calls
initiated by a customer in response to a general advertisement relating
to investment opportunities.\13\
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\12\ 16 CFR 310.6(b)(5)-(6). Moreover, the Rule exempts from the
National Do Not Call Registry provisions calls placed by for-profit
telemarketers to solicit charitable contributions; such calls are
not exempt, however, from the ``entity-specific'' do not call
provisions or the TSR's other requirements. 16 CFR 310.6(a).
\13\ See, e.g., 16 CFR 310.6(b)(5)-(6) (provisions related to
general advertisements and direct mail solicitations).
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The TSR is designed to protect consumers in a number of different
ways. First, the Rule includes provisions governing communications
between telemarketers and consumers, requiring certain disclosures and
prohibiting material misrepresentations.\14\ Second, the TSR requires
telemarketers to obtain consumers' ``express informed consent'' to be
charged on a particular account before billing or collecting payment
and, through a specified process, to obtain consumers' ``express
verifiable authorization'' to be billed through any payment system
other than a credit or debit card.\15\ Third, the Rule prohibits as an
abusive practice requesting or receiving any fee or consideration in
advance of obtaining any credit repair services;\16\ recovery
services;\17\ or offers of a loan or other extension of credit, the
granting of which is represented as ``guaranteed'' or having a high
likelihood of success.\18\ Fourth, the Rule prohibits credit card
laundering\19\ and other forms of assisting and facilitating sellers or
telemarketers engaged in violations of the TSR.\20\ Fifth, the TSR,
with narrow exceptions, prohibits telemarketers from calling consumers
whose numbers are on the National Do Not Call Registry or who have
specifically requested not to receive calls from a particular
entity.\21\ Finally, the TSR requires that telemarketers transmit to
consumers' telephones accurate Caller ID information\22\ and places
restrictions on calls made by predictive dialers\23\ and those
delivering pre-recorded messages.\24\
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\14\ The TSR requires that telemarketers soliciting sales of
goods or services promptly disclose several key pieces of
information in an outbound telephone call or an internal or external
upsell: (1) the identity of the seller; (2) the fact that the
purpose of the call is to sell goods or services; (3) the nature of
the goods or services being offered; and (4) in the case of prize
promotions, that no purchase or payment is necessary to win. 16 CFR
310.4(d); see also 16 CFR 310.2(ee) (defining ``upselling'').
Telemarketers also must disclose in any telephone sales call the
cost of the goods or services and certain other material
information. 16 CFR 310.3(a)(1).
In addition, the TSR prohibits misrepresentations about, among
other things, the cost and quantity of the offered goods or
services. 16 CFR 310.3(a)(2). It also prohibits making false or
misleading statements to induce any person to pay for goods or
services or to induce charitable contributions. 16 CFR 310.3(a)(4).
\15\ 16 CFR 310.4(a)(7); 16 CFR 310.3(a)(3).
\16\ 16 CFR 310.4(a)(2).
\17\ 16 CFR 310.4(a)(3). As the Commission has previously
explained, [in] recovery room scams . . . a deceptive telemarketer
calls a consumer who has lost money, or who has failed to win a
promised prize, in a previous scam. The recovery room telemarketer
falsely promises to recover the lost money, or obtain the promised
prize, in exchange for a fee paid in advance. After the fee is paid,
the promised services are never provided. In fact, the consumer may
never hear from the telemarketer again.
TSR Final Rule, 60 FR at 43854.
\18\ 16 CFR 310.4(a)(4); see TSR Amended Rule, 68 FR at 4614
(finding that these three services were ``fundamentally bogus'').
\19\ 16 CFR 310.3(c).
\20\ 16 CFR 310.3(b).
\21\ 16 CFR 310.4(b)(iii).
\22\ 16 CFR 310.4(a)(7).
\23\ 16 CFR 310.4(b)(1)(iv) (a call abandonment safe harbor is
found at 16 CFR 310.4(b)(4)).
\24\ 16 CFR 310.4(b)(1)(v).
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C. Overview of Debt Relief Services
Debt relief services have proliferated in recent years as the
economy has declined and greater numbers of consumers hold debts they
cannot pay.\25\ A range of nonprofit and for-profit entities -
including credit counselors, debt settlement companies, and debt
negotiation companies - offer debt relief services, frequently through
telemarketing. Thus, consumers with debt problems have several options
for which they may qualify. Those who have sufficient assets and income
to repay their full debts over time, if their creditors make certain
concessions (e.g., a reduction in interest rate), can enroll in a debt
management plan with a credit counseling agency. On the other end of
the spectrum, for consumers who are so far in debt that they can never
catch up, declaring Chapter 13 or Chapter 7 bankruptcy might be the
most appropriate course. Debt settlement is ostensibly designed for
consumers who fall between these two options, i.e., consumers who
cannot repay their full debt amount, but could pay some percentage of
it.\26\
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\25\ See, e.g., TASC (Oct. 26, 2009) at 7; NFCC at 2; Federal
Reserve Board, Charge-off and Delinquency Rates (May 24, 2010),
available at (http://www.federalreserve.gov/releases/chargeoff/delallsa.htm) (charting recent increase in credit card delinquency
rate); Debt Settlement: Fraudulent, Abusive, and Deceptive Practices
Pose Risk to Consumers: Hearing on The Debt Settlement Industry: The
Consumer's Experience Before the S. Comm. on Commerce, Science, &
Transportation, 111\th\ Cong. at 1 (2010) (statement of Philip A.
Lehman, Assistant Attorney General, North Carolina Department of
Justice) (``NC AG Testimony'').
\26\ See Weinstein (Oct. 26, 2009) at 8 (see attached Bernard L.
Weinstein & Terry L. Clower, Debt Settlement: Fulfilling the Need
for An Economic Middle Ground at 7 (Sept. 2009) (``Weinstein
paper'')). It is not clear, however, how wide a ``slice'' of the
debt-impaired population is suitable for debt settlement programs.
See Summary of Communications (June 16, 2010) at 1 (according to
industry groups, consumers who can afford to pay 1.5-2% of their
debt amount each month should enter debt settlement). Moreover, even
for those consumers for whom debt settlement might be appropriate,
the practice of charging large advance fees makes it much less
likely that those consumers can succeed in such a program. CFA at 9;
CareOne at 4; see SBLS at 2-3.
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Over the last several years, the Commission has addressed consumer
protection concerns about debt relief services through law enforcement
actions,\27\ consumer education,\28\ and outreach to industry and other
relevant parties.\29\ The brief description of the debt relief services
industry in the next section is based upon information in the record,
the enforcement activities of the FTC and the states, and independent
research by Commission staff.\30\
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\27\ See List of FTC Law Enforcement Actions Against Debt Relief
Companies, following Section V of the SBP, for a list of cases that
the FTC has prosecuted since 2003 (``FTC Case List''). In addition,
as detailed in the subsequent List of State Law Enforcement Actions
Against Debt Relief Companies (``State Case List''), state law
enforcement agencies have brought at least 236 enforcement actions
against debt relief companies in the last decade.
\28\ See, e.g., FTC, Settling Your Credit Card Debts (2010);
FTC, Fiscal Fitness: Choosing a Credit Counselor (2005); FTC, For
People on Debt Management Plans: A Must-Do List (2005); FTC, Knee
Deep in Debt (2005).
\29\ In September 2008, the Commission held a public workshop
entitled ``Consumer Protection and the Debt Settlement Industry''
(``Workshop''), which brought together stakeholders to discuss
consumer protection concerns associated with debt settlement
services, one facet of the debt relief services industry. Workshop
participants also debated the merits of possible solutions to those
concerns, including the various remedies that were subsequently
included in the proposed rule. An agenda and transcript of the
Workshop are available at (http://www.ftc.gov/bcp/workshops/debtsettlement/index.shtm). Public comments associated with the
Workshop are available at (http://www.ftc.gov/os/comments/debtsettlementworkshop/index.shtm). As discussed below, in November
2009, the Commission held a public forum on issues specific to the
rulemaking proceeding.
\30\ A more detailed description of the history and evolution of
these different forms of debt relief can be found in Section II of
the Notice of Proposed Rulemaking in this proceeding.
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1. 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, enabling consumers to repay the full amount owed to their
creditors under renegotiated terms that make repayment less
onerous.\31\ To be eligible for a DMP,
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a consumer generally must have sufficient income to repay the full
amount of the debts, provided that the terms are adjusted to make such
repayment possible. Credit counselors typically also provide
educational counseling to assist consumers in developing manageable
budgets and avoiding debt problems in the future.\32\
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\31\ GP (Oct. 22, 2009) at 2; Cambridge (Oct. 26, 2009) at 1.
Each creditor determines what, if any, repayment options to offer
the consumer based on the consumer's income and total debt load.
Repayment options, known as ``concessions,'' include reduced
interest rates, elimination of late or over limit fees, and
extensions of the term for repayment.
\32\ GP (Oct. 22, 2009) at 2; Davis at 2; CCCS NY at 2; FECA
(Oct. 26, 2009) at 2-3; DebtHelper at 1; Cambridge (Oct. 26, 2009)
at 1 (``Roughly 85% of the individuals who contact Cambridge [a
credit counseling agency] simply have questions about a particular
aspect of their finances or wouldn't qualify for creditor
concessions due to too much or too little income. Nevertheless, they
receive the same financial analysis and Action Plan offered to
Cambridge's DMP clients, and are also offered ongoing counseling,
educational guides and web resources, free of charge.''). In fact,
Section 501(c)(3) of the Internal Revenue Code (``IRC''), 26 U.S.C.
501(c)(3), dictates that nonprofits must provide a substantial
amount of free education and counseling to the public and prohibits
them from refusing credit counseling services to a consumer if the
consumer cannot pay. FECA (Oct. 26, 2009) at 4.
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Nonprofit CCAs generally receive funding from two sources. First,
consumers typically pay for their services: usually $25 to $45 to
enroll in a DMP, followed by a monthly charge of roughly $25.\33\ The
second source of funding is creditors themselves. After a consumer
enrolls in a DMP, the consumer's creditors often pay the CCA a
percentage of the monthly payments the CCA receives. In the past, this
funding mechanism, known as a ``fair share'' contribution, has provided
the bulk of a nonprofit CCA's operating revenue, but these agencies now
typically receive less than 10% of their revenue from such
contributions.\34\
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\33\ Cambridge (Oct. 26, 2009) at 1; NWS (Oct. 22, 2009) at 6
(see attached Hasnain Walji, Delivering Value to Consumers in a Debt
Settlement Program at 6 (Oct. 16, 2009) (``Walji paper'')) (the
average account set up fee is $25 and monthly maintenance fee is
$15); see also Cards & Payments, Vol. 22, Issue 2, Credit
Concessions: Assistance for Borrowers on the Brink (Feb. 1, 2009)
(nonprofit agencies' counseling fees average about $25 per month);
Miami Herald, Credit Counselors See Foreclosures on the Rise, July
13, 2008, (CCAs charge an initial fee of $25 and a $25 monthly fee).
These fees are often limited by state law. See, e.g., Me. Rev.
Stat. Ann. Tit. 17, Sec. 701, et seq., tit. 32 Sec. 6171, et seq.
(limiting fees to $75 for set-up and $40 monthly charge); Md. Code
Ann. Sec. 12-901 et seq. (limiting fees to $50 consultation fee and
the lesser of $40 per month or $8 per creditor per month); Ill. Com.
Stat. Ann., Sec. 205 ILCS 665/1 et seq. (limiting fees to an
initial counseling fee of $50, provided the average initial
counseling fee does not exceed $30 per debtor for all debtors
counseled, and $50 per month for each debtor, provided the average
monthly fee does not exceed $30 per debtor for all debtors
counseled); N.C. Gen. Stat. Sec. 14-423 et seq. (limiting fees to
$40 for set-up and 10% of the monthly payment disbursed under the
DMP, not to exceed $40 per month).
\34\ GP (McNamara), Transcript of Public Forum on Debt Relief
Amendments to the TSR (``Tr.''), at 77-78; RDRI at 2 (creditor fair
share has fallen to 4% to 5% of consumer debt amounts and in some
cases has been eliminated); NWS (Oct. 22, 2009) at 5 (see attached
Walji paper at 5) (fair share is 4% to 10%); see also National
Consumer Law Center, Inc. & Consumer Federation of America, Credit
Counseling in Crisis: The Impact on Consumers of Funding Cuts,
Higher Fees and Aggressive New Market Entrants at 10-12 (April
2003); NFCC (Binzel), Transcript of ``Consumer Protection and the
Debt Settlement Industry'' Workshop, September 2008 (``Workshop
Tr.'') at 37; but see JH (Oct. 24, 2009) at 8 (without citation, the
commenter states that CCAs receive 22.5% of the total amount
collected from each consumer).
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Over the past decade, a number of larger CCAs entered the market.
Many of these CCAs obtained nonprofit status from the Internal Revenue
Service. Other CCAs openly operated as for-profit companies. In
response to illegal practices by some of these new entrants, the FTC
and state attorneys general brought a number of enforcement actions
challenging these practices.\35\ Specifically, since 2003, the
Commission has brought six cases against credit counseling entities 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.\36\ The defendants in these cases allegedly engaged in several
common patterns of deceptive conduct in violation of Section 5 of the
FTC Act.\37\ First, most made allegedly deceptive statements regarding
their nonprofit nature.\38\ Second, they allegedly made frequent
misrepresentations about the benefits and likelihood of success
consumers could expect from their services. These included false
promises to provide counseling and educational services\39\ and
overstatements of the amount or percentage of interest charges a
consumer might save.\40\ Third, the Commission alleged that these
entities misrepresented material information regarding their fees,
including making false claims that they did not charge upfront fees\41\
or that fees were tax deductible.\42\ In addition to allegedly
violating the FTC Act, some of these entities were engaging in outbound
telemarketing and allegedly violating the TSR, particularly the Rule's
disclosure requirements and prohibitions of misrepresentations, as well
as its provisions on certain abusive practices, including violations of
the National Do Not Call Registry provision.\43\
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\35\ See FTC and State Case Lists, supra note 27.
\36\ FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md., final
order May 17, 2006). On the eve of trial, the FTC obtained a $35
million settlement and thus far has distributed $12.7 million in
redress to 287,000 consumers. See Press Release, FTC, FTC's
AmeriDebt Lawsuit Resolved: Almost $13 Million Returned to 287,000
Consumers Harmed by Debt Management Scam (Sept. 10, 2008), (http://www.ftc.gov/opa/2008/09/ameridebt.shtm).
\37\ See, e.g., FTC v. Debt Solutions, Inc., No. 06-0298 JLR
(W.D. Wash. filed Mar. 6, 2006); U.S. v. Credit Found. of Am., No.
CV 06-3654 ABC(VBKx) (C.D. Cal. filed June 13, 2006); FTC v.
AmeriDebt, Inc., No. PJM 03-3317 (D. Md. filed Nov. 19, 2003).
\38\ See U.S. v. Credit Found. of Am., No. CV 06-3654 ABC(VBKx)
(C.D. Cal. filed June 13, 2006); FTC v. Integrated Credit Solutions,
Inc., No. 06-806-SCB-TGW (M.D. Fla. filed May 2, 2006) ; FTC v.
Express Consolidation, No. 06-cv-61851-WJZ (S.D. Fla. Am. Compl.
filed Mar. 21, 2007); FTC v. Debt Mgmt. Found. Servs., Inc., No. 04-
1674-T-17-MSS (M.D. Fla. filed July 20, 2004); FTC v. AmeriDebt,
Inc., No. PJM 03-3317 (D. Md. filed Nov. 19, 2003). Although the
defendants in these cases had obtained IRS designation as nonprofits
under IRC Sec. 501(c)(3), they allegedly funneled revenues out of
the CCAs and into the hands of affiliated for-profit companies and/
or the principals of the operation. Thus, the FTC alleged defendants
were ``operating for their own profit or that of their members'' and
fell outside the nonprofit exemption in the FTC Act. See 15 U.S.C.
44, 45(a)(2).
As the Commission has stated in testimony before the Permanent
Subcommittee on Investigations of the Senate Committee on
Governmental Affairs, significant harm to consumers may accrue from
misrepresentations regarding an entity's nonprofit status. See
Consumer Protection Issues in the Credit Counseling Industry:
Hearing Before the Permanent Subcomm. on Investigations, S. Comm. on
Governmental Affairs, 108\th\ Cong. 2d Sess. (2004) (testimony of
the FTC) (``[S]ome CCAs appear to use their 501(c)(3) status to
convince consumers to enroll in their DMPs and pay fees or make
donations. These CCAs may, for example, claim that consumers'
`donations' will be used simply to defray the CCA's expenses.
Instead, the bulk of the money may be passed through to individuals
or for-profit entities with which the CCAs are closely affiliated.
Tax-exempt status also may tend to give these fraudulent CCAs a
veneer of respectability by implying that the CCA is serving a
charitable or public purpose. Finally, some consumers may believe
that a `non-profit' CCA will charge lower fees than a similar for-
profit.''), available at (http://www.ftc.gov/os/2004/03/040324testimony.shtm).
\39\ See, e.g., FTC v. Integrated Credit Solutions,No. 06-806-
SCB-TGW(M.D. Fla. filed May 2, 2006); U.S. v. Credit Found. of Am.,
No. CV 06-3654 ABC(VBKx) (C.D. Cal. filed June 13, 2006); FTC v.
Nat'l Consumer Council, No. SACV04-0474 CJC(JWJX) (C.D. Cal. filed
Apr. 23, 2004).
\40\ See U.S. v. Credit Found. of Am., No. CV 06-3654 ABC(VBKx)
(C.D. Cal. filed June 13, 2006); FTC v. Integrated Credit Solutions,
Inc., No. 06-806-SCB-TGW (M.D. Fla. filed May 2, 2006); FTC v. Debt
Mgmt. Found. Servs., Inc., No. 04-1674-T-17-MSS (M.D. Fla. filed
July 20, 2004).
\41\ See FTC v. Express Consolidation, No. 06-cv-61851-WJZ (S.D.
Fla. Am. Compl. filed Mar. 21, 2007); FTC v. AmeriDebt, Inc., No.
PJM 03-3317 (D. Md. filed Nov. 19, 2003).
\42\ See FTC v. Integrated Credit Solutions, No. 06-806-SCB-TGW
(M.D. Fla. filed May 2, 2006); U.S. v. Credit Found. of Am., No. CV
06-3654 ABC(VBKx) (C.D. Cal. filed June 13, 2006). Other defendants
allegedly claimed to have ``special relationships'' with the
consumers' creditors. See FTC v. Debt Solutions, Inc., No. 06-0298
JLR (W.D. Wash. filed Mar. 6, 2006) .
\43\ See FTC v. Express Consolidation, No. 06-cv-61851-WJZ (S.D.
Fla. Am. Compl. filed Mar. 21, 2007); U.S. v. Credit Found. of Am.,
No. CV 06-3654 ABC(VBKx) (C.D. Cal. filed June 13, 2006).
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Over the last several years, in response to abuses such as these,
the
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IRS has challenged the tax-exempt status of a number of purportedly
nonprofit CCAs - both through enforcement of existing statutes and new
tax code provisions.\44\ To enhance the IRS's ability to oversee CCAs,
in 2006 Congress amended the IRC, adding Sec. 501(q) to provide
specific eligibility criteria for CCAs seeking tax-exempt status as
well as criteria for retaining that status.\45\ Among other things,
Sec. 501(q) of the Code prohibits tax-exempt CCAs from refusing to
provide credit counseling services due to a consumer's inability to pay
or a consumer's ineligibility or unwillingness to enroll in a DMP;
charging more than ``reasonable fees'' for services; or, unless allowed
by state law, basing fees on a percentage of a client's debt, DMP
payments, or savings from enrolling in a DMP.\46\ In addition to
receiving regulatory scrutiny from the IRS, as a result of changes in
the federal bankruptcy code, 158 nonprofit CCAs, including the largest
such entities, have been subjected to rigorous screening by the
Department of Justice's Executive Office of the U.S. Trustee
(``EOUST'').\47\ Finally, nonprofits must comply with state laws in 49
states, most of which set fee limits.\48\
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\44\ In 2006, the IRS examined all tax-exempt CCAs, resulting in
revocation or proposed revocation of the existing tax-exempt status
of 41 of them, as well as increased scrutiny of new applications for
tax-exempt status. TSR Proposed Rule, 74 FR at 41992; Hunter at 1;
AICCCA at 5; FECA (Oct. 26, 2009) at 4; CareOne at 4; Eileen
Ambrose, Credit firms' status revoked; IRS says 41 debt counselors
will lose tax-exempt standing, Baltimore Sun, May 16, 2006.
\45\ Pension Protection Act of 2006, Pub. L. No. 109-280,
Section 1220 (Aug. 2006) (codified as 26 U.S.C. 501(q)).
\46\ See 26 U.S.C. 501(q). Section 501(q) also limits the total
revenues that a tax-exempt CCA may receive from creditors for DMPs
and prohibits tax-exempt CCAs from making or receiving referral fees
and from soliciting voluntary contributions from a client. 26 U.S.C.
501(q)(1)-(2); see also FECA (Oct. 26, 2009) at 4-5.
\47\ Pursuant to the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, consumers must obtain credit counseling
before filing for bankruptcy and must take a financial literacy
class before obtaining a discharge from bankruptcy. See Pub L. No.
109-8, 119 Stat. 23 (codified as amended at 11 U.S.C. 101 et seq.).
CCAs seeking certification as approved providers of the required
credit counseling must submit to an in-depth initial examination and
to subsequent re-examination by the EOUST. See Application
Procedures and Criteria for Approval of Nonprofit Budget and Credit
Counseling Agencies by United States Trustees; Notice of Proposed
Rulemaking, 73 FR 6062 (Feb. 1, 2008) (seeking comment on proposed
rule setting forth additional procedures and criteria for approval
of entities seeking to become, or remain, approved nonprofit budget
and credit counseling agencies). A list of EOUST-approved credit
counselors is available to consumers at (http://www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm).
\48\ Supra note 33; see also CareOne at 4. Some of the state
laws apply to for-profit credit counseling companies as well; others
do not.
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2. For-Profit Debt Settlement Services
Debt settlement companies purport to offer consumers the
opportunity to obtain lump sum settlements with their creditors for
significantly less than the full outstanding balance of their unsecured
debts. Unlike a traditional DMP, the goal of a debt settlement plan is
for the consumer to repay only a portion of the total owed.
The Promotion of Debt Settlement Services
Debt settlement companies typically advertise through the Internet,
television, radio, or direct mail.\49\ The advertisements generally
follow the ``problem-solution'' approach - consumers who are over their
heads in debt can be helped by enrolling in the advertiser's program.
Many advertisements make specific claims that appeal to the target
consumers - for example, claims that consumers will save 40 to 50 cents
on each dollar of their credit card debts\50\ or will become debt-
free.\51\ The advertisements typically then urge consumers to call a
toll-free number for more information.\52\
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\49\ Able (Oct. 21, 2009) at 17; CFA at 2-3; Weinstein (Oct. 26,
2009) at 7 (see attached Weinstein paper at 6); see also USOBA
Workshop Comment at 9.
\50\ In April 2010, FTC staff conducted a surf of debt
settlement websites, based on a sample of the websites that a
consumer searching for debt settlement services on a major search
engine would encounter. In conducting the surf, staff searched on
Google for the term ``debt settlement services,'' obtaining more
than 24,000 results. To best duplicate what a typical consumer
searching for these services would find, staff narrowed the results
to the websites that appeared on the first six pages of the search
results and eliminated duplicates. The staff found that 86% of the
100 debt settlement websites reviewed represented that the provider
could achieve a specific level of reduction in the amount of debt
owed.
See also, e.g., FTC v. Better Budget Fin. Servs., Inc., No. 04-
12326 (WG4) (D. Mass. filed Nov. 2, 2004) (Complaint, ] 12)
(defendants' websites represented that they could ``reduce the
amount of the consumer's debt by as much as 50% - 70%.''); infra
note 566; Debt Settlement: Fraudulent, Abusive, and Deceptive
Practices Pose Risk to Consumers: Hearing on The Debt Settlement
Industry: The Consumer's Experience Before the Sen. Comm. On
Commerce, Science, & Transportation, 111\th\ Cong. (2010) (testimony
of the U.S. Government Accountability Office) (``GAO Testimony'') at
13.
\51\ Of the 100 websites FTC staff reviewed, see supra note 50,
57% represented that they could settle or reduce all unsecured debts
(websites made claims such as ``Become Debt Free,'' ``Debt free in
as little as 24-48 months,'' and ``Achieve $0.00 Debt In 12-60
Months.''); see also, e.g., FTC v. Edge Solutions, Inc., No. CV-07-
4087 (E.D.N.Y. filed Sept. 28, 2007) (Complaint, ] 16) (defendants'
websites represented that ``we can reduce your unsecured debt by up
to 60% and sometimes more and have you debt free in 18 to 30
months.''); FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 GAF
JTLx (C.D. Cal. filed Feb. 3, 2004) (Complaint, ] 26) (the company's
website ``represent[ed] that, by using DRS's debt negotiation
services, consumers can pay off their credit card debt for fifty
percent or less of the amount currently owed and be debt free within
three to 36 months.''); GAO Testimony, supra note 50, at 18.
\52\ In its review of debt settlement websites, see supra note
50, FTC staff found that 91% of websites reviewed directed the
consumer to call a telephone number to learn more about the service.
The Commission also has observed this practice in its law
enforcement experience. See, e.g., FTC v. Debt-Set, Inc., No. 1:07-
CV-00558-RPM (D. Colo. filed Mar. 19, 2007); FTC v. Edge Solutions,
Inc., No. CV-07-4087 (E.D.N.Y. filed Sept. 28, 2007); FTC v.
Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. Am. Compl. filed
Nov. 27, 2006); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC
(Ex) (C.D. Cal. filed Aug. 19, 2002).
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Consumers who call the specified phone number reach a telemarketer
working for or on behalf of the debt settlement provider. The
telemarketer obtains information about the consumer's debts and
financial condition and makes the sales pitch, often repeating the
claims made in the advertisements as well as making additional ones. If
the consumer agrees to enroll in the program, the provider mails a
contract for signature. Providers sometimes pressure consumers to
return payment authorization forms and signed contracts as quickly as
possible following the call.\53\
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\53\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D.
Colo. filed Mar. 19, 2007) (Complaint ] 20) (alleging ``[c]onsumers
who agree to enroll . . . are sent an initial set of enrollment
documents from Debt Set Colorado. During their telephone pitches,
the defendants' telemarketers also exhort consumers to fill out the
enrollment documents and return the papers as quickly as possible .
. . . Included in these documents are forms for the consumer to
authorize direct withdrawals from the consumer's checking account,
to identify the amounts owed to various creditors, and a Client
Agreement.'').
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The Debt Settlement Program
In the typical scenario, consumers enroll one or more of their
unsecured debts into the program and begin making payments into a
dedicated bank account established by the provider.\54\ These payments
are apportioned in some fashion between the provider's fees and money
set aside for settlements of the debts. According to industry
representatives, debt settlement providers assess each consumer's
financial condition and, based on that individualized assessment and
the provider's historical experience, calculate a single monthly
payment that
[[Page 48462]]
the consumer must make to both save for settlements and pay the
provider's fee.\55\ The providers typically tell consumers that the
monthly payments - often in the hundreds of dollars - will accumulate
until there are sufficient funds to make the creditor or debt collector
an offer equivalent to an appreciable percentage of the amount
originally owed to the creditor. The provider generally will not begin
negotiations with creditors until the consumer has saved money
sufficient to fund a possible settlement of the debt.\56\ The provider
pursues settlements on an individual, debt-by-debt basis as the
consumer accumulates sufficient funds for each debt. According to
industry representatives, the process of settling all of a consumer's
debts can take three years or more to complete.\57\
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\54\ See SBLS at 1; USDR (Oct. 20, 2009) at 14; Orion (Jan. 12,
2009) at 5; NWS (Oct. 29, 2009) at 10 (see attached Walji paper at
10). In fact, most state debt management laws, including the Uniform
Debt-Management Services Act (``UDMSA''), require providers to keep
client funds in separate, dedicated bank accounts. ULC at 2; CareOne
at 6.
\55\ See, e.g., FDR (Jan. 14, 2010) at 2; TASC (Oct. 26, 2009)
at 7.
\56\ USOBA (Oct. 26, 2009) at 32. A trade association reported
that creditors may not consider settlements until an account is at
least 60 days delinquent. USOBA (Oct. 26, 2009) at 32. If consumers
are current on their debts, debt settlement providers sometimes
advise them to stop making payments to their creditors so that they
can achieve the duration of delinquency necessary for the provider
to initiate negotiations. Infra note 73.
\57\ DSA/ADE at 8; see also CO AG at 5 (based on data submitted
by industry members, the average program length was 32.3 months).
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While the consumer is accumulating funds, the debt settlement
provider often advises the consumer not to talk to the associated
creditors or debt collectors.\58\ In addition, some providers instruct
the consumer to assign them power of attorney\59\ and to send creditors
a letter, directly or through the provider, instructing the creditor to
cease communication with the consumer.\60\ In some cases, providers
have even executed a change of address form substituting their address
for the consumer's, thereby redirecting billing statements and
collection notices so that the consumer does not receive them.\61\ Some
providers represent that they maintain direct contact with the
consumer's creditors or debt collectors and that collection calls and
lawsuits will cease upon the consumer's enrollment in the debt
settlement program.\62\
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\58\ See CFA at 9; SOLS at 2; AFSA at 2; JH (Oct. 24, 2009) at
14; NC AG Testimony, supra note 25, at 3-4 (``The whole premise of
debt settlement is based on consumers not paying their debts and not
communicating with creditors.''); see also, e.g., FTC v. Connelly,
No. SA CV 06-701 DOC (RNBx) (C.D. Cal. Am. Compl. filed Nov. 27,
2006); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC (Ex) (C.D.
Cal. filed Aug. 19, 2002).
\59\ AFSA at 5 (``Debt settlement providers frequently use such
means to block communication between the creditor and the consumer.
This prevents the creditor from being able to put together a workout
plan that would be free for the consumer.''). However, ACA
International (``ACA''), a trade organization representing third-
party debt collectors, stated that the power of attorney documents
prepared by debt settlement providers frequently are legally
deficient under state law. See ACA Workshop Comment (Dec. 1, 2008)
at 5-8. Further, unless presented by an attorney, a power of
attorney may permit, but does not require, a creditor to contact the
debt settlement provider. Accordingly, it appears that this strategy
often does not stop collection calls, lawsuits, or garnishment
proceedings, but instead may actually escalate the collection
process. See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D.
Colo. filed Mar. 19, 2007)(alleging defendants sent power of
attorney documents to consumers); FTC v. Better Budget Fin. Servs.,
Inc., No. 04-12326 (WG4) (D. Mass. filed Nov. 2, 2004) (alleging
that consumers were instructed to sign power of attorney forms); FTC
v. Nat'l Credit Council, Case No. SACV04-0474 CJC (JWJx) (C.D. Cal.
2004) (alleging that defendants used power of attorney documents).
\60\ AFSA at 6; RDRI at 5 (``The issuance of `cease and desist'
letters from debt settlement companies to creditors provides a false
sense of security to consumers that their accounts are being
successfully negotiated and that there is not any threat of
impending legal action.''); see also ACA Workshop Comment (Dec. 1,
2008) at 4-7; Consumer Bankers Association Workshop Comment (Dec. 1,
2008) at 2-3. Creditors have expressed displeasure, however, that
once debt settlement providers intercede on behalf of consumers, the
providers are not responsive to creditor contacts. See, e.g., AFSA
at 2. One workshop panelist representing the American Bankers
Association (``ABA'') noted that, even when successful, attempts to
inhibit direct communication with consumers prevent creditors from
informing consumers about available options for dealing with the
debt and the ramifications of the failure to make payments. See ABA
(O'Neill), Workshop Tr. at 96.
\61\ See, e.g., FTC v. Jubilee Fin. Servs., Inc., No. 02-6468
ABC (Ex) (C.D. Cal. filed Aug. 19, 2002) (alleging defendants
instructed consumers, among other things, to submit change of
address information to creditors so that mail would go directly to
defendants); FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM, Exs.
Supp. Mot. T.R.O., at Exh. 7 (D. Colo. Mar. 20, 2007) (same).
\62\ NACCA at 5; AFSA at 8; FTC v. Connelly, No. SA CV 06-701
DOC (RNBx) (C.D. Cal. Am. Compl. filed Nov. 27, 2006); Better
Business Bureau, BBB on Differences Between Debt Consolidation, Debt
Negotiation and Debt Elimination Plans (Mar. 2, 2009) , available at
(http://www.bbb.org/us/article/bbb-on-differences-between-debt-consolidation-debt-negotiation-debt-elimination-plans-9350).
---------------------------------------------------------------------------
Debt Settlement Fee Models
Many debt settlement providers charge significant advance fees.
Some require consumers to pay 40% or more of the total fee within the
first three or four months of enrollment and the remainder over the
ensuing 12 months or fewer.\63\ These fees must be paid whether or not
the provider has attempted or achieved any settlements. An increasing
number of providers utilize a so-called ``pay as you go'' model,
spreading the fees over the first fifteen months or more of the
program, yet still requiring consumers to pay hundreds of dollars in
fees before they receive a single settlement.\64\ Even when providers
spread the fee over the anticipated duration of the program (usually
three years), consumers typically are required to pay a substantial
percentage of the fee before any portion of their funds is paid to
creditors.\65\
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\63\ USDR (Oct. 20, 2009) at 2; NAAG (Oct. 23, 2009) at 3; CFA
at 4, 8-10; SBLS at 4; QLS at 2; SOLS at 2; see also, e.g., FTC v.
Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. Am. Compl. filed
Nov. 27, 2006) (alleging that defendants required consumers to make
a ``down payment'' of 30% to 40% of the total fee in the first two
or three months with the remainder paid over the following six to 12
months). A debt settlement trade association (USOBA) obtained
information about providers' fee structures from 58 providers and
reported that six of the 58 primarily use this ``front end fee
model.'' USOBA (Jan. 29, 2010) at 3 (providing no information as to
whether the 58 respondents are representative of the trade
association or the industry as a whole).
\64\ DRS (Jan. 12, 2010) at 1 (fee of 15% of enrolled debt
balance is collected over 15 months); FDR (Oct. 26, 2009) at 14
(fees are collected over the first 18 months or longer of the
program); JH (Jan. 12, 2010) at 4 (The first payment goes toward
fees; the remainder of the fee is collected in installments over
one-half of the program. The company's total fee is 15% of enrolled
debt, plus a $49 per month maintenance fee. Formerly, the company
collected the 15% fee over the first 12 months.); Hunter at 3
(``[I]t is becoming more common for companies to charge a one-time,
flat enrollment fee and prorate the remaining percentage of the fee
over at least half the life of the program.''); NC AG Testimony,
supra note 25, at 4 (``a significant portion of the consumer's
initial payments is diverted to the settlement company's fees.'').
\65\ See USOBA (Jan. 29, 2010) at 3; CSA (Witte), Tr. at 64
(company collects its entire fee monthly, in even amounts,
throughout the program); USDR (Johnson), Tr. at 187 (same); SDS
(Jan. 22, 2010) at 1-2 (no fee is taken from the first payment; the
fee is then taken in equal amounts from the next 20 payments for 36-
month programs).
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Many debt settlement companies break their fee into separate
components, such as an initial fee, monthly fees, and/or contingency
fees based on the amount of savings the company obtains for the
consumer.\66\ While fee models vary greatly, they generally require a
substantial portion of the fee in advance of any settlements.\67\ As
described more fully below, the large initial commitment required of
consumers has contributed to the high
[[Page 48463]]
rate at which consumers drop out of these programs before their debts
are settled.
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\66\ CRN (Jan. 21, 2010) at 4; FCS (Oct. 27, 2009) at 2; ACCORD
(Oct. 9, 2009) at 2-3; SBLS at 4 (Financial Consulting Services,
National Asset Services, and American Debt Arbitration, three
different companies that share identical websites, have charged a
``set-up fee'' of $399, an ``enrollment fee'' equal to half of each
of the first six monthly payments, a $49 monthly maintenance fee, a
$7.20 monthly bank fee, and a settlement fee of 29% of the savings
on each settlement. Two other providers, Debt Choice and the Palmer
Firm, have charged an 8% set-up fee, a $65 monthly fee, and a 33%
settlement fee on realized savings at the time of settlement. A debt
settlement company called Allegro Law has charged a 16% fee
collected over 18 months and a $59.99 monthly fee; the 16% fee is
due immediately if the customer drops out of the program within the
first 18 months. Morgan Drexen and the Eric A. Rosen law firm have
charged a set-up fee of 5%, monthly fees of $48, and a 25%
settlement fee based on realized savings at time of settlement).
\67\ GAO Testimony, supra note 50, at 9. The wide variety of fee
models makes it difficult for consumers to shop for the lowest cost
service. See Loeb (Mallow), Tr. at 206.
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Consumer Protection Concerns
Debt settlement plans, as they are often marketed and implemented,
raise several consumer protection concerns. First, many providers'
advertisements and ensuing telemarketing pitches include false,
misleading, or unsubstantiated representations, including claims that
the provider will or is highly likely to obtain large debt
reductions for enrollees, e.g., a 50% reduction of what the consumer
owes;\68\
---------------------------------------------------------------------------
\68\ Supra note 50; infra note 566.
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the provider will or is highly likely to eliminate the
consumer's debt entirely in a specific time frame, e.g., 12 to 36
months;\69\
---------------------------------------------------------------------------
\69\ Supra note 51.
---------------------------------------------------------------------------
harassing calls from debt collectors and collection
lawsuits will cease;\70\
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\70\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D.
Colo. filed Mar. 19, 2007); FTC v. Better Budget Fin. Servs., Inc.,
No. 04-12326 (WG4) (D. Mass. filed Nov. 2, 2004); FTC v. Jubilee
Fin. Servs., Inc., No. 02-6468 ABC (Ex) (C.D. Cal. filed Aug. 19,
2002); GAO Testimony, supra note 50, at 13; see also, e.g., In re
Positive Return, Inc. (Cal. Dep't of Corps., desist and refrain
order May 28, 2004).
---------------------------------------------------------------------------
the provider has special relationships with creditors and
expert knowledge about available techniques to induce settlement;\71\
and
---------------------------------------------------------------------------
\71\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D.
Colo. filed Mar. 19, 2007); FTC v. Better Budget Fin. Servs., Inc.,
No. 04-12326 (WG4) (D. Mass. filed Nov. 2, 2004); Press Release,
Florida Attorney General, Two Duval County Debt Negotiation
Companies Sued for Alleged Deceptions (Mar. 5, 2008), available at
(myfloridalegal.com/__852562220065EE67.nsf/0/1E9B7637235FE16C85257403005C595F?Open&Highlight=0,ryan,boyd); In re Am. Debt
Arb., No. 06CS01309 (Cal. Dep't of Corps., desist and refrain order
June 30, 2008).
---------------------------------------------------------------------------
the provider's service is part of a government program,
through the use of such terms as ``credit relief act,'' ``government
bailout,'' or ``stimulus money.''\72\
---------------------------------------------------------------------------
\72\ See, e.g., NAAG (July 6, 2010) at 2; FTC v. Dominant Leads,
LLC, No. 1:10-cv-00997 (D.D.C. filed June 15, 2010); GAO Testimony,
supra note 50, at 13-14; Steve Bucci, Bankrate.com, Settle Credit
Card Debt For Pennies? (Feb. 2, 2010), available at (http://www.bankrate.com/finance/credit-cards/settle-credit-card-debt-for-pennies-1.aspx).
---------------------------------------------------------------------------
Many providers also tell consumers that they can, and should, stop
paying their creditors, while not disclosing that failing to make
payments to creditors may actually increase the amounts consumers owe
(because of accumulating fees and interest) and will adversely affect
their creditworthiness.\73\ The rulemaking record, discussed in detail
below, establishes that a large proportion of consumers who enter a
debt settlement plan do not attain results close to those commonly
represented.
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\73\ See, e.g., FTC v. Connelly,No. SA CV 06-701 DOC (RNBx)
(C.D. Cal. Am. Compl. filed Nov. 27, 2006); FTC v. Jubilee Fin.
Servs., Inc., No. 02-6468 ABC (Ex) (C.D. Cal. filed Aug. 19, 2002);
see also Texas Attorney General, Press Release, Attorney General
Abbott Pursues Restitution for Texans from ``Debt Settlement
Company'' in Bankruptcy Court (Aug. 20, 2009), available at (http://www.oag.state.tx.us/oagNews/release.php?id=3088); Florida v. Hacker
(Fl. Cir. Ct. - 4th filed Feb 21, 2008); GAO Testimony, supra note
50, at 9; NC AG Testimony, supra note 25, at 4 (``The theory is that
the older and more delinquent the debt, the easier it will be to
negotiate.''); Debt Settlement: Fraudulent, Abusive, and Deceptive
Practices Pose Risk to Consumers: Hearing on The Debt Settlement
Industry: The Consumer's Experience Before the Sen. Comm. On
Commerce, Science, & Transportation, 111\th\ Cong. (2010) (Statement
of Holly Haas) (``Haas Testimony''), at 2 (``We were instructed by
[the debt settlement company] not to pay our credit card bills
because the credit card companies would not negotiate settlements
with current accounts.''); RDRI at 5.
---------------------------------------------------------------------------
In the context of the widespread deception in this industry, the
advance fee model used by many debt settlement providers causes
substantial consumer injury. Consumers often are not aware that their
initial payments are taken by the provider as its fees and are not
saved for settlement of their debt; in many instances, providers
deceptively underestimate the time necessary to complete the
program.\74\ As a result, many consumers fall further behind on their
debts, incur additional charges, harm their creditworthiness, including
credit scores, and, in some cases, suffer legal action against them to
collect the debt.\75\ Moreover, in a large percentage of cases,
consumers are unable to continue making payments while their debts
remain undiminished and drop out of the program, usually forfeiting all
the payments they made towards the provider's fees.\76\
---------------------------------------------------------------------------
\74\ See, e.g., Debt Settlement USA, Growth of the Debt
Settlement Industry,at 10 (Oct. 17, 2008) (``Fraudulent firms also
regularly fail to provide the services promised to consumers by
claiming that they can help them become debt free in an
unrealistically short amount of time and/or promise too low of a
settlement.''); see also, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-
00558-RPM (D. Colo. filed Mar. 19, 2007).
\75\ One of the Commission's enforcement actions, FTC v.
Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. Am. Compl. filed
Nov. 27, 2006), is particularly illustrative of the risk of
litigation. In that case, between 2004 and 2005, nearly a third of
defendants' 18,116 customers were sued by creditors or debt
collectors. See id.,Trial Exs. 382, 561, 562, 623 & Schumann Test.,
Day 4, Vol. III, 37:21 - 40:12; 34:17 - 37:4.
\76\ NC AG Testimony, supra note 25, at 4 (``If the consumer
drops out before the settlement process is concluded, as is usually
the case, he or she will lose the fee payments, while facing
increased debt account balances.''); see infra Section
III.C.2.a.(1); FTC Case List, supra note 27.
---------------------------------------------------------------------------
Both the Commission and state enforcers have brought numerous law
enforcement actions targeting deceptive and unfair practices in the
debt settlement industry.\77\ Since 2001, the Commission has brought
nine actions against debt settlement entities under the FTC Act for
many of the abuses detailed above.\78\ As in the FTC's actions against
deceptive credit counselors, these suits commonly alleged that the
provider misrepresented, or failed to disclose adequately, the amount
and/or timing of its substantial advance fees.\79\ Additionally, the
Commission alleged that the defendants in these cases falsely promised
high success rates and results that were, in fact, unattainable;\80\
misrepresented their refund policies;\81\ and failed to disclose the
accumulation of creditor late fees and other negative consequences of
their programs.\82\
---------------------------------------------------------------------------
\77\ See FTC and State Case Lists, supra note 27.
\78\ See FTC Case List, supra note 27.
\79\ See, e.g., FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo.
filed Mar. 19, 2007) (alleging that defendants misrepresented that
they would not charge consumers any upfront fees before obtaining
the promised debt relief, but in fact required a substantial upfront
fee).
\80\ See, e.g., id; FTC v. Connelly, No. SA CV 06-701 DOC (RNBx)
(C.D. Cal. Am. Compl. filed Nov. 27, 2006).
\81\ See, e.g., FTC v. Innovative Sys. Tech., Inc., No. CV04-
0728 GAF JTLx (C.D. Cal. filed Feb. 3, 2004) (defendants
misrepresented that they would refund consumers' money if
unsuccessful).
\82\ See, e.g., id.; FTC v. Connelly,No. SA CV 06-701 DOC (RNBx)
(C.D. Cal. Am. Compl. filed Nov. 27, 2006); FTC v. Debt-Set, No.
1:07-cv-00558-RPM (D. Colo. filed Mar. 19, 2007).
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The states also have been active in attacking abuses in this
industry. State regulators and attorneys general have filed numerous
law enforcement actions against debt settlement providers\83\ under
their state unfair and deceptive acts and practices statutes\84\ or
other state laws or regulations.\85\ In addition, many states have
enacted statutes specifically designed to combat deceptive debt
settlement practices;\86\ in
[[Page 48464]]
fact, six states have banned for-profit debt settlement services
entirely.\87\ Most state laws, however, allow these services but impose
certain requirements or restrictions, for example, banning advance
fees,\88\ requiring that providers be licensed in the state,\89\
providing consumers with certain key disclosures (e.g., a schedule of
payments and fees),\90\ and granting consumers some right to cancel
their enrollment.\91\
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\83\ See State Case List, supra note 27.
\84\ See, e.g. State of Illinois v. Clear Your Debt, LLC, No.
2010-CH-00167 (Cir. Ct. 7\th\ Judicial Cir. filed Feb. 10, 2010);
State of Texas v. CSA-Credit Solutions of Am., Inc., No. 09-000417
(Dist. Travis Cty. filed Mar. 26, 2009); State of Florida v. Boyd,
No. 2008-CA-002909 (Cir. Ct. 4th Cir. Duval Cty filed Mar. 5, 2008).
\85\ See, e.g., Press Release, Colorado Attorney General, Eleven
Companies Settle With The State Under New Debt-Management And Credit
Counseling Regulations (Mar. 12, 2009), available at (http://www.ago.state.co.us/press_detail.cfmpressID=957.html).
\86\ Some states restrict the amount and timing of fees,
including initial fees and subsequent monthly charges. In 2005, the
Uniform Law Commission (``ULC'') drafted the UDMSA in an attempt to
foster consistent regulation of both for-profit and nonprofit debt
relief services across the United States. ULC at 2. Among the key
consumer protection provisions in the UDMSA are: a fee cap,
mandatory education requirements, a requirement that the provider
employ certified counselors, and accreditation requirements for
sellers of debt management services. Id. To date, six states have
adopted the UDMSA with some modifications; additional state
legislatures currently are considering doing so. Id.
\87\ See, e.g., La. Rev. Stat. Sec. 14:331, et seq.; N.D. Cen.
Code Sec. 13-06-02; Wyo. Stat. Ann. Sec. 33-14-101, et seq.; Haw.
Rev. Stat. Ann. Sec. 446-2; Mass. Gen. Laws Ann. Ch. 180 Sec. 4A;
N.J. Stat. Ann. Sec. 17:16G-2.
\88\ N.C. Gen. Stat. Sec. 14-423 et seq.
\89\ See, e.g., Kan. Stat. Ann. Sec. 50-1116, et seq.; Me. Rev.
Stat. Ann. Tit. 17 Sec. 701, et seq. & tit. 32 Sec. 6171, et seq.,
1101-03; N.H. Rev. Stat. Ann. Sec. 339-D:1, et seq.; Va. Code Ann.
Sec. 6.1-363.2, et seq.
\90\ See, e.g,. Kan. Stat. Ann. Sec. 50-1116, et seq.; N.H.
Rev. Stat. Ann. Sec. 339-D:1, et seq.; S.C. Code Ann. Sec. 37-7-
101, et seq.; Wash. Rev. Code Sec. 18.28.010, et seq.
\91\ See, e.g., S.C. Code Ann. Sec. 37-7-101, et seq.; Va. Code
Ann. Sec. 6.1-363.2, et seq.; Wash. Rev. Code Sec. 18.28.010, et
seq.
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3. Debt Negotiation
In addition to credit counseling and debt settlement, there is a
third category of debt relief services, often referred to as ``debt
negotiation.'' Debt negotiation companies offer to obtain interest rate
reductions or other concessions to lower the amount of consumers'
monthly payment owed to creditors.\92\ Unlike DMPs or debt settlement,
debt negotiation does not purport to implement a full balance payment
plan or obtain lump sum settlements for less than the full balance the
consumer owes.
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\92\ NAAG (Oct. 23, 2009) at 3-4; MN AG at 2 (``Minnesotans are
being deluged with phone calls and advertising campaigns promising
to lower credit card interest rates, reduce bills, or repair damaged
credit''); see, e.g., FTC v. Advanced Mgmt. Servs. NW, LLC, No. 10-
148-LRS (E.D. Wash. filed May 10, 2010); FTC v. Econ. Relief Techs.,
LLC, No. 09-CV-3347 (N.D. Ga. filed Nov. 30, 2009); FTC v. 2145183
Ontario, Inc., No. 09-CV-7423 (N.D. Ill. filed Nov. 30, 2009); FTC
v. JPM Accelerated Servs., Inc., No. 09-CV-2021 (M.D. Fla. Am.
Compl. filed Jan. 19, 2010); FTC v. Group One Networks, Inc., No.
8:09-cv-352-T-26-MAP (M.D. Fla. Am. Compl. filed Apr. 14, 2009); FTC
v. Select Pers. Mgmt., No. 07-CV-0529 (N.D. Ill. Am. Compl. filed
Aug. 18, 2007); FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D.
Wash. filed Mar. 6, 2006); see also, e.g., Press Release, West
Virginia Attorney General, Attorney General McGraw Announces WV
Refunds of $214,000 in Debt Relief Companies Settlement (Jan. 13,
2010), available at (http://www.wvago.gov/press.cfm?ID=500&fx=more);
Press Release, Minnesota Attorney General, Attorney General Swanson
Files Three Lawsuits Against companies Claiming to Help Consumers
Lower Their Credit Card Interest Rates (Sept. 22, 2009), available
at (http://www.ag.state.mn.us/consumer/pressrelease/090922ccinterestrates.asp).
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Debt negotiation providers often market to consumers through so-
called ``robocalls.''\93\ Like debt settlement companies, some debt
negotiation providers charge significant advance fees.\94\
Additionally, like some debt settlement companies, debt negotiators may
promise specific results, such as a particular interest rate reduction
or amount of savings that will be realized.\95\ In some cases, the
telemarketers of debt negotiation services refer to themselves as
``card services'' or a ``customer service department'' during telephone
calls with consumers in order to mislead them into believing that the
telemarketers are associated with consumers' credit card companies.\96\
In other cases, debt negotiators represent that they can secure savings
for consumers, but the sole service provided is creation of an
accelerated payment schedule that recommends increased monthly
payments.\97\ Although increased monthly payments would result in
interest savings, consumers seeking these services usually cannot
afford the recommended payments.
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\93\ See, e.g., FTC v. Advanced Mgmt. Servs. NW, LLC, No. 10-
148-LRS (E.D. Wash. filed May 10, 2010); FTC v. Econ. Relief Techs.,
LLC, No. 09-CV-3347 (N.D. Ga. filed Nov. 30, 2009) .
\94\ NAAG (Oct. 23, 2009) at 3-4; FTC v. Advanced Mgmt. Servs.
NW, LLC, No. 10-148-LRS (E.D. Wash. filed May 10, 2010) (alleging
defendants charged an upfront fee of $499 to $1,590); FTC v. Econ.
Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga. filed Nov. 30, 2009)
(alleging defendants charged an upfront fee of $990 to $1,495); FTC
v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill. filed Nov. 30,
2009) (alleging defendants charged an upfront fee of $495 to
$1,995); FTC v. JPM Accelerated Servs., Inc., No. 09-CV-2021 (M.D.
Fla. Am. Compl. filed Jan. 19, 2010) (alleging defendants charged an
upfront fee of $495 to $995); FTC v. Group One Networks, Inc., No.
8:09-cv-352-T-26-MAP (M.D. Fla. Am. Compl. filed Apr. 14, 2009)
(alleging defendants charged an upfront fee of $595 to $895); FTC v.
Select Pers. Mgmt., No. 07-CV-0529 (N.D. Ill. Am. Compl. filed Aug.
18, 2007) (alleging defendants charged an upfront fee of $695); FTC
v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. Wash. filed Mar. 6,
2006) (alleging defendants charged an upfront fee of $399 to $629).
\95\ See, e.g., FTC v. Advanced Mgmt. Servs. NW, LLC, No. 10-
148-LRS (E.D. Wash. filed May 10, 2010) (alleging defendants
represented that if the consumer did not save the promised amount of
$2,500 or more in a short time, the consumer would receive a full
refund); FTC v. Econ. Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga.
filed Nov. 30, 2009) (alleging defendants represented that if
consumers did not save a ``guaranteed'' amount - typically $4,000 or
more - they could get a full refund of the upfront fee); FTC v.
2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill. filed Nov. 30,
2009) (alleging defendants claimed that their interest rate
reduction services would provide substantial savings to consumers,
typically $2,500 or more in a short time); FTC v. JPM Accelerated
Servs., Inc., No. 09-CV-2021 (M.D. Fla. Am. Compl. filed Jan. 19,
2010) (same); FTC v. Group One Networks, Inc., No. 8:09-cv-352-T-26-
MAP (M.D. Fla. Am. Compl. filed Apr. 14, 2009) (alleging defendants
represented they would provide consumers with savings of $1,500 to
$20,000 in interest) ; FTC v. Select Pers. Mgmt., No. 07-CV-0529
(N.D. Ill. Am. Compl. filed Aug. 18, 2007) (alleging defendants
represented consumers would save a minimum of $2,500 in interest);
FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. Wash. filed Mar.
6, 2006) (alleging defendants promised to save consumers $2,500).
\96\ MN AG at 2; see also, e.g., FTC v. JPM Accelerated Servs.,
Inc., No. 09-cv-2021 (M.D. Fla. Am. Compl. filed Jan. 19, 2010).
\97\ NAAG (Oct. 23, 2009) at 3-4; see also, e.g., FTC v.
Advanced Mgmt. Servs. NW, LLC, No. 10-148-LRS (E.D. Wash. filed May
10, 2010).
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The FTC has brought nine actions against defendants alleging
deceptive and abusive debt negotiation practices.\98\ In each case, the
defendants used telemarketing to deliver representations that they
could reduce consumers' interest payments by specific percentages or
minimum amounts. In many of these cases, the Commission also alleged
that the defendants falsely purported to be affiliated, or have close
relationships, with consumers' creditors.\99\ Finally, in each case,
the Commission charged defendants with violations of the TSR.
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\98\ See FTC Case List, supra note 27.
\99\ See, e.g., FTC v. Econ. Relief Techs., LLC, No. 09-cv-3347
(N.D. Ga. filed Nov. 30, 2009); FTC v. 2145183 Ontario, Inc., No.
09-CV-7423 (N.D. Ill. filed Nov. 30, 2009); FTC v. Group One
Networks, Inc., No. 8:09-cv-352-T-26- MAP (M.D. Fla. Am. Compl.
filed Apr. 14, 2009) (alleging defendants claimed to have ``close
working relationships with over 50,000'' creditors); FTC v. Select
Pers. Mgmt., No. 07-CV-0529 (N.D. Ill. Am. Compl. filed Aug. 18,
2007) (alleging defendants claimed to be affiliated with consumers'
credit card companies); FTC v. Debt Solutions, Inc., No. 06-0298 JLR
(W.D. Wash. filed Mar. 6, 2006) (alleging that defendants claimed to
have ``special relationships'' with creditors); see also MN AG at 2.
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II. Overview of the Proposed Rule and Comments Received
On August 19, 2009, the Commission published its Notice of Proposed
Rulemaking (``NPRM'') proposing revisions to the TSR (``proposed
rule'') to cover debt relief services. The Commission proposed
amendments to:
Define the term ``debt relief service'' to cover any
service to renegotiate, settle, or in any way alter the terms of a debt
between a consumer and any unsecured creditor or debt collector,
including a reduction in the balance, interest rate, or fees owed;
Prohibit providers from charging fees until they have
provided the debt relief services;
Require providers to make six specific disclosures about
the debt relief services being offered;
Prohibit misrepresentations about material aspects of debt
relief services, including success rates and whether a provider is a
nonprofit entity; and
Extend the TSR to cover calls consumers make to debt
relief service
[[Page 48465]]
providers in response to general media advertising.
During the course of this rulemaking, the Commission received
comments from 321 stakeholders, including representatives of the debt
relief industry, creditors, law enforcement, consumer groups, and
individual consumers.\100\ Most industry commenters supported parts of
the proposal but opposed the advance fee ban.\101\ One industry member
opposed virtually the entire proposal,\102\ while a few supported the
proposal as a whole.\103\ In contrast, state attorneys general and
regulators, consumer advocates, legal aid attorneys, and creditors
generally supported the proposed amendments, including the advance fee
ban.\104\ The comments and the basis for the Commission's adoption or
rejection of the commenters' suggested modifications to the proposed
rule are analyzed in detail in Section III below.
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\100\ These 321 commenters consist of: 35 industry
representatives, 10 industry trade associations and groups, 26
consumer groups and legal services offices, six law enforcement
organizations, three academics, two labor unions, the Uniform Law
Commission, the Responsible Debt Relief Institute, the Better
Business Bureau, and 236 individual consumers. Of these commenters,
three sought and obtained confidential treatment of data submitted
as part of their comments pursuant to FTC Rule 4.9(c), 16 CFR
4.9(c).
\101\ See, e.g., TASC (Oct. 26, 2009) at 2; USOBA (Oct. 26,
2009) at 3. Two industry commenters supported a partial advance fee
ban allowing debt relief providers to receive fees to cover
administrative expenses before providing the promised services. CRN
(Oct. 2, 2009) at 10-11; USDR (Oct. 20, 2009) at 2.
\102\ MD (Oct. 26, 2009) at 4.
\103\ ACCORD (Oct. 9, 2009) at 1; FCS (Oct. 27, 2009) at 1;
CareOne at 1.
\104\ NAAG (Oct. 23, 2009) at 1; NACCA at 1; CFA at 2; SBLS at
1; QLS at 2; AFSA at 3; ABA at 2.
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On November 4, 2009, the Commission held a public forum to discuss
the issues raised by the commenters in this proceeding. Many of those
who had filed comments on the proposed rule participated as panelists
at the forum, and members of the public had the opportunity to make
statements on the record. A transcript of the proceeding was placed on
the public record.\105\ After the forum, Commission staff sent letters
to trade associations and individual debt relief providers that had
submitted public comments, soliciting additional information in
connection with certain issues that arose at the public forum.\106\
Sixteen organizations responded and provided data. Finally, Commission
staff met with industry and consumer representatives to discuss the
issues under consideration in the rulemaking proceeding.
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\105\ The public record in this proceeding, including the
transcript of the forum, is available at (http://www.ftc.gov/bcp/rulemaking/tsr/tsr-debtrelief/index.shtm) and in Room 130 at the
FTC, 600 Pennsylvania Avenue, NW, Washington, D.C. 20580, telephone
number: 202-326-2222.
\106\ The letters are posted at (http://www.ftc.gov/os/comments/tsrdebtrelief/index.shtm).
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III. Summary of the Final Amended Rule and Comments Received
The Commission has carefully reviewed and analyzed the entire
record developed in this proceeding. The record, as well as the
Commission's own law enforcement experience and that of its state
counterparts, shows that amendments to the TSR are warranted and
appropriate.\107\ As discussed in detail in this SBP, the Final Rule
addresses deceptive and abusive practices of debt relief service
providers and includes the following elements:
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\107\ The Commission's decision to amend the Rule is made
pursuant to the rulemaking authority granted by the Telemarketing
Act to protect consumers from deceptive and abusive practices. 15
U.S.C. 6102(a)(1) and (a)(3).
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Defines the term ``debt relief service'' as proposed in
the NPRM;
Prohibits providers from charging or collecting fees until
they have provided the debt relief services, but (1) permits such fees
as individual debts are resolved on a proportional basis, or if the fee
is a percentage of savings,\108\ and (2) allows providers to require
customers to place funds in a dedicated bank account that meets certain
criteria;
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\108\ See infra Section III.C.5.b.
---------------------------------------------------------------------------
Requires four disclosures in promoting debt relief
services, in addition to the existing disclosures required by the TSR:
(1) the amount of time it will take to obtain the promised debt relief;
(2) with respect to debt settlement services, the amount of money or
percentage of each outstanding debt that the customer must accumulate
before the provider will make a bona fide settlement offer; (3) if the
debt relief program entails not making timely payments to creditors, a
warning of the specific consequences thereof; and (4) if the debt
relief provider requests or requires the customer to place funds in a
dedicated bank account, that the customer owns the funds held in the
account and may withdraw from the debt relief service at any time
without penalty, and receive all funds remitted to the account.
Prohibits misrepresentations about material aspects of
debt relief services, including success rates and a provider's
nonprofit status; and
Extends the TSR to cover calls consumers make to debt
relief services in response to advertisements disseminated through any
medium, including direct mail or email.
The final amended Rule adopted here is substantially the same in
most respects to the proposed rule, but includes certain important
modifications. The Commission bases these modifications on the entire
record in this proceeding, including the public comments, the forum and
workshop records, consumer complaints, recent testimony on debt
settlement before Congress, and the law enforcement experience of the
Commission and state enforcers. The major differences between the
proposed amendments and the final amendments are as follows:
The advance fee ban provision now explicitly sets forth
three conditions before a telemarketer or seller may charge a fee: (1)
the consumer must execute a debt relief agreement with the creditor;
(2) the consumer must make at least one payment pursuant to that
agreement; and (3) the fee must be proportional either to the fee
charged for the entire debt relief service (if the provider uses a flat
fee structure) or a percentage of savings achieved (if the provider
uses a contingency fee structure);
Notwithstanding the advance fee ban, the Final Rule allows
providers to require consumers to place funds for the provider's fee
and for payment to consumers' creditors or debt collectors into a
dedicated bank account if they satisfy five specified criteria; and
The Final Rule eliminates three of the proposed
disclosures that the Commission has determined are unnecessary, and it
adds one new disclosure.
A. Section 310.1: Scope
Many commenters raised concerns regarding the TSR's scope as
applied to the debt relief industry, in particular its treatment of
nonprofits, creditors, and debt collectors.\109\ First, several
commenters expressed concern that while nonprofit entities are a major
part of the debt relief industry, the Rule does not apply to them, thus
establishing a potential competitive imbalance. Some of these
commenters requested that the FTC explicitly apply the Rule to
nonprofits.\110\ Others argued that the TSR is not an appropriate
vehicle for regulating the debt relief industry because the FTC cannot
regulate bona fide nonprofits through it.\111\
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\109\ The proposed rule did not modify the scope of the TSR.
\110\ SOLS at 3; Orion (Oct. 1, 2009) at 1; CareOne at 8; TASC
(Oct. 26, 2009) at 29.
\111\ USOBA (Oct. 26, 2009) at 40; MD (Mar. 22, 2010) at 16 n.9;
TASC (Young), Tr. at 229; see also USOBA (Ansbach), Tr. at 231-32;
ULC at 6.
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As stated above, the FTC Act exempts nonprofit entities, and,
pursuant to the
[[Page 48466]]
Telemarketing Act, this jurisdictional limit applies to the TSR.\112\
As a result, the Commission has no discretion to include nonprofits in
the Final Rule.\113\ Nonprofits, however, must comply with 49 state
laws and stringent IRS regulations.\114\ These regulations include
strict limitations on fee income.\115\ Additionally, based on
examination of consumer complaints and other research, and in light of
the IRS and EOUST programs, it appears many of the concerns about
deceptive practices, including deceptive claims of nonprofit status,
have been addressed.\116\ Thus, the Commission does not believe that
the TSR's exclusion of nonprofits is likely to create an unfair
competitive disadvantage for for-profit debt relief services.\117\
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\112\ 15 U.S.C. 6105(b) (providing that the jurisdiction of the
Commission in enforcing the Rule is coextensive with its
jurisdiction under Section 5 of the FTC Act).
\113\ 15 U.S.C. 44 and 45(a)(2) (setting forth certain
limitations to the Commission's jurisdiction with regard to its
authority to prohibit unfair or deceptive acts or practices).
Although nonprofit entities are exempt, telemarketers or sellers
that solicit on their behalf are nonetheless covered by the TSR. See
TSR Amended Rule, 68 FR at 4631. Indeed, several commenters
requested that the Commission carve out an explicit exemption for
nonprofits. See, e.g., CareOne (Croxson), Tr. at 243. The
Commission, however, believes it is unnecessary to state in the Rule
what is already clear in the Telemarketing Act, and it therefore
declines to include an express statement in the Rule that nonprofits
are exempt. See TSR Amended Rule, 68 FR at 4586.
\114\ Supra Section I.C.1; GP (McNamara), Tr. at 245-46. In
addition, 158 nonprofit CCAs, including the largest entities, have
been approved by the EOUST after rigorous screening.
\115\ Supra note 33.
\116\ The Commission is continuing to monitor this industry,
particularly for evidence of a resurgence of sham nonprofits. See
CareOne at 4 (``A wave of tough state debt management laws and
increased federal oversight over the past several years has helped
clean up the debt management side of the debt relief industry.'').
\117\ In any event, the government need not ``regulate all
aspects of a problem before it can make progress on any front.'' FTC
v. Mainstream Mktg. Servs., Inc., 358 F.3d 1228, 1238 (10th Cir.
2004) (holding that the FTC's Do Not Call Registry, which applies to
commercial calls but not calls made by charities or politicians, was
not unconstitutionally underinclusive under the First Amendment).
---------------------------------------------------------------------------
Some commenters raised concerns that the proposed rule could be
read to apply to creditors and others collecting on unsecured debts to
the extent that they offer concessions to individual debtors. For
example, a financial services industry association expressed concern
that the proposed rule would potentially cover an affiliate entity
servicing an unsecured loan or credit card account on behalf of a
creditor.\118\ A banking trade group stated that the FTC should clarify
that the Rule is not intended to apply to the legitimate outreach and
loss mitigation activities of creditors and their agents or
affiliates.\119\ Similarly, an association of debt collectors sought to
clarify that the Rule would exclude routine communications between
consumers and credit grantors or debt collectors about settling debts,
restructuring debt terms, waiving fees, reducing interest rates, or
arranging for other account changes.\120\
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\118\ AFSA at 7; see also FSR at 1-2 (the rule should clarify
that the proposal does not include ``the legitimate activities of
servicers seeking collection on loans they own or service for others
pursuant to bona fide servicing relationships.'').
\119\ ABA at 3.
\120\ ACA at 6. NACCA also commented that it was not clear
whether the Rule excludes holders of the debt or entities that are
contracted to service the debt for the debt holder, and recommended
that it exclude such entities. NACCA at 2.
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The TSR only covers the practice of ``telemarketing,'' defined as
``a plan, program, or campaign which is conducted to induce the
purchase of goods or services . . . .''\121\ The types of debt
collection and debt servicing activities described by the commenters do
not fall within this definition because they are not intended to induce
purchases. Therefore, it is unnecessary to explicitly exempt creditors
or debt collectors from compliance with this provision of the Final
Rule.\122\
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\121\ 16 CFR 310.2(dd).
\122\ See TSR Amended Rule, 68 FR at 4615. In the event that a
creditor or debt collector is engaging in the sale of a service to
assist in altering debts of the consumer that it does not itself own
or service, the entity would be subject to the Rule. More generally,
the Fair Debt Collection Practices Act (``FDCPA''), 15 U.S.C. 1692,
governs the debt collection practices of third-party collectors;
creditors collecting on their own debts are not covered by the
FDCPA, but are subject to the general prohibition of unfair or
deceptive acts or practices in Section 5 of the FTC Act.
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B. Section 310.2: Definitions
The Final Rule defines ``debt relief service'' as ``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.'' This definition is virtually unchanged from the
proposed rule.\123\
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\123\ The only difference is the addition of the word
``program'' to the definition to clarify that the term ``service''
is not intended to be limiting in any way. Thus, regardless of its
form, anything sold to consumers that consists of a specific group
of procedures to renegotiate, settle, or in any way alter the terms
of a consumer debt, is covered by the definition. The definition is
not intended, however, to cover services or products that offer to
refinance existing loans with a new loan as a way of eliminating the
original debts, as such a process would result in a new extension of
credit that replaces the existing debts rather than altering them.
---------------------------------------------------------------------------
The Commission received several comments about the definition of
``debt relief service'' with respect to its (1) breadth, (2) limitation
to unsecured debts, (3) product coverage, and (4) application to
attorneys.
1. Breadth of Definition of Debt Relief Service
Several commenters addressed the breadth of the debt relief service
definition. For example, the National Association of Attorneys General
(``NAAG'') supported the proposed definition, stating that because the
debt relief industry is constantly evolving, the definition of ``debt
relief'' should be broad enough to account for future developments in
the industry.\124\ NAAG noted that in recent years, the debt settlement
industry has engaged in particularly abusive practices, but the same
concerns exist with respect to all forms of debt relief.\125\ The
National Association of Consumer Credit Administrators (``NACCA'')
emphasized that many providers of debt relief services purchase
consumer contact information from so-called ``lead generators'' -
intermediaries that produce and disseminate advertisements for debt
relief services to generate ``leads'' that they then sell to actual
providers.\126\ NACCA recommended that lead generators be covered by
the Rule.\127\ A coalition of consumer groups commented that the
definition should be broad and include debt management, debt
settlement, and debt negotiation,\128\ noting that some companies
provide a range of debt relief options.\129\ A consumer law professor
also advocated a definition that covers credit counseling and debt
settlement, asserting that many of the abuses are common to both types
of services.\130\ Moreover, some industry commenters
[[Page 48467]]
supported a broad definition that includes debt management plans and
debt settlement arrangements.\131\ On the other hand, a nonprofit
credit counseling agency stated that CCAs and debt management plans
should be excluded entirely from the debt relief services definition
because they provide consumers with financial education.\132\
---------------------------------------------------------------------------
\124\ NAAG (Oct. 23, 2009) at 4.
\125\ Id.
\126\ NACCA at 3 (representing 49 state government agencies that
regulate non-depository consumer lending and debt relief companies);
see also ULC at 7 (``The regulations go further than the UDMSA in
reaching lead generation firms that solicit debtors for debt relief
providers but provide no direct consumer services themselves. The
ULC whole-heartedly supports this additional regulation.''); FTC v.
Dominant Leads, LLC, No. 1:10-cv-00997 (D.D.C. filed June 15, 2010)
(alleging that defendants misrepresented that they were the
government, or were affiliated with the government, on multiple
websites, then provided consumers toll-free numbers connecting them
to third-party companies that marketed purported debt relief
services for a fee).
\127\ NACCA at 3; see also GP (Oct. 22, 2009) at 2.
\128\ CFA at 7-8.
\129\ Id. at 7.
\130\ Greenfield at 1.
\131\ CareOne at 3; USDR (Oct. 20, 2009) at 12.
\132\ CCCS CNY at 1.
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After considering the comments, and other than the addition of the
word ``program,'' as noted in footnote 123, the Commission has
determined not to change the proposed rule's definition of ``debt
relief service.'' The Commission believes that this definition
appropriately covers all current and reasonably foreseeable forms of
debt relief services, including debt settlement, debt negotiation, and
debt management, as well as lead generators for these services.\133\
This definition is consistent with the goal of ensuring that consumers
are protected regardless of how a debt relief service is structured or
denominated. The Commission does not believe there is sufficient basis
for excluding CCAs and debt management plans from the definition.
Indeed, the record shows that some for-profit CCAs have engaged in the
types of deceptive or abusive practices that the Rule is designed to
curtail.
---------------------------------------------------------------------------
\133\ Depending on the facts, lead generators for debt relief
services may be covered under the TSR's primary provisions or its
assisting and facilitating provision. See 16 CFR 310.3(b).
---------------------------------------------------------------------------
2. Limitation to Unsecured Debts
Several comments related to the definition's limitation to
unsecured debt. A creditor trade association expressed concern that the
Rule would not cover relationships with most installment lenders, title
lenders, auto finance lenders, secured card issuers, or residential
mortgage lenders, all of which typically provide secured credit.\134\
By contrast, a representative of an association of state legislators
agreed with the limitation to unsecured debts because secured debts are
governed by the Uniform Commercial Code, which may conflict with some
elements of the Rule.\135\
---------------------------------------------------------------------------
\134\ AFSA at 7 (``There does not appear to be a reason in the
Rule for limiting debt repair services to relationships only with
unsecured creditors.'').
\135\ ULC (Kerr), Tr. at 252. In addition, the evidence in the
record suggests that debt relief services generally do not seek to
alter secured debts such as installment loans and title loans. NACCA
(Keiser), Tr. at 250; see also USDR (Oct. 20, 2009) at 12
(supporting the definition's limitation to unsecured debts).
---------------------------------------------------------------------------
The Commission has determined to keep the proposed rule's
limitation of debt relief services to unsecured debt. The definition in
the Final Rule covers all types of unsecured debts, including credit
card, medical, and tax debts. There is no evidence in the record of
deceptive or abusive practices in the promotion of services for the
relief of non-mortgage secured debt.\136\ The Commission notes that it
is addressing the practices of entities that purport to negotiate
changes to the terms of mortgage loans or avert foreclosure in a
separate rulemaking proceeding.\137\ Commenters generally agreed that
concerns regarding mortgage relief services are appropriately addressed
in a separate rulemaking.\138\
---------------------------------------------------------------------------
\136\ To the extent any entity markets debt relief related to
automobile title loans or other secured debts, Section 5 of the FTC
Act covers such marketing.
\137\ Mortgage Assistance Relief Services Notice of Proposed
Rulemaking, 75 FR 10707 (Mar. 9, 2010). This rulemaking addresses
the industry of for-profit companies purporting to obtain mortgage
loan modifications or other relief for consumers facing foreclosure.
Under the proposed rule in that proceeding, companies could not
receive payment until they have obtained for the consumer a
documented offer from a mortgage lender or servicer that comports
with the promises they have made.
\138\ FCS (Oct. 27, 2009) at 3; FDR (Linderman), Tr. at 115.
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3. Coverage of Products
Some commenters recommended that the Commission add the term
``products'' to the term ``debt relief services'' to ensure that
providers cannot evade the Rule by selling books, CDs, or other
tangible materials promising debt relief, or by including such products
as part of the service.\139\ Another commenter disagreed, stating that
products should be excluded from the definition. This commenter noted
that a consumer who purchases a product (e.g., a book) intended to help
relieve debt is himself responsible for taking the steps stated
therein; in contrast, an individual who purchases a service is paying
the seller to provide that service.\140\
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\139\ CFA at 7; ULC (Kerr), Tr. at 258; AFSA (Sheeran), Tr. at
259-60; FDR (Linderman), Tr. at 256 (for products that are sold with
a guarantee).
\140\ Centricity (Manganiello), Tr. at 239; see also MP at 3
(stating that expanding the definition to products is ``completely
unnecessary,'' as ``the FTC already has adequate authority to deal
with deceptive marketing of such products.'' The commenter also
stated that ``where the true intention of the product offering is to
`up-sell' consumers to a full-service debt program, then the
proposed rule-change would already govern.'').
---------------------------------------------------------------------------
The Commission declines to modify the Rule to include products in
the definition of debt relief services. The Rule is targeted at
practices that take place in the provision of services, and the record
does not indicate that deceptive or abusive practices in the sale of
products, such as books or other goods containing information or
advice, are common. This limitation, however, should not be used to
circumvent the rule by calling a service - in which the provider
undertakes certain actions to provide assistance to the purchaser - a
``product.'' Nor can a provider evade the rule by including a
``product,'' such as educational material on how to manage debt, as
part of the service it offers. The Commission further notes that
deceptive or abusive practices in the telemarketing of products already
are prohibited by the TSR and/or the FTC Act. Therefore, the Final Rule
does not add the term ``product'' to the definition of ``debt relief
services.''
4. Coverage of Attorneys
A number of commenters expressed views as to whether the Rule
should cover attorneys who provide debt relief services. Several
commenters argued that attorneys generally should be covered by the
Rule when they are providing covered services.\141\ One commenter
stated that exempting attorneys would create a major loophole for
providers engaged in deception or abuse.\142\ A second commenter agreed
that an exemption would make it easy for debt relief companies to ally
themselves with lawyers to escape the Rule.\143\ By contrast, two
commenters argued that attorneys should be exempt from the Rule because
state bars separately license them, and the bars' ethics rules and
complaint systems
[[Page 48468]]
govern their behavior.\144\ A different commenter, however, questioned
whether state bar rules are effective in deterring unfair and deceptive
practices.\145\
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\141\ TASC (Oct. 26, 2009) at 13 (``Consumers should be entitled
to the same protections whether or not their provider is an
attorney.''); ACCORD (Noonan), Tr. at 236-37 (recommending an
exception for attorneys who attempt to settle debts as a de minimis,
incidental part of their primary businesses); see also CFA (Grant),
Tr. at 240.
\142\ MN LA (Elwood), Tr. at 233. Another commenter noted that
the Commission has played an active role in policing unfair and
deceptive practices by attorneys in other industries, such as credit
repair and debt collection. ACCORD (Noonan), Tr. at 237.
\143\ FDR (Linderman), Tr. at 234; see also TASC (Young), Tr. at
238; FTC v. Nat'l Consumer Council, No. SACV04-0474 CJC(JWJX) (C.D.
Cal. June 10, 2004) (Supplement to Report of Temporary Receiver's
Activities, First Report to the Court at 2) (defendant would assign
certain debt settlement contracts with consumers to a law firm
because of certain state qualification restrictions). The FTC has
filed a number of lawsuits against mortgage assistance relief
service providers, in an analogous context, that affiliated
themselves with attorneys in order to come within attorney
exemptions in state statutes. In those cases, the Commission has
named both the providers and the attorneys themselves as defendants.
See, e.g., FTC v. US Foreclosure Relief Corp., No. SACV09-768 JVS
(MGX) (C.D. Cal. filed July 7, 2009) ; FTC v. LucasLawCenter
``Inc.,'' No. 09-CV-770 (C.D. Cal. filed July 7, 2009); FTC v. Fed.
Loan Modification Law Ctr., LLP, No. SACV09-401 CJC (MLGx) (C.D.
Cal. filed Apr. 3, 2009).
\144\ USOBA (Ansbach), Tr. at 231; USOBA (Oct. 26, 2009) at 42;
MD (Oct. 26, 2009) at 28, 38, 57-58.
\145\ MN LA (Elwood), Tr. at 232-33.
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The existing TSR currently covers attorneys who engage in
telemarketing.\146\ Based on the record in this proceeding, the
Commission has concluded that an exemption from the amended rule for
attorneys engaged in the telemarketing of debt relief services is not
warranted. The Commission believes that the final amended Rule strikes
the appropriate balance between permitting attorneys to provide bona
fide legal services and curbing deceptive and abusive practices engaged
in by some attorneys in this industry. Several factors support this
conclusion.
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\146\ In fact, the only exemption for attorneys found in the TSR
is a very limited one that permits attorneys who help consumers
recover funds lost as a result of telemarketing fraud to collect an
upfront fee. See 16 CFR 310.4(a)(3); TSR Final Rule, 60 FR at 43854
(``[T]he Commission does not wish to hinder legitimate activities by
licensed attorneys to recover funds lost by consumers through
deceptive telemarketing.'').
---------------------------------------------------------------------------
First, as a threshold matter, the TSR applies only to persons,
regardless of their professional affiliation, who engage in
``telemarketing'' - i.e., ``a plan, program, or campaign which is
conducted to induce the purchase of goods or services'' and that
involves interstate telephone calls.\147\ In general, attorneys who
provide bona fide legal services do not utilize a plan, program, or
campaign of interstate telephonic communications in order to solicit
potential clients to purchase debt relief services. Thus, an attorney
who makes telephone calls to clients on an individual basis to provide
assistance and legal advice generally would not be engaged in
``telemarketing.''
---------------------------------------------------------------------------
\147\ 16 CFR 310.2(cc).
---------------------------------------------------------------------------
Second, even if an attorney is engaged in telemarketing as defined
in the TSR, it is common for the attorney to meet with prospective
clients in person before agreeing to represent them. These attorneys
would not be covered by the TSR under the Rule's exemption for
transactions where payment is not required until after a face-to-face
meeting.\148\ It should be noted, however, that even in transactions
falling within the face-to-face exemption, telemarketers must abide by
certain restrictions in the Rule.\149\
---------------------------------------------------------------------------
\148\ See 16 CFR 310.6(b)(3). The Commission considered whether
it should explicitly exempt attorneys representing clients in
bankruptcy proceedings from the Rule's coverage, as attorneys in
such proceedings generally advise their clients about handling their
debt. The Commission determined that such an exemption was
unnecessary, because bankruptcy attorneys typically would not be
involved in ``telemarketing,'' and, in any event, likely would meet
with their clients face-to-face.
\149\ See 16 CFR 310.6(b)(3). Sellers engaged in telemarketing
that qualify for the face-to-face exemption must not fail to comply
with the National Do Not Call Registry provisions; call outside
permissible calling hours; abandon calls; fail to transmit Caller ID
information; threaten or intimidate a consumer or use obscene
language; or cause any telephone to ring or engage a person in
conversation with the intent to annoy, abuse, or harass the person
called. Id.
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Third, the Commission believes that attorneys acting in compliance
with state bar rules and providing bona fide legal services already
fall outside of the TSR's coverage in most instances. For example,
state bar rules typically prohibit attorneys from making outbound
telemarketing calls to prospective clients.\150\ State bar rules also
restrict another practice common to telemarketers - the provision of
services to consumers in multiple states or nationwide.\151\ State bar
rules also require an attorney to provide basic, competent legal
services and to charge a reasonable fee.\152\ Accordingly, attorneys
who limit their contact with clients to telemarketing calls and then
charge hundreds or thousands of dollars for those services may also
violate these rules. Finally, based on the Commission's experience,
telemarketers frequently split fees, pay for referrals, and engage in
other activity that would run afoul of other state bar rules.\153\
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\150\ See, e.g., Model Rules of Prof. Conduct 7.3(a); Cal. Rules
of Prof. Conduct 1-400; Florida Rules of Prof. Conduct 4-7.4(a).
\151\ See, e.g., Model Rules of Prof. Conduct 5.5 (prohibiting
attorneys from providing legal services to consumers outside of the
state in which he or she is licensed).
\152\ See, e.g., Model Rules of Prof. Conduct 1.1, 1.3, & 1.5.
For example, some state bars recently suggested that attorneys who
refuse to meet in person with prospective clients may be violating
some of these basic requirements. See Press Release, CA Bar, State
Bar Takes Action to Aid Homeowners in Foreclosure Crisis (Sept. 18,
2009) (``The State Bar suggests that consumers be wary of attorneys
offering loan modification services . . . [who are] too busy or not
willing to meet personally with prospective clients.''), available
at (http://www.calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10144&n=96395); Helen Hierschbiels, Working with
Loan Modification Agencies, Oregon State Bar Bulletin, Aug./Sept.
2009 (attorneys who join companies that ``do not contemplate the
lawyer ever meeting or speaking with the client . . . risk violating
the duties of competence, diligence and communication'').
Additionally, the Ohio Supreme Court has sanctioned attorneys hired
by a foreclosure ``rescue'' company for, inter alia, failing to
engage in adequate preparation and failing to properly pursue
clients' individual objectives. In so doing, it noted that the
attorneys relegated responsibility for meeting with clients to non-
attorneys at the company and ``did not as a rule meet with [the
company's] clients.'' See Cincinnati Bar Ass'n v. Mullaney, 894 N.E.
2d 1210 (Ohio 2008).
\153\ Id. Model Rules of Prof. Conduct 5.4, 7.2(b) . Cf. Supreme
Court of New Jersey Adv. Comm. Professional Ethics & Comm. on
Unauthorized Practice of Law, Lawyers Performing Loan or Mortgage
Modification Services for Homeowners, 197 N.J.L.J. 59 (June 26,
2009) (noting that attorneys are being approached by mortgage loan
modification entities and asked to enter impermissible fee sharing
agreements).
---------------------------------------------------------------------------
Fourth, it is important to retain Rule coverage for attorneys, and
those partnering with attorneys, who principally rely on telemarketing
to obtain debt relief service clients, because they have engaged in the
same types of deceptive and abusive practices as those committed by
non-attorneys and that are proscribed by the Rule. For example,
attorneys have been sued in numerous law enforcement actions alleging
deceptive practices in violation of the TSR.\154\ In some cases, law
enforcement authorities have alleged that a law firm served as a
referral service for a non-attorney third party, and many consumers
selected the company believing they would be represented by a law
firm.\155\ Some public comments also detailed deception and abuse by
attorneys.\156\ State bar rules, while important and
[[Page 48469]]
effective when enforced, have not eliminated these practices.
---------------------------------------------------------------------------
\154\ See, e.g., FTC v. Express Consolidation, No. 06-cv-61851-
WJZ (S.D. Fla. Am. Compl. filed Mar. 21, 2007) (a Florida attorney,
his debt management services company, and a telemarketer charged
with using abusive telemarketing and deception to sell debt
management services to consumers nationwide); Florida v. Hess, No.
08007686 (17\th\ Jud. Cir., Broward Cty. 2008) ; Alabama v. Allegro
Law LLC, No. 2:2009cv00729 (M.D. Ala. 2009) ; North Carolina v. Hess
Kennedy Chartered, LLC, No. 08CV002310, (N.C. Super. Ct., Wake Cty.
2008); California Dep't of Corps. v. Express Consolidation, Inc.,
No. 943-0122 (2008) ; In re The Consumer Protection Law Ctr.
(California Dep't of Corps. Amended Desist and Refrain Order filed
Jan. 9, 2009); (WV) State ex rel. McGraw v. Hess Kennedy Chartered
LLC, No. 07-MISC-454 (Cir. Ct., Kanawha Cty. 2007); see also, e.g.,
Alabama State Bar, The Alabama Lawyer, 71 Ala. Law. 90, 91 (Jan.
2010) (noting suspension of attorney purporting to provide debt
settlement services to over 15,000 consumers nationwide); Press
Release, Maryland Attorney General, Richard A. Brennan Jailed for
Contempt: Brennan Ordered to Pay More Than $2.5 Million in
Restitution (July 31, 2009), available at (http://www.oag.state.md.us/Press/2009/073109.htm).
\155\ Press Release, Alabama Attorney General, A.G. King and
Securities Commission Sue Prattville Companies Operating Alleged
National Debt Settlement Scheme, available at (http://www.ago.state.al.us/news_template.cfm?Newsfile=http://www.ago.alabama.gov/news/07102009.htm).
\156\ For instance, a legal services lawyer identified six
consumers who were harmed by law firms offering debt relief services
or partnering with companies that offered the services. SBLS at 2-4;
see also TASC (Young), Tr. at 229. A consumer advocate noted that
public websites contain numerous complaints about law firms engaging
in unfair or deceptive debt relief practices. CFA (Grant), Tr. at
241.
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Finally, the Commission's determination not to extend a special
exemption to attorneys is consistent with the existing scope of the TSR
and several other statutes and FTC rules designed to curb deception,
abuse, and fraud. For example, the Credit Repair Organizations Act
(``CROA'') contains no exemption for attorneys.\157\ The fact that the
CROA and TSR cover attorneys reflects the reality that the number of
attorneys who have engaged in unfair, deceptive, and abusive acts that
fall within the Commission's law enforcement authority is not de
minimis.\158\
---------------------------------------------------------------------------
\157\ 15 U.S.C. 1679-1679j.
\158\ See, e.g., FTC v. Credit Restoration Brokers, LLC, No.
2:10-cv-0030-CEH-SPC (M.D. Fla. filed Jan. 19, 2010) (alleging,
inter alia, violations of CROA by attorney engaged in credit
repair); FTC v. US Foreclosure Relief Corp., No. SACV09-768 JVS
(MGX) (C.D. Cal. filed July 7, 2009)(alleging violations of FTC Act
and TSR against attorney purporting to provide mortgage assistance
relief services); FTC v. Rawlins & Rivera, Inc., No. 07-146 (M.D.
Fla. filed Jan. 31, 2007) (alleging violations of the FDCPA against
attorney); U.S. v. Entrepreneurial Strategies, Ltd., No. 2:06-CV-15
(WCO)(N.D. Ga. filed Jan. 24, 2006) (alleging violations of TSR
against attorney assisting debt relief entity); FTC v. Express
Consolidation, No. 06-cv-61851-WJZ (S.D. Fla. Am. Compl. filed Mar.
21, 2007) (alleging violations of the FTC Act and TSR against
attorney engaged in debt relief); U.S. v. Schrold, No. 98-6212-CIV-
ZLOCH (S.D. Fla. filed Mar. 3, 1998) (alleging violations of the FTC
Act and CROA against attorney credit repair provider); FTC v.
Capital City Mortgage Corp., No. 98-237 (JHG) (D.D.C. Sec. Am.
Compl. filed Mar. 19, 2003) (alleging FDCPA violations against
attorney); FTC v. Watson, No. 98-C-1218 (N.D. Ill. filed Feb. 26,
1998) (alleging violations of CROA and FTC Act against attorney);
FTC v. Gill, No. 98-1436 LGB (Mcx) (C.D. Cal. filed Mar. 2, 1998)
(same).
---------------------------------------------------------------------------
In light of the above factors, the Commission concludes that
attorneys who choose to offer debt relief services using telemarketing
should be treated no differently under the TSR than non-attorneys who
do the same.
C. Section 310.4: Abusive Telemarketing Acts or Practices - Advance Fee
Ban
As noted earlier, the existing TSR bans the abusive practice of
collecting advance fees for three other services - credit repair
services, recovery services, and offers of a loan or other extension of
credit, the granting of which is represented as ``guaranteed'' or
having a high likelihood of success.\159\ Section 310.4(a)(5) of the
proposed rule would have prohibited as ``abusive'' the request or
receipt by a debt relief provider of payment of any fee from a consumer
until the provider obtained a valid settlement contract or agreement
showing that the particular debt had been renegotiated, settled,
reduced, or otherwise altered. The Final Rule includes an advance fee
ban, but in a form modified from the proposed rule. In short, the Final
Rule sets forth three conditions before a debt relief provider may
collect a fee for resolving a particular debt: (1) the consumer must
execute a debt relief agreement with the creditor or debt collector;
(2) the consumer must make at least one payment pursuant to that
agreement; and (3) the fee must be proportional, i.e., the same
fraction of the total fee as the size of the debt resolved is of the
total debt enrolled, or, alternatively, the fee collected must be based
on a percentage of savings that the debt relief company achieves for
the consumer. In addition, the Final Rule allows the provider to
require consumers to place funds in a dedicated bank account for fees
and payments to their creditor(s) or debt collector(s) in advance of
securing the debt relief, provided certain conditions are met.\160\
---------------------------------------------------------------------------
\159\ 16 CFR 310.4(a)(4).
\160\ See infra Section III.C.5.c.
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The Commission concludes that the collection of advance fees in
transactions that frequently are characterized by deception is an
abusive practice. In reaching this conclusion, the Commission has
applied the unfairness analysis set forth in Section 5(n) of the FTC
Act,\161\ finding that this practice: (1) causes or is likely to cause
substantial injury to consumers that (2) is not outweighed by
countervailing benefits to consumers or competition and (3) is not
reasonably avoidable.\162\ The Commission's decision to adopt the
advance fee ban is based on its review of the entire record in this
proceeding, including the public comments, the forum and workshop
records, consumer complaints, recent testimony on debt settlement
before Congress, and the law enforcement experience of the Commission
and state enforcers. In this section, the Commission: (1) reviews
comments supporting the advance fee ban, (2) reviews comments opposing
the advance fee ban, (3) sets forth its legal analysis, and (4)
describes the operation of this provision of the Final Rule.
---------------------------------------------------------------------------
\161\ The Telemarketing Act authorizes the Commission to
promulgate Rules ``prohibiting deceptive telemarketing acts or
practices and other abusive telemarketing acts or practices.'' 15
U.S.C. 6102(a)(1) (emphasis added). In determining whether a
practice is ``abusive,'' the Commission has used the Section 5(n)
unfairness standard. See TSR Amended Rule, 68 FR at 4614.
\162\ See 15 U.S.C. 45(n) (codifying the Commission's unfairness
analysis, set forth in a letter from the FTC to Hon. Wendell Ford
and Hon. John Danforth, Committee on Commerce, Science and
Transportation, United States Senate, Commission Statement of Policy
on the Scope of Consumer Unfairness Jurisdiction, reprinted in In re
Int'l Harvester Co., 104 F.T.C. 949, 1079, 1074 n.3 (1984))
(``Unfairness Policy Statement'').
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1. Comments Supporting the Proposed Ban on Advance Fees
Numerous commenters supported the proposed ban on advance
fees.\163\ In supporting the advance fee ban, NAAG, representing over
forty state attorneys general, cited its law enforcement experience in
this area. Over the past decade, 29 states have brought at least 236
enforcement actions against debt relief companies, at least 127 of
which targeted debt settlement providers.\164\ Typical allegations in
these cases targeted deceptive television and radio advertising,
deceptive telemarketing pitches, and failure to provide promised
services. In 2009, the New York and Florida Attorneys General announced
investigations of 19 debt settlement companies, which are still
pending.\165\
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\163\ As explained below, the advance fee ban in the Final Rule
differs from that in the proposed rule in certain respects. The
discussion of the commenters' views refers to the proposed version.
\164\ NAAG (Oct. 23, 2009) at 1-2 & NAAG (July 6, 2010),
supplemented by Commission staff research; see State Case List,
supra note 27. Of the 127 state debt settlement cases, 84 were
brought by state attorneys general and 43 by state regulatory
agencies. In addition, state attorneys general have brought 21 cases
against credit counseling companies and 14 cases against debt
negotiation companies. States have also brought 64 actions against
debt relief companies for failure to file requisite state
registrations or obtain proper licenses.
\165\ See State Case List, supra note 27, for names of companies
under investigation by New York and Florida.
---------------------------------------------------------------------------
NAAG further stated that prohibiting the collection of advance fees
would provide regulators and enforcement authorities a bright line
method to identify entities that merit immediate investigation and
prosecution.\166\ NAAG further asserted that debt relief providers
currently have minimal incentives to perform promised services because
they collect substantial advance fees whether or not they negotiate
debt reductions for the consumer.\167\ NACCA also filed a comment
supporting the advance fee ban.\168\
---------------------------------------------------------------------------
\166\ NAAG (Oct. 23, 2009) at 10; NAAG (July 6, 2010) at 1 (``A
prohibition on advance fees for debt settlement services is the most
essential element of the proposed Rule.'').
\167\ NAAG (Oct. 23, 2009)at 9.
\168\ NACCA at 2 (providing general statement of support without
elaboration).
---------------------------------------------------------------------------
The Colorado Attorney General filed a supplemental comment
supporting the Commission's advance fee ban. It cited data supplied by
debt relief providers showing that only 7.81% of Colorado consumers who
had entered a debt settlement program since the beginning of 2006 had
completed their programs
[[Page 48470]]
by the end of 2008.\169\ At the end of that period of less than three
years, 39% of the consumers were still active, while 53% had dropped
out of the program.\170\ Thus, over half of enrolled consumers had
dropped out in less than three years.
---------------------------------------------------------------------------
\169\ CO AG at 5. These consumers executed a total of 1,357
consumer agreements with about 13 companies.
\170\ Id. at 5.
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A coalition of 19 consumer advocacy groups filed a comment stating
that an advance fee ban is ``essential'' to protect consumers who pay
fees in advance but receive few, if any services.\171\ According to
this comment, debt settlement firms often mislead consumers about the
likelihood of a settlement and the consequences of the settlement
process on debt collection activities and the consumer's
creditworthiness. The coalition asserted that having to pay advance
fees prevents consumers from saving enough money to fund settlement
offers satisfactory to creditors or debt collectors.\172\
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\171\ CFA at 8; see also NC AG Testimony, supra note 25, at 5
(``the advance fee ban . . . is the key to preventing fraud and
ensuring that debt settlement services will be performed.'').
\172\ CFA at 4-5.
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Three legal services offices also submitted comments supporting the
advance fee ban.\173\ The comment by SBLS highlighted eight consumers
whose financial situations had deteriorated as a result of entering
debt settlement programs; each of them paid over $1,000 in fees to debt
settlement companies while receiving virtually no benefits.\174\ QLS
commented that consumers who leave debt settlement programs after
several months typically have accumulated little, if any, money to fund
settlements because of the large upfront fees they were required to
pay.\175\ QLS recounted the experience of a husband and wife who paid
$3,200 in fees to a debt settlement provider, only to be sued by a
creditor within five months. The provider refused to refund the fees,
even though it had not settled any of the couple's debts.\176\
---------------------------------------------------------------------------
\173\ QLS at 2-3; SBLS at 8; SOLS at 2. In addition, two
additional legal services offices, Mid-Minnesota Legal Assistance
and Jacksonville Area Legal Aid, were part of the coalition of
consumer groups discussed above.
\174\ SBLS at 2-4.
\175\ QLS at 3.
\176\ Id.
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A law professor commented in support of the advance fee ban,
stating that debt settlement companies should not be allowed to collect
and retain a fee before any beneficial service is provided.\177\ Two
creditor trade groups also supported the advance fee ban.\178\ One
group stated that its members often get one or two letters from a debt
settlement service provider, but then stop hearing from the provider
entirely, even when the creditor requests a response.\179\
---------------------------------------------------------------------------
\177\ Greenfield at 1-2.
\178\ AFSA at 3; ABA at 2.
\179\ AFSA at 9. The second group claimed that an average of 63%
of identified accounts enrolled in debt settlement programs are
charged off, as compared to only 16% of accounts placed by a credit
counseling agency into a debt management plan. ABA at 4. Charged off
debt is the term used to describe debt that is written off as a
nonperforming asset by a creditor because of severe delinquency,
typically after 180 days. If a creditor charges off the debt or
sends it to a collection agency, it ``will likely have a severe
negative impact'' on a consumer's credit score. See Fair Isaac
Corp., Credit Q&A, What are the different categories of late
payments and how does your FICO score consider late payments?,
available at (http://www.myfico.com/CreditEducation/Questions/Late-Credit-Payments.aspx).
---------------------------------------------------------------------------
Some debt relief industry commenters also supported the proposed
rule's advance fee ban. One debt settlement company (CRN) credits its
success in obtaining settlements to its practice of not charging fees
until the service is performed and the creditor is paid.\180\ Another
debt settlement company (FCS) stated that it has been implementing a
debt settlement program that does not require any advance fees.\181\ A
small trade association, ACCORD, of which FCS is a member, also
supported the advance fee ban.\182\ It stated that a ban on advance
fees and a requirement that fees be based on the savings achieved would
protect consumers from debt settlement programs that leave them in
worse financial shape than when they started.\183\
---------------------------------------------------------------------------
\180\ CRN (Oct. 8, 2009) at 1. CRN recommended allowing a
nominal monthly service fee. Id. at 10-11.
\181\ FCS (Oct. 27, 2009) at 2.
\182\ ACCORD (Oct. 9, 2009) at 1. Another debt settlement
industry association asserted that ACCORD only has one member. USOBA
(Oct. 26, 2009) at 48. As of July 2010, the ACCORD website lists six
members. See (http://www.accordusa.org/members-area.html).
\183\ ACCORD (Oct. 9, 2009) at 2.
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A third debt settlement company (USDR) commented that, if an
advance fee ban were imposed, consumers would be able to evaluate debt
relief companies more easily, and poorly performing companies would
need to improve their service levels in order to get paid.\184\
Moreover, consumers would be able to change providers if they were
dissatisfied with a company's services without forfeiting the large
sums they had paid in fees, thus increasing competition in the debt
relief market.\185\
---------------------------------------------------------------------------
\184\ USDR (Oct. 20, 2009) at 2, 12. USDR encouraged the FTC to
allow an initial set-up fee and monthly fees consistent with the
Uniform Act.
\185\ Id. at 2.
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For-profit debt relief company CareOne Services also supported a
form of an advance fee ban,\186\ noting that the predominant business
model of the debt settlement industry has been based on significant
upfront fees that make it difficult for consumers to amass funds for a
settlement, while forcing them to endure extensive creditor collection
efforts.\187\ CareOne posited that it would be economically feasible
for it to provide effective debt settlement services even with an
advance fee ban.\188\
---------------------------------------------------------------------------
\186\ CareOne at 4-5. CareOne has traditionally provided
consumers with credit counseling and DMP services. In 2009, CareOne
began a pilot debt settlement program designed for consumers who do
not qualify for a DMP and who are not candidates for bankruptcy. Id.
at 2.
\187\ Id. at 4.
\188\ Id. at 5.
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Two associations of nonprofit credit counselors, NFCC and AICCCA,
supported the advance fee ban.\189\ AICCCA stated that its member CCAs
saw the victims of debt settlement scams on a regular basis,\190\ and
asserted that an advance fee ban would both protect consumers from
paying for promised benefits that may prove entirely illusory, and
force debt settlement providers to deliver on their promises if they
wish to be compensated. Other commenters opined that an advance fee ban
would motivate providers to engage in a more robust qualification
process to ensure that the program is suitable for the consumer.\191\
---------------------------------------------------------------------------
\189\ NFCC at 1, 12; AICCCA at 6. AICCCA supported the ban on
the condition that the Final Rule explicitly exempt nonprofit debt
relief providers. AICCCA at 6.
\190\ AICCCA at 2. Other CCAs stated that they, too, regularly
counsel consumers who paid debt settlement companies but never
received the promised services. FECA (Oct. 26, 2009) at 4; GP (Oct.
22, 2009) at 1.
\191\ CRN (Oct. 8, 2009) at 4; WV AG (Googel), Tr. at 222;
ACCORD (Noonan), Tr. at 275-76.
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2. Comments Opposing the Proposed Ban on Advance Fees for Debt Relief
Services
Numerous commenters - in particular, members of the debt settlement
industry - opposed the advance fee ban.\192\ The overall theme of most
of these comments can be summarized as follows: many enrollees in debt
settlement programs (including some who drop out before completing the
[[Page 48471]]
program) obtain significant reductions in their debt. Therefore, debt
settlement is a useful product for many people, the benefits of which
would be lost if providers went out of business because they could not
collect fees necessary to fund their operations until they settled the
debts.
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\192\ Twenty companies, five trade associations, two employees
of debt settlement companies, three other entities, and over 190
consumers filed comments opposing the proposed advance fee ban. Of
these commenters, two industry members supported a partial ban that
would allow debt relief providers to receive fees to cover
administrative expenses in advance of delivering settlements. CRN
(Oct. 2, 2009) at 10-11; USDR (Oct. 20, 2009) at 2; see also CSA at
14 (``if the FTC chooses to regulate the fees charged for debt
settlement services,'' it should follow the UDMSA framework and
allow specific set-up fees and monthly fees).
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The commenters advanced a number of specific arguments in support
of this position, including the following: (1) debt settlement and
other forms of debt relief services provide significant benefits to
consumers, which, according to industry's comments, is demonstrated by
survey data and the numerous consumers who are satisfied with their
debt settlement programs; (2) consumers obtain better outcomes from
debt settlement services than other debt relief options; (3) advance
fees provide needed cash flow for debt settlement providers to fund
their operations; (4) advance fees compensate debt settlement providers
for services undertaken before settlement occurs; (5) advance fees
ensure that debt settlement providers get paid; (6) the advance fee ban
violates the First Amendment; (7) state regulation of debt relief
services is preferable to federal regulation; (8) the TSR is not the
appropriate mechanism for regulating debt relief services; (9) the
problematic practices in the debt settlement industry are limited to a
relatively few ``bad actors,'' and the services are not ``fundamentally
bogus;'' and (10) an advance fee ban does not provide proper incentives
for debt settlement companies. The following section addresses each
point in turn.
a. Point 1: Debt Relief Services Provide Benefits to a Significant
Number of Consumers
Several industry commenters sought to demonstrate that debt relief
services provide benefits to a significant proportion of their
customers.\193\ Some debt settlement providers and their
representatives submitted data about the number of debts that they or
their members have settled in recent years.\194\ Several credit
counseling companies also submitted information about the number of
DMPs they have arranged for their customers.\195\ In contrast, no debt
negotiation company provided any data or other information showing that
it successfully achieved interest rate reductions or other debt
alterations for consumers.
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\193\ The FTC has sought data on this issue from the industry
since July 2008. See (http://www.ftc.gov/opa/2008/07/debtsettlement.shtm) (Topics for Comment link). In response to the
July 2008 request, only TASC provided some information about success
and cancellation rates. It submitted a so-called ``preliminary
study'' purporting to show ``completion rates'' ranging from 35% to
60% for consumers in TASC member debt settlement programs. TASC,
Study on the Debt Settlement Industry, at 1 (2007). The study's
probative value, however, was limited due to methodological issues.
See TSR Proposed Rule, 74 FR at 41995 n.104; see also NAAG (Oct. 23,
2009) at 8-9.
\194\ E.g., TASC (Oct. 26, 2009) at 2 (respondents to a TASC
survey settled in the aggregate almost 95,000 accounts in 2008); FCS
(Oct. 27, 2009) at 1 (FCS and its family of companies have obtained
over 70,000 settlements since 2003); FDR (Oct. 26, 2009) at 3 (FDR
has obtained more than 100,000 settlements); Loeb at 1-2 (10
companies settled 23,586 accounts between 2003 and 2009);
Confidential Comment at 2 (company has obtained 21,651 settlements
for 24,323 active clients from March 2007 to Sept. 2009). Although
the absolute number of debts that providers have settled over the
years may be sizable, as discussed below, the record indicates that
many consumers either receive no settlements or save less than the
fees and other costs that they pay.
\195\ Cambridge (Jan. 15, 2009) at 1 (171,089 accounts enrolled
in DMPs between July 1, 2004 and December 31, 2009); GP (Jan. 15,
2010) at 1 (75,485 accounts enrolled in a total of 13,328 DMPs in
2009); CareOne at 1 (over 225,000 consumers enrolled in DMPs);
AICCCA at 1 (member CCAs serve about 500,000 clients enrolled in
DMPs).
Only two for-profit credit counseling companies, CCC and
CareOne, commented in this proceeding. Only CareOne provided data,
stating that (1) over 700,000 consumers have called the company for
counseling assistance; (2) over 225,000 customers enrolled in a DMP;
(3) nearly 700,000 customer service calls have been made; (4) over
nine million creditor payments were processed; (5) nearly $650
million in payments have moved from consumers to their creditors;
and (6) fewer than 35 Better Business Bureau complaints were filed
in the previous year on approximately 70,000 new customers, and all
had been successfully resolved. CareOne at 1-2.
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Debt Settlement Data
With respect to debt settlement, some commenters submitted specific
data purporting to show that they obtain substantial savings for a
significant share of their customers. The industry association TASC
submitted results from a 2009 survey covering 75% of customer debt
enrolled in its members' programs (``TASC survey''). In addition, 17
commenters provided individual debt settlement company data.
Collectively, these data fall into five primary categories:\196\ (1)
completion and dropout rates, (2) outcomes for dropouts, (3) average
percentage savings and savings-to-fee ratios, (4) settlement rates for
all enrollees, and (5) testimonials from satisfied consumers. Each
category is examined in turn in the following section.
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\196\ Most of these commenters did not submit data in all five
categories.
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(1) Completion and Dropout Rates
Completion and dropout rates are important measures of the
effectiveness of a debt settlement program; only consumers who complete
the program are able to eliminate their debts by using the
service.\197\ Only a small number of parties submitted company-specific
completion rate data, however, even after FTC staff sent letters to
commenters in late December 2009 asking detailed follow-up questions
relating to completion rates.\198\
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\197\ See USDR (Oct. 20, 2009) at 3 (citing retention rates and
graduation rates as important indicators of debt relief service
success); RDRI at 6 (the percent of customers that complete the
program within 39 months is an ``essential metric'').
A commenter stated that the Commission should not impose a
``100% standard'' on debt settlement companies. FDR (Oct. 26, 2009)
at 8; see also Franklin at 17; MD (Mar. 22, 2010) at 13. Nothing in
the Final Rule would require providers to achieve any particular
completion rate; rather, they must deliver whatever they claim. For
example, if a provider expressly or by implication represents that
it will eliminate consumers' debt, consumers have a right to expect
that all of the debts they enroll in the program will be resolved.
\198\ The request was in connection with the November 2009
public forum. The letters are posted at (http://www.ftc.gov/os/comments/tsrdebtrelief/index.shtm).
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The TASC member survey and seven individual commenters provided
some information about debt settlement completion and dropout rates.
The TASC survey estimated that 24.6% of consumers who remained in a
debt settlement program for three years completed the program - defined
as having settlements for at least 75% of their overall debt amount -
with another 9.8% still active at the three-year point.\199\
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\199\ TASC (Oct. 26, 2010) at 10.
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The TASC survey methodology has several limitations. First, the
survey is not representative of the entire industry's performance. Only
12 debt settlement companies reported sufficient data to determine a
three-year dropout rate, a very small number relative to the hundreds
of operating debt settlement providers.\200\ These companies may not be
representative of the industry as a whole and, in fact, may have been
comparatively more successful.\201\ Indeed, it is unlikely that
providers that have low success rates would identify themselves by
participating in a survey the results of which will be provided to a
federal agency with enforcement authority over
[[Page 48472]]
them.\202\ Second, many of the consumers counted as ``completed'' had
significant debts left after exiting the program.\203\ Third, TASC
members themselves reported the data to an accountant hired by the
organization; neither the accountant nor any other entity validated
that the data were complete or accurate.\204\
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\200\ TASC (Mar. 15, 2010) at 4-5. TASC stated that the survey
as a whole was based on 75% of customer debt enrolled in its
members' programs, as several very large members participated in the
survey. TASC sent the survey questionnaires only to the 20 largest
TASC members, representing approximately 80% of the debt settlement
consumers served by TASC members. TASC (Mar. 15, 2010) at 4. The
survey included data on over 43,000 consumers who had enrolled in a
debt settlement plan offered by one of the 12 firms that responded
to the survey. TASC (Oct. 26, 2009) at 9.
\201\ TASC stated that its membership represented about 25% of
the industry. TASC (Housser), Tr. at 61.
\202\ In general, self-selection and self-reporting bias can
result in an over-representation of successful respondents. See,
e.g., Alyse S. Adams, et al., Evidence of Self-report Bias in
Assessing Adherence to Guidelines, International Journal for Quality
in Health Care 11:187-192 (1999). In addition, providers that join
trade associations may tend to conform to higher standards than
nonmembers. USOBA (Ansbach), Tr. at 106; TASC (Oct. 26, 2009) at 4-
5.
\203\ As noted above, ``completion'' was defined as settlement
of at least 75% of the individual's total debt amount enrolled. TASC
(Oct. 26, 2009) at 9. See CU (Hillebrand), Tr. at 55 (``[c]onsumers
are not getting what they expected to get, if only 25 percent are
even getting close.'').
\204\ TASC (Housser), Tr. at 60. See FTC v. SlimAmerica, Inc.,
77 F. Supp. 2d 1263, 1274 (S.D. Fla. 1999) (holding that defendant's
weight loss claims were unsupported where, inter alia, defendant
failed to obtain proper scientific validation of those claims); FTC
v. Cal. Pac. Research, Inc., 1991 WL 208470, at *5 (D. Nev. Aug. 27,
1991) (holding that defendants failed to properly substantiate hair
loss claims because studies they cited did not meet basic scientific
requirements demonstrating validity and reliability).
Law enforcement authorities' experience has shown that self-
reported data may not be reliable. For example, the New York
Attorney General reported to the GAO that a consumer testified that
she received a ``congratulations'' letter from the company for
completing a debt settlement program, citing to settlements on four
small accounts, even though the largest balance included in the
program was not settled, and the creditor sued the consumer for the
full amount of that debt, plus penalties and interest. GAO
Testimony, supra note 50, at 26. In addition, the GAO reported that
some consumers who finished a debt settlement program ``complained
of being deceived and harmed by the group. Nearly half of them
actually paid more than they owed.'' Id. at 25.
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In any event, even assuming that (1) the survey accurately
represents overall industry performance, (2) 75% of debts settled is an
appropriate demarcation of ``success,'' and (3) the 9.8% ``still
active'' consumers ultimately receive the promised results, nearly two-
thirds of enrolled consumers dropped out of the programs within the
first three years.\205\
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\205\ The Commission analyzes industry data on outcomes for
dropouts in the following subsection, Section III.C.2.a.(2).
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In addition to the TASC survey, individual debt settlement
providers reported a range of dropout rates. A paper by Dr. Richard
Briesch reported on a sample of 4,500 consumers from one company,
finding that the cancellation rate was 60% over two years.\206\ Three
other commenters reported dropout rates of 71.9%,\207\ 54.4%,\208\ and
20%.\209\ Some debt settlement providers reported that careful
screening, strong customer service, and full disclosure greatly reduced
the number of dropouts.\210\
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\206\ JH (Oct. 24, 2009) at 20 (see attached paper, Richard A.
Briesch, Economic Factors and the Debt Management Industry 2 (Aug.
2009) (``Briesch paper'')). The paper is based on data from Credit
Solutions, identified on page 15 of the Briesch paper in a footnote.
\207\ SDS (Jan. 22, 2010) at 2. Of consumers enrolled in the
program at least 36 months earlier, fewer than 17% had completed the
program and 11.2% were still active.
\208\ DMB (Feb. 12, 2010) at 6. Of consumers who had enrolled in
the program at least 36 months earlier, about 40% had completed the
program and about 5% were still active.
Debt settlement provider FDR provided data about completion
rates, but its data also comprised a very substantial part of the
TASC data; accordingly, its data are not a separate reference point.
Specifically, FDR stated that 32% of the enrollees who remained in
its program for three years or more completed the program with 100%
of debts settled, while 10.3% were still active. These numbers were
based on 7,803 consumers who had enrolled in the FDR program at
least 36 months before the analysis was performed. FDR (Oct. 26,
2009) at 10. Therefore, 57.7% of consumers dropped out within three
years of entering the program. See id.
Debt settlement company Orion also provided some completion
data. It stated that out of 825 customers who had made at least one
payment, approximately 29% had completed the program, and 12.7% were
still active. Orion (Jan. 12, 2010) at 5. It noted that the numbers
were based upon its former business model, in which customers saved
funds to be used for settlements in their own bank accounts, rather
than in special purpose accounts monitored by the company. Id.
\209\ JH (Jan. 12, 2010) at 5. Of consumers who had enrolled in
this debt settlement program at least two years and nine months
earlier, about 41% had completed the program and about 39% were
still active. The company considered fewer than 1,000 consumers in
calculating the dropout rate, as it had only been providing services
for two years and nine months at the time of the response. Summary
of Communications with FTC Staff Placed on the Public Record (Apr.
13, 2010).
\210\ ACCORD (Oct. 9, 2009) at 3. In addition, debt settlement
provider CRN reported that of all consumers that had enrolled in its
program from April 2007 through September 2009, 39% had completed
the program. CRN (Jan. 21, 2010) at 6. CRN has enrolled 1,218
consumers in total, and it stated that its practice of refraining
from charging fees other than the initial membership fee of $495
allows its customers to achieve success sooner. Id. at 2, 4; CRN
(Oct. 8, 2009) at 1. CRN's business model is unique; after receipt
of the initial membership fee, it provides instructions to consumers
on how to achieve debt settlements by calling creditors themselves.
Subsequently, if the consumer specifically requests help, the
company negotiates on the customer's behalf and charges additional
fees if it obtains successful settlements. CRN (Oct. 8, 2009) at 1.
CRN did not provide data separately for consumers using its do-it-
yourself model and those using its negotiation services. See CRN
(Jan. 21, 2010) at 2, 6.
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As several commenters noted, not all dropouts are attributable to
the failure of the provider.\211\ Several commenters, on the other
hand, asserted that providers are primarily responsible for the
dropouts, because they enroll consumers who are not financially
suitable for the program, collect large fees in advance that are not
adequately disclosed, and ultimately fail to settle the debts.\212\
Several commenters provided survey information about the reasons
consumers drop out, finding that consumers drop out for various
reasons, e.g., because they paid off the debts themselves, settled the
debts themselves, failed to save enough money for settlements, filed
for bankruptcy, or experienced ``buyer's remorse.''\213\
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\211\ JH (Oct. 24, 2009) at 34 (see attached Briesch paper at
16); Loeb at 4 (citing Briesch paper); Arnold & Porter (Mar. 17,
2010) at Exhs. 4 & 5; MD (Mar. 22, 2010) at Exhs. E-8 & E-9; see
also FTC v. Connelly, 2006 WL 6267337, at *11-12 (C.D. Cal. Dec. 20,
2006) (holding that the reasons for the approximately 75% dropout
rate for a debt settlement program were genuine issues of fact.
Defendants claimed that consumers dropped out because of their
inability to save money for settlement purposes, whereas the FTC
contended that consumers dropped out because of lawsuits,
garnishments, property liens and other negative, undisclosed
consequences of participation in the program.).
\212\ NAAG (Oct. 23, 2009) at 4-8, CFA at 9; SBLS at 1-4;
CareOne at 4; see GP (Oct. 22, 2009) at 3; ACCORD (Feb. 5, 2010) at
3 (``the more the fee structure is weighted toward the settlement
fee, the higher the completion rate.'').
\213\ JH (Oct. 24, 2009) at 34 (see attached Briesch paper at
16). This survey does not establish how many borrowers fall into
each category, as 56% of consumer respondents chose ``other'' as the
reason they dropped out. Id. In any event, the survey responses do
not establish who is responsible for the dropouts. Indeed, if a
consumer cannot afford to make the payments or files bankruptcy, it
is not clear whether the consumer failed to complete the program
because the provider misled the consumer about the amount of the
monthly payments or the timing of the fees; the provider failed to
engage in an effective suitability analysis; or the consumer took on
new debt that made the program unsustainable.
A different survey of 129 consumers who enrolled with a
particular debt settlement provider and dropped out of the program
after completing 50% of the program found that: 32% cancelled
because they decided to settle the debts on their own; 42% could no
longer afford or were not paying the monthly payment; 9% were
generally dissatisfied; 9% were categorized as ``account lost
through collection activity; could no longer collect;'' 5% were
categorized as ``unwilling to go through the legal process,'' and 5%
were categorized as ``other.'' QSS (Oct. 22, 2009) at 2.
A third provider submitted survey information about 20,166
consumers who dropped out of the program. The most frequent
responses were: customer decided to file bankruptcy (24.9%);
customer made other arrangements (16.8%); and customer did not have
sufficient money in bank account for payments (11%). Arnold & Porter
(Mar. 17, 2010) at Exhs. 4 & 5.
Finally, a provider submitted results of a customer exit survey
of an unspecified number of consumers who dropped out of the
provider's program; the most frequent responses were: customer did
not have sufficient money in bank account for payments (28.6%);
customer could not afford payments (15.9%); customer decided to file
bankruptcy (14%); and customer made other arrangements (9.5%). MD
(Mar. 22, 2010) at Exh. E-8.
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In any event, the relevant issue for purposes of determining
whether the advance fee ban is justified is the extent to which
enrollees receive a net benefit
[[Page 48473]]
from the program. The net benefit takes into account whether consumers
save more money than they paid in fees and other costs; it also
considers other harms to consumers that result from participation in
the program, such as harm to creditworthiness and continued collection
activity in many cases. In addition, by enrolling in a debt settlement
program, consumers forgo other alternatives, such as filing for
bankruptcy, borrowing money from a relative, negotiating directly with
creditors, or enrolling in a credit counseling program that may be
better alternatives for them. Thus, many consumers suffer an
opportunity cost when they enroll in debt settlement programs that do
not benefit them.\214\ As discussed below, consumers who drop out of
the program prior to completion generally do not obtain a net
benefit.\215\
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\214\ Summary of Communications (June 16, 2010) at 2 (consumer
group comments).
\215\ SBLS (Tyler), Tr. at 187-88; see discussion of industry
data on outcomes for dropouts in Section III.C.2.
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(2) Outcomes for Dropouts
As stated above, a major concern with debt settlement services is
that most consumers drop out of the program after paying large,
unrefunded fees to the provider. In response, industry commenters
provided data purporting to show that a significant number of their
dropouts obtained at least some value from the program in the form of
one or more settled debts, prior to dropping out. It is true that some
consumers who enroll in debt settlement programs, including some of
those who subsequently drop out, may obtain some savings. For the
reasons explained below, however, the submitted data provide little
information about the proportion of dropouts who receive a net benefit
from the program. To the extent that the net benefit can be estimated,
it appears that dropouts generally pay at least as much in fees and
other costs as they save in reduced debts.
Several industry members or groups provided statistics on the
number of settlements that dropouts obtained prior to exiting the
program. TASC reported that 34.8% of the dropouts in its survey
received at least one settlement - which means that 65.2% of the
dropouts (representing over 42% of all consumers who enrolled) received
no settlements.\216\ It also reported that the dropouts saved $58.1
million in the aggregate (based on debt amounts at the time of
settlement).\217\ These dropouts paid $55.6 million in fees, however,
which alone virtually cancel out the savings. When the other costs
associated with the program (e.g., creditor late fees and interest) are
factored in, it is likely that the costs exceed the benefits.\218\
Moreover, as described earlier, there are a number of methodological
concerns about this survey that likely skew the results in the
direction of showing greater success.
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\216\ TASC (Oct. 26, 2009) at 10; CRL at 4.
\217\ TASC (Mar. 15, 2010) at 3.
\218\ To this point, TASC asserted that because interest and
fees continued to accrue during the course of the program, if a
consumer is in the program for two years and settles his debt for
the amount that he owed at enrollment, he received a large benefit
from the program. TASC (Young), Tr. at 56-57. Consumers reasonably
expect, however, that the program will substantially reduce the debt
they carry when they enter the program, not that much or all of the
``benefit'' is from a reduction in the additional debt that accrues
during the program. In one case, the Commission found that a
telemarketer represented that the company could ``negotiate your
debt down to about 50 cents on the dollar . . . [so that] you're
looking at about $15,000, $16,000 in debt as opposed to [the]
$30,000'' owed at the time of the call. FTC v. Debt-Set, No. 1:07-
cv-00558-RPM, Mem. Supp. Mot. T.R.O. at 9-10 & Exh. D (D. Colo. Mar.
20, 2007); see also id. Exh. N (telemarketer representing that ``on
$30,000 [owed], our settlement would be about $19,500''); see also
FTC v. Edge Solutions, Inc., No. CV-07-4087, Mem. Supp. Mot. T.R.O.,
Exh. PX-6 (E.D.N.Y. Sept. 28, 2007) (consumer stating that ``[a]fter
telling [the telemarketer] what my credit card balances were, [he]
informed me that [defendant] could settle my $18,882 debt for
$11,880'').
In a similar example, a large TASC member, FDR, reported that
the 4,496 customers who dropped out of its program before completion
reduced their debt by approximately $9.1 million, based on their
debt at the time of enrollment, and paid $8.7 million in fees. FDR
(Jan. 13, 2010) at 4; see also FDR (Oct. 26, 2009) at 10. Thus, on
average, each of the 4,496 terminated customers during this period
saved $89.
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Dr. Briesch also analyzed a second company's data regarding
dropouts. In that analysis, 43% of the dropouts settled at least one
account.\219\ The 57% of dropouts who did not settle any accounts
clearly did not obtain a net benefit from the program, having paid and
forfeited at least some amount of fees. Even as to those consumers who
did obtain one or more settlements before dropping out, Dr. Briesch did
not report how much consumers paid in fees, nor did he report how many
accounts were settled out of the total number of accounts enrolled in
the program.
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\219\ According to Dr. Briesch, dropouts received settlements at
a similar rate to consumers who stayed active in the program. See
Briesch (dated Oct. 27, 2009, and filed with the FTC on Nov. 5,
2009) at 1-2 (stating that these dropouts settled at least one
account, and the average settlement percentage on the settled
accounts was 58%, meaning that the average savings percentage was
42%).
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Another debt settlement provider reported that it had settled at
least one account for 30% of its dropouts.\220\ In that company's case,
70% of dropouts did not receive any benefit from the program, and even
as to the remaining 30%, there is no evidence that the consumers
received savings significantly greater than the fees and costs they
paid.
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\220\ SDS (Jan. 22, 2010) at 3.
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(3) Average Percentage Savings and Savings-to-Fee Ratios
Many debt settlement providers advertise that consumers using their
services achieve debt reductions within a range of percentages, often
40% to 60%.\221\ In their public comments, debt settlement providers
reported that they achieved average savings ranging from 39% to
72%.\222\ The Commission
[[Page 48474]]
believes, however, that the methodology used to calculate these
percentages is fundamentally flawed. Specifically, the calculations do
not account for (1) interest, late fees, and other creditor charges
that accrued during the life of the program; (2) the provider's fees;
(3) consumers who dropped out or otherwise failed to complete the
program; and (4) debts that were not settled successfully. By failing
to account for these factors, the providers substantially inflate the
amount of savings that consumers generally can expect. The following
paragraphs discuss each of these points in turn.
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\221\ In its review of 100 debt settlement websites, supra note
50, FTC staff found that 86% of websites made specific savings
claims. The most frequently used percentage claims were 40% to 60%,
50%, and up to 70%; see also GAO Testimony, supra note 50, at 19.
\222\ TASC (Oct. 26, 2009) at 11 (average debt reductions were
55% of outstanding balances in 2008 and 58% in the first six months
of 2009 for 14 respondents in TASC survey); USOBA (Jan. 29, 2010) at
3 (51 respondents provided information to the trade association; the
average percentage reduction from the amount owed at enrollment
ranged from 27.9% to 72%, and the mean percentage reduction for all
respondents was 53.23%); FDR (Oct. 26, 2009) at 3 (55.3% in 2008);
JH (Oct. 24, 2009) at 35 (see attached Briesch paper at 17) (among
consumers who received settlement of at least one account, savings
were over 50% of the original amount owed); FCS (Oct. 27, 2009) at 1
(49% reduction of the debt calculated from the time of enrollment);
CRN (Jan. 12, 2010) at 3 (savings of 67% of the debt at the time of
enrollment); SDS (Jan. 22, 2009) at 1 (savings of 51.19% of the debt
at the time of enrollment); Orion (Jan. 12, 2010) at 4 (``For those
consumers who have completed the program, the settlements have
typically been between 50-75% of their incoming debt.''); Loeb at 9
(providing raw numbers for ten unnamed companies without any
description of the methodology; percentage saved ranged from 38.73%
to 71.66% and averaged 45.15%); DRS (Jan. 21, 2010) at 1 (savings of
44% of the debt at the time of enrollment; 53% at the time of
settlement).
In addition, QSS conducted surveys on behalf of TASC and NWS.
The QSS-TASC survey consisted of 691 exit interviews of former
customers of ``certain TASC members,'' including both dropouts and
successful graduates, and reported that 69% of settled accounts
experienced a balance reduction of at least 40%. QSS (Oct. 22, 2009)
at 7. The QSS-NWS survey consisted of 329 exit interviews and
reported that 79% of consumers settled their credit card debts at a
discount of at least 40% or more of the outstanding balance. Id. at
18. In reporting on these surveys, QSS provided limited information
about the sample surveyed, such as the proportion of the relevant
consumer population the interviewees represented or whether the TASC
members involved were representative of the industry generally. NWS
(Feb. 17, 2010) at 2-3. Moreover, the labels on the electronic files
submitted by QSS indicate that the interviews were conducted with
consumers from no more than five companies. QSS requested and
received confidential treatment pursuant to FTC Rule 4.9(c), 16 CFR
4.9(c), for the recorded interviews contained on the electronic
files.
The USOBA comment provided selected data about one of its member
companies, which it claimed to have verified. The comment asserted
that this member had settled significant numbers of consumer debts
for 53 cents on the dollar, based on the amount of the debt at the
time of enrollment, which would equate to savings of 47%. USOBA
reported that this company had settled 32,450 accounts totaling $174
million in debt settled. USOBA provided no other information about
the methodology used to arrive at these figures, making it difficult
to evaluate its reliability. USOBA (Oct. 26, 2009) at 28-29.
Another debt settlement company stated that it had settled
between 257 and 992 accounts with each of ten creditors and that
debt reductions ranged from 58.07% to 61.57%. MD (Mar. 22, 2010) at
Exh. E-8. The company provided information only for the ``top ten''
largest creditors; it did not explain whether these creditors were
representative or why it chose to highlight results from these
creditors. The comment provided virtually no information about the
total population of accounts, nor any information about the amount
of fees that consumers paid to the provider.
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First, some commenters calculated ``savings'' without accounting
for the additional debt and losses consumers incur as a result of
interest, late fees, and other charges imposed by the creditor(s) or
debt collector(s) during the course of the program. For example, if a
consumer enrolls $10,000 in debt, and the provider represents that it
can achieve a 40% reduction, the consumer reasonably expects to have to
pay $6,000 to completely resolve his debts. If, however, the size of
the debt increases over the course of the program due to interest and
creditor fees of $2,000, the consumer will have to pay $6,000 plus an
additional $1,200 to cover the additional creditor charges (the 40%
reduction would apply to the $2,000 in creditor charges as well as the
original balance). Accordingly, the consumer must actually pay a total
of $7,200 to settle the $10,000 in debt he enrolled, and he saves
$2,800. Thus, the percentage of actual savings is lower than the 40%
represented by the provider. In this example, putting aside the other
issues, the percentage of savings would be 28%.
Second, the industry data generally exclude provider fees in
calculating percentage savings and thereby inflate the actual amount
consumers saved. For example, if the provider charges $3,000 in fees to
consumers with $10,000 in debt and represents that the consumers will
obtain a 40% reduction, consumers who expected to be debt-free with the
payment of $6,000 actually must pay $9,000, not counting possible
penalties and interest. The actual percentage savings would be 10%,
putting aside the other issues. Although consumers likely presume the
provider charges some fees, it is unlikely they would realize that the
fees are so substantial that they exceed savings for many consumers,
especially because debt settlement advertisements and websites
generally do not disclose the fees.\223\ Even an industry
representative has stated that the various debt settlement fee models
are confusing.\224\
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\223\ Of the 100 websites FTC staff reviewed, supra note 50,
staff found that only 14% of debt settlement websites disclosed the
specific fees that a consumer will have to pay upon enrollment in
the service. An additional 34 out of the 100 websites mentioned fees
but did not provide specific fee amounts. The Commission's law
enforcement experience bears this out as well. See, e.g., FTC v.
Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. Colo. filed Mar. 19,
2007); see also New York v. Credit Solutions, No. 401225 (N.Y. Sup.
Ct. N.Y. Cty. filed May 19, 2009) (Complaint, ] 17).
\224\ Smart Money, Debt Settlement: A Costly Escape (Aug. 6,
2007)(quoting Jenna Keehnen, the executive director of USOBA, as
saying, ``I have seen every kind of (fee) model you can think of . .
. . It's very confusing.''), available at (http://articles.moneycentral.msn.com/SavingandDebt/ManageDebt/DebtSettlementACostlyEscape.aspx).
---------------------------------------------------------------------------
Third, commenters often considered only the savings associated with
consumers for whom settlements were obtained and excluded all those who
dropped out of the programs.\225\ One analysis removed 78% of the
provider's customers from the sample and merely reported the
settlements received by the remaining customers, excluding those who
had dropped out of the program and those who were still active but had
not yet settled a debt.\226\ Fourth, even among the group that had
settled at least one debt and therefore was included in the analysis,
the savings calculations accounted only for those individual accounts
that actually were settled, excluding those that were not.\227\
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\225\ See supra note 222.
\226\ JH (Oct. 24, 2009) at 33 (see attached Briesch paper at
15). In Dr. Briesch's comment to the FTC following publication of
the paper, he reported that among active consumers in the sample,
only 55.7% had obtained at least one settlement. Briesch (dated Oct.
27, 2009 and filed with the FTC on Nov. 5, 2009) at 6-7. In arriving
at the 78% figure stated in the text, the FTC calculated that 60%,
or 2,700, of the 4,500 consumers in the database had dropped out;
out of 1,800 active consumers, 44.3%, or 797, had not obtained any
settlements at the time the data were collected. Thus, only 1,003,
or 22.3% of the sample, were actually included in the analysis. See
CU at 6.
\227\ For example, Dr. Briesch stated that on average, about 50%
of the consumer's debts were settled. JH (Oct. 24, 2009) at 35 (see
attached Briesch paper at 17).
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No commenter provided the information necessary for the Commission
to calculate actual average savings amounts using an appropriate
methodology. Because the savings amounts reported by commenters were
calculated using methodologies that substantially overstate the
savings,\228\ the Commission concludes that the actual savings, if any,
generally achieved by consumers in a debt settlement program are
significantly lower than the average savings amounts commenters
reported.\229\
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\228\ See supra note 222.
\229\ In further support of their contention that debt
settlement service providers obtain successful outcomes for
consumers, some commenters asserted that debt settlement providers
obtain more favorable settlements than consumers could obtain on
their own. See Figuliuolo at 4 (``Debt settlement companies
generally have substantial experience dealing with creditors, have
access to large quantities of data, can engage in sophisticated
analysis of those data, have a good understanding of what sorts of
deals can realistically be struck with particular creditors, develop
ongoing relationships with those creditors, and importantly their
clients generally have the capital to fulfill the negotiated
settlement at the time of negotiation.''); Franklin at 8-13. These
commenters provided limited evidence in support of their assertions.
Moreover, even if the assertions were true, they do not support the
sorts of specific savings claims that providers have made, nor do
they counsel against imposition of an advance fee ban.
---------------------------------------------------------------------------
In addition to savings percentages, several commenters provided
``savings-to-fee ratios.'' These ratios purport to compare the debt
reductions consumers have received from debt settlement programs to the
amount consumers have paid in fees to show the value provided to
consumers.\230\ The ratios, however,
[[Page 48475]]
only account for debts that are settled; they fail to account for
increased balances on debts that were not settled. Assessing whether
consumers benefitted from the programs would require review of
individual consumer circumstances, as well as determining harm to
creditworthiness and harm resulting from continued collection activity.
Additionally, neither the TASC survey respondents nor the individual
commenters are representative of the industry; TASC selected its
largest members, and only some of them provided responsive information.
Thus, although the savings-to-fee ratios provided to the Commission
suggest that some consumers of debt relief services may have benefitted
to a certain extent, they do not establish that consumers generally
achieved more in savings than they paid in fees and other expenses for
their debts as a whole.
---------------------------------------------------------------------------
\230\ The TASC survey reported that customers of the companies
that participated in the survey, including dropouts, received $245
million in savings at a cost of $126 million in fees, a savings-to-
fee ratio of nearly 2 to 1. TASC (Oct. 26, 2009) at 10. The
calculations, however, do not account for interest, late fees, and
other creditor charges that accrued during the life of the program.
FDR asserted that active customers who had been in the program
for at least three years reduced their debt by $6.5 million and paid
$3.3 million in fees, a 1.97 to 1 ratio; completed customers reduced
their debt by $25.2 million and paid $8.8 million in fees, a 2.86 to
1 ratio; and terminated customers reduced their debt by $9.1 million
and paid $8.7 million in fees, a 1.05 to 1 ratio. On average, each
of the 4,496 terminated customers saved $89. FDR also calculated
that enrollees as a whole reduced their debt by $40.8 million and
paid $20.8 million in fees, a 1.96 to 1 ratio. FDR (Jan. 14, 2010)
at 4-5. In these calculations, FDR estimated the amount consumers
owed at enrollment to determine the savings.
NCC reported that its savings-to-fee ratio was 1.5 to 1. Arnold
& Porter (Mar. 17, 2010) at Exh. 1. Total fees paid were
approximately $3 million, and total customer savings were
approximately $4.5 million, a 1.5 to 1 savings-to-fee ratio. Id. NCC
provided no information regarding whether the calculations use
balances at enrollment or at settlement, the number of consumers who
completed the program, or whether the data covered all consumers who
completed the program.
A debt settlement company provided confidential information,
pursuant to FTC Rule 4.9(c), 16 CFR 4.9(c), reporting that its
savings-to-fee ratio was 1.2 to 1, as total fees paid were almost
$900,000 and total customer savings were slightly over $1 million.
The company provided no information regarding whether the savings
calculation used balances at enrollment or at settlement, the number
of consumers who completed the program, or whether the data covered
all consumers who completed the program.
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(4) Settlement Rates for All Enrollees
Several commenters asserted that many consumers receive settlement
offers soon after enrollment and before they pay substantial fees to
the provider.\231\ The CSA comment reported that among consumers who
remained in CSA's program for one month or more, 56% received at least
one settlement offer.\232\ The CSA comment, however, did not provide
any information as to whether consumers accepted, or were able to fund,
the offers.\233\ Moreover, the data do not measure the drop out rate or
the success of enrollees as a whole.\234\ The CSA comment also did not
disclose the amounts of the debts that were the subjects of the early
offers, and it may be the case that the early settlements tended to be
for relatively small debts.\235\ Finally, as was true with the Briesch
study, CSA did not provide the amount of savings from the early
settlements, nor the amount paid in fees by consumers. Thus, the data
do not show whether consumers in CSA's program experienced a net
benefit or net loss.
---------------------------------------------------------------------------
\231\ If consumers obtain settlements soon after enrollment,
providers should not be adversely affected by a ban on collecting
fees before they procure settlements. As explained below, however,
the record does not support this assertion.
\232\ For consumers who stayed in the program for a minimum of
three months, 67% received at least one offer (and 47% received at
least three); among consumers who stayed in the program for a
minimum of six months, 77% received at least one offer and 58%
received three or more offers. All consumers who stayed in the
program for 36 months received five or more offers. CSA at 5-6; see
also CSA (Witte) at 29-30 (``And in the first month, we're able to
get 56 percent of the people one offer and 28 percent of the people
five or more offers, just in the first month. And I think everyone
can agree that's pretty remarkable and sort of stands against what
was in the [NPRM] that no work is being done at the beginning.'').
\233\ See SBLS (Tyler), Tr. at 40 (``I had a client who got
three offers. She had no money in the escrow account. She had no
money to pay the offer.'').
\234\ The comment only reported results for consumers who
remained in the program until - or beyond - each time interval.
Therefore, consumers who dropped out of the program by the end of
each interval were excluded from the calculations of the next group
of consumers.
\235\ See RDRI at 5 (noting that settlement companies may begin
with customer accounts that have the smallest balances or with
``friendly'' creditors).
---------------------------------------------------------------------------
A second provider stated that in recent years, 40.4% of its
customers had settled at least one debt within the first year after
enrolling.\236\ Thus, almost 60% failed to settle even one debt within
that first year. Furthermore, the company provided no information about
the amount of savings dropouts obtained from settlements, nor the
amount consumers paid in fees.\237\
---------------------------------------------------------------------------
\236\ SDS (Jan. 22, 2010) at 3.
\237\ Another commenter stated that its figures were difficult
to estimate but provided rough figures. The commenter estimated that
of its customers who stayed in the program for at least four months,
75% received at least one settlement in the first year. It also
estimated that, of customers who stayed in the program for at least
one year, more than 95% had at least one debt settled within two
years. Finally, it estimated that about 15% to 20% of its customers
drop out without settling any debts. The commenter noted that a
significant portion of customers revoke their enrollment before six
months and receive a refund; these individuals were not counted in
any of the above statistics. Orion (Jan. 12, 2010) at 5.
---------------------------------------------------------------------------
(5) Testimonials from Satisfied Consumers
Two-hundred thirty-nine consumers filed comments about their
experiences with debt settlement companies, 193 of which expressed
positive views. Several industry commenters also incorporated positive
consumer testimonials into their comments.\238\
---------------------------------------------------------------------------
\238\ USOBA (Oct. 26, 2009) at 85-212; CSA at 22-47; DRS (Sept.
29, 2009) at 3-13; see also Franklin at 7-8.
---------------------------------------------------------------------------
The Commission does not question that some consumers have had
favorable experiences with debt settlement. That fact, however, does
not establish that consumers generally benefit from these programs, or
that they receive the results they were promised.\239\ Individual
consumer testimonials are, by their nature, anecdotal; they do not
constitute a representative sample of consumers who have enrolled in
debt settlement programs.\240\ Moreover, it is not clear for many of
the testimonials in the record that the individual consumer actually
benefitted financially from the program. Many of the consumers did not
provide any specific information about their debt settlement
experiences,\241\ and, for some other consumers, it was not clear that
they had obtained any settlements at the time they submitted their
comment.\242\
---------------------------------------------------------------------------
\239\ Similarly, in assessing whether a success or performance
claim is deceptive under Section 5 of the FTC Act, courts
consistently have held that the existence of some satisfied
consumers is not adequate substantiation. See, e.g., FTC v. Amy
Travel Serv., 875 F.2d 564, 572 (7th Cir.1989), cert. denied, 493
U.S. 954 (1989); FTC v. Five-Star Auto Club, Inc., 97 F. Supp. 2d
502, 530 (S.D.N.Y. 2000); FTC v. SlimAmerica, Inc., 77 F. Supp. 2d
1263, 1273 (S.D. Fla. 1999).
\240\ This is especially true here, where some providers
actively solicited positive comments from specific consumers. Ho at
2 (attaching email from debt settlement company encouraging the
consumer to send positive comments to the FTC).
\241\ See, e.g., Allen at 1; Clement at 1; Garner at 1; Gecha at
1; Houghton at 1; Kaiser at 1; McInnis at 1; Neal at 1; Seigle at 1;
Taillie at 1.
\242\ See, e.g., Wheat at 1; Silverman at 1; Paquette at 1;
Pratt at 1. Although an industry association argued that positive
comments from consumers before they achieve any settlements shows
that the companies provide value aside from obtaining settlements
(USOBA (Oct. 26, 2009) at 33-34), the overriding purpose for which
consumers enroll in debt relief programs is to resolve their debts,
not to receive other ``benefits.'' See WV AG (Googel), Tr. at 45;
SBLS (Tyler), Tr. at 38. Indeed, in some of the consumer comments,
it was not even clear that the consumer had actually participated in
a debt settlement program. See, e.g., Atkins at 1; Brodie at 1;
Cheney at 1; Hargrove at 1; Hinksor at 1.
---------------------------------------------------------------------------
In addition to the individual consumer comments, the QSS-TASC
customer survey discussed previously included a satisfaction question.
The survey concluded that 88% of consumers said they were ``satisfied''
or ``very satisfied'' with their settlement amounts.\243\ As explained
above, however, QSS did not provide any information as to whether the
consumers were representative in any sense of the population of
consumers who use debt settlement services.\244\
---------------------------------------------------------------------------
\243\ QSS (Oct. 22, 2009) at 8. In addition, the survey reported
that 82% of consumers had an ``Excellent'' or ``Good'' experience in
the debt settlement program. Id. at 9.
\244\ Supra note 222.
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b. Point 2: Debt Settlement is Superior to Other Debt Relief Services
Several industry commenters argued that the Commission should not
impose an advance fee ban on debt settlement services because they
provide better outcomes for consumers than other types of debt relief,
particularly bankruptcy and DMPs.\245\ The Briesch paper contended that
consumers pay less overall in payments and fees in a successful debt
settlement plan than in
[[Page 48476]]
a DMP.\246\ The paper included a hypothetical example of a consumer
with $10,000 in debt who is on a DMP that lowers his credit card
interest rates to 10%, requires the consumer to pay his debt over a
period of five years, and charges a fee of $15 per month. Based on
these assumptions, that consumer would pay $13,648 in total payments
and generate $1,537 in revenue for the CCA.\247\ In contrast, if the
consumer enrolls in a debt settlement program that reduces his debt by
50%\248\ and imposes a fee of 15%, that same consumer would pay $6,500
in total payments and generate $1,500 in fees for the debt settlement
provider.
---------------------------------------------------------------------------
\245\ In fact, the Final Rule applies to for-profit DMPs as well
as debt settlement and other debt relief services.
\246\ JH (Oct. 24, 2009) at 39 (see attached Briesch paper at
21); see also USOBA (Oct. 26, 2009) at 25-26. Dr. Briesch also
asserted that credit counseling has a higher dropout rate which, at
different points, he asserts is 65% or 74%. The paper provides no
citation to support the 65% number and cites to an unnamed NCLC
report that relies on a National Foundation for Credit Counseling
report for the 74% figure. A 2003 NCLC report actually cites a 79%
dropout rate, citing to an earlier report published in 1999.
National Consumer Law Center & Consumer Federation of America,
Credit Counseling in Crisis 23 (April 2003). However, the dropout
rates on DMPs are not comparable to dropout rates on debt settlement
plans, as the initial fees are generally much lower for DMPs, and
consumers have received the promised service - a creditor-approved
plan that allows them to pay modified amounts if they make all of
the required payments.
\247\ JH (Oct. 24, 2009) at 39 (see attached Briesch paper at
21).
\248\ Dr. Briesch assumes the savings are based on the debt owed
at the time of enrollment.
---------------------------------------------------------------------------
However, credit counseling and debt management provide entirely
different benefits from debt settlement, and it is misleading simply to
measure how much a hypothetical consumer saves from each program.\249\
Dr. Briesch's analysis does not account for a significant advantage of
DMPs: consumers enrolled in DMPs receive the benefits - in the form of
creditor concessions - within a short time, providing more certainty
than debt settlement and eliminating additional collection efforts.
Late fees and other penalty fees generally stop accruing on a DMP. In
contrast, consumers who enter a debt settlement program typically do
not receive benefits (i.e., settlements) for many months, if not years.
During that extended period, the consumer has no certainty that he or
she will be successful, and creditor collection efforts are likely to
continue.\250\ In addition, consumers obtain some benefits from a DMP
even if they do not complete the programs because most of each monthly
payment goes to their creditors and reduces their overall debt balance.
In contrast, in the typical debt settlement plan, most of the money,
for the first several months, goes to the non-refundable fees of the
provider.
---------------------------------------------------------------------------
\249\ GP (Oct. 22, 2009) at 2 (``With a DMP, the consumer is
receiving ongoing benefits each month in the form of waived fees,
lower interest rates and lower balances. In debt settlement, the
consumer does not receive any benefits until a settlement is
actually made, if it occurs at all.'').
Additionally, Dr. Briesch's comparison of the relative costs to
consumers of credit counseling and debt settlement was skewed. In
calculating the ``total fees paid'' for credit counseling, he
included the full amounts of fair share payments that creditors make
to the agency. JH (Oct. 24, 2009) at 39 (see attached Briesch paper
at 21); see also CSA at 9; Loeb at 2-3. Consumers do not make these
payments, however. Moreover, the author offered no evidence that
fair share payments are equivalent to the forgiven principal balance
either in terms of dollar amounts or in overall benefits to the
creditor. Nor did he consider whether creditors place value on the
educational services that most credit counseling services provide,
such as advice on budgeting. CU at 3; see also Consumer Federation
of America, American Express, & Georgetown University Credit
Research Center, Evaluating the Effects of Credit Counseling, (2006)
(finding that effective debt management plans contain a meaningful
educational component, ``significantly improved credit profiles,''
and a reduced risk of bankruptcy filing, which the report attributed
to ``the DMP experience itself, e.g., budgeting to make regular DMP
payments, continued interaction with and reinforcement from the
counseling agency''); Cambridge (Oct. 26, 2009) at 1.
\250\ See GP (Jan. 15, 2010) at 2.
---------------------------------------------------------------------------
Dr. Briesch's analysis also failed to consider the relative impact
of debt settlement and DMPs on consumers' creditworthiness, a
significant factor in determining under which type of program a
consumer would obtain a better ``outcome.''\251\ Indeed, Dr. Briesch
employed very optimistic assumptions in the debt settlement examples -
either the consumer can afford monthly payments of $625 for one year
(if the debt reduction is 40% of the original debt balance) or the
consumer can obtain debt reductions in the amount of 60% of the
original debt balance and can make monthly payments of $458 over one
year.\252\ These high monthly payment amounts are likely to be
unrealistic for many consumers. In contrast, Dr. Briesch estimated that
a consumer with $10,000 in debt would pay only $227 per month on a DMP
for five years.
---------------------------------------------------------------------------
\251\ The record does not contain conclusive evidence on this
issue. The GAO reported that according to FICO, stopping payments to
creditors as part of a debt settlement program can decrease credit
scores anywhere between 65 to 125 points. GAO Testimony, supra note
50, at 10. In addition, missed payments leading up to a debt
settlement can remain on a consumer's credit report for seven years,
even after a debt is settled. Id. A consumer testified that her
credit score was harmed due to her enrollment in a debt settlement
program. Haas Testimony, supra note 73, at 4 (``Our credit scores
had gone from excellent to poor. All credit extended to us now is at
a higher rate - if at all. Banks who once gladly financed our cars
won't look at us. Insurance companies have given us higher quotes
due to our credit history.''). According to a CCA commenter, the
presence of settled accounts on a credit report is ``clearly a
danger sign.'' Cambridge (Oct. 26, 2009) at 1.
In contrast, a debt settlement industry commenter asserted that
debt settlement may lead to improved creditworthiness and improved
credit scores, as compared to bankruptcy or credit counseling. JH
(Oct. 24, 2009) at 15. However, the NERA Economic Consulting report
cited and attached to the foregoing comment does not address the
creditworthiness of consumers who completed credit counseling. Id.
at 47-54. In addition, the comment acknowledges that the initial
effect of a debt settlement program on a consumer's credit score
will be negative; it then focuses on creditworthiness after
completion of the program. Id. at 47-48.
\252\ JH (Oct. 24, 2009) at 40 (see attached Briesch paper at
22). As stated above, according to the TASC survey results, based on
information from 14 debt settlement companies, the average debt
reduction for those consumers who obtained settlements was
approximately 45.5% of the original debt amount in 2008, and 49.4%
of the original debt amount in 2009. TASC (Mar. 15, 2010) at 3.
---------------------------------------------------------------------------
Other debt settlement providers similarly argued that, on average,
consumers who complete debt settlement plans pay lower monthly payment
amounts and lower amounts overall than consumers who complete
DMPs.\253\ Where consumers actually obtain debt settlements, this may
be true, but the comparison fails to examine fully the costs and
benefits of each type of program with respect to consumers who fail to
complete them. As described above, DMPs offer more certainty than debt
settlement, provide a reprieve from collection efforts, and result in
decreasing debt balances with every payment.
---------------------------------------------------------------------------
\253\ As an example, a debt settlement provider calculated that
a consumer with $39,000 in credit card debt could settle that debt
for $30,038 in less than five years by making monthly payments of
about $500, given specific assumptions set forth in the comment; by
comparison, the same consumer on a DMP would have to pay $775 per
month and total payments of $51,150. The stated assumptions were:
(i) a 60 month program, (ii) no interest rate adjustments by
creditors (that is, the interest rate stays at 24.9%), (iii) the
consumer obtained a 40% debt reduction ``on current balance,'' and
(iv) the following fee structure: first two months payments of
$34.95 per month, plus 25% of the savings amount negotiated. DMB
(Oct. 29, 2009) at 3 nn. 7 & 11. Putting aside the question of
whether the provider's assumptions were unbiased and realistic, it
appears that the provider may not have followed its own assumptions
in doing its calculations. Specifically, the assumptions included an
interest rate on the debt of 24.9% that continues to accrue
throughout the program, as would typically be the case. With that
assumption, however, the calculation for the debt settlement plan
yields a monthly payment of $1,650 with a total payment over 60
months of over $96,800, substantially more costly than the DMP. The
Commission asked the commenter whether it had assumed that interest
and fees stopped accruing for a consumer enrolled in debt
settlement, but the commenter did not respond to that question. DMB
(Feb. 12, 2010) at 8. Alternatively, the commenter actually may have
assumed a 40% debt reduction from the balance at the time of
enrollment, not on the ``current balance,'' which presumably would
be the balance at the time of settlement.
---------------------------------------------------------------------------
Several debt settlement commenters also argued that their programs
help
[[Page 48477]]
consumers avoid bankruptcy, which, they assert, has consequences that
are worse for consumers.\254\ One commenter submitted a research paper
stating that debt settlement may result in a better credit rating for
the consumer than would bankruptcy.\255\ Even if that were true,
however, the relative benefits and costs of bankruptcy and debt
settlement cannot be gauged on the basis of a single characteristic. In
particular, if a consumer files for bankruptcy, creditors must cease
collection efforts.\256\
---------------------------------------------------------------------------
\254\ USOBA (Oct. 20, 2009) at 23-24; Palmiero (employee of
Century Negotiations, Inc.) at 1; CSA at 3; JH (Jan. 12, 2010) at 1;
Weinstein (Oct. 26, 2009) at 8 (see attached Weinstein paper at 7).
\255\ JH (Oct. 24, 2009) at 47-54. In fact, the report
acknowledges that, because the algorithms used in determining a
consumer's credit score are proprietary, the author cannot really
determine how debt settlement - or bankruptcy - would affect a
consumer's credit score.
\256\ Filing bankruptcy stays collection efforts, including on
delinquent mortgage accounts.
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USOBA argued that completion rates for debt settlement are better
than for bankruptcy.\257\ Although many consumers do not complete
Chapter 13 bankruptcy plans,\258\ there are many reasons for this that
are unique to bankruptcy proceedings and are not indicative of a
``failure.'' In some instances, a Chapter 13 bankruptcy is converted to
a Chapter 7; in other cases, the debtor might not be eligible for a
discharge because of previous discharge or misconduct, or the debtor
could have filed a Chapter 13 bankruptcy simply to decelerate and cure
a mortgage default without intending to seek a discharge of other
debts.
---------------------------------------------------------------------------
\257\ USOBA (Oct. 26, 2009) at 28; see also Franklin at 19.
Relying on the preliminary TASC study discussed in footnote 194,
USOBA stated that the purported debt settlement completion rate of
45% to 50% exceeds the completion rates for both Chapter 13
bankruptcy (stated to be 33%) and credit counseling programs (stated
to be 21%). USOBA (Oct. 26, 2009) at 28. In fact, the revised TASC
data suggest much lower completion rates for debt settlement than
are stated in TASC's ``preliminary'' study submitted in connection
with the workshop - an average of 24.6% rather than 45% to 50%. TASC
(Oct. 26, 2009) at 10.
\258\ Scott F. Norberg & Andrew J. Velkey, Debtor Discharge and
Creditor Repayment in Chapter 13, 39 Creighton L. Rev. 473, 505 &
n.70 (2006) (``The overall discharge rate for the debtors in the
seven districts covered by the Project was exactly the oft-repeated
statistic of one-third.''); Gordon Bermant & Ed Flynn, Measuring
Projected Performance in Chapter 13: Comparisons Across the States,
19 Am. Bankr. Inst. J. 22, 22 & 34-35 (July-Aug. 2000); Henry E.
Hildebrand, III, Administering Chapter 13--At What Price?, 13 Am.
Bankr. Inst. J. 16, 16 (July-Aug. 1994).
---------------------------------------------------------------------------
In short, the relative costs and benefits of debt settlement
programs and bankruptcy cannot be generalized. Whether one or the other
option is best depends entirely on the individual consumer's
circumstances, and, most importantly, whether the consumer has
sufficient assets to fund settlements.
c. Point 3: Numerous Debt Settlement Companies Will Go Out of Business
Representatives and members of the debt settlement industry argued
that many providers will go out of business if the FTC imposes an
advance fee ban.\259\ The trade association USOBA submitted a survey of
its members who reported that the following would occur if an advance
fee ban were imposed:
---------------------------------------------------------------------------
\259\ SDS (Oct. 7, 2009) at 2-3; MD (Oct. 26, 2009) at 25; RADR
at 1; Orion (Oct. 1, 2009) at 2; CDS at 1; D&A at 2; see also ULC at
6; CSA at 10 (stating generally that the advance fee ban ``could put
a legitimate company out of business''); FDR (Oct. 26, 2009) at 16-
17; Hunter at 1; MP at 3; CCC at 1 (for-profit credit counseling
company would go out of business if the Commission promulgates the
advance fee ban). One debt settlement company said that no other
businesses can afford to operate by accepting payment ``only after
the customer has received and agrees to be satisfied with that
service.'' JH (Oct. 24, 2009) at 6 (emphasis in original).
---------------------------------------------------------------------------
84% would ``almost certainly'' or ``likely'' have to shut
down their operations;
95% would ``certainly'' or ``likely'' lay off employees;
and
85% would stop offering debt settlement services to new
and existing customers.\260\
---------------------------------------------------------------------------
\260\ USOBA (Oct. 26, 2009) at 20.
---------------------------------------------------------------------------
The Commission concludes that this survey is not reliable and is of
little probative value. USOBA did not provide the number of its members
or their employees who responded to the survey, what proportion of the
industry they comprise, or whether they were in any sense a
representative sample.\261\ The survey elicited self-reported,
conclusory, and possibly self-serving statements of opinion without any
evidence to support those opinions, such as data on the financial
impact of a ban. Furthermore, it appears that the survey respondents
were reacting to a complete advance fee ban, without the option of
requiring consumers to place funds in a dedicated bank account until
services are performed and receiving appropriate fees from the account
as each debt is settled, as the Final Rule permits.
---------------------------------------------------------------------------
\261\ Cf. infra note 576.
---------------------------------------------------------------------------
The trade association TASC submitted a cash flow analysis,
presumably based on its members' historical experience, that purports
to show that it would take 49 months for a provider to break even under
an advance fee model.\262\ The Commission finds this analysis
unpersuasive for at least three reasons.
---------------------------------------------------------------------------
\262\ TASC (July 1, 2010) at 1-2. Specifically, TASC states that
its model shows that the cumulative breakeven (which is the point at
which the net of all losses as compared to gains in the prior months
turns from negative to positive) occurs at 49 months if, where
settlements involve multiple payments, providers collect their fee
for each settlement after the first installment payment. See id.
n.3. Providers may do so under the Final Rule and, thus, this is the
applicable cumulative breakeven point in the TASC model. TASC also
reports that, if providers cannot collect their fees until the last
installment payment is received, the cumulative breakeven would not
occur until month 74. However, as noted, the Final Rule imposes no
such restriction, so this cumulative breakeven point is
inapplicable.
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First, TASC assumes that providers will find it profitable to
continue to follow the same marketing strategy that many of them follow
today. Many debt settlement providers currently incur significant costs
to acquire customers through general audience advertising, even though
a large portion of the consumers drawn in by the advertisements are
unsuitable for the program and subsequently drop out. For example,
TASC's analysis assumes that sales, general, and administrative
expenses (``SG&A'') and ``support'' expenses total $1,326 per consumer
in the first two months. It is not clear exactly what costs are
included in these expense figures, but they appear to be based on an
extensive advertising campaign of the kind that many debt settlement
providers employ under the existing business model. Although the impact
of the advance fee ban in the rule cannot be predicted with precision,
one reasonable outcome could be that providers will have to improve the
cost-effectiveness of their customer acquisition strategies by more
narrowly tailoring them to the segment of the population that may be
suitable for debt settlement services, rather than to the general
population. In a competitive market, those providers that are more
efficient in targeting their advertising to consumers who are most
likely to enroll and stay in the programs will spend less on
advertising and, thus, be able to make a profit sooner.
Second, the predicted break even point in TASC's analysis also
depends crucially on what is assumed about the dropout rate and the
amount of the contingency fee. With a lower dropout rate or a higher
contingency fee, the break even point occurs earlier.\263\ In fact,
dropout rates are likely to decrease once the advance fee ban is in
place because, among other reasons, providers will have the incentive
to carefully screen borrowers before enrolling them.\264\
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\263\ For instance, the provider's cash flow would change
significantly if it increased the fee amount to 40% of savings or
experienced a 3% dropout rate in each of the first three months
instead of a 6% dropout rate.
\264\ CU (July 1, 2010) at 4; ACCORD (Feb. 5, 2010) at 3 (``the
more the fee structure is weighted toward the settlement fee, the
higher the completion rate.'').
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Finally, the model assumes that the provider is a new entrant that
does not have any cash flow from existing
[[Page 48478]]
customers. The model does not show what the impact of the advance fee
ban would be on existing companies. Presumably, an existing company
would already have significant monthly revenue associated with its
current customers, and therefore would have a more favorable cumulative
cash flow than a new entrant.
More generally, there is little reliable evidence in the record to
substantiate the concerns raised by debt settlement providers about
their future viability. Certainly, under an advance fee ban, providers
would have to capitalize their businesses, at least initially, until
they began settling debts and collecting their fees. After that initial
period, however, providers presumably could fund their ongoing
operations with the earnings from prior transactions.\265\ This is not
an unusual business model; for example, many professionals, such as
realtors, obtain payment only after they have completed their services
to the client.\266\ These professionals often must expend considerable
time and resources to perform those services. One debt settlement
company commenter stated that, in its experience, using a business
model that does not rely on advance fees is feasible for well-managed
and well-capitalized firms,\267\ and other commenters agreed.\268\
Thus, the Commission is not persuaded that an advance fee ban would
make it infeasible for legitimate debt settlement providers to operate
their businesses.
---------------------------------------------------------------------------
\265\ In addition to funding ongoing operating expenses,
providers may have to fund debt payments if they borrowed money to
pay costs before they began collecting their fees.
\266\ See ACCORD (Noonan), Tr. at 21.
\267\ FCS (Oct. 27, 2009) at 4.
\268\ ACCORD (Oct. 9, 2009) at 1; CareOne at 5; Summary of
Communications (June 30, 2010) at 1 (assistant state attorney
general stated that some companies that do not charge advance fees
are doing business in North Carolina); see also Terry Savage, Debt
Manager Put to the Test, Chicago Sun Times, June 28, 2010, available
at (http://www.suntimes.com/business/2439574,terry-savage-debt-manager-062810.article) (discussing provider that collects a
relatively small amount of 3% of the original debt owed over the
first two months and 15% of the original debt owed when a successful
settlement is obtained; the consumer gets a 1% refund for completing
the program).
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d. Point 4: Debt Settlement Companies Incur Significant Costs in
Providing Pre-Settlement Services
Related to the financial viability questions discussed in the
previous section, many commenters addressed the issue of the types and
quantity of services that debt settlement providers must perform, and
the costs they must finance, before settling a debt. Industry
commenters asserted that they provide substantial services and incur
significant costs well before obtaining settlements and need advance
fees to pay for those services. Several commenters stated that debt
settlement is labor-intensive and that a substantial amount of a debt
settlement company's work occurs before the first settlement is
finalized.\269\ For example, a large debt settlement company stated
that it employs approximately 500 people, 150 of whom are responsible
for communicating with consumers, compared to 130 who are responsible
for negotiating with creditors.\270\ Another debt settlement provider
stated that the vast majority of its expenses are incurred within the
first 12 months of the program to attain new customers and provide
customer service.\271\
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\269\ CDS at 1; Figliuolo at 5; ART at 1; Orion (Oct. 1, 2009)
at 2; Franklin at 24-25; MD (Mar. 22, 2010) at 4-6; see also ULC at
5. However, in investigations by state attorneys general, debt
settlement companies have not demonstrated any justification for
advance fees based on the effort required to set up an account. NAAG
(Oct. 23, 2009) at 10.
\270\ FDR (Oct. 26, 2009) at 6.
\271\ According to this commenter, the expenses include
personnel costs for the following employees: the representative who
explains all of the options to the customer, a second representative
who reviews the program a final time with the customer, the
processors who handle the paperwork and help establish the account,
the assigned negotiator who reviews the accounts and formulates a
plan, and the representatives who conduct a 30 to 60 minute
``Welcome Call'' and bi-weekly coaching calls thereafter. CDS at 1.
CDS did not provide any breakdown of the cost by individual service.
---------------------------------------------------------------------------
Several commenters provided estimates of debt settlement providers'
pre-settlement costs. A researcher estimated that a provider's average
administrative cost to enroll a consumer is $112.53.\272\ A provider
estimated that the combined cost to acquire a customer and engage in
required administrative work to set up the account ranges from $715 to
$1,365, depending on the advertising and marketing media used.\273\
According to this commenter, in order to properly service a customer on
an ongoing basis, the provider must handle basic customer inquiries,
input data entry changes to the customer's file, provide assistance on
creditor harassment concerns, call customers to assist them in
fulfilling their commitment to the program, handle calls involving
emotionally distraught customers, and provide access to an attorney
network to advise about possible violations of the FDCPA.\274\ The
commenter estimated that $50 per month would cover these services.\275\
The commenter also pointed to the significant costs involved in
negotiating settlements, stating that it may make as many as 50 phone
calls to negotiate with a single creditor.\276\ Another provider
submitted an analysis showing that 22% of its expenses were dedicated
to the intake of new customers. These expenses included marketing,
payroll, office and related occupancy expenses, other general and
administrative expenses, professional fees, depreciation, and
taxes.\277\
---------------------------------------------------------------------------
\272\ This amount is comprised of $59.45 for processing the
enrollment paperwork, $16.05 for the Welcome Packet, and $37.02 for
three compliance calls. NWS (Oct. 22, 2009) at 11 (see attached
Walji paper at 11).
\273\ ART at 1.
\274\ Id.
\275\ Id.
\276\ Id. at 2; see also CSA at 8 (``The settlement of one
account with one creditor may require more than 30, 40, or 50 phone
calls.'').
\277\ Confidential Comment at 10.
---------------------------------------------------------------------------
The comments indicate that a large percentage of the pre-settlement
costs incurred by providers is for marketing and other customer
acquisition efforts.\278\ One provider estimated that marketing costs
range from $500 to $1,200 per customer.\279\ A researcher stated that
average marketing costs per customer at the company he studied were
$987.50.\280\ Overall, the record shows that advertising and marketing
constitute the largest portion - and in many cases a substantial
majority - of upfront costs for debt settlement providers.
---------------------------------------------------------------------------
\278\ USDR (Oct. 20, 2009) at 11; CRN at 2 (60% to 70% of fees
support the sales side of the business); CDS at 1; TASC, Study on
the Debt Settlement Industry 4 (2007) (``One of the primary costs is
the client acquisition. . . . Since the concept of debt settlement
is not well-known to the public, debt settlement companies must
spend more time, effort and money marketing their services. The lead
cost for acquiring one debt settlement client ranges from $300 to
$400. Once the intake costs associated with contacting the potential
clients and the overhead costs are factored into the lead costs, the
cost to acquire and set up a single debt settlement client can range
from approximately $425 to $1,000. The data reveals that most debt
settlement companies report this cost at $700 to $1,000 range. This
necessitates debt settlement companies to charge a greater portion
of fees during the initial phase of the program.'').
\279\ Orion (Oct. 1, 2009) at 2.
\280\ NWS (Oct. 22, 2009) at 10 (see attached Walji paper at
10); see also CRN (Bovee), Tr. at 28 (lead generators receiving
commissions of more than 25% of revenue).
---------------------------------------------------------------------------
Some industry commenters also claimed that they provide services to
customers other than settling debt.\281\ One provider asserted that it
provides education and support to consumers well before any debt
settlements are finalized.\282\ USOBA asserted that its
[[Page 48479]]
members offer budgeting advice, financial literacy information,
emotional support, and education on debtor rights.\283\ In a survey
commissioned by USOBA, 86% of employees of debt settlement companies
reported that they provide value or service to consumers other than
settling debt, and 72% stated that they talk to consumers every day as
part of their job.\284\
---------------------------------------------------------------------------
\281\ Summary of Communications (June 14, 2010) at 1 (industry
groups stated that providers conduct a budget analysis of each
consumer to determine ``fit'' with the debt settlement model and
provide budgeting advice and educational information about
consumers' rights with respect to debt collection calls and
harassment).
\282\ SDS (Oct. 7, 2009) at 2. It also asserted that it speaks
with 30 potential customers (that it does not accept) for every one
it accepts and spends at least 45 minutes with each of these
consumers providing free advice. Id. at 3.
\283\ USOBA (Oct. 26, 2009) at 30, 33. Industry groups also
argued that if the Commission imposes an advance fee ban, the
companies that provide customers with extensive counseling,
coaching, and assistance during the period in which they accumulate
sufficient savings to enter into debt settlements will be at a
competitive disadvantage compared to companies that do not provide
these additional services. Id. at 34; Summary of Communications
(June 14, 2010) at 1. The Commission believes, however, that
companies will have incentives to provide customers with counseling
and other assistance so that they stay in the program and receive
settlements, at which time the provider will get paid.
\284\ USOBA (Oct. 26, 2009) at 31; see also Palmiero (employee
of Century Negotiations, Inc.) at 1 (``I hear the tears of relief
that someone is available to listen as well as offer options and
solutions to the concerns as they arise.''). As discussed above, the
USOBA survey consists of self-reported and potentially self-serving
responses from an unspecified sampling of employees of an undefined
sampling of providers. Thus, the Commission does not accord this
survey significant weight.
---------------------------------------------------------------------------
Based on the above and other evidence in the record, the Commission
has reached the following conclusions about the cost issues:
Debt settlement providers must perform certain tasks prior
to settling their customers' debts, ranging from customer acquisition
to recordkeeping to customer support. These tasks entail costs.\285\
---------------------------------------------------------------------------
\285\ FDR (Oct. 26, 2009) at 6; CDS at 1; NWS (Oct. 22, 2009) at
11 (see attached Walji paper at 11); ART at 1.
---------------------------------------------------------------------------
In most cases, the largest component of pre-settlement
costs that providers incur is for customer acquisition, i.e.,
advertising and marketing.\286\
---------------------------------------------------------------------------
\286\ USDR (Oct. 20, 2009) at 10-11; CRN at 2; CDS at 1; MD AG
(Sakamoto-Wengel), Tr. at 105 (``And in complaints and the
investigations that we have had, at the state level, what we have
found is that rather than the trained counselors . . . a lot of the
people that are hired as counselors are really salespeople, without
counseling experience, without financial experience, but they're
there to sell a product.''); TASC, Study on the Debt Settlement
Industry 4 (2007).
---------------------------------------------------------------------------
Some providers may offer ancillary services such as
education and financial advice, but there is no reliable evidence in
the record to establish how many providers offer these services, how
extensive they are, or what they cost.\287\
---------------------------------------------------------------------------
\287\ See TASC (Oct. 26, 2009) at 18; USOBA (Oct. 26, 2009) at
30.
---------------------------------------------------------------------------
The types and amounts of services providers perform and
the costs of performing them appear to vary widely. Frequently, the
nonmarketing costs are relatively small.\288\
---------------------------------------------------------------------------
\288\ CDS at 1; NWS (Oct. 22, 2009) at 11 (see attached Walji
paper at 11); ART at 1.
---------------------------------------------------------------------------
Even accepting the commenters' cost estimates at face value, the
record does not support the assertions by some industry members that
initial costs are so substantial that they could not operate without
collecting their fees in advance. Charging large advance fees is not
the only business model in the debt settlement industry. Several
providers use payment schedules that are less front-loaded and entail
payments over a longer term, require no advance fees at all, or tie
payments to successful outcomes for consumers.\289\ The record shows
that these business models are feasible and that at least some debt
settlement providers have adopted such models successfully.
---------------------------------------------------------------------------
\289\ FDR (Oct. 26, 2009) at 14 (fees are collected over the
first 18 months or longer of the program); JH (Jan. 12, 2010) at 4
(entire first payment is collected as a fee; the remainder is
collected in installments over one-half of the program); Hunter at 3
(``[I]t is becoming more common for companies to charge a one-time,
flat enrollment fee and prorate the remaining percentage of the fee
over at least half the life of the program.''); CRN (Jan. 21, 2010)
at 4 (company charges an ``initial membership fee'' of $495 and, for
consumers seeking additional assistance, $100.00 per account, a $50
monthly membership fee, and 15% of savings for any debt settled);
FCS (Oct. 27, 2009) at 1 (``FCS has two program types, a blended fee
approach and a settlement fee-only approach. The Debt Negotiation
Company is a registered trade name of Financial Consulting Services.
It offers only The Simple Plan, the settlement fee-only program.'');
see also ACCORD (Feb. 25, 2010) at 2-3 (``ACCORD supports the
collection of a fee after a creditor agrees to a negotiated
settlement amount and when the consumer transmits the funds to the
creditor'').
---------------------------------------------------------------------------
As noted, the bulk of the upfront costs that providers incur are
for advertising and customer acquisition, which are within the control
of the provider and do not confer any direct benefit on consumers. To a
large extent, providers have funded their marketing efforts with money
forfeited by consumers who enrolled in these programs as a result of
that marketing, paid large advance fees, and then dropped out, because
they were financially unsuitable to be in a debt settlement program in
the first place. The Commission has concluded that the interests of
providers in obtaining advance fees primarily to fund their marketing
efforts is outweighed by the likelihood of substantial injury to many
of these financially-distressed consumers from paying hundreds or
thousands of dollars without obtaining a commensurate benefit, or any
benefit at all.
e. Point 5: Advance Fees Are Necessary to Ensure that Companies Get
Paid and Consumers Fulfill Their Obligations
Industry commenters also contended that charging fees in advance is
needed to protect them against the risks of nonpayment by consumers
after delivery of the services.\290\ One commenter stated that
relegating the debt settlement provider to the position of other
unsecured creditors would hinder its ability to service its
customers.\291\
---------------------------------------------------------------------------
\290\ See, e.g., Patel at 1; Orion (Oct. 1, 2009) at 2; Loeb at
6-7; CSA at 9.
\291\ RADR at 1.
---------------------------------------------------------------------------
The risk of nonpayment may be significant given the precarious
financial situation of consumers who enroll in debt relief programs.
Accordingly, the Final Rule permits debt relief providers to require
consumers to make payments into a dedicated bank account, assuming
certain conditions are satisfied, from which the consumer can pay the
provider's fee as each of the consumer's debts is settled. The specific
operation of this provision of the Final Rule is explained in Section
III.C.5.c. below.
Other commenters expressed concern that, under an advance fee ban,
consumers could avoid having to pay the provider by refusing reasonable
settlement offers, failing to save money, or otherwise taking actions
to prevent settlements.\292\ Although this may be theoretically
possible, most consumers would have an incentive to agree to reasonable
settlement offers. In any event, providers can take these risks into
account in their screening procedures and pricing policies.\293\
---------------------------------------------------------------------------
\292\ CSA at 9; D&A at 2.
\293\ Other service providers who charge upon delivery of
results experience the same risk. For example, realtors may spend
considerable time and money unsuccessfully trying to sell a client's
home and never get paid for those efforts.
---------------------------------------------------------------------------
f. Point 6: The Advance Fee Ban Violates the First Amendment
An industry association argued that an advance fee ban would run
afoul of the First Amendment.\294\ The association stated that the ban
targets protected speech, preventing debt relief providers from
receiving fees for speaking to their customers and providing
educational, coaching, and counseling information.\295\
---------------------------------------------------------------------------
\294\ USOBA (Oct. 26, 2009) at 43-47.
\295\ Id. at 43 (``advice or legal assistance'' is communication
entitled to full First Amendment protection, especially because
information regarding statutory rights is ``vital''). It is worth
noting that this ``communication'' portion of the service is a
relatively minor part of a commercial transaction.
---------------------------------------------------------------------------
[[Page 48480]]
The Commission concludes that the advance fee ban adopted here is
permitted under the First Amendment. The advance fee ban does not
restrain advertising, educational services, or other forms of
communications, but is simply a restriction on the timing of payment.
In denying a similar challenge to an advance fee ban in the TSR for
certain offers of credit, a federal court found that it merely
regulated ``when payment may be collected'' and did not impair the sale
of educational materials produced by the company.\296\
---------------------------------------------------------------------------
\296\ In re Nat'l Credit Mgmt. Group, 21 F. Supp. 2d 424, 457
(D.N.J. 1998). USOBA's comment in this proceeding criticized the
court's reasoning and instead cited to a case invalidating fee
regulations applicable to for-profit companies soliciting money on
behalf of nonprofit charities. USOBA (Oct. 26, 2009) at 44 (citing
Riley v. Nat'l Fed'n of the Blind, Inc., 487 U.S. 781, 789 n.5
(1988)). USOBA ignored the distinction, however, between the
established speech interests at stake when charitable solicitations
are at issue (see Riley, 487 U.S. at 788) as opposed to what is
entirely commercial speech relating to the sale of debt relief
services. See Bd. of Trs v. Fox, 492 U.S. 469, 474-75 (1989) (where
speech proposing a commercial transaction touched on educational
subjects, such speech was not converted into educational speech).
---------------------------------------------------------------------------
Even assuming the advance fee ban were a restriction on speech, it
would be scrutinized under the commercial speech test. Commercial
speech is communication related solely to the economic interests of the
speakers, in this case for-profit debt relief companies.\297\ The First
Amendment accords a lesser degree of protection to commercial speech
than to other constitutionally guaranteed expression.\298\ In Central
Hudson, the Supreme Court established an analytical framework for
determining the constitutionality of a regulation of commercial speech
that is not false or misleading, and does not otherwise involve illegal
activity.\299\ Under that framework, the regulation (1) must serve a
substantial governmental interest; (2) must directly advance that
interest; and (3) may extend only as far as the interest it serves -
that is, it must be ``narrowly tailored to achieve the desired
objective.''\300\ In explaining the framework, the Court has said that
the fit between the restriction's purpose and the means chosen to
accomplish it must be ``reasonable'' but ``not necessarily the least
restrictive means'' available to achieve the desired objective.\301\
---------------------------------------------------------------------------
\297\ Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n, 447
U.S. 557, 561 (1980).
\298\ Fox, 492 U.S. at 475; Fla. Bar v. Went for It, 515 U.S.
618, 623 (1995).
\299\ Cent. Hudson, 447 U.S. 557.
\300\ Id. at 566.
\301\ Fox, 492 U.S. at 480.
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The advance fee ban in the Final Rule comports with this test.
First, preventing abusive sales practices is a substantial governmental
interest.\302\ Hundreds of thousands of financially distressed
consumers have lost large sums of money to debt relief providers
engaged in such practices.\303\ Second, the advance fee ban directly
advances this interest by protecting consumers from paying fees for
services that are not rendered as promised. Thus, it will prevent the
substantial harm, described in detail in this SBP, that arises when
consumers pay in advance for debt relief services.\304\ Finally, the
advance fee ban is narrowly tailored to protect consumers from abuse,
while nonetheless permitting legitimate firms to receive timely payment
for services they provide to consumers. Without the carefully crafted
advance fee ban adopted here, vulnerable consumers who enroll in debt
settlement programs must pay hundreds or thousands of dollars in fees
months or years before they receive any benefit from those payments, if
they ever receive a benefit at all. This constitutes substantial
consumer injury. As discussed below, therefore, charging an advance fee
for debt settlement services is an abusive practice.\305\ The modified
advance fee ban, crafted to be no broader than absolutely necessary to
remedy the identified significant consumer harm, will stop that
abuse.\306\ In addition, the advance fee ban provides enforcement
authorities an efficient and essential law enforcement tool to ensure
that practices in this burgeoning industry do not continue to harm
consumers.\307\ Accordingly, the advance fee ban, even if it is
considered a regulation of ``speech,'' is an appropriate restriction
under the First Amendment.
---------------------------------------------------------------------------
\302\ See Edenfield v. Fane, 507 U.S. 761, 768-69 (1993)
(``[T]here is no question that [the government's] interest in
ensuring the accuracy of commercial information in the marketplace
is substantial.''); FTC v. Mainstream Mktg. Servs., Inc., 345 F.3d
850, 854 (10th Cir. 2003); see also TSR Amended Rule; 68 FR at 4635
n.669 (``In some instances, the `do-not-call' registry provisions
will also serve another substantial governmental interest--
prevention of fraud and abuse, as in cases where elderly consumers
are signed up on the registry to protect them from exploitative or
fraudulent telemarketers.'').
\303\ GAO Testimony, supra note 50, at 21 (``We identified
allegations of fraud, deception and other questionable activities
that involve hundreds of thousands of consumers.'').
\304\ Infra Section III.C.3.a.
\305\ Infra Section III.C.3.
\306\ CFA at 10 (``[D]esperate consumers will tend to focus most
on the representations made in the advertisements about how these
services can relieve them of their debt worries. We see the required
disclosures and prohibited misrepresentations as good complements
to, but not substitutes for, the proposed ban on advance fees.'');
CareOne at 4 (the advance fee ban ``is likely to have the greatest
impact.''); Summary of Communications (June 24, 2010) at 1 (state
attorney general representatives said that an advance fee ban is the
most important provision in the FTC's proposed rule and is necessary
to stop abusive practices of debt relief companies). Disclosures are
often of limited benefit in inoculating consumers from being
deceived. See, e.g., FTC, Letter to Jennifer L. Johnson, Secretary,
FRB, in response to a request for public comments regarding the
``Home Equity Lending Market,'' Docket No. OP-1253, Sept. 14, 2006,
available at (http://www.ftc.gov/os/2006/09/docketop-1253commentfedreservehomeeqlenditextv.pdf).
The TSR prohibits the collection of advance fees by purveyors of
credit repair services, money recovery services, and guaranteed
loans or other extensions of credit even though the Rule also bans
deceptive claims and requires disclosures in marketing those
products and services. See TSR, 16 CFR 310.1.
\307\ NAAG (Oct. 23, 2009) at 10.
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g. Point 7: State Regulation Is Preferable to Federal Regulation
Several commenters discussed whether the Commission should forgo
federal regulation and leave regulation of the debt relief industry to
state governments. USOBA argued that the Commission should not impose
an advance fee ban because it would usurp state regulatory prerogatives
and prevent states from experimenting with diverse approaches to fee
regulation.\308\ On the other hand, several commenters asserted that
FTC regulation was preferable to state regulation because (1) the FTC,
with its regulatory expertise regarding advertising and telemarketing
claims, is in a better position than state regulators to regulate debt
relief firms, especially in that such marketing frequently crosses
state lines;\309\ (2) state law enforcement activity is uneven;\310\
and (3) a state that finds a law violation can only protect and provide
restitution to that state's residents, unless the company happens to
reside within the enforcing state.\311\
---------------------------------------------------------------------------
\308\ USOBA (Oct. 26, 2009) at 36; see also Weinstein (Oct. 26,
2009) at 12 (see attached Weinstein paper at 11) (state regulation
``is a better approach because it preserves the states' traditional
prerogatives of overseeing the provision of financial services while
establishing a flexible regulatory structure for an evolving
industry'').
\309\ ULC at 4.
\310\ SOLS at 2.
\311\ SBLS at 9-10.
---------------------------------------------------------------------------
The Commission believes that state law enforcement agencies play a
valuable role in enforcing state laws against deceptive or abusive debt
relief providers. A number of states have enacted laws or regulations
restricting industry members in various ways, including setting maximum
fees and, in some cases, even banning certain debt relief services. The
Commission agrees with the commenters who noted the advantages of a
federal standard that is enforceable both by the FTC and the states, in
particular the ability to obtain nationwide injunctive relief and
consumer redress.\312\
---------------------------------------------------------------------------
\312\ Where, as here, Congress has not totally foreclosed state
regulation, a state statute is preempted if it conflicts with a
federal statute. Ray v. Atl. Richfield Co., 435 U.S. 151, 158
(1978). State laws are preempted only to the extent there is a
conflict - compliance with both federal and state regulations is
impossible or the state law is an obstacle to effectuating the
purposes and objectives of Congress. Id. The Commission has
emphasized that state laws can impose additional requirements as
long as they do not directly conflict with the TSR. TSR Final Rule,
60 FR at 43862-63; 16 CFR 310.7(b). State laws regulating debt
relief services that contain fee caps permit, rather than mandate,
that fees for debt relief services be collected before the promised
services are provided. See supra note 86. As a result, there is no
conflict with the Rule and no conflict preemption. Therefore,
providers may not charge initial or monthly fees in advance of
providing the services, even if state laws specifically authorize
such fees.
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[[Page 48481]]
h. Point 8: The TSR Is Not the Appropriate Vehicle for Regulating Debt
Relief Services
Some commenters argued that debt relief services should not be
regulated through the TSR. One commenter stated that amending the TSR
is not warranted ``merely because the industry uses telephones in its
business.''\313\ It also stated that the FTC had brought all of its
enforcement actions against debt relief companies under Section 5 of
the FTC Act and, thus, that any rules should be promulgated under that
section as well.\314\ This statement is incorrect. The Commission and
other law enforcement agencies have investigated and charged a number
of debt relief providers with violations of the Telemarketing Act and
the TSR.\315\
---------------------------------------------------------------------------
\313\ TASC (Oct. 26, 2009) at 3.
\314\ Id. at 4. The FTC has the general authority to promulgate
rules addressing unfair or deceptive practices under Section 18 of
the FTC Act, 15 U.S.C. 57a. The Commission also enacts rules
pursuant to specific Congressional mandates, as it did with the TSR.
\315\ See FTC Case List, supra note 27. While the Commission has
sued credit counselors and debt negotiators under the Telemarketing
Act and the TSR, it has not specifically brought such actions
against debt settlement providers. Nevertheless, some state law
enforcement agencies have done so. See, e.g., Press Release, Florida
Attorney General, Attorney General Announces Initiative to Clean Up
Florida's Debt Relief Industry (Oct. 15, 2008), available at (http://myfloridalegal.com/newsrel.nsf/newsreleases/BD3AB29E6DDAF150852574E3004DFACD) (subpoenas served by Florida on
debt settlement firms as part of a sweep to assess violations, among
others, of Florida laws regulating telephone solicitations,
telemarketing, credit counseling organizations, and credit service
organizations); In re PDM Int'l (Assurance of Voluntary Compliance
filed May 29, 2008) (case brought by the West Virginia Attorney
General alleging, among other things, that defendant engaged in
telemarketing sales without a business license or surety bond).
---------------------------------------------------------------------------
Two commenters recommended that the FTC expand the scope of its
proposed regulations to cover Internet and face-to-face
transactions.\316\ A third commenter questioned whether issuing these
rules as part of the TSR might encourage debt relief providers to
switch to an entirely online business model.\317\
---------------------------------------------------------------------------
\316\ ULC at 6; Orion (Oct. 1, 2009) at 1; see also GP (Oct. 22,
2009) at 2.
\317\ Loeb (Mallow), Tr. at 155-56 (acknowledging that he had
not personally seen debt relief companies operating solely online,
but some clients had told him that they were aware of companies
conducting most, if not all, of their marketing online).
---------------------------------------------------------------------------
The Commission has determined that regulation of the deceptive and
abusive practices of debt relief providers can be accomplished
appropriately through amendments to the TSR. The record shows that debt
relief companies primarily sell their services through national
telemarketing campaigns as defined in the TSR.\318\ Currently,
prevalent forms of advertising (television, radio, Internet, and direct
mail) instruct consumers to call a toll-free number for more
information.\319\ Debt relief service providers then utilize
telemarketing to conduct the full sales pitch and obtain consumers'
consent to purchase their services.\320\ Thus, the Commission concludes
that the abusive and deceptive practices in the debt relief services
industry should be addressed through amendments to the TSR.
---------------------------------------------------------------------------
\318\ CFA (Grant), Tr. at 157; NFCC (Binzel), Tr. at 157.
Similarly, other industries regulated by the TSR, such as credit
repair services, may market their services through other media in
some cases, although the predominant business model at present
relies on telemarketing.
\319\ Supra note 52. As a result of the Final Rule in this
proceeding, these calls are inbound calls covered by the TSR.
\320\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM
(D. Colo. filed Mar. 19, 2007)(Complaint, ]] 16-19); FTC Case List,
supra note 27; CU (Hillebrand), Tr. at 183 (``We heard the TASC
folks say four phone calls over two weeks to sign up the client, we
heard the Freedom Debt folks in the prior panel say eight phone
calls. Phone conversations, signing up the client, telemarketing and
telephone communications are a big piece of how consumers get signed
up.'').
In addition, USOBA asserted that the Commission does not have
authority to regulate fees through the Telemarketing Act, stating
that the Telemarketing Act focuses on communications that are
harmful because of their content, and those issues are distinct from
concerns relating to payment or other parts of the commercial
relationship. USOBA (Oct. 26, 2009) at 40-41. The Commission
believes, however, that regulating the timing of fee collection
constitutes a reasonable exercise of authority under the
Telemarketing Act under these facts. See 16 CFR 310.4(a); Nat'l
Credit Mgmt. Group, 21 F. Supp. at 457 (upholding advance fee ban on
credit repair services).
---------------------------------------------------------------------------
i. Point 9: Very Few Debt Relief Companies Are Engaged in Abuse, and
the Services Are Not ``Fundamentally Bogus''
Industry representatives have argued that the Commission should not
impose an advance fee ban because only a few ``bad actors'' have
engaged in deceptive or abusive practices.\321\ To the contrary, the
record in this proceeding - including the Commission's law enforcement
experience,\322\ actions by state law enforcement agencies,\323\
consumer complaints,\324\ the public comments, and the GAO study -
demonstrates that, in fact, debt relief providers commonly fail to
produce the results they promise, causing substantial consumer
injury.\325\ Indeed, the industry's own data show that most consumers
who enroll in debt relief services covered by the Final Rule exit the
program in worse financial condition than when they started.\326\
---------------------------------------------------------------------------
\321\ See, e.g., TASC (Apr. 30, 2010) at 2 (arguing that a
possible advance fee ban would be ``predicated upon the experience,
as described in the NPR, of a very few `bad actors' and a
disproportionately small number of injured consumers.''); USOBA
(Oct. 26, 2009) at 27; DRS (Sept. 29, 2009) at 1; DS at 12; Franklin
at 23.
\322\ See FTC Case List, supra note 27.
\323\ See State Case List, supra note 27.
\324\ See infra Section III.C.3.a.
\325\ The GAO identified allegations of fraud, deception, and
other questionable activities involving hundreds of thousands of
consumers. GAO Testimony, supra note 50, at 21. Moreover, GAO's own
survey of 20 debt settlement firms found that 17 of them were making
highly dubious success rate and other claims. Id. at 9-21.
\326\ See supra Sections III.C.1. & III.C.2.a.(1)-(2).
---------------------------------------------------------------------------
Further, some commenters asserted that the Commission should not
adopt the ban on advance fees because the services are not
``fundamentally bogus,'' the phrase that the Commission used when
promulgating the advance fee bans for credit repair services, recovery
services, and offers of certain loans.\327\ Nothing in the Commission's
statements suggests, however, that advance fee bans are legally
permissible only when the services at issue are ``fundamentally
bogus.'' The Telemarketing Act does not require that the Commission
meet any standard other than ``abusive,'' and the Commission uses the
unfairness test to determine which practices are abusive.\328\ Here,
the Commission has determined that the practice of charging advance
fees for debt relief services satisfies the unfairness standard based
on the rulemaking record.
---------------------------------------------------------------------------
\327\ CSA at 12; TASC (Oct. 26, 2009) at 16; Smith, Tr. at 263;
see TSR Amended Rule, 68 FR at 4614.
\328\ TSR Amended Rule, 68 FR at 4614.
---------------------------------------------------------------------------
j. Point 10: An Advance Fee Ban Will Not Establish the Proper
Incentives for Debt Settlement Companies
Certain commenters argued that an advance fee ban will only serve
to motivate debt settlement providers to enroll as many consumers as
possible, regardless of their suitability for a debt settlement
program, in the hope that at least some will complete the program and
pay the fees.\329\ There is no
[[Page 48482]]
evidence in the record to support this assertion. Given that enrolling
and servicing consumers entails at least some costs, it is more likely
that, under an advance fee ban, providers will be more discriminating
in enrolling those consumers most likely to be successful and thus
generate fees.\330\ This would represent an improvement over the
predominant fee structure in place currently - in which providers get
paid no matter how, or if, they perform - which provides little
incentive for providers to expend the resources necessary to obtain
settlements quickly or effectively.
---------------------------------------------------------------------------
\329\ Summary of Communications (June 16, 2010) at 2.
\330\ See ACCORD (Oct. 9, 2009) at 3 (``The debt settlement
company will bear the risk that the consumer will not see the
program through to the settlement of her debts.''); NAAG (Oct. 23,
2009) at 9.
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Debt settlement industry representatives also stated that an
advance fee ban would encourage employees of debt settlement companies,
when negotiating with creditors or debt collectors, to accept the first
offer extended, regardless of whether it is the best possible offer for
the consumer.\331\ They further argued that banning advance fees would
result in a power shift to the creditors and debt collectors, who would
be able to offer less favorable settlements on the assumption that the
debt settlement provider would take any settlement in order to get
paid.\332\ Again, there is no evidence in the record to substantiate
these predictions. Moreover, it is based on the unsupported assumption
that it is the provider, rather than the consumer, who makes the
decision on whether a particular settlement offer is acceptable and
affordable. Creditors and debt collectors should still have substantial
incentives to settle debts at amounts that consumers can afford.
---------------------------------------------------------------------------
\331\ Summary of Communications (June 16, 2010) at 2.
\332\ Id.
---------------------------------------------------------------------------
3. The Commission's Conclusion that Advance Fees for Debt Relief Meet
the Test for Unfairness
The Commission uses the unfairness test set forth in Section 5(n)
of the FTC Act to determine whether an act or practice is ``abusive''
under the Telemarketing Act.\333\ An act or practice is unfair if: (1)
it causes or is likely\334\ to cause substantial injury to consumers,
(2) the injury is not outweighed by any countervailing benefits to
consumers or competition, and (3) the injury is not reasonably
avoidable by consumers. Based on the record in this proceeding, the
Commission concludes that the collection of advance fees by debt relief
services meets the unfairness test and, thus, is an abusive practice.
---------------------------------------------------------------------------
\333\ TSR Amended Rule, 68 FR at 4614.
\334\ Thus, the Commission need not demonstrate actual consumer
injury, but only the likelihood of substantial injury. In this
proceeding, however, there is sufficient evidence that the practice
of collecting advance fees causes actual injury.
---------------------------------------------------------------------------
a. Advance Fees Charged by Debt Relief Services Cause or Are Likely to
Cause Substantial Injury
The record shows that collecting fees for debt relief services
prior to delivering services causes or is likely to cause substantial
injury to consumers. Consumers in the midst of financial distress
suffer monetary harm - often in the hundreds or thousands of dollars -
when, following sales pitches frequently characterized by high pressure
and deception, they use their scarce funds to pay in advance for
promised results that, in most cases, never materialize.\335\ Further,
in the case of debt settlement as currently structured, providers often
instruct or advise consumers to stop paying their creditors and begin
paying the provider's fees instead.\336\ These consumers not only
suffer direct monetary injury from the late charges and interest that
accrue when creditors are not paid, but they also suffer lasting harm
to their creditworthiness such that future efforts to obtain credit,
insurance, or other benefits will become more difficult and more
expensive.
---------------------------------------------------------------------------
\335\ Supra Section III.C.2.a. According to TASC, the median fee
under the predominant debt settlement model calls for a consumer to
pay the equivalent of 14% to 18% of the debt enrolled in the
program; thus, a consumer with $20,000 in debt would pay between
$2,800 and $3,600 for debt settlement services. Consumers
complaining to the FTC have reported paying fees in very substantial
amounts - often $2,500 to $11,000, depending on the company, the
amount of the debt, and the length of time the consumer participated
in the program.
\336\ Supra note 73.
---------------------------------------------------------------------------
The Commission received many comments on the unfairness analysis in
the NPRM. These comments are discussed in the following sections as
they relate to consumer injury.
(1) Consumers are injured because they pay for services that are
promised but not provided
Many commenters supported the injury analysis in the NPRM,
contending that most consumers who purchase debt relief services pay in
advance for promised benefits they never receive.\337\ The Commission
also has considered federal and state law enforcement actions, consumer
complaints received by government and private organizations, and
certain statewide data reported to the Colorado Attorney General. The
evidence shows that the number of injured consumers is substantial.
First, the FTC's cases have helped over 475,000 consumers who have been
harmed by deceptive and abusive practices by debt relief
companies.\338\ Moreover, with respect to debt settlement companies
alone, federal and state law enforcement agencies have brought actions
challenging the practices of dozens of companies with, in the
aggregate, hundreds of thousands of customers.\339\ Twenty-nine states
have brought at least 236 enforcement actions against debt relief
companies.\340\ These cases consistently have alleged that the
defendants employed deception in order to enroll consumers, and then
did not produce the results they promised.\341\ As an example, the New
York Attorney General filed cases against two debt settlement companies
alleging that these entities had provided the represented services to
only one percent and one-third of one percent (0.33%), respectively, of
their customers.\342\ Undoubtedly, many more consumers have been
injured by providers that have not been the subject of formal law
enforcement action. Thus, the Commission has determined that debt
relief companies engage in widespread deception, frequently fail to
produce the results they promise, and have caused injury to a large
number of consumers.
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\337\ Supra Section III.C.1. (citing NAAG (Oct. 23, 2009) at 2-
5; MN AG at 1; CFA at 4; AFSA at 4).
\338\ Debt Settlement: Fraudulent, Abusive, and Deceptive
Practices Pose Risk to Consumers: Hearing on The Debt Settlement
Industry: The Consumer's Experience Before the Sen. Comm. On
Commerce, Science, & Transportation, 111\th\ Cong. (2010) (testimony
of the Federal Trade Commission) at 2.
\339\ GAO Testimony, supra note 50, at 21 (tallying customers of
debt settlement companies subject to enforcement actions, not all
types of debt relief companies); see FTC and State Case Lists, supra
note 27; supra Section III.C.1.
\340\ Supra Section III.C.1.
\341\ NAAG (Oct. 23, 2009) at 2-5.
\342\ Press Release, New York Attorney General, Attorney General
Cuomo Sues Debt Settlement Companies for Deceiving and Harming
Consumers (May 20, 2009), available at (http://www.oag.state.ny.us/media_center/2009/may/may19b_09.html). Similarly, in one FTC case,
the Commission alleged that only 1.4% of consumers enrolled in the
defendants' debt settlement plan obtained the results defendants
promised. See FTC v. Nat'l Consumer Council, Inc., No. SACV04-0474
CJC(JWJX) (C.D. Cal. filed Apr. 23, 2004) (calculating completion
rates over a 40-month period without controlling for the time of
enrollment).
---------------------------------------------------------------------------
Second, a significant and growing number of consumers have filed
complaints about debt relief companies. Complaints to the FTC about
debt relief increased approximately 18% from 2008 to 2009, rising from
1,073 to 1,263.\343\
[[Page 48483]]
NAAG reported that the number of complaints the states have received
against debt relief companies, particularly debt settlement companies,
has been rising and has more than doubled since 2007.\344\ Moreover,
consumers have filed numerous complaints with the Better Business
Bureaus (``BBB'') about debt settlement and debt negotiation
companies.\345\ The BBB categorizes these companies as ``Inherently
Problematic Businesses,'' indicating that it has fundamental concerns
about the industry as a whole.\346\ In March 2009, the BBB reported
that complaints against debt consolidation and negotiation companies
had risen by almost 19% in 2008 over the previous year.\347\ Based on
the complaints it had received, the BBB concluded that debt settlement
and negotiation companies often charge substantial advance fees, make
promises that cannot be fulfilled, mislead consumers about the impact
of the services on their credit scores, and exaggerate the negative
effects of bankruptcy to make their own services seem more
appealing.\348\ The BBB also found that some customers of debt
negotiation and debt settlement providers stopped communicating with
their creditors only to find that the providers, even after accepting
payment, never contacted their creditors.\349\
---------------------------------------------------------------------------
\343\ Commission staff used the following method to analyze debt
relief complaints in the Commission's Consumer Sentinel database.
FTC staff identified all complaints coded under ``Debt Management/
Credit Counseling'' that were received directly by the Commission
and limited those search results to only those complaints that
included specified key words in the complaint comments field. Staff
also excluded complaints with certain keywords that produced false
hits, such as ``credit repair'' and ``foreclosure,'' as well as
those that were coded as Do Not Call registry and Identity Theft
complaints.
In preparing the NPRM, FTC staff utilized the same method,
reviewing a computer-generated sample of 100 debt relief complaints
received between April 1, 2008, and March 31, 2009, that met the
search criteria above. TSR Proposed Rule, 74 FR at 42001 n.166. In
its comment, AADMO stated that the ``evidence in the record'' upon
which the FTC based its proposed rule was flawed. Via a Freedom Of
Information Act request, AADMO obtained all complaints coded under
``Debt Management/Credit Counseling'' for January 1, 2008, through
August 2009, and pointed out that many of the complaints in the
Consumer Sentinel database were incorrectly designated as debt
relief. AADMO at 2; see also CSA at 18. FTC staff did not merely
rely on the Consumer Sentinel designations to determine the number
and substance of relevant complaints, but substantially refined its
analysis as described.
\344\ NAAG (Oct. 23, 2009) at 4; NAAG (July 6, 2010) at 2 (``We
previously commented that the number of consumer complaints the
States have received against debt relief companies, particularly
debt settlement companies, have consistently risen. This trend has
continued.'').
\345\ According to data provided to the GAO, the BBB has
received thousands of complaints about debt settlement companies in
recent years, with the number increasing from eight in 2004 to
nearly 1,800 in 2009. GAO Testimony, supra note 50, at 12; see also
Better Business Bureau, BBB on Differences Between Debt
Consolidation, Debt Negotiation and Debt Elimination Plans, supra
note 62; BBB at Attachment A. The BBB defines debt negotiation and
debt settlement companies as those claiming to negotiate with
creditors to lower the total amount of a consumer's debt in exchange
for an upfront fee.
\346\ NAAG (Oct. 23, 2009) at 4 n.5. According to information
provided to the GAO, the BBB's rating system incorporates
information known to the BBB and its experience with the industry
under assessment. Companies can apply to be removed from the
category by demonstrating they deliver what they promise, make
certain disclosures to consumers, have adequate procedures for
screening out customers who are not appropriate candidates for debt
settlement, and that a majority of its customers successfully
complete its program. No debt settlement firm had successfully
demonstrated that it met these criteria as of March 2010. GAO
Testimony, supra note 50, at 12-13; see also Candice Choi, Beware:
Debt-Settlement Firms Often Promise More Than They Can Deliver, The
Boston Globe, Nov. 6, 2009, available at (http://www.boston.com/business/personalfinance/articles/2009/11/06/beware_debt_settlement_firms_often_promise_more_than_they_can_deliver/
).
\347\ Better Business Bureau, BBB on Differences Between Debt
Consolidation, Debt Negotiation and Debt Elimination Plans, supra
note 62.
\348\ Better Business Bureau, Debt Settlement and Debt
Negotiation: Buyer Beware, It's a Jungle Out There, May 21, 2009,
available at (http://louisville.bbb.org/article/debt-settlement-and-debt-negotiation-buyer-beware-its-a-jungle-out-there-10569); see
also Orion (Jan. 12, 2010) at 1-2 (acknowledging that, after contact
from the BBB, it sought to eliminate systemic sales issues such as
(1) selling a ``Client Service Agreement'' as an application; (2)
guaranteeing or over-promising the product; (3) failing to fully
disclose service fees; and (4) discussing only positive effects on
consumer credit scores).
\349\ Better Business Bureau, BBB on Differences Between Debt
Consolidation, Debt Negotiation and Debt Elimination Plans, supra
note 62.
---------------------------------------------------------------------------
The Commission recognizes that consumer complaints do not
constitute a statistically representative sample of the population of
purchasers of debt relief services. At the same time, such complaints
usually are the ``tip of the iceberg'' in terms of the actual levels of
consumer dissatisfaction.\350\ In any event, the conclusion that
collecting advance fees causes substantial consumer injury is not based
on this body of evidence alone. The Commission has decades of
experience in drawing inferences from the number and types of consumer
complaints it receives. Complaint trends often are used for purposes of
focusing law enforcement resources and identifying targets for
prosecution. In this matter, the sheer number and consistency of the
complaints received by the Commission and others, in the context of the
Commission's overall Consumer Sentinel database, raise, at minimum, a
strong inference of widespread consumer protection problems in the debt
relief industry, including frequent misrepresentations and, ultimately,
nonperformance, and that the collection of advance fees causes
substantial injury to large numbers of consumers. Therefore, the
Commission relies on the consumer complaint data as corroborative of
the other types of evidence in the record.
---------------------------------------------------------------------------
\350\ See, e.g., Dennis E. Garrett, The Frequency and
Distribution of Better Business Bureau Complaints: An Analysis Based
on Exchange Transactions, 17 Journal of Consumer Satisfaction,
Dissatisfaction and Complaining Behavior 88, 90 (2004) (noting that
only a small percentage of dissatisfied consumers complain to third-
party entities or agencies); Jeanne Hogarth et al., Problems with
Credit Cards: An Exploration of Consumer Complaining Behaviors, 14
Journal of Consumer Satisfaction, Dissatisfaction and Complaining
Behavior 88, 98 (2001) (finding that only 7% of consumers having
problems with their credit card company complained to third party
entities or agencies).
---------------------------------------------------------------------------
Finally, as part of its injury analysis, the Commission considered
the evidence regarding consumer outcomes in the record. Debt
negotiation companies, which often operate through robocalls offering
purported interest rate reductions, did not provide any data at all.
Consumers who accept these offers are confronted with advance fees of
hundreds or thousands of dollars and typically do not receive any
services beyond placement of a single call to a creditor or providing a
document instructing the consumer to accelerate their debt
payments.\351\
---------------------------------------------------------------------------
\351\ NAAG (Oct. 23, 2009) at 3; CFA at 4, 8-10; SBLS at 4; QLS
at 2; SOLS at 2; MN AG at 2 (``many debt relief services companies
have no intention of delivering the services that they promise.'');
see FTC and State Case Lists, supra note 27.
---------------------------------------------------------------------------
Similarly, no member of the for-profit credit counseling industry
submitted any kind of comprehensive data on the extent to which members
of their industry provide the promised counseling services, or the
extent to which they endeavor to screen out consumers for whom a DMP is
unsuitable.\352\ In fact, statewide data from Colorado suggest that
most consumers who start DMPs do not finish them. In its comment, the
Colorado Attorney General submitted data collected directly from debt
relief providers, as required by statute. Of Colorado consumers who had
been on DMPs for two to three years, less than nine percent had
completed them.\353\ The data do not distinguish between for-profit and
nonprofit credit counseling providers, however.
---------------------------------------------------------------------------
\352\ Supra note 195 (describing data from one for-profit credit
counseling company about the number of consumers who called for
counseling assistance and the number who enrolled in DMPs).
\353\ Of the remaining consumers, 43.87% were categorized as
still active, and 47.78% had dropped out of the program. CO AG at 4.
The average program length was 40 months. Id.
---------------------------------------------------------------------------
With respect to debt settlement, as described at length above, the
data that industry members provided showed that
[[Page 48484]]
most consumers drop out of these programs before receiving benefits
commensurate with the fees they pay at the outset.\354\ For example,
the industry-sponsored TASC survey concluded that over 65% of consumers
dropped out of the respondents' programs within the first three
years.\355\ Based on the data collected by the Colorado Attorney
General, of those consumers who had been in a debt settlement program
for two to three years, barely 8% had completed their programs.\356\
---------------------------------------------------------------------------
\354\ Supra Section III.C.2.a.
\355\ Id.; infra III.C.2.a. The evidence shows that consumers
generally dropped out before receiving savings commensurate with the
fees, if they received any savings at all.
\356\ Of the remaining consumers, 39% were categorized as still
active, and 53% had dropped out of the program. CO AG at 5. The
average program length was 32.3 months. Id. Debt settlement plans
are typically 36 months in length. DSA/ADE at 8.
---------------------------------------------------------------------------
Thus, consumers have suffered substantial injury by paying in
advance for debt relief services that were promised but not provided.
(2) The amount and timing of front-loaded fees in the debt relief
context cause significant injury
The record demonstrates that collecting fees in advance of
providing the represented services is the most common business model in
the debt negotiation, for-profit credit counseling, and debt settlement
industries.\357\ The record, including the Commission's law enforcement
experience, further demonstrates that advance fees have been an
integral part of the widespread deception and abuse in the debt
settlement industry. In the context of debt relief transactions,
advance fees create incentives for providers that fundamentally are at
odds with the interests of consumers: (1) to enroll as many applicants
as possible, without adequate regard to their suitability, (2) to
deceive consumers about fundamental aspects of the program in order to
entice them to enroll, and (3) to direct more resources to promotion
and marketing rather than settling debts.\358\
---------------------------------------------------------------------------
\357\ Supra Section I.C.; CFA at 9; CRN at 2; GAO Testimony,
supra note 50, at 7 (discussing debt settlement); see also, e.g.,
FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. Wash. filed Mar.
6, 2006) (alleging that consumers paid an advance fee of between
$329 and $629 before any debt negotiation was attempted); FTC v.
Integrated Credit Solutions, Inc., No. 06-806-SCB-TGW(M.D. Fla.
filed May 2, 2006) (alleging that defendants charged between $99 and
$499 as an initial fee for credit counseling services that were not,
in fact, provided).
\358\ See CU (July 1, 2010) at 4.
---------------------------------------------------------------------------
Indeed, the advance fee requirement impedes the ultimate purpose of
the service - helping consumers resolve their debts and restore their
financial health.\359\ Debt settlement providers, for example,
represent the settlement process as a way to pay off each unsecured
debt with a one-time, lump sum payment as the consumer accumulates
sufficient money to fund the settlement. Financially distressed
consumers generally will find it difficult, if not impossible, to pay
large advance fees while accumulating the necessary funds for a
settlement and enduring extended creditor collection efforts.\360\ The
practice of taking substantial advance fees makes it far more difficult
for consumers to save the money necessary for settlements.\361\ In many
cases, providers misrepresent or fail to disclose material aspects of
their programs, causing consumers to make payments to the providers for
several months, not realizing that most of the payments go towards
fees, rather than settlement offers.\362\ Moreover, not paying
creditors leads to late fees, penalties, impaired credit ratings,
lawsuits and other negative consequences.\363\ Moreover, creditors may
garnish consumers' wages, forcing consumers to abandon their debt
relief programs.\364\ Charging advance fees thus impedes the goal of
debt relief and contributes to consumers having to drop out of programs
and forfeit the fees already paid.\365\
---------------------------------------------------------------------------
\359\ See ULC at 5 (``The UDMSA drafting committee likewise
recognized that debt settlement firms often charge excessive up-
front fees, to the detriment of consumers and to the viability of
their efforts to avoid bankruptcy.'').
\360\ SBLS at 2-4; CFA at 9; CareOne at 4.
\361\ USDR (Oct. 20, 2009) at 5 (``The proposed Rule change
would have the effect of allowing the consumer to save and settle
debt faster since the predatory upfront fees charged by settlement
companies would not be restricting of or burdensome to settlement
activity.''); USDR (Johnson), Tr. at 188; see also CFA at 9.
\362\ Summary of Communications (June 30, 2010) (teleconference
with state attorneys general representatives); QLS at 4; see also,
e.g., FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4) (D.
Mass. filed Nov. 2, 2004) (alleging that defendant obfuscated the
total costs for the products and services by separately reeling off
various fees, such as retainer fees, monthly fees, and fees
correlated to the percentage of money that a customer saves using
the services, without ever disclosing the total cost, which
sometimes was in the thousands of dollars); FTC v. Debt-Set, No.
1:07-cv-00558-RPM (D. Colo. filed Mar. 19, 2007) (alleging that, in
numerous instances, defendants represented that there would be no
upfront fees or costs for their debt settlement program, when in
fact the defendants required consumers to pay an upfront fee of
approximately 8% of the consumer's total unsecured debt); see also,
e.g., Illinois v. SDS West Corp., No. 09CH368 (Cir. Ct. of 7th Jud.
Dist., Sangamon Cty. filed May 4, 2009); Illinois v. Debt Relief
USA, Inc., No. 09CH367 (Cir. Ct. of 7th Jud. Dist., Sangamon Cty.
filed May 4, 2009); North Carolina v. Commercial Credit Counseling
Servs., Inc., No. 06CV014762 (Sup. Ct. Wake Cty. filed Oct. 9,
2006); North Carolina v. Cambridge Credit Counseling Corp., No.
04CVS005155 (Sup. Ct. Wake Cty. filed Apr. 15, 2004); North Carolina
v. Knight Credit Servs., Inc., No. 04CVS8345 (Sup. Ct. Cumberland
Cty. filed Feb. 17, 2004).
\363\ NAAG (Oct. 23, 2009) at 3; CFA at 4-5; QLS at 3; SBLS at
3; SOLS at 1; see also USDR (Johnson), Tr. at 188. Notably, a
banking trade group commented that an average of 63% of accounts
known to be part of a debt settlement program ultimately are charged
off, likely indicating that the consumer's credit score has
suffered. See supra note 179. The comparable figure for accounts in
a DMP was 16%. ABA at 4.
\364\ SBLS at 2-4; CFA at 4; NFCC at 4, 6.
\365\ QLS at 3; SBLS at 3.
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Commenters also stated that in debt settlement programs,
significant numbers of consumers drop out once they realize, contrary
to many telemarketers' representations, that their initial payments are
going to the provider's fees, not to pay off their debts.\366\ Once
they drop out, these consumers often end up with higher debt balances
than they had before, among other detrimental results, thereby
suffering substantial injury.\367\ An organization of nonprofit credit
counselors reported that, in most cases, after dropping out of a debt
settlement service, the consumer's financial position has been so badly
damaged that nonprofit CCAs are unable to provide assistance, and often
bankruptcy is the consumer's only option.\368\ Similarly, legal
services lawyers reported that low-income consumers often are more in
debt with their original creditors when they leave the debt relief
program than before they enrolled.\369\ In sum, debt settlement is a
high-risk financial product that requires consumers simultaneously to
pay significant fees, save hundreds or thousands of dollars for
potential settlements, and meet other obligations such as mortgage
payments. Failure leads to grave consequences - increased debt,
impaired credit ratings, and lawsuits that result in judgments and wage
garnishments.\370\
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\366\ NAAG (Oct. 23, 2009) at 7; SOLS at 2.
\367\ See, e.g., FTC v. Edge Solutions, Inc., No. CV-07-4087
(E.D.N.Y. filed Sept. 28, 2007); see also FTC v. Debt-Set, Inc., No.
07-558, Mem. Supp. Mot. T.R.O. at 16-19 (D. Colo. Mar. 20, 2007);
FTC v. Express Consolidation, No. 06-cv-61851-WJZ, Pls. Mem. Law
Supp. T.R.O. at 17 (S.D. Fla. Dec. 11, 2006); FTC v. Better Budget
Fin. Servs., Inc., No. 04-12326 (WG4), Pls. Mem. Law Supp. T.R.O. at
8-9 (D. Mass. filed Nov. 2, 2004); see also State Case List, supra
note 27.
\368\ AICCCA at 3.
\369\ See, e.g., SOLS at 1.
\370\ NAAG (Oct. 23, 2009) at 8 (``[C]onsumers 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.''); see
NC AG Testimony, supra note 25, at 4 (``Three months of nonpayment
and non-communication lead not only to increased debt, but also
increased collection efforts and legal action.''); Haas Testimony,
supra note 73, at 4 (``We joined the program on March 10, 2008. In 6
months time we were about $13K behind from where we started.'').
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[[Page 48485]]
Consumers drop out of debt relief programs for many reasons, but
the record shows that providers' practice of charging substantial
advance fees is a significant cause.\371\ The injury that results from
consumers paying in advance for promised services that frequently do
not materialize is substantial.
---------------------------------------------------------------------------
\371\ Supra note 213 and accompanying text; SBLS at 2-4; CFA at
9; CareOne at 4; QLS at 3.
---------------------------------------------------------------------------
(3) The context in which debt relief services are offered has
contributed to the substantial injury
The Commission concludes that several aspects of debt relief
transactions have contributed to the substantial injury caused by
advance fees in the debt relief context. First, debt relief services
are directed to financially distressed consumers, who are particularly
vulnerable to the providers' claims.\372\ The Commission has long
recognized that sellers may exercise undue influence over highly
susceptible classes of purchasers.\373\ For this reason, the TSR
prohibits advance fees for credit repair services and certain loan
offers, services that also target financially distressed
consumers.\374\
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\372\ CFA at 10.
\373\ Unfairness Policy Statement, supra note 162, at 1074.
\374\ See 16 CFR 310.4(a).
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Second, debt relief services, as they are currently marketed,
frequently take place in the context of high pressure sales tactics,
contracts of adhesion, and deception. For example, many Commission
cases have alleged that telemarketers of debt relief services have
exhorted consumers to fill out the enrollment documents and return the
papers as quickly as possible.\375\ Notably, these enrollment documents
typically include a power of attorney form, which providers use to cut
off communication between the consumers and their creditors or debt
collectors.
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\375\ FTC v. Debt-Set, Inc., No. 1:07-CV-00558-RPM (D. Colo.
filed Mar. 19, 2007); FTC v. Better Budget Fin. Servs., Inc., No.
04-12326 (WG4) (D. Mass. filed Nov. 2, 2004) (complaint alleging
that ``[d]uring sales conversation, consumers are instructed to
immediately stop making any payments to their unsecured
creditors''); FTC v. Edge Solutions, Inc., No. CV-07-4087, Mem.
Supp. Mot. T.R.O., Exs. PX-2 - PX-4 (E.D.N.Y. filed Oct. 1, 2007)
(telemarketer pressuring FTC investigators to quickly sign and
return written contracts - e.g., within 24 to 48 hours - and
misrepresenting aspects of the debt relief program); FTC v. Debt
Solutions, Inc., No. 06-0298 JLR, App. T.R.O. at 9-10 (W.D. Wash.
filed Mar. 6, 2006) (in a debt negotiation case, alleging that the
defendants' telemarketers ``aggressively push consumers to agree to
scripted language, spoken very quickly, that either contradicts or
omits material representations . . . made in their sales
pitches.''); FTC v. Group One Networks, Inc., No. 8:09-cv-352-T-26-
MAP, Mem. Supp. Mot. T.R.O. at 9-10 (M.D. Fla. filed Feb. 27, 2009)
(in a debt negotiation case, alleging that, in order to obtain
consumers' consent to enroll, defendants play consumers a
``difficult to understand pre-recorded verification [that] contains
additional information that is not part of defendants' telemarketing
sales pitch,'' including information on fees).
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Third, as Congress recognized in enacting the Telemarketing Act,
telemarketing calls are more susceptible to deception than face-to-face
transactions because consumers do not have the opportunity to assess
credibility or visual cues.\376\ Indeed, the record shows that there
has been a high level of deception in the telemarketing of debt relief
services. For example, in its investigation, the GAO found numerous
instances of companies providing fraudulent or deceptive information in
telemarketing sales calls, such as debt reduction guarantees or
government affiliation claims.\377\ As described above, the Commission
has charged 23 debt relief firms with deceptive practices in recent
years, and the states have charged numerous additional firms with such
violations.\378\ Thus, the manner in which debt relief services have
been sold has impeded the free exercise of consumer decisionmaking. The
Commission historically has viewed such an impediment as one of the
hallmarks of an unfair practice.\379\
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\376\ TSR Amended Rule, 68 FR at 4655.
\377\ GAO Testimony, supra note 50, at 13.
\378\ See FTC and State Case Lists, supra note 27.
\379\ Unfairness Policy Statement, supra note 162, at 1074; In
re Amrep, 102 F.T.C. 1362 (1983), aff'd, 768 F.2d 1171 (10\th\ Cir.
1985) (``[A] 100% forfeiture clause, appearing in an adhesion
contract for the sale of land, signed in an atmosphere of high
pressure sales tactics, unequal bargaining power and deceptive
misrepresentations, violated Section 5's proscription of unfair
practices.''); In re Horizon Corp., 97 F.T.C. 464 (1981) (same); In
re Sw. Sunsites, 105 F.T.C. 7, 340 (1985), aff'd, 785 F.2d 1431 (9th
Cir. 1986) (``Respondents' practices resulted in substantial
monetary injury to consumers, because they induced consumers to
continue paying substantial amounts. . . through a variety of
continuing misrepresentations.'').
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A final factor in the injury calculation with respect to this
industry is that charging an advance fee requires consumers to bear the
full risk of the transaction, when the seller is in a better position
to assume that risk. Consumers often have limited means to evaluate
whether they are good candidates for debt relief, and therefore,
consumers rely on the sellers' claims. Providers frequently hold
themselves out as experts in determining the right course of action for
the indebted consumer.\380\ Moreover, only the provider knows the
historic dropout rate for the service, as providers do not disclose
their actual success rates. Thus, providers are better situated than
individual consumers to know which consumers are likely to be able to
complete the programs. The Commission long has held that consumers are
injured by a system that forces them to bear the full risk and burden
of sales-related abuses, particularly, as in this context, where the
seller is in a better position to know and understand the risks.\381\
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\380\ See FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo.,
final order Apr. 11, 2008); FTC v. Nat'l Consumer Council, Inc., No.
ACV04-0474CJC (JWJX) (C.D. Cal., final order Apr. 1, 2005). A debt
settlement industry association stated that, based on its members'
experiences, there are certain characteristics that make it more
likely that a consumer will be able to achieve the benefits offered
by a debt settlement program. TASC (Apr. 30, 2010) at 3; FDR
(Linderman), Tr. at 96 (stating his company employs ``25 to 30
people who do nothing more than analyze the information we receive
from consumers regarding the appropriateness of the program for
these consumers'').
\381\ See Cooling Off Period For Door-to-Door Sales; Trade
Regulations Rule and Statement of Basis and Purpose, 37 FR 22934,
22947 (Oct. 26, 1972) (codified at 16 CFR 429); Preservation of
Consumers' Claims and Defenses, Statement of Basis and Purpose, 40
FR 53,506, 53,523 (Nov. 18, 1975) (codified at 16 CFR 433) (same);
In re Orkin Exterminating, 108 F.T.C. at 263, 364 (``By raising the
fees, Orkin unilaterally shifted the risk of inflation that it had
assumed under the pre-1975 contracts to its pre-1975 customers.'');
In re Thompson Medical Co., Inc., 104 F.T.C. 648 (1984) (noting that
marketers must provide a high level of substantiation to support
``claim[s] whose truth or falsity would be difficult or impossible
for consumers to evaluate by themselves'').
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b. The Harm to Consumers Is Not Outweighed by Countervailing Benefits
The second prong of the unfairness test recognizes that costs and
benefits attach to most business practices, and it requires the
Commission to determine whether the harm to consumers is outweighed by
countervailing benefits to consumers or competition.\382\ In this
proceeding, no debt negotiator provided any comments or evidence of
countervailing benefits from advance fees. For-profit credit counselors
provided only minimal evidence that they provide the promised
services.\383\
[[Page 48486]]
The bulk of the comments and data submitted relating to the second
prong of the unfairness test came from the debt settlement industry
which essentially made two arguments.
---------------------------------------------------------------------------
\382\ Unfairness Policy Statement, supra note 162, at 1073-74
(``The Commission also takes account of the various costs that a
remedy would entail. These include not only the costs to the parties
directly before the agency, but also the burdens on society in
general in the form of increased paperwork, increased regulatory
burdens on the flow of information, reduced incentives to innovation
and capital formation, and similar matters.''); see also J. Howard
Beales III, The FTC's Use of Unfairness Authority: Its Rise, Fall,
and Resurrection, available at (http://www.ftc.gov/speeches/beales/unfair0603.shtm) (noting that ``[g]enerally, it is important to
consider both the costs of imposing a remedy (such as the cost of
requiring a particular disclosure in advertising) and any benefits
that consumers enjoy as a result of the practice, such as the
avoided costs of more stringent authorization procedures and the
value of consumer convenience'').
\383\ CareOne was the only for-profit provider that submitted
data; it stated that: (1) over 700,000 consumers have called the
company for counseling assistance; (2) over 225,000 customers
enrolled in a DMP; (3) nearly 700,000 customer service calls have
been made; (4) over nine million creditor payments were processed;
(5) nearly $650 million in payments have moved from consumers to
their creditors; and (6) fewer than 35 Better Business Bureau
complaints were filed in the previous year on approximately 70,000
new customers, and all had been successfully resolved. CareOne at 1-
2.
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First, members of the debt settlement industry commented that many
consumers receive substantial benefits from debt settlement programs.
In fact, as explained in Section III.C.2. above, the record shows that
most consumers do not obtain a net benefit from debt settlement
services. In any event, the Final Rule does not ban debt settlement
services or restrict the amount of debt settlement company fees; it
only bars collection of advance fees.\384\ There is no empirical
evidence in the record that paying large advance fees has any benefits
for consumers.\385\ Given the large percentage of consumers who drop
out of debt settlement programs - in large part due to having to pay
advance fees - the Commission concludes that any countervailing
benefits to consumers that might possibly derive from paying advance
fees is greatly outweighed by the substantial injury that practice
causes.\386\
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\384\ In any event, as explained in Section III.C.2. above, the
record shows that, in fact, most consumers do not obtain a net
benefit from debt settlement services.
\385\ According to one commenter, research indicates that
consumers have higher success rates when they pay some fees upfront
and thereby have a ```stake in the game.''' Loeb at 5-6. Another
commenter expressed concern that without advance fees, consumers may
be more likely to misrepresent their financial status to get into
the program and to drop out because of a lack of commitment. DMB
(Feb. 12, 2010) at 5. Neither of these commenters cited any
empirical data demonstrating that consumers who pay upfront fees
have higher success rates than those who do not. In any event, even
if upfront fees strengthened consumers' commitment to the program,
requiring consumers to put fees into a dedicated bank account likely
would have the same effect.
\386\ Supra Section III.C.2.a. Similarly, in considering the
Holder In Due Course Rule, the Commission determined that readily
available credit from a ```fly-by-night' salesperson who does not
perform as promised does not benefit consumers.'' Preservation of
Consumers' Claims and Defenses, Statement of Basis and Purpose, 40
FR at 53,520.
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Second, several commenters, principally from the debt settlement
industry, predicted that significant numbers of debt relief companies
would be harmed or go out of business if the advance fee ban were
implemented,\387\ because (1) they would not have the cash flow
necessary to administer settlement plans and provide customer
service;\388\ (2) they may not get paid for the services they rendered
given their customers' already precarious financial condition;\389\ and
(3) scam operators would ignore the advance fee ban, profiting at the
expense of debt settlement companies that complied with the law.\390\
Other commenters posited that no new companies would enter the market,
further injuring competition.\391\
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\387\ Supra Section III.C.2.c.
\388\ Supra Section III.C.2.d. Moreover, a commenter argued that
if existing providers' costs increase, they could be forced to
increase the prices they charge consumers for their services in
order to remain solvent. CSA at 9.
\389\ Supra Section III.C.2.e.
\390\ USOBA (Oct. 26, 2009) at 35; CSA at 10.
\391\ CSA at 9; Able (Oct. 21, 2009) at 28; SDS (Oct. 7, 2009)
at 3; CRN (Oct. 8, 2009) at 5; TASC (Young), Tr. at 186-87.
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Although the Commission cannot predict with precision what impact
the advance fee ban will have on the debt relief industry, the
Commission concludes, based on the record evidence, that any injury to
competition resulting from the elimination of any companies unable to
succeed under the modified advance fee prohibition adopted here would
be outweighed by the benefits to consumers that would result from this
provision. The record suggests that legitimate providers of debt relief
services can operate their businesses without collecting advance
fees.\392\ The record contains scant evidence about the costs debt
relief providers typically incur prior to settling debt, and the
estimated costs appear to vary widely.\393\ The large bulk of those
costs, however, are for marketing and customer acquisition.\394\ As in
many other lines of business, debt relief companies would have to
capitalize their businesses adequately in order to fund their initial
operations. Further, the record indicates that they could start
recouping their expenses relatively quickly. Providers only need
sufficient capitalization to operate until they begin receiving fees
generated by performance of the promised services.\395\ The Final Rule
allows providers to receive fees as they settle each debt.\396\ CCAs
generally will be able to collect fees at the beginning of the DMP,
after the consumer enrolls and makes at least one payment.\397\ With
respect to debt settlement, if information submitted by commenters is
accurate, providers often can start settling debts as early as five or
six months into the program.\398\
---------------------------------------------------------------------------
\392\ Supra Section III.C.2.d.
\393\ Id.
\394\ Orion (Oct. 1, 2009) at 2 (marketing costs can be $500 to
$1,200 per enrolled consumer); NWS at 10 (see attached Walji paper
at 10) (marketing costs at one company averaged $987.50 per enrolled
consumer).
\395\ See infra Section III.C.5.a. Some states already impose
licensing and bonding requirements on companies and thus require
some capitalization. See, e.g., Kan. Stat. Ann. Sec. 50-1116, et
seq.; Me. Rev. Stat. Ann. Tit. 17 Sec. 701, et seq. & tit. 32
Sec. Sec. 6171-82, 1101-03; S.C. Code Ann. Sec. 37-7-101, et seq.
\396\ See infra Section III.C.5.a.
\397\ Id.
\398\ CRN (Bovee), Tr. at 28; see CSA at 6 (almost 78% percent
of consumers receive at least one settlement offer in the first six
months).
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The Commission acknowledges that the ban on advance fees will shift
some of the transactional risk from the consumer to the provider. At
present, however, consumers bear the full risk - they must pay hundreds
or thousands of dollars with no assurance that they will ever receive
any benefit in return.\399\ Moreover, the transaction inherently is one
in which many consumers are doomed to fail, because they are already
financially distressed and cannot afford to pay the large advance fees,
make payments to creditors, and save enough money to fund settlements.
The record in this proceeding bears this out - a large majority of
consumers drop out of the program, in most cases before they receive
savings commensurate with the fees and other costs they paid.\400\
---------------------------------------------------------------------------
\399\ See WV AG (Googel), Tr. at 43; NC AG Testimony, supra note
25, at 4 (``Consumers are taking a big risk, while interest charges
mount and the debt settler's fees are being collected, that they
will eventually get relief from all their debts,'' and the debt
settlement company ``profits whether or not it accomplishes anything
for its client.''). Consumers clearly are injured by a system that
forces them to bear the full risk and burden of sales related
abuses. See Cooling Off Period For Door-to-Door Sales; Trade
Regulations Rule and Statement of Basis and Purpose, 37 FR 22934,
22947 (Oct. 26, 1972).
\400\ As discussed above, industry data show that at least 65%
of consumers drop out of debt settlement programs. Supra Section
III.C.2.a.1.
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In any event, the Final Rule substantially mitigates the provider's
risk of nonpayment. As described in more detail below, providers will
be able to require customers to make payments into a dedicated bank
account. As each debt is settled, the consumer can pay the provider's
fee from that account.\401\
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\401\ Infra Section III.C.5.c. Under the Final Rule, consumers
will own the account and be permitted to recoup the money they paid
into it if they terminate their enrollment. Thus, some consumers may
drop out of the program before receiving any settlements, causing
the provider to lose the value of its services up to that point.
Providers can limit that risk, however, by more carefully screening
prospective customers to ensure that they are financially suitable
for the program and by obtaining settlements more quickly. There is
no reason to believe that consumers would attempt to ``game'' the
system by dropping out of the program and getting their money back
before the provider obtains any settlements; since the purpose of
enrolling in the first place is to obtain settlements, consumers
would have no incentive to drop out prior to obtaining them.
Moreover, to the extent that consumers must pay fees to the bank or
other entity holding their accounts, they will stand to lose at
least some money if they later quit the program and withdraw their
money. Ultimately, the risk of nonpayment will have to be factored
into providers' pricing decisions. This should lead to a more
competitive market. Providers that do better screening and are more
effective in obtaining settlements quickly should be able to
minimize their losses from dropouts. Such firms may choose to lower
their prices and gain a competitive advantage.
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[[Page 48487]]
Given that most consumers who pay advance fees receive little, if
any, benefit from the debt relief services covered by the Final Rule,
any injury to individual providers resulting from the advance fee ban
does not outweigh the consumer injury resulting from current fee
practices.
c. Consumers Cannot Reasonably Avoid the Injury
The third and final prong of the unfairness analysis precludes a
finding of unfairness in cases where the substantial injury is one that
consumers reasonably can avoid.\402\ The extent to which a consumer can
reasonably avoid injury is determined in part by whether the consumer
can make an informed choice. In this regard, the Unfairness Policy
Statement explains that certain types of sales techniques may prevent
consumers from effectively making their own decisions, and that
corrective action may then become necessary.\403\ The Commission finds
a practice unfair ``not to second-guess the wisdom of particular
consumer decisions, but rather to halt some form of seller behavior
that unreasonably creates or takes advantage of an obstacle to the free
exercise of consumer decisionmaking.''\404\
---------------------------------------------------------------------------
\402\ 15 U.S.C. 45(n); see also Unfairness Policy Statement,
supra note 162, at 1073.
\403\ Unfairness Policy Statement, supra note 162, at 1074.
\404\ Id.
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Consumers can reasonably avoid harm only if they understand the
risk of injury from an act or practice.\405\ In the context of debt
relief service fees, consumers can avoid the injury only if they
understand the payment arrangement, and its implications, and are aware
of the risks of paying in advance. Consumers are unlikely to know that
the services do not benefit most consumers who enroll and that they are
at significant risk of losing the large sums of money they pay in
advance fees.\406\ This is especially true because of the widespread
deception surrounding the marketing of debt relief services\407\ and
because purchasers of debt relief services typically are in serious
financial straits and are thus particularly vulnerable to the
providers' glowing claims.\408\ Relying on the representations made in
advertisements and in telemarketing calls, these vulnerable consumers
have every reason to expect to receive the promised benefits from those
who purport to be experts and have no way of knowing that, in fact,
they are unlikely to receive those benefits, if they receive any
benefits at all.\409\ Consumers are unaware that when they purchase
debt relief services, they are at high risk of failure and the
concomitant loss of hundreds or thousands of dollars that they can ill
afford to lose.\410\ As described earlier, debt relief programs with
large advance fees force consumers in financial distress to do what
most of them cannot do: simultaneously pay the provider, save for
settlements, and meet other obligations such as mortgage payments.
---------------------------------------------------------------------------
\405\ See id.; In re Orkin Exterminating Co., 108 F.T.C. 263,
366-67 (1986), aff'd, 849 F.2d 1354 (11th Cir. 1988); In re Int'l
Harvester, 104 F.T.C. 949, 1066 (1984).
\406\ CFA at 10; SOLS at 3 (advertisements lack specific
disclosures; subsequent disclosures are buried in fine print
contracts).
\407\ See In re Sw. Sunsites, 105 F.T.C. 7, 81-93 (1985)
(holding that land sale companies engaged in an unfair practice by
continuing to collect payments on land sales contracts, and refusing
to make refunds, for consumers who agreed to purchase land based on
deceptive representations made by the companies), aff'd, 785 F.2d
1431 (9th Cir. 1986).
\408\ As the Commission has noted with respect to another group
of vulnerable consumers desperate for a solution to their woes -
individuals trying to lose weight - ``the promises of weight loss
without dieting are the Siren's call, and advertising that heralds
unrestrained consumption while muting the inevitable need for
temperance if not abstinence simply does not pass muster.'' In re
Porter & Dietsch, Inc., 90 F.T.C. 770, 865 (1977), aff'd, 605 F.2d
294, 297 (7th Cir. 1979) (approving FTC order with ``minor
exceptions'').
\409\ See supra Sections I.C.2. & III.C.2.; CFA at 10; CCCS CNY
at 1; QLS at 2.
\410\ Having paid in advance and having not received a refund,
the only remaining recourse consumers would have for a nonperforming
debt relief service provider is to file a lawsuit for breach of
contract, hardly a viable option for financially distressed
consumers. Orkin, 108 F.T.C. at 379-80 (Oliver, Chmn., concurring)
(suing for breach of contract is not a reasonable means for
consumers to avoid injury). The cost of litigating makes it
impossible or impractical for many consumers to seek legal recourse.
Many consumers who are in financial distress may not even be aware
that filing an action against the provider for breach of contract is
available as an alternative. Therefore, the possibility of taking
legal action does not sufficiently mitigate the harm to consumers
from paying an advance fee.
---------------------------------------------------------------------------
Moreover, consumers typically cannot mitigate their harm by seeking
a refund. Debt relief providers often advertise generous refund
policies, but frequently consumers lose much of their money.\411\
---------------------------------------------------------------------------
\411\ MN AG at 2 (attaching complaints in cases against Priority
Direct Marketing, Inc., Clear Financial Solutions, and Moneyworks,
LLC); see, e.g., FTC v. Innovative Sys. Tech., Inc., No. CV04-0728
GAF JTLx (C.D. Cal. filed Feb. 3, 2004) (defendants advertised
money-back guarantees, yet allegedly refused to honor them); New
York v. Credit Solutions, No. 401225 (N.Y. Sup. Ct. N.Y. Cty. 2009
filed May 19, 2009); QLS at 3; CFA at 5, 9; WV AG (Googel), Tr. at
84. Moreover, a requirement that debt relief services honor refund
requests is not sufficient to address this harm because obtaining a
refund has a cost to consumers. FTC v. Think Achievement Corp., 312
F.3d 259, 261 (7th Cir. 2002) (``This might be a tenable argument if
obtaining a refund were costless, but of course it is not. It is a
bother. No one would buy something knowing that it was worthless and
that therefore he would have to get a refund of the purchase
price.'').
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d. Public Policy Concerning Advance Fees
The Commission's unfairness analysis permits it to consider
established public policies in determining whether an act or practice
is unfair, although those policies cannot be the primary basis for that
determination.\412\ In this regard, nearly all states have adopted laws
that regulate the provision of some or all debt relief services. In
fact, six of these laws ban receiving any payment as a for-profit debt
settlement company.\413\ Consistent with these statutes and its law
enforcement experience, NAAG filed comments strongly advocating that
the Commission issue a rule prohibiting the charging of advance fees
for debt relief services.\414\ These state laws provide further support
for the Commission's finding that this practice is unfair.
---------------------------------------------------------------------------
\412\ 15 U.S.C. 45(n).
\413\ La. Rev. Stat. Sec. 14:331; N.D. Cen. Code Sec. 13-06-
02; Wyo. Stat. Ann. Sec. 33-14-102; Mass. Gen. Laws Ann. Ch. 180
Sec. 4A; N.J. Stat. Ann. Sec. 17:16G-2; Haw. Rev. Stat. Ann. Sec.
446-2.
\414\ NAAG (Oct. 23, 2009) at 1.
---------------------------------------------------------------------------
Accordingly, the Commission concludes that the practice of charging
advance fees is an abusive practice under the Telemarketing Act because
it meets the statutory test for unfairness - it causes or is likely to
cause substantial injury to consumers that is not outweighed by
countervailing benefits to consumers or competition and is not
reasonably avoidable.
4. Recommendations to Restrict Other Abusive Practices
A number of commenters proposed additional remedial provisions, as
discussed below. The Commission declines to adopt these additional
remedies in the Final Rule.
a. Suitability Analysis
A coalition of consumer groups and other commenters recommended
that the Commission require providers to employ a suitability or
screening analysis of prospective customers to ensure that only those
who meet the financial requirements to successfully complete the
offered debt relief program
[[Page 48488]]
are permitted to enroll.\415\ Several commenters asserted that
providers' failure to do such analyses contributes to consumers'
inability to stay in the program, and thus to the injury they suffer
when they drop out.\416\
---------------------------------------------------------------------------
\415\ See CFA at 21 (``[D]ebt relief providers should be
required to conduct an individual financial analysis for all
potential customers to determine whether the service is suitable for
and will provide a tangible net benefit to them before enrolling
them.''); CareOne at 7 (``Providers should be required to . . .
attest to and document the suitability of the service sold to the
consumer.''); TASC (Apr. 30, 2010) at 1-2; see also RDRI (Manning),
Tr. at 220-21.
\416\ See NAAG (Oct. 23, 2009) at 2 (``The primary consumer
protection problem areas that have given rise to the States' action
include . . . lack of screening and analysis to determine
suitability of debt relief programs for individual debtors.'');
CareOne at 7 (``One of the greatest concerns about abuse of
consumers in the debt relief industry relates to whether consumers
are appropriately placed into plans that represent the most suitable
approach for addressing their debt problems.''); MP at 2 (``The
reality is that the majority of consumers being enrolled into
traditional debt settlement programs are not suitable candidates for
this strategy.''); NACCA (Keiser), Tr. at 66 (``I think one problem
might be is too many people might be getting into programs that
aren't appropriate for them that they cannot afford, and that's
where you hear the horror stories.''); WV AG (Googel), Tr. at 84
(``[T]he classic complaint that I think most states have received is
consumers who have paid thousands and thousands of dollars up front,
who probably weren't even suitable candidates for debt
settlement.''). But see, e.g., TASC (Housser), Tr. at 224 (``I do
want to point out that we think we do a pretty good job and TASC
members think they do a pretty good job of suitability analysis of
consumers''); FDR (Linderman), Tr. at 95 (arguing that ``we take the
time to do a thorough suitability analysis'').
---------------------------------------------------------------------------
The Commission has concluded that it is unnecessary at this time to
institute explicit suitability requirements in the Final Rule. The
existing provisions of the Final Rule should provide incentives for
providers to screen out consumers who cannot afford both to save funds
for settlement and to pay the provider's fee, because if a consumer
cannot do both and drops out before settling or otherwise resolving any
debts, the provider cannot collect its fees.\417\ Certainly the
Commission regards it as a best practice to implement screening
procedures to maximize the likelihood that enrollees will have the
wherewithal to complete and benefit from a service. The Commission will
continue to monitor the industry to ensure that debt relief providers
establish and maintain reasonable policies and procedures to screen
prospective customers for suitability. If it finds that significant
numbers of providers continue to enroll consumers who are unsuitable
for their programs, the Commission may consider further amendments to
the TSR to solve the problem.
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\417\ Final Rule, Sec. 310.4(a)(5). See, e.g., ACCORD (Noonan),
Tr. at 275-76 (``[I]f you have a ban on advance fees . . . no one
will have an incentive to have a high drop-out rate, they won't be
paid for those clients. . . . [E]veryone will continue to have an
incentive, as we do now, to do a proper suitability study, because
we won't want unsuitable people in our plans.''); WV AG (Googel),
Tr. at 222 (``[O]ne of the best ways to require or to bring about a
suitability analysis, without even specifically requiring it, would
be the advance fee ban, because then there would be that, you know,
meeting of interest, it would be in everybody's interest to do
it.''); CRN (Bovee), Tr. at 120; CU (July 1, 2010) at 4.
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b. Right of Rescission or Refund Provision
Several commenters also recommended that the Final Rule grant
consumers a right to rescind their contracts within a certain period of
time and receive a refund of fees paid to debt relief providers.\418\
They argue that such a requirement would provide consumers with more
time to assess whether the service is beneficial for them and also
discourage providers from enrolling consumers who are unlikely to
benefit from their services. The Commission also considered whether
requiring providers to give consumers refunds for a certain period of
time would mitigate any harm consumers suffered from advance fees.
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\418\ See, e.g., CFA at 19; CFA (Grant), Tr. at 209; NFCC at 13;
CRN at 7; TASC (Apr. 30, 2010) at 6-7.
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The Commission concludes that the modified advance fee restrictions
in Sec. 310.4(a)(5) adequately address these concerns. A consumer who
receives no benefit from a program will not be required to pay a fee
and can simply terminate the program. Because any funds that the
consumer pays into a dedicated bank account remain the property of the
consumer until the debts are settled, enabling the consumer to cancel
the program and recoup his money, the advance fee ban effectively
provides a right of rescission and refund. Moreover, a rescission or
refund right on its own leaves significant risk with consumers that the
provider will not respond to a request for rescission or refund, or it
will be out of business before providing the contract rescission or
refund.\419\ Finally, if a refund right only lasts until the consumer
receives the first settlement, the company would have the incentive to
settle a small debt very quickly in order to extinguish the refund
right, which does not provide a substantial benefit to the
consumer.\420\
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\419\ Summary of Communications (June 16, 2010) (meeting with
consumer groups); see supra note 411.
\420\ Summary of Communications (June 16, 2010) at 1 (meeting
with consumer groups).
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c. Fee Caps
Industry representatives also have argued that, instead of
prohibiting advance fees, the Final Rule should set limits or caps on
such fees similar to those currently imposed by many states.\421\ The
Commission declines to set fee limits in this proceeding. While the
Commission concludes that the collection of advance fees by debt relief
providers is an abusive practice, it does not believe that the
Telemarketing Act authorizes the Commission to regulate the amount of
fees a provider charges, absent some other type of deceptive or abusive
conduct that interferes with a competitive market.\422\ In general,
fee-setting is best done by a competitive market, and the Commission's
role is to remove obstacles to consumers making the informed choices
that are necessary to a properly functioning market. The provisions of
the Final Rule, including the narrowly tailored ban on advance fees,
are designed to ensure that the debt relief market functions properly
and to eliminate the risk that consumers will pay thousands of dollars
and receive little or nothing in return.\423\ In any event, the
Commission believes that any decision to set fees is made more
appropriately by legislative bodies, as several states have done with
respect to debt relief services.\424\
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\421\ See, e.g., TASC (Apr. 30, 2010) at 1-2, 7-9. Additionally,
TASC recommended that the Commission mandate that companies spread
their collection of fees over a specified period of months. This fee
structure, however, allows providers to collect fees regardless of
whether they have achieved results and therefore suffers from the
flaws discussed in this subsection and results in the abuse
described in Section III.C.3. See SOLS at 2 (recommending fee caps
in addition to an advance fee ban).
\422\ The purpose of the FTC's unfairness doctrine is not to
permit the Commission to obtain better bargains for consumers than
they can obtain in the marketplace. Am. Fin. Servs. Ass'n v. FTC,
767 F.2d 957, 964 (D.C. Cir. 1985). Instead, it is to prohibit acts
and practices that may unreasonably create or take advantage of an
obstacle to the ability of consumers to make informed choices. See
id. at 976.
\423\ Simply capping the fees might reduce the amount of
consumer injury, but, so long as consumers are induced to pay some
amount of money for services that may never be rendered, would not
eliminate the injury.
\424\ Moreover, any federally established maximum advance fee
might well become the de facto actual fee for debt relief services.
F. M. Scherer, Industrial Market Structure and Economic Performance
190-93, 204 (1980); F.M. Scherer, Focal Point Pricing and Conscious
Parallelism, in Competition Policy, Domestic and International, 89-
97 (2000). Further, fee caps can quickly become obsolete, as changes
in market conditions and technologies render the fixed maximum fee
too low (e.g., if the costs of providing the service rise) or too
high (e.g., if new technology lowers the cost of providing the
service or if market participants would compete on price absent
regulation). U.S. v. Trenton Potteries Co., 273 U.S. 392, 397 (1927)
(``The reasonable price fixed today may through economic and
business changes become the unreasonable price of tomorrow.'').
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[[Page 48489]]
5. The Advance Fee Ban - Final Rule Amendment
The amended Rule Sec. 310.4(a)(5)(i) would prohibit:
(i) Requesting or receiving payment of any fee or consideration for
any debt relief service until and unless:
(A) the seller or telemarketer has renegotiated, settled, reduced,
or otherwise altered the terms of at least one debt pursuant to a
settlement agreement, debt management plan, or other such valid
contractual agreement executed by the customer;
(B) the customer has made at least one payment pursuant to that
settlement agreement, debt management plan, or other valid contractual
agreement between the customer and the creditor or debt collector; and
(C) to the extent that debts enrolled in a service are
renegotiated, settled, reduced, or otherwise altered individually, the
fee or consideration either:
(1) bears the same proportional relationship to the total fee for
renegotiating, settling, reducing, or altering the terms of the entire
debt balance as the individual debt amount bears to the entire debt
amount. The individual debt amount and the entire debt amount are those
owed at the time the debt was enrolled in the service; or
(2) is a percentage of the amount saved as a result of the
renegotiation, settlement, reduction, or alteration. The percentage
charged cannot change from one individual debt to another. The amount
saved is the difference between the amount owed at the time the debt
was enrolled in the service and the amount actually paid to satisfy the
debt.\425\
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\425\ The provisions currently contained in Sec. Sec.
310.4(a)(5)-310.4(a)(7) will be renumbered to accommodate the new
Sec. 310.4(a)(5) and will shift to Sec. Sec. 310.4(a)(6)-
310.4(a)(8), respectively.
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The Final Rule places no restriction on the amount of fees that
providers can charge or mandate a formula for calculating fees,\426\
but does establish rules about when they can collect them. In short,
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.
Four issues arising from this provision merit further discussion: the
contractual agreement, fee requirements, bank account practices, and
effective date.
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\426\ The Final Rule does require providers to clearly and
prominently disclose their fees. 16 CFR 310.3(a)(1).
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a. The Contractual Agreement
The Final Rule specifies that, in order to collect a fee, providers
must have obtained a settlement or other alteration of a debt, pursuant
to a settlement agreement, DMP, or other valid contractual agreement
between the consumer and the creditor or debt collector that is
executed by the customer. The provider may obtain an oral or written
execution of the agreement in order to allow providers to proceed
efficiently. The consumer must execute the specific agreement, however;
a contract signed at the outset specifying, for example, that any offer
that involves the payment of a certain amount will be deemed acceptable
to the consumer is not sufficient to comply with the Rule.\427\
Moreover, the provider may not rely on authority obtained through a
power of attorney to execute the contract on the consumer's behalf. The
requirement that consumers execute the agreements is necessary to
ensure that the offers are legitimate, final, and acceptable to the
consumers.\428\ The Rule further specifies that the provider cannot
collect its fee until the consumer makes at least one payment to the
creditor or debt collector to resolve the debt. This provision, which
was not included in the proposed rule but was recommended by
commenters, will help ensure that the consumer has the necessary funds
to satisfy the offer.\429\
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\427\ See CFA at 17.
\428\ Commenters supported such a requirement. See CFA at 15-16;
SOLS at 2.
\429\ FCS (Oct. 27, 2009) at 4 (``If a company is permitted to
collect its fee after merely negotiating a settlement, but before
the creditor receives payment from the consumer, consumers may find
themselves paying fees regardless of their ability to meet the
settlement payment obligations to their creditors. This provision
should be changed to allow the debt settlement company to collect
its fee only when the consumer's payment is sent to the
creditor.''); ACCORD (Oct. 9, 2009) at 2.
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In order to collect its fee, the provider must have documentation
evidencing the debt resolution, as specified by Sec. 310.4(a)(5)(i)(A)
of the Final Rule.\430\ Different types of debt relief services may
generate different types of documentation. With regard to debt
negotiation, an executed contract showing that a creditor has agreed to
the concession (e.g., a lower interest rate for a particular credit
card), along with evidence that the consumer has made at least one
payment under the new terms, would suffice. For a DMP, the CCA must
provide a debt management plan containing the altered terms and
executed by the customer that is binding on all applicable creditors.
The CCA also must have evidence that the consumer has made the first
payment to the CCA for distribution to creditors.\431\ In the case of
debt settlement, the provider must obtain documentation showing that
the account at issue has been successfully settled and at least one
payment has been made toward the settlement, before receiving the fee
for that debt.\432\ Examples of such documentation include a letter or
receipt from the creditor or debt collector stating that the debt has
been satisfied, or a payment has been made toward satisfaction and the
amount of the payment received.\433\ Once the consumer executes the
agreement, the debt relief entity may collect the fee associated with
the individual debt and need not wait until all debts have been settled
or otherwise altered.
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\430\ 16 CFR 310.4(a)(5)(i)(A) (``the seller or telemarketer has
renegotiated, settled, reduced, or otherwise altered the terms of at
least one debt pursuant to a settlement agreement, debt management
plan, or other such valid contractual agreement executed by the
customer'') (emphasis added). See AFSA at 10 (``It is appropriate to
require provision of documents proving that a debt has, in fact,
been renegotiated, settled, reduced or otherwise altered.'');
Weinstein (Oct. 26, 2009) at 8 (see attached Weinstein paper at 7)
(``When a consumer and a creditor reach a mutual agreement, the debt
settlement company provides a written agreement to the consumer and
assists with arranging the consumer's payment to the creditor.'').
\431\ CCAs renegotiate all of the consumer's eligible debts at
one time, and creditors generally grant concessions immediately upon
enrolling consumers in the DMP. GP (Mar. 5, 2010) at 1. Thus, CCAs
do not renegotiate debts individually, and Final Rule Sec.
310.4(a)(5)(i)(C) does not apply to them. CCAs commonly charge
consumers not only an initial set-up fee, but also periodic (usually
monthly) fees throughout the consumer's enrollment in the DMP. Laws
in most states cap these fees. Final Rule Sec. 310.4(a)(5)
prohibits CCAs from charging a set-up or other fee before the
consumer has enrolled in a DMP and made the first payment, but it
would not prevent the CCA from collecting subsequent periodic fees
for servicing the account.
\432\ The ``at least one payment'' provision applies
specifically to the case of bona fide installment settlements, in
which a creditor or debt collector contracts to accept the
settlement amount in installments over time. If the creditor or debt
collector requires a single payment to satisfy the debt, the
provider cannot divide the settlement into separate parts and
collect its fees upon a payment from the consumer that only
partially satisfies the debt. The Commission will monitor fee
practices relating to installment settlements to ensure that
providers are not manipulating settlement offers to collect their
fee to the detriment of consumers.
\433\ See CRN (Jan. 12, 2010) at 7 (``All creditors and their
assignees provide documentation of settlement and/or payment
agreements.''). A letter containing an offer to settle by itself
does not meet the Rule's requirements, but may be one part of the
necessary documentation. Some commenters stated that some creditors
or debt collectors may not provide a document confirming that the
payment has been accepted and the debt has been satisfied. MD (Oct.
26, 2009) at 53 (some collection agents refuse to provide
documentation that clearly establishes the debt has been
extinguished); ART at 2 (some creditors do not provide timely
documentation).
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[[Page 48490]]
b. Fee Requirements
The purpose of the advance fee ban could be thwarted if debt
settlement providers collect a disproportionately large percentage, or
even the entire amount, of the fee after settling a single debt. The
Final Rule addresses this concern: in situations in which providers
settle debts individually over time, the fee collected by the provider
must bear the same proportional relationship to the total fee as the
individual debt bears to the entire debt amount. Further, the Final
Rule requires that, in calculating this proportion, the provider must
use the amount of the individual debt and the entire debt at the time
the consumer enrolls in the program (i.e., before any interest or
creditor fees have accrued).\434\
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\434\ In other words, if the amount of the debt that is settled
is one-third of the entire debt amount enrolled in the program, the
provider can collect one-third of its total fee.
For the purposes of calculating a proportional fee, the provider
must include as part of the entire debt amount any additional debts
that the consumer enters into the program after the original date of
enrollment. Further, the provider must use the amount of the
additional individual debt at the time the consumer entered that
debt into the program. For example, suppose that a consumer enrolls
in a debt settlement program with a total of two $10,000 debts -
totaling $20,000. Six months after enrolling in the program, the
consumer places one additional debt with a balance of $10,000 into
the program. Under Sec. 310.4(a)(5)(ii)(C)(1), the consumer's
entire debt amount is now $30,000. Thus, if the provider settles any
one of the consumer's three debts, it may only collect one-third of
its total fee ($10,000 divided by $30,000).
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Alternatively, the provider can collect a percentage of savings
achieved.\435\ In that case, the fee for each debt settled or otherwise
altered must be an unchanging percentage of the amount saved as a
result of the service.\436\ The amount saved must be based on the
difference between the amount of debt at the time the consumer enrolls
in the program and the amount of money required to satisfy the debt.
Using either fee structure, the fee or consideration must be accurately
disclosed in compliance with Sec. 310.3(a)(1)(i).\437\
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\435\ This alternative can be used when the provider uses a
contingency-based fee model.
\436\ This requirement explicitly prevents providers from front-
loading the fee by collecting a disproportionately large percentage
of savings for any debts settled early in the program.
\437\ 16 CFR 310.3(a)(1)(i).
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Two commenters recommended that the Commission require that the
amount of the provider's fee be based on the percentage of savings
realized by the consumer.\438\ As stated earlier, the Final Rule does
not set fee maximums or dictate a formula for calculating fees but
simply governs when the fees can be collected. The provisions of the
Final Rule, including the required disclosures, prohibitions on
misrepresentations, and advance fee ban, should spur price competition
in the market.\439\
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\438\ CareOne at 5; FCS (Oct. 27, 2009) at 4 (``We also urge the
Commission to consider requiring fee structures that are based on
the savings the company negotiates for the consumer. . . . Allowing
companies to collect flat fees (even fees that are capped, as some
states provide) disconnects the amount of the fee from the value the
consumer receives. In contrast, success-based fees ensure the fee is
proportionate to the benefit and still allow debt settlement
companies to compete on price.''). Several companies use a
contingency fee model, charging consumers a specific percentage of
savings that they obtain. CRN (Jan. 21, 2010) at 4 (15% of savings);
FCS (Oct. 27, 2009) at 2; ACCORD (Oct. 9, 2009) at 2-3; TBDR at 1;
see also SBLS at 4. One commenter raised concerns whether assessing
fees based on settlement activity would lead to the best outcomes
for consumers. FDR (Oct. 26, 2009) at 15-16 (``Where fees are based
exclusively on settlement activity or on the timing of achieving
settlements, the debt settlement services provider has an incentive
to complete settlements with the creditor and on the account that
creates the most revenue.'').
\439\ See USDR (Oct. 20, 2009) at 2.
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c. Dedicated Bank Accounts
In the NPRM, the Commission stated that it did not intend the
proposed rule to prohibit consumers from using dedicated bank accounts,
and it requested comments on this issue.\440\ In response, some
commenters expressed views, assuming the Final Rule included an advance
fee ban, on whether the Rule should permit consumers, or allow
providers to require consumers, to put funds into a dedicated bank
account until the services are delivered. A coalition of consumer
groups stated that an advance fee ban should allow consumers to use
legitimate bank accounts that they control.\441\ An industry member
stated that allowing providers to require consumers to set money aside
in a dedicated bank account is ``absolutely necessary'' to ensure that
the money available is adequate to cover the settlement amount and the
provider's fee.\442\ Additionally, a municipal consumer protection
agency stated that dedicated bank accounts would ensure that a debt
settlement company could collect its fees once it has settled a
consumer's debt.\443\
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\440\ TSR Proposed Rule, 74 FR 41988, 42017 (Aug. 19, 2009).
\441\ CFA at 17; CFA (Plunkett), Tr. at 141.
\442\ CRN (Bovee), Tr. at 142 (stating that his company does not
use escrow accounts and has outstanding uncollected fees of more
than $100,000).
\443\ NYC DCA at 2.
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Section 310.4(a)(5)(ii) of the Rule permits debt relief providers
to require consumers to place funds designated for the company's fees
and for payment to the consumer's creditors or debt collectors in a
dedicated bank account, provided certain conditions are met. Once a
settlement agreement is executed and the payment (or first payment, in
the case of an installment agreement) is made, the provider may require
that the appropriate fee payment be sent from the account to the
company. This provision will assure providers that, once they settle a
consumer's debt, they will receive the appropriate fee.
To ensure that consumers are protected, the Final Rule specifies
five conditions that the provider must meet if it wishes to require the
consumer to set aside funds for its fee and for payment to creditors or
debt collectors in a dedicated bank account.\444\ First, the account
must be located at an insured financial institution.\445\ Second, all
funds in the account must remain the property of the consumer, and, if
the money is held in an interest-bearing account, all interest that
accrues must be paid to the consumer.\446\ Third, the agent holding the
funds must be independent - that is, not under the control of or
affiliated with the debt relief provider.\447\ Fourth, to further
ensure that the account provider is truly independent, the debt relief
provider may not give or accept any money or other compensation in
exchange for referrals of business involving the debt relief
service.\448\ The Commission intends this provision to be read broadly
to prohibit all fee splitting between the entity or entities
administering the
[[Page 48491]]
account and the debt relief service provider.
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\444\ If a provider is going to require a dedicated bank
account, it may not require the use of a dedicated bank account
solely to set aside funds for the provider's fees.
\445\ This requirement does not prevent an intermediary that is
not an insured financial institution from providing services in
connection with the account as well. For example, GCS and Noteworld
Servicing Center provide account management and transaction
processing services relating to special purpose bank accounts that
clients of debt settlement companies use. See GCS at 1. If such an
intermediary is used, the bank and the nonbank both are ``entities
administering the account'' under the Final Rule.
\446\ See Summary of Communications (June 24, 2010) at 2 (state
attorney general representative stated that consumers could be
injured if they were not able to use money in the accounts for
living expenses if necessary; a second state attorney general
representative stated that if providers own the accounts, the money
could be subject to claims by the company's creditors); Summary of
Communications (July 9, 2010) at 1 (consumer group representative
stated that the consumer should have control over the account, and
it should be in the consumer's name).
\447\ See Summary of Communications (June 24, 2010) at 2 (a
state attorney general representative described risks of service
provider collusion with fraudulent companies).
\448\ See Summary of Communications (June 24, 2010) at 2 (a
state attorney general representative stated that the rule should
ensure that debt settlement companies do not split fees with the
account providers or charge unreasonable fees for the accounts).
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Fifth and finally, the provider must allow the consumer to withdraw
from the debt relief service at any time without penalty; thus, the
provider may not charge a termination fee or similar fee. The provider
also must ensure that the consumer receives, within seven business days
of the consumer's request, all funds in the account, less any money
that the provider has earned in fees in compliance with the Rule's
provisions, as a result of having settled a debt prior to the
consumer's withdrawal from the program.\449\ Therefore, the Rule allows
the consumer to cancel the program and recoup the money in the account
at any time to ensure that the consumer does not pay in advance for
services that are not performed.
---------------------------------------------------------------------------
\449\ See Summary of Communications (July 9, 2010) at 1
(consumer group representative stated that the consumer should be
able to withdraw all funds from the account at any time).
---------------------------------------------------------------------------
Moreover, the Commission's law enforcement cases show that there is
a risk that providers will utilize funds in consumers' accounts for
their own purposes.\450\ Thus, the Rule includes five specific
safeguards discussed in this section to guard against such illegal
activity.\451\
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\450\ See, e.g., FTC v. Jubilee Fin. Servs., Inc., No. 02-6468
ABC (Ex) (C.D. Cal. filed Aug. 19, 2002) (alleging that defendants
regularly withdrew money from consumers' trust accounts to pay their
operating expenses); FTC v. Edge Solutions, Inc., No. CV-07-4087,
First Interim Report of Temporary Receiver at 3 (E.D.N.Y. Oct. 23,
2007) (noting that ``customer funds in the amount of $601,520 were
missing from the receivership defendants' accounts and unaccounted
for by the receivership defendants''); see also GAO Testimony, supra
note 50, at 27 (discussing a case study in which the U.S. Department
of Justice prosecuted a debt settlement company for using funds in
customer escrow accounts to cover overdrafts from the defendant's
operating account and make payments to his wife).
\451\ The safeguards appear to be consistent with the practices
of many industry members. For example, a service provider stated
that it is an independent firm and the ``special purpose'' or
dedicated bank accounts that its system manages are owned and
controlled by consumers. GCS at 1-2.
---------------------------------------------------------------------------
The Rule does not prohibit an independent entity that holds or
administers a dedicated bank account meeting the above criteria from
charging the consumer directly for the account. However, the Commission
will be monitoring practices related to these fees, and it may take
further action, if needed, to address any deceptive or abusive fee
practices in connection with the accounts.
d. Effective Date
The advance fee ban provision, Sec. 310.4(a)(5) of the Final Rule,
takes effect on October 27, 2010. The Commission is allowing debt
relief providers an additional month after the effective date of the
other provisions of the Rule, because compliance with the advance fee
ban may entail adjustments to many providers' operations. The Final
Rule does not apply retroactively; thus, the advance fee ban does not
apply to contracts with consumers executed prior to the effective date.
D. Section 310.3: Deceptive Telemarketing Acts or Practices
The Final Rule mandates four debt relief-specific disclosures,
which complement the existing, generally applicable disclosures
currently in the TSR.\452\ The Final Rule requires debt relief service
providers to disclose, clearly and conspicuously, before the consumer
consents to pay: (1) the amount of time necessary to achieve the
represented results; (2) the amount of savings needed before the
settlement of a debt; (3) if the debt relief program includes advice or
instruction to consumers not to make timely payments to creditors, that
the program may affect the consumer's creditworthiness, result in
collection efforts, and increase the amount the consumer owes due to
late fees and interest; and (4) if the debt relief provider requests or
requires the customer to place funds in a dedicated bank account at an
insured financial institution, that the customer owns the funds held in
the account and may withdraw from the debt relief service at any time
without penalty, and receive all funds in the account. Together, these
disclosure requirements will ensure that consumers have the material
information they need to make an informed decision about whether to
enroll in a debt relief program.
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\452\ Pursuant to the pre-existing TSR, in an outbound telephone
call or an internal or external upsell, sellers and telemarketers of
debt relief services must promptly disclose several key pieces of
information: (1) the identity of the seller; (2) the fact that the
purpose of the call is to sell goods or services; and (3) the nature
of the goods or services being offered. 16 CFR 310.4(d). They must
also, in any telephone sales call, disclose cost and certain other
material information before consumers pay. 16 CFR 310.3(a)(1). As
discussed in Section III.D.2., the Commission received very few
comments addressing these disclosures.
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Section 310.3(a)(1)(viii) of the proposed rule contained three
other debt relief-specific disclosures. After consideration of the
record, the Commission has decided to delete those disclosures:
that creditors may pursue collection efforts pending the
completion of the debt relief service (proposed Section
310.3(a)(1)(viii)(D)), which has been combined with another required
disclosure;
that any savings from the debt relief program may be
taxable income (proposed Section 310.3(a)(1)(viii)(F)); and
that not all creditors will accept a reduction in the
amount owed (proposed Sec. 310.3(a)(1)(viii)(c)).
The Final Rule also modifies the preamble to the general disclosure
requirements in Sec. 310.3(a)(1) to clarify that sellers or
telemarketers must make disclosures before a consumer consents to pay
for the goods or services offered.
This section discusses: (1) the debt relief-specific disclosure
obligations added as a result of this proceeding, (2) the disclosures
in the proposed rule that were not adopted in the Final Rule, (3) the
general disclosure obligations under the TSR, (4) the timing of the
required disclosures, and (5) additional disclosures that commenters
recommended, but which the Commission did not adopt in the Final Rule.
1. Amendments to Section 310.3(a)(1): Debt Relief-Specific Disclosure
Obligations
In assessing the six new disclosures in the proposed rule, the
Commission considered whether omitting the information would cause
consumers to be misled, the need for those disclosures, and their
likely effectiveness. The Commission applies its deception standard in
determining the legal basis for disclosures: an act or practice is
deceptive if (1) there is a representation or omission of information
that is likely to mislead consumers acting reasonably under the
circumstances; and (2) that representation is material to
consumers.\453\ Injury is likely if inaccurate or omitted information
is material.\454\ A claim is deceptive if it either misrepresents or
omits a material fact such that reasonable consumers are likely to be
misled.\455\ Application of
[[Page 48492]]
this analysis leads the Commission to conclude that each of the four
items of information that the provisions adopted herein require to be
disclosed are material and that, absent disclosure of these items of
information, consumers seeking debt relief draw reasonable but
incorrect conclusions about the benefit of purchasing such service, and
are therefore likely to be misled. Thus, failure to disclose any of
these four items of information is a deceptive practice.
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\453\ Federal Trade Commission Policy Statement on Deception,
appended to In re Cliffdale Assocs., 103 F.T.C. 110, 174-83 (1984)
(``Deception Policy Statement''); see also FTC v. Tashman, 318 F.3d
1273, 1277 (11th Cir. 2003); FTC v. Gill, 265 F.3d 944, 950 (9th
Cir. 2001).
\454\ Deception Policy Statement, supra note 453, at 171.
\455\ FTC v. Simeon Mgmt. Corp., 532 F.2d 708, 716 (9th Cir.
1976); FTC v. Pharmtech Research, Inc., 576 F. Supp. 294, 300
(D.D.C. 1983).
In some circumstances, silence also may be deceptive. Silence
associated with the appearance of a particular product, the
circumstances of a specific transaction, or ordinary consumer
expectations represents that the product is reasonably fit for its
intended purpose. Deception Policy Statement, supra note 453, at
170. For example, in connection with the sale of a car, consumers
assume in the absence of other information that the car can go fast
enough for ordinary use on a freeway. If the car cannot, the
seller's silence on this point may have been deceptive.
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a. Need for Debt Relief-Specific Disclosures
Commenters generally supported the proposed rule's approach of
requiring debt relief-specific disclosures in connection with the
telemarketing of debt relief services or programs. NAAG supported the
proposed disclosures, stating that although they alone might not be
sufficient to curb abusive conduct by debt relief providers, consumers
are entitled to the basic information that the proposed disclosures
provide.\456\ A coalition of 19 consumer advocacy groups ``strongly''
supported the proposed disclosures, noting that they will ensure that
consumers understand how debt relief services work and whether the
program will satisfy their needs.\457\
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\456\ NAAG (Oct. 23, 2009) at 11.
\457\ CFA at 2-3, 20; see also MN AG at 2.
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Most debt relief providers also supported the proposed
disclosures.\458\ One debt relief industry trade association
recommended that the Rule require ``full and complete disclosure'' to
consumers of the risks of debt settlement before a consumer enters a
plan, noting that the FTC's proposed new disclosures were similar to
the model disclosures contained in trade association guidelines.\459\
Individual debt relief providers expressed support for the proposed
disclosures because consumers who fully understand all aspects of a
debt relief program are more likely to complete it successfully,\460\
and because the disclosures would make it more difficult for fraudulent
companies to operate.\461\
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\458\ FCS (Oct. 29, 2009) at 3; Able (Oct. 21, 2009) at 30;
CareOne at 4; CSA at 1; DS at 18; DMB (Oct. 29, 2009) at 5; DSA/ADE
at 1-2.
\459\ TASC (Oct. 26, 2009) at 15. TASC, however, objected to the
proposed disclosures on the ground that they were targeted primarily
to the risks of debt settlement and did not inform consumers
adequately of the risks of nonprofit credit counseling and
bankruptcy. Id. As explained above, the FTC does not have
jurisdiction to regulate the activities of bona fide nonprofit
credit counselors. Moreover, the Commission believes that the
revised debt relief-specific disclosures in the Final Rule
adequately address the most harmful conduct by debt relief
providers, including debt settlement providers, for-profit credit
counselors, and debt negotiators.
\460\ FCS (Oct. 29, 2009) at 3.
\461\ CSA at 1.
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A comment submitted by an association of credit counseling agencies
also supported the proposed disclosures for debt relief services.\462\
An individual nonprofit CCA commented that the proposed disclosures are
necessary to ensure that consumers understand that some of the money
they pay to the provider goes towards the provider's fees rather than
to pay creditors.\463\
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\462\ AICCCA at 2; see also CCCS CNY at 2 (full disclosures will
give consumers accurate information on which they can base their
financial decisions and possibly help consumers put money they would
have spent on debt relief toward more pressing bills).
\463\ GP (Oct. 22, 2009) at 1.
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b. Debt Relief-Specific Disclosures
As explained in the NPRM and in Section I above, consumers often do
not understand the mechanics of debt relief, making them more
susceptible to deception.\464\ The debt relief-specific disclosures are
intended to ensure that consumers have accurate information, thereby
enabling them to make informed purchasing decisions and that they are
not misled by the omission of key information. As modified in the Final
Rule and discussed herein, Sec. 310.3(a)(1) explicitly mandates that
all of the required disclosures be made ``[b]efore a customer consents
to pay for goods or services offered.'' Language added to the existing
Footnote 1 of the Rule clarifies that the provider must make the
required disclosures before the consumer enrolls in an offered
program.\465\
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\464\ TSR Proposed Rule, 74 FR at 42001.
\465\ 16 CFR 310.3(a)(1) & n.1.
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After review and analysis of the record, the Commission has adopted
three of the six proposed disclosures in the Final Rule, having
determined that the remaining three are duplicative or likely to
detract from the efficacy of the required disclosures. It also has
adopted one additional disclosure regarding the use of dedicated bank
accounts.
The next three sections discuss the four disclosures adopted in the
Final Rule.
(1) Sections 310.3(a)(1)(viii)(A) and (B)
The proposed rule would have required telemarketers of debt relief
services to make the following disclosures:
the amount of time necessary to achieve the represented
results and, if the service entails making settlement offers\466\ to
customers' creditors, the specific time by which the provider will make
a bona fide settlement offer to each creditor or debt collector;\467\
and
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\466\ A settlement offer is an offer to extinguish an unsecured
debt for less than what the debtor owes the creditor or debt
collector. See Weinstein (Oct. 26, 2009) at 6 (see attached
Weinstein paper at 5).
\467\ TSR Proposed Rule, 74 FR at 42019. In so doing, the
provider would have to disclose the fact that negotiations will not
take place with all creditors simultaneously but rather
sequentially, if such is the case. The record supports disclosure of
this information because consumers may not understand the amount of
time necessary to achieve the represented results or that there may
be prerequisites to obtaining debt relief. See CFA (Grant), Tr. at
175.
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to the extent that the service may include a settlement
offer to any of the customer's creditors or debt collectors, the amount
of money, or the percentage of each outstanding debt, that the customer
must accumulate before the provider will make a bona fide settlement
offer to each creditor or debt collector.\468\
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\468\ TSR Proposed Rule, 74 FR at 42019.
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These disclosures were designed to prevent deception by ensuring
that consumers understand the time and monetary commitment necessary
for the plan to succeed, and thus the risks involved in enrolling in a
debt relief program in which the provider may not begin to negotiate
relief for months or even years.
The Commission received several comments on these two disclosures.
Several commenters and forum participants recommended modifying the
disclosures to allow estimates or projections of the time for program
completion and the amount a consumer would have to save.\469\ One
industry trade association explained that it likely would be impossible
for a provider to state with certainty the time by which it will
achieve settlements or the amount of money the consumer would have to
accumulate before the provider made a settlement offer.\470\ Similarly,
a debt relief provider objected to the time disclosure in proposed
Sec. 310.3(a)(1)(viii)(A) because it failed to account for market
conditions that are ``beyond anyone's range of knowledge other than a
best guess.''\471\ Other commenters echoed these views.\472\
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\469\ Loeb (Mallow), Tr. at 204; TASC (Housser), Tr. at 202; CFA
(Grant), Tr. at 207; USOBA (Oct. 26, 2009) at 15-17; FCS (Oct. 29,
2009) at 3.
\470\ USOBA (Oct. 26, 2009) at 15-16; see also FCS (Oct. 29,
2009) at 3; DS at 19 (``the exact amount a given creditor will
settle a debt account for and the precise time the same will be
accomplished varies.'').
\471\ Able (Oct. 21, 2009) at 26.
\472\ FCS (Oct. 29, 2009) at 3 (``We support these disclosures,
in principle, but recommend revision to the extent they would
require a company to determine in advance the timing and order in
which each specific debt will be settled. Creditors vary in their
willingness to make concessions, and their position often changes
with time. Debt settlement firms must have the latitude to make the
most favorable settlements for a client, and this requires
flexibility to determine the order and timing of settlements.'');
see CRN (Oct. 8, 2009) at 6 (``Amounts and terms of settlement
fluctuate and are hard to predict, so setting a predetermined time
or amount of settlement might prevent debt relief providers from
getting consumers the best settlement as quickly as possible. Such a
result could occur if a creditor unexpectedly makes a settlement
offer to a consumer that, if accepted, would disrupt the previously
disclosed schedule of time and amount of settlement for the other
enrolled debts.''); MD (Oct. 26, 2009) at 29-30.
One provider objected to the money accumulation proposed
disclosure (Sec. 310.3(a)(1)(viii)(B)) because programs that allow
for payments over time do not require accumulation of the entire
amount needed to settle the debt. Able (Oct. 21, 2009) at 26. The
Commission believes that the disclosure is warranted even if the
consumer only has to accumulate a lesser amount, since that amount
still may be substantial, especially for consumers who are in
financial distress.
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[[Page 48493]]
Based on the record, the Commission has determined to require these
two disclosures, but is clarifying that providers may make a good faith
estimate of the necessary time and money commitments entailed in the
service. Providers must have a reasonable basis to support their
estimates. With respect to the paragraph (A) disclosure, the provider's
estimate of the amount of time necessary to achieve the represented
results should be based on the type of program or service offered, the
consumer's particular debts, and available historical data regarding
similarly-situated consumers' experiences with creditors. With respect
to the paragraph (B) disclosure, the provider should base its estimate
on its historical experience and other information indicating the
threshold amount of money that, if offered to the particular creditor,
is reasonably likely to result in a successful settlement that is
consistent with results represented by the provider.\473\ Providers
should keep consumers informed throughout the duration of the program
of any changes in creditor policies that may impact the projected time
or amount of money needed before completion.
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\473\ Thus, if a debt settlement provider expects that a
creditor will make an initial settlement offer for 95% of the debt
owed, but it knows that consumers historically settle debts with
that creditor for 60% after a certain amount of time has passed,
compliance with this provision requires disclosure of the estimated
time it would take and the amount of money the consumer would have
to accumulate before the 60% settlement offer is obtained.
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The Final Rule makes two modifications to the language of the
proposed rule to accomplish this clarification. Paragraph (A) in the
proposed rule would have required disclosure of ``the specific time by
which the debt relief service provider will make a bona fide settlement
offer.'' The Final Rule deletes the word ``specific,'' which could have
been read to require a time certain rather than a good faith
estimate.\474\ Paragraph (B) in the proposed rule required disclosure
of ``the specific amount of money or the percentage of each outstanding
debt that the customer must accumulate before the debt relief service
provider will make a bona fide settlement offer.'' Like the revision of
paragraph (A), the Final Rule deletes the word ``specific,'' which
could have been read to require a disclosure with certainty of the
amount of money or percentage of debt, rather than a good faith
estimate. As modified, these provisions will help ensure that consumers
are not deceived and have the information they need to make informed
decisions, while recognizing that certain information may only be
estimated at the time disclosure is required.
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\474\ The other disclosures required in subsections (A) and (B)
do not use the term ``specific.''
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(2) Section 310.3(a)(1)(viii)(C)
Section 310.3(a)(1)(viii)(C) of the Final Rule adopts the proposed
rule's requirement that debt relief providers whose programs entail
consumers not making timely payments to creditors disclose that the
program may affect the consumer's creditworthiness; may result in
continued collection efforts, including lawsuits; and may increase the
amount the consumer owes due to late fees and interest.\475\ The
adverse consequences of not paying creditors would be highly material
to reasonable consumers in deciding whether to purchase the service or,
if they do purchase it, whether to stop paying creditors. This
disclosure is especially important in the debt settlement context where
many consumers must choose between paying their creditors or saving
funds for possible settlements.\476\
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\475\ TSR Proposed Rule, 74 FR at 49019. In the proposed rule,
this was Sec. 310.3(a)(1)(viii)(E).
\476\ See CFA at 9.
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Debt settlement providers often encourage consumers to stop paying
creditors, or consumers stop on their own because they simply cannot
afford simultaneously to make monthly payments to their creditors, set
aside funds for settlements, and pay fees to the debt settlement
company.\477\ The record shows, however, that consumers' credit ratings
are harmed, often substantially, as a result of not making payments to
creditors.\478\ Lower credit scores raise the cost of obtaining credit
- or make it more difficult to obtain it at all.\479\ Another serious
and negative consequence that may result from a consumer's decision to
enter a debt relief plan in which he or she stops paying creditors is
the accrual of late fees or interest on the accounts, which can
significantly increase the consumer's ultimate obligation.\480\
Finally, if a consumer stops making payments, his likelihood of being
sued by creditors will increase. Indeed, even while a consumer is
enrolled in a debt relief program, creditors and debt collectors may
continue to make collection calls pending resolution of the consumer's
debts and may proceed with lawsuits and subsequent enforcement of any
judgments, such as through garnishment of wages.\481\ Disclosure of
these potentially serious negative consequences is necessary to prevent
deception and the consumer injury that arises from consumers enrolling
in debt relief plans and ceasing to pay creditors.\482\
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\477\ TSR Proposed Rule, 74 FR at 41995. See WV AG (Googel), Tr.
at 44-45.
\478\ See AFSA at 2; CFA at 18; CFA (Plunkett), Workshop Tr. at
102 (noting that the length of time it takes to achieve settlement,
combined with withheld payments, has a negative effect on
consumers); see also Fair Isaac Corp., Understanding Your FICO
Score, at 7 (noting that payment history typically is the most
important factor used to determine a consumer's FICO score),
available at (http://www.myfico.com/Downloads/Files/myFICO_UYFS_Booklet.pdf); see also TSR Proposed Rule, 74 FR at 42002.
\479\ In addition, as frequently noted by the Commission, a
consumer's credit score can impact the availability and/or terms of
a wide variety of benefits, including loans, employment, rental
property, and insurance. See, e.g., FTC, Need Credit or Insurance?
Your Credit Score Helps Determine What You'll Pay, available at
(http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm).
\480\ The Credit CARD Act of 2009 sets some limits on the fees
and penalties that credit card companies can charge delinquent
consumers. Pub. L. No. 111-24, Sec. 511(a)(1)&(2), 123 Stat. 1734
(May 22, 2009). That Act, however, does not prohibit default fees
and thus does not diminish the importance of this disclosure.
\481\ Third party collectors are governed by the FDCPA. 15
U.S.C. 1692a(6), 1692c. Creditors collecting their own debts are not
subject to the FDCPA, but are subject to Section 5 of the FTC Act.
\482\ TSR Proposed Rule, 74 FR at 49002; see JH (Oct. 24, 2009)
at 6.
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The Commission received comments both supporting and opposing this
proposed disclosure. The American Bankers Association filed a comment
in support, arguing that the disclosure will help consumers understand
the increased risks to their creditworthiness if they stop
communicating with their creditors.\483\ TASC also voiced support, but
expressed concern that the disclosure was linked primarily to debt
settlement programs. TASC therefore recommended that the Commission
require bankruptcy providers to make the same disclosure about the
effect of
[[Page 48494]]
nonpayment on creditworthiness.\484\ The Commission notes that
bankruptcy providers who are telemarketers of debt relief services
would be subject to the TSR. Thus they would be required to make the
TSR's disclosures unless they have a face-to-face meeting with the
client.\485\ Moreover, consumers seeking to file bankruptcy must
participate in pre-filing credit counseling with a certified credit
counselor.\486\ These credit counselors generally inform consumers that
bankruptcy negatively impacts their credit rating, remains on their
credit report for ten years, and may make obtaining credit in the
future more difficult and expensive.
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\483\ ABA at 4.
\484\ TASC (Oct. 26, 2009) at 15.
\485\ See 16 CFR 310.6(b)(3) (exempting ``[t]elephone calls in
which the sale of goods or services or charitable solicitation is
not completed, and payment or authorization of payment is not
required, until after a face-to-face sales or donation presentation
by the seller or charitable organization, provided, however, that
this exemption does not apply to the requirements of Sec. Sec.
310.4(a)(1), (a)(7), (b), and (c)'').
\486\ 11 U.S.C. 109(h); AICCCA at 1.
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The Final Rule requires these disclosures to be made only ``to the
extent that any aspect of the debt relief service relies upon or
results in the customer failing to make timely payments to creditors or
debt collectors.'' In general, DMPs do not rely upon the customer
failing to make timely payments to creditors or debt collectors. Thus,
this disclosure typically will not apply to debt relief providers
offering DMPs.
One debt relief provider objected to the required disclosures on
the basis of a ``pilot survey'' it conducted of its customers that
purported to show that the customers' FICO scores were higher at
completion of the program than at enrollment. Thus, it argued, the
creditworthiness disclosure would be inaccurate.\487\ The survey,
however, only included 12 consumers, and the comment provided no
information indicating that these consumers were representative of the
universe of consumers enrolled in the program.\488\ Moreover, the
survey only measured FICO scores at enrollment and completion,
providing no information regarding whether consumers' scores
deteriorated during the time that they were enrolled in the debt
settlement program and, in many cases, not paying their creditors. For
these reasons, the Commission does not consider the survey to be
reliable or probative.
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\487\ MD (Oct. 26, 2009) at 30.
\488\ Id.; MD (Mar. 22, 2010) at E-2.
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The Commission addressed in the NPRM some of the concerns with this
disclosure that were raised by the comments. Specifically, one debt
relief provider objected to the disclosure because it relates to
actions taken by creditors against consumers that are not directly
caused by the consumer's enrollment in the debt relief program.\489\ In
the NPRM, the Commission acknowledged that some consumers considering
debt relief already have stopped making payments and may be subject to
late fees or other charges regardless of whether they enroll in the
program.\490\ The record shows, however, that in a significant number
of instances, consumers are induced by the provider's instructions not
to make payments that they otherwise would have made.\491\ This is
particularly true for debt settlement services.\492\ Moreover, even as
to those consumers who already have ceased paying their creditors, the
provider's instruction may persuade them not to resume payments. A
disclosure about the adverse consequences of not paying creditors is
therefore highly material to many consumers' purchase or use decisions.
For these reasons, the Final Rule includes Sec. 310.3(a)(1)(viii)(C)
as proposed.
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\489\ See Able (Oct. 21, 2009) at 26. The commenter noted,
however, that his company currently makes this disclosure to
consumers.
\490\ TSR Proposed Rule, 74 FR at 42002.
\491\ The stop-payment instruction is especially persuasive in
those instances when the provider misrepresents or obscures the fact
that some or all of the consumer's payments to the provider are
going towards its fees, rather than the consumer's debts. See SBLS
at 4; FTC v. Debt-Set, No. 1:07-cv-00558-RPM, Mem. Supp. Mot. T.R.O.
at 8-9 (D. Colo. Mar. 20, 2007) (``Defendants lead consumers to
conclude that, once enrolled, the Defendants in turn will disburse
consumers' monthly payments to the appropriate creditors every
month.''); Illinois v. SDS West Corp., No. 09CH368 (Cir. Ct. of 7th
Jud. Dist., Sangamon Cty. 2009); Illinois v. Debt Relief USA, Inc.,
No. 09CH367 (Cir. Ct. of 7th Jud. Dist., Sangamon Cty. 2009); North
Carolina v. Knight Credit Servs., Inc. (Sup. Ct. Wake Cty. 2004).
\492\ Supra note 73.
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(3) New Section 310.3(a)(1)(viii)(D)
Section 310.3(a)(1)(viii)(D) of the Final Rule imposes an
additional disclosure requirement on debt relief providers who request
or require the customer to place money for its fee and for payment to
customers' creditors or debt collectors, in a dedicated bank account at
an insured financial institution. These providers must disclose that
the consumer owns the funds held in the account and may withdraw from
the debt relief service at any time without penalty and receive all
funds currently in the account. This information would be highly
material to reasonable consumers in deciding whether to enroll in the
service; the right to cancel and receive a refund is a key right for
consumers under the rule, but it is only meaningful if consumers know
that they have the right.\493\
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\493\ See Summary of Communications (June 16, 2010) at 2
(meeting with consumer groups).
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2. Proposed Disclosures Not Adopted in the Final Rule
After reviewing the record, and as explained below, the Commission
has decided not to adopt in the Final Rule three of the disclosures
included in the proposed rule, because they are largely duplicative or
likely to detract from the efficacy of the required disclosures. The
omitted disclosures are: (1) that not all creditors will accept a
reduction in the amount of debt owed; (2) that creditors may pursue
collection efforts pending the completion of the debt relief services;
and (3) that any savings from the debt relief program may be taxable
income.
a. Proposed Section 310.3(a)(1)(viii)(C)
Section 310.3(a)(1)(viii)(C) of the proposed rule would have
required telemarketers of debt relief services to disclose that ``not
all creditors or debt collectors will accept a reduction in the
balance, interest rate, or fees a customer owes such creditor or debt
collector.''\494\ USOBA supported this disclosure, stating it is one of
the disclosures that USOBA encourages its members to make.\495\ Some
creditors refuse to work with third-party debt relief providers in
certain situations, or not all,\496\ and many consumers may not realize
this is the case. It is difficult to predict with certainty, however,
the circumstances under which a particular creditor will or will not be
willing to negotiate the debt with a third party.\497\ In fact, even
those creditors that claim not to work with debt relief providers may
do so in certain situations.\498\ One commenter explained that, while
some creditors
[[Page 48495]]
might refuse to negotiate a debt balance in the early stages of
delinquency, rarely would they continue to do so as the account becomes
increasingly delinquent. This is the case because the creditor
typically collects more from negotiation with a debt relief program
than through other alternatives.\499\ One debt relief provider
commented that it is very rare that an account cannot be negotiated,
especially after the creditor charges off the debt and sells it to a
debt buyer who, in turn, initiates its own collection efforts.\500\
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\494\ TSR Proposed Rule, 74 FR at 42019.
\495\ USOBA (Oct. 26, 2009) at 14.
\496\ TSR Proposed Rule, 74 FR at 42002; see, e.g., CFA
(Plunkett), Workshop Tr. at 101 (``[T]here is no guarantee . . . or
reasonable chance of a guarantee of a reduction in the amount of
debt owed by consumers who meet required conditions. In fact, some
creditors insist that they won't settle.''); American Express
(Flores), Tr. at 164 (``[O]ur policy is not to . . . accept
settlements from debt settlement companies.''); see also, e.g., Phil
Britt, Debt Settlement Companies Largely Ignored by Banks, Inside
ARM, Nov. 3, 2008(noting statement by Discover Financial Services
spokesman that ``[w]e choose not to work with debt settlement
companies''), available at (http://www.insidearm.com/go/arm-news/debt-settlement-companies-largely-ignored-by-banks).
\497\ MD (Oct. 26, 2009) at 30; FCS (Oct. 29, 2009) at 3; ABA at
2; CRN at 6; CFA (Grant), Tr. at 175.
\498\ See USOBA (Ansbach), Tr. at 75-76 (``[O]ne of our largest
members had a financial institution [that allegedly does not work
with debt settlement companies] call up and say, we would like to
scrub our financial data against yours and offered [settlements of]
cents on the dollar.'').
\499\ Able (Oct. 21, 2009) at 26.
\500\ CRN at 6.
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In sum, the record indicates that many creditors and debt
collectors settle at least some debts for some consumers, and creditor
policies and practice may change depending on the length and severity
of the delinquency, other features of the debt, or external factors
such as the creditor's need for liquidity.\501\ Accordingly, the
usefulness of a general disclosure about the fact that not all
creditors will negotiate debts would vary from case to case. In
addition, eliminating this disclosure from the Final Rule reduces the
amount of information consumers must absorb, thus making the remaining
disclosures more effective, and lessens the burden on industry.\502\
Moreover, the Final Rule prohibits any misrepresentation by a debt
relief provider relating to whether creditors or debt collectors will
modify a debt.\503\ For these reasons, the Commission has decided not
to adopt proposed Sec. 310.3(a)(1)(viii)(C)).
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\501\ USOBA (Ansbach), Tr. at 75-76.
\502\ Consumer research shows that consumers' ability to process
information and make rational choices may be impaired if the
quantity of the information is too great. See generally, Byung-Kwan
Lee & Wei-Na Lee, The Effect of Information Overload on Consumer
Choice Quality in an On-Line Environment, 21(3) Psychology &
Marketing 159, 177 (Mar. 2004); Yu-Chen Chen et al., The Effects of
Information Overload on Consumers' Subjective State Towards Buying
Decision in the Internet Shopping Environment, 8(1) Electronic
Commerce Research and Applications 48 (2009).
\503\ 16 CFR 310.3(a)(2)(x).
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b. Proposed Section 310.3(a)(1)(viii)(D)
Proposed Sec. 310.3(a)(1)(viii)(D) would have required debt relief
providers to disclose ``that pending completion of the represented debt
relief services, the customer's creditors or debt collectors may pursue
collection efforts, including initiation of lawsuits.''\504\ This
information could be valuable to consumers considering whether to
purchase the service and whether to stop paying their creditors.\505\
However, another of the proposed disclosures - that, if applicable, the
customer may be sued by creditors or debt collectors - essentially
makes the same point: enrollment in a debt relief program does not
prevent creditors and collectors from continuing to pursue the debtor.
Thus, the Commission has decided not to adopt proposed Sec.
310.3(a)(1)(viii)(D).\506\
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\504\ Id. at 42019.
\505\ See AFSA at 2; ABA at 4; TASC (Oct. 26, 2009) at 15.
\506\ TSR Proposed Rule, 74 FR at 49019. Some commenters
suggested additional disclosures related to lawsuits, e.g. that the
longer a consumer is enrolled in a debt relief program the more
likely the consumer is to be sued and possibly have wages or bank
accounts garnished. CRN at 6; MN LA at 1. The Commission believes
that the disclosure in Section 310.3(a)(1)(viii)(C) is adequate to
inform consumers of the most common risks involved in debt relief,
such as the possibility of continuing collection efforts and
lawsuits.
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c. Proposed Section 310.3(a)(1)(viii)(F)
Proposed Sec. 310.3(a)(1)(viii)(F) would have required that a
telemarketer of debt relief services disclose ``that savings a customer
realizes from use of a debt relief service may be taxable
income.''\507\ It is likely that many consumers do not understand this
fact, which would limit the financial benefits of the service.\508\
This provision generated only a small number of comments. According to
one commenter, several of his clients claimed that they would not have
enrolled in the debt relief program if they had been aware of the tax
consequences.\509\ Consumer advocates also supported this
disclosure.\510\
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\507\ TSR Proposed Rule, 74 FR at 42019.
\508\ IRS, Publication 525 - Taxable and Nontaxable Income 19-20
(Feb. 19, 2009) (``Generally, if a debt you owe is canceled or
forgiven, other than as a gift or bequest, you must include the
canceled amount in your income.''), available at (http://www.irs.gov/pub/irs-pdf/p525.pdf).
\509\ RDRI at 5.
\510\ CFA at 20. See CU (Hillebrand), Tr. at 165-66; see also
DSUSA (Craven), Workshop Tr. at 91 (``Amounts greater than $600 in
savings obtained through a settlement may be reported to the IRS.
Again, this has to be disclosed to consumers.''); AMCA (Franklin),
Workshop Tr. at 223 (``Unless they get that early disclosure that
they may have the tax consequence, they may opt for the - what
sounds to be the better of the two, which would be the debt
settlement, which might not be the best solution for them. So, there
has to be some sort of a disclosure that says look, this is it. If
you're going to settle a debt for greater than $600, you're going to
have an IRS tax consequence this year.'').
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Other commenters objected to this proposed disclosure. One asserted
that the information is not relevant to all consumers, such as those
who are insolvent before or at the time of the forgiveness of
debt.\511\ NACCA commented that this disclosure is not accurate for
consumers who enroll in a DMP, which generally does not involve debt
forgiveness and thus would not result in a tax liability.\512\
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\511\ Able (Oct. 21, 2009) at 26; see also Franklin at 22 (``a
large portion of debt settlement clients are not actually
solvent''); IRS, Publication 525 - Taxable and Nontaxable Income 20
(Feb. 19, 2009) (``Do not include a canceled debt in your gross
income . . . [if] the debt is cancelled when you are insolvent.''),
available at (http://www.irs.gov/pub/irs-pdf/p525.pdf).
\512\ NACCA at 3.
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After reviewing the record, the Commission has decided not to adopt
proposed Sec. 310.3(a)(1)(viii)(F) as part of the Final Rule. As noted
by some of the commenters, in many cases this disclosure might not be
accurate. Further, as is true with the other two proposed disclosures
that are omitted from the Final Rule, this disclosure would add
verbiage and complexity to the information consumers receive, and
thereby potentially diminish the effectiveness of the more important
disclosures.\513\
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\513\ The Commission encourages debt relief providers to advise
consumers about the tax consequences in those cases where such
consequences are likely to exist.
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3. Application of Section 310.3(a)(1) to Debt Relief Services: General
Disclosure Obligations
Under the Final Rule, debt relief service providers that promote
their services through inbound or outbound telemarketing are subject
both to the debt relief-specific disclosure requirements and the
existing disclosure and other provisions of the TSR. Consumer advocacy
groups noted the importance of applying the TSR's pre-existing
disclosure requirements to the telemarketing of debt relief
services.\514\ Three of those pre-existing disclosures would provide
critical information for consumers in the context of debt relief
services: the total cost of the services; material restrictions,
limitations, or conditions on purchasing, receiving, or using the
services; and the seller's refund policy.\515\
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\514\ CFA at 20.
\515\ See 16 CFR 310.3(a)(1)(i)-(iii).
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Forum participants agreed that a total cost disclosure is important
in the sale of debt relief services. This is especially true for debt
settlement plans, for which the costs are often substantial and
complex.\516\ Similarly, in the sale of debt management plans,
disclosure of total costs is crucial to ensure that consumers are not
misled about the amount of those costs.\517\
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\516\ According to TASC, the median fee under the predominant
debt settlement model calls for a consumer to pay the equivalent of
14% to 18% of the debt enrolled in the program. Using this formula,
a consumer with $20,000 in debt would pay between $2,800 and $3,600
for debt settlement services. See USOBA (Keehnen), Tr. at 209.
\517\ See JH (Jan. 12, 2010) at 2. In the FTC cases brought
against sham nonprofit credit counselors, consumers allegedly were
misled not only as to the total costs, but also that the fees were
``voluntary contributions'' used to offset the operating expenses of
the allegedly nonprofit service provider. See, e.g., FTC v.
AmeriDebt, Inc., No. PJM 03-3317 (D. Md. filed Nov. 19, 2003)
(alleging that, ``[i]n response to the question, `How much will it
cost me to be on the Debt Management Program,' AmeriDebt's website .
. . stated, `Due to the fact that AmeriDebt is a nonprofit
organization, we do not charge any advance fees for our service. We
do request that clients make a monthly contribution to our
organization to cover the costs involved in handling the accounts on
a monthly basis.''' In fact, the defendants allegedly retained each
consumer's first monthly payment as a fee without notice to the
consumer.).
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[[Page 48496]]
Several forum participants stated that at least some debt service
providers currently disclose costs to consumers even when they are not
required to do so.\518\ Often, however, fee disclosures made in the
telemarketing call are contradicted by the written contract.\519\ Many
providers say little, if anything, about fees or misrepresent the
amount and/or timing of fee payments.\520\ Broadcast advertisements and
websites offering debt relief services typically are silent as well
about how much a consumer must pay for the advertised service.\521\ The
complexity of the fee structure used by many debt relief providers
exacerbates the potential for consumer confusion or deception.\522\ As
a result, consumers often enroll in programs under a false impression
or are confused about what they have to pay or when they have to pay
it. Bringing inbound calls within the coverage of Sec. 310.3(a)(1)
will help to diminish this problem. Furthermore, while Sec.
310.3(a)(1) only requires disclosure of the total fee, the failure to
clearly and conspicuously disclose material payment terms, such as the
fees for individual settlements, may mislead consumers and thus
constitutes a deceptive practice prohibited by Section 5 of the FTC
Act.
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\518\ See USOBA (Keehnen), Tr. at 209.
\519\ See, e.g., FTC v. Connelly, No. SA CV 06-701 DOC (RNBx),
Opp. to FTC Mot. Summ. J. at 12 (C.D. Cal. filed Aug. 3, 2006)
(alleging that defendant failed to disclose to consumers that they
would have to pay 45% of their total program fees upfront, before
any payments would be made to the consumer's creditors;
telemarketing claims contradicted by subsequent written
disclosures). Even if true, subsequent disclosures generally are not
sufficient to correct misrepresentations made in the initial
communications. Resort Car Rental Sys., Inc. v. FTC, 518 F.2d 962,
964 (9th Cir. 1975) (citing Exposition Press, Inc. v. FTC, 295 F.2d
869 (2d Cir. 1961), cert. denied, 370 U.S. 917, 82 S.Ct. 1554, 8
L.Ed.2d 497; Carter Products, Inc. v. FTC, 186 F.2d 821 (7th Cir.
1951)); Deception Policy Statement, supra note 453, at 182;
Removatron Int'l Corp. v. FTC, 884 F.2d 1489, 1497 (1st Cir. 1989)
(advertisement was deceptive despite written qualification); FTC v.
Gill, 71 F. Supp. 2d 1030, 1044 (C.D. Cal. 1999) (advertisement was
deceptive even though a disclaimer in a written contract later
signed by consumers contained accurate, non-deceptive information).
\520\ Supra notes 79, 362; see also Loeb (Mallow), Tr. at 206.
\521\ As noted above, supra note 223, FTC staff found that only
14 of 100 debt settlement websites reviewed disclosed the specific
fees that a consumer will have to pay upon enrollment in the
service. An additional 34 out of the 100 websites mentioned fees but
did not provide specific fee amounts.
\522\ The Commission previously has explained compliance
obligations when marketing installment contracts, some of which are
particularly applicable to debt relief services. Specifically, in an
earlier amendment to the TSR, the Commission noted that ``it is
possible to state the cost of an installment contract in such a way
that, although literally true, obfuscates the actual amount that the
consumer is being asked to pay.'' TSR Proposed Rule, 67 FR 4492,
4502 (Jan. 30, 2002). The Commission went on to state that ``[t]he
Commission believes that the best practice to ensure the clear and
conspicuous standard is met is to do the math for the consumer
wherever possible. For example, where the contract entails 24
monthly installments of $8.99 each, the best practice would be to
disclose that the consumer will be paying $215.76. In open-ended
installment contracts, it may not be possible to do the math for the
consumer. In such a case, particular care must be taken to ensure
that the cost disclosure is easy for the consumer to understand.''
Id. at n.92. (emphasis supplied, internal quotations omitted).
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In addition to fees, Sec. 310.3(a)(1)(ii) of the TSR requires
providers to disclose ``[a]ll material restrictions, limitations, or
conditions to purchase, receive, or use the goods or services that are
the subject of the sales offer.''\523\ Two common conditions that
commenters suggested should be disclosed are (1) the consumer must have
a minimum amount of debt to be eligible,\524\ and (2) the debt relief
services will extend only to unsecured debt, if that is the case.\525\
The Commission believes both of these conditions are material and must
be disclosed under the TSR.
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\523\ 16 CFR 310.3(a)(1)(ii).
\524\ DMB (Oct. 29, 2009) at 5-6.
\525\ See MN LA (Elwood), Tr. at 251. Another commenter proposed
modifying Sec. 310.3(a)(1)(ii) to require that only ``reasonable''
material restrictions be disclosed. Able (Oct. 21, 2009) at 25. The
definition of materiality - ``likely to affect a person's choice of,
or conduct regarding, goods or services'' - is a well established
limiting principle codified in the Commission's Deception Policy
Statement, supra note 453; see also TSR Final Rule, 60 FR at 43845
(citing In re Thompson Med. Co., 104 F.T.C. 648 (1984), aff'd, 791
F.2d 189 (D.C. Cir. 1986), cert. denied, 479 U.S. 1086 (1987)). The
Commission declines to change it in this Rule.
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Section 310.3(a)(1)(iii) of the TSR requires that if the seller has
a policy of not making refunds, cancellations, exchanges, or
repurchases, it must disclose this policy to consumers.\526\ Further,
if the seller or telemarketer makes a representation about a refund
policy, it must state all material terms and conditions of the policy.
Application of this provision to providers of debt relief services is
important in light of the record evidence that many consumers either
are not apprised that refunds are available or are misled about key
limitations and conditions of the refund policy.\527\
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\526\ 16 CFR 310.3(a)(1)(iii). This requirement reflects the
Commission's determination that a seller's unwillingness to provide
refunds is a material term about which a consumer must be informed
before paying for goods or services.
\527\ See WV AG (Googel), Tr. at 84; CFA at 9; see also, e.g.,
FTC v. Select Pers. Mgmt., Inc., No. 07-CV-0529 (N.D. Ill. Am.
Compl. filed Aug. 18, 2007); FTC v. Connelly, No. SA CV 06-701 DOC
(RNBx) (C.D. Cal. Am. Compl. filed Nov. 27, 2006); FTC v. Debt
Solutions, Inc., No. 06-0298 JLR (W.D. Wash. filed Mar. 6, 2006);
FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 GAF JTLx (C.D.
Cal. filed Feb. 3, 2004); FTC v. Debt Mgmt. Found. Servs., No. 04-
1674-T-17-MSS (M.D. Fla. filed July 20, 2004).
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4. Timing of Required Disclosures
The TSR specifies the point in the transaction at which disclosures
must be made. The pre-existing TSR required all disclosures to be made
``[b]efore a customer pays for goods or services offered.''\528\ The
proposed rule would have modified this language by adding the phrase
``and before any services are rendered.'' In the Final Rule, the
Commission has determined to modify the TSR language in a different
manner from the proposed rule. Specifically, Sec. 310.3(a)(1) of the
Final Rule now provides that all required disclosures must be made
``[b]efore a customer consents to pay.'' This formulation more closely
comports with the Commission's intent in the original language to
trigger the disclosure requirement before any agreement is executed,
when the information is most useful, rather than only after the
consumer has made a payment on that agreement.\529\ Moreover, the
phrase ``consents to pay'' encompasses the conduct that the Commission
has previously identified as triggering the disclosure requirement
under the pre-existing TSR.\530\ Under the Final Rule, the disclosures
must be made before any act or communication that signifies the
consumer's consent to pay, such as sending full or partial payment;
providing credit card, bank account or other billing information,
stating agreement to a transaction, or invoking an electronic process
used to electronically sign an agreement. This change applies to all
disclosures required by the TSR, and not just those
[[Page 48497]]
specific to debt relief services. In the case of debt relief services,
a footnote added to the Final Rule clarifies that the provider must
make the required disclosures before the consumer enrolls in an offered
program. Thus, debt relief providers must make the disclosures at the
time the provider is marketing the service and before the consumer
signs an enrollment contract or otherwise agrees to enroll, and not at
the time the consumer executes a debt relief agreement pursuant to the
advance fee ban provision.
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\528\ 16 CFR 310.3(a)(1).
\529\ In the SBP to its TSR amendments in 2003, the Commission
interpreted the original TSR language to mean that telemarketers
must make required disclosures ``[b]efore a seller or telemarketer
obtains a consumer's consent to purchase, or persuades a consumer to
send any full or partial payment,'' i.e., before the agreement is
executed. TSR Amended Rule, 68 FR at 4599 (citing the original
Rule's TSR Compliance Guide); see also Loeb (Mallow), Tr. at 212-13
(``the FTC law of [when a company must make disclosures under the
TSR] is pretty clear, it has to be prior to contracting.''); CFA at
20.
\530\ See TSR; Final Amended Rule, 68 FR at 4599 (disclosures
must be made ``[b]efore a seller or telemarketer obtains a
consumer's consent to purchase, or persuades a consumer to send any
full or partial payment'').
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5. Recommended Additional Changes to the Disclosure Provisions Not
Adopted in the Final Rule
Commenters and forum participants recommended several additional
modifications to the proposed disclosures that the Commission has
decided not to adopt. First, several consumer advocates proposed that
the Final Rule require debt relief providers to disclose their dropout
rate, i.e., the percentage of consumers who enroll in a program but
drop out before completing it.\531\ The Commission agrees that the
dropout rate of a particular program is likely to be valuable
information for consumers considering enrollment in that program. The
Commission has concluded, however, that requiring disclosure of dropout
rates is unnecessary and would be difficult to implement. As discussed
in detail in Section III.E.b, providers making savings claims must use
a calculation that takes into account all of the provider's customers,
including those who dropped out, in order for the claim to be truthful
and non-deceptive. In addition, there is no single defined way to
calculate a dropout rate, and any disclosure requirement would have to
be very prescriptive in specifying the formula the provider would have
to use to calculate the rate, including all of the different variables
that must be factored in.\532\
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\531\ See NACCA (Keiser), Tr. at 217-18; CU (Hillebrand), Tr. at
218-19; QLS at 5; see also CFA (Grant), Tr. at 218 (a dropout rate
is very important, especially if success claims are permitted and
there is no advance fee ban in place).
\532\ Among other things, the rule would have to identify the
conditions under which a consumer would be considered to have
dropped out, e.g., at what point the consumer would be deemed to
have completed, or not completed, the program. This could be a
difficult determination in that many debt relief services involve
payments - and services - that take place over time. Thus, for
example, if a consumer terminates a debt settlement program after
80% of his debts were settled, should he be considered a dropout?
The rule also would have to account for new entrants into the market
that would lack data on which to calculate a drop out rate. Without
standardization of all of these factors, consumers could not compare
the dropout rates of different providers.
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Second, a commenter recommended that the Rule require that
disclosures be in writing to allow consumers additional time to
consider their decision, rather than immediately enrolling in a program
over the phone.\533\ Two forum participants, on the other hand,
recommended against requiring written disclosures, asserting that they
would come too late in the consumer's decision- making process\534\ and
noting that consumers often sign documents with written disclosures
they do not understand.\535\
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\533\ CRN at 5; see NACCA at 2.
\534\ See CU (Hillebrand), Tr. at 211.
\535\ See SBLS (Tyler), Tr. at 214.
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The Final Rule does not specify the precise manner or mode in which
disclosures must be made.\536\ The Commission has determined that it is
unnecessary to require that disclosures be in writing, but notes that
they must be made in a ``clear and conspicuous'' manner, prior to the
time that the consumer enrolls in the service.\537\ The Commission
concludes that these requirements, in conjunction with the advance fee
ban, will be adequate to protect consumers of debt relief services from
deceptive or abusive practices.
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\536\ As stated earlier, after-the-fact written disclosures do
not cure deceptive claims made earlier in the transaction. See supra
note 519.
\537\ 16 CFR 310.3(a)(1). If the provider markets to consumers
in a language other than English, the disclosures must be provided
in the language the provider is using for the marketing, in order to
meet the clear and conspicuous requirement. See 16 CFR 14.9 (foreign
language disclosures in advertising); 16 CFR 308.3(a)(1) (foreign
language disclosures under Pay Per Call Rule); 16 CFR 429.1(a)
(foreign language disclosure of right to cancel door-to-door sales);
16 CFR 455.5 (Spanish language version of FTC's used car
disclosures); 16 CFR 610.4(a)(3)(ii) (foreign language disclosures
in marketing free credit reports).
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Commenters and forum participants recommended that the Commission
adopt a variety of additional disclosures, including, among others: (1)
identifying contact and other background information about the
provider;\538\ (2) a list of the consumer's debts to be included in the
program;\539\ (3) a statement that ``other debt relief options may be
more appropriate for the consumer;'' \540\ (4) a statement that
consumers will not achieve settlement results until they have
accumulated sufficient funds;\541\ (5) a notice to consumers when they
are collecting funds for debt settlements at a rate more accelerated
than a pro rata arrangement;\542\ (6) the percentages of clients who
complete the program after 39 months and who file for bankruptcy after
paying fees to a debt relief provider;\543\ (7) the percentage of
settlements consummated after charge off;\544\ (8) annual retention
rates;\545\ (9) the length of time the provider has been
operating;\546\ and (10) the number of complaints and lawsuits filed
against the company over the prior three years.\547\ The Commission has
declined to adopt any of these additional disclosures. The disclosures
required in the Final Rule will provide consumers with the most
important material information they need to avoid deception and make
well-informed choices. Adding more disclosures would risk overshadowing
more important information and place a potentially unnecessary burden
on providers.
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\538\ NFCC at 10-11, RDRI at 6.
\539\ NFCC at 10-11.
\540\ CareOne at 7; see also NFCC at 14.
\541\ MD (Oct. 26, 2009) at 33, 35.
\542\ NACCA at 3-4.
\543\ RDRI at 6.
\544\ Id.
\545\ Id.
\546\ Id.
\547\ Id.
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6. Effective Date
This provision will be effective September 27, 2010. The Commission
expects prompt compliance with this provision, as it ensures that
consumers receive basic information about the advertised services.
E. Sections 310.3(a)(2) & 310.3(a)(4): Misrepresentations
The Final Rule supplements the existing TSR prohibitions against
misrepresentations with a provision specifically intended to target
deceptive practices by debt relief service providers.\548\ As stated
above, an act or practice is deceptive if: (1) there is a
representation or omission of information that is likely to mislead
consumers acting reasonably under the circumstances; and (2) that
representation or omission is material to consumers.\549\
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\548\ The Final Rule does not change any of the existing TSR
prohibitions on misrepresentations.
\549\ Deception Policy Statement, supra note 453, at 174-83.
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The new provision prohibits sellers or telemarketers of debt relief
services from making misrepresentations regarding any material aspect
of any debt relief service and provides several illustrative examples,
including misrepresentations of:
the amount of money or the percentage of the debt amount
that a customer may save by using such service;
the amount of time necessary to achieve the represented
results;
the amount of money or the percentage of each outstanding
debt that
[[Page 48498]]
the customer must accumulate before the provider will initiate attempts
with the customer's creditors or debt collectors or make a bona fide
offer to negotiate, settle, or modify the terms of the customer's debt;
the effect of the service on a customer's
creditworthiness;
the effect of the service on the collection efforts of the
customer's creditors or debt collectors;
the percentage or number of customers who attain the
represented results; and
whether a service is offered or provided by a nonprofit
entity.
This provision is largely unchanged from proposed Sec.
310.3(a)(2)(x) of the proposed rule.\550\
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\550\ The final provision contains only four minor revisions.
First, it corrects two typographical errors by inserting the words
``or'' and ``the'' into the prohibition against misrepresenting
``the amount of money or the percentage of each outstanding debt
that the customer must accumulate before the provider of the debt
relief service will initiate attempts with the customer's creditors
or debt collectors to negotiate, settle, or modify the terms of the
customer's debt.'' (emphasis added). For consistency purposes, the
Final Rule also replaces the word ``consumer's''' with the word
``customer's'' in the prohibition against misrepresenting ``the
effect of the service on collection efforts of the customer's
creditors or debt collectors.'' (emphasis added). ``Customer'' is
defined in Section 310.2(l) of the TSR and used throughout the
Rule.''
Finally, the Commission added the phrase ``or make a bona fide
offer'' to clarify that the misrepresentation provision prohibits
misrepresentations about the amount that the customer must
accumulate before the provider initiates attempts to settle the debt
and/or about the amount that a customer must accumulate before the
provider makes a bona fide settlement offer or other offer to
renegotiate, settle, or modify the terms of the customer's debt.
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In this Section of the SBP, the Commission discusses the amended
TSR's prohibitions against misrepresentations and their applicability
to debt relief services. Specifically, it provides an analysis of new
Sec. 310.3(a)(2)(x) of the Final Rule and the public comments received
on the proposed version of this provision. It also provides further
detail on the requirements for making truthful and substantiated
savings claims under the amended Rule. Finally, this section explains
how the existing provisions of Sec. Sec. 310.3(a)(2) and 310.4(a)(4)
of the TSR - those that predate, and were unaltered by, this rulemaking
- would apply to inbound telemarketing of debt relief services.
1. Public Comments on Proposed Section 310.3(a)(2)(x)
As described above, Sec. 310.3(a)(2)(x) adds several debt relief-
specific examples of misrepresentations that are prohibited by the TSR.
The vast majority of commenters who addressed this provision in the
proposed rule, including representatives of the debt relief industry,
strongly supported it.\551\ Additionally, participants in the public
forum voiced general support for the proposal.\552\ All but two of the
comments that recommended changes to Sec. 310.2(a)(2)(x) focused on
relatively minor revisions; these comments are discussed, as
applicable, in the analysis of the Final Rule below.
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\551\ See, e.g., TASC (Oct. 26, 2009) at 16; USOBA (Oct. 26,
2009) at 17-18; Orion (Oct. 1, 2009) at 1; CareOne at 4; AICCCA at
5; CFA at 3, 20; NAAG (Oct. 23, 2009) at 11; AFSA at 9 (``Each
specified misrepresentation is sufficiently widespread to justify
inclusion in the Rule.'').
\552\ See, e.g., CSA (Witte), Tr. at 65; USOBA (Ansbach), Tr. at
108 (``[The] Commission has got two things down, that I think are
widely supported, the disclosures and misrepresentations.'').
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Two debt relief service providers opposed this provision, arguing
that it is wholly unjustified because material misrepresentations are
not widespread in the debt relief industry.\553\ As detailed in this
SBP and the NPRM, however, the record demonstrates that the
misrepresentations banned by Sec. 310.3(a)(2)(x) are common in this
industry.\554\
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\553\ See MD (Oct. 26, 2009) at 37-38; Able (Oct. 21, 2009) at
30.
\554\ See TSR Proposed Rule, 74 FR at 41991-41997.
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Some commenters recommended that the Commission add additional
examples of prohibited misrepresentations to Sec. 310.3(a)(2)(x).\555\
The examples included in Sec. 310.3(a)(2)(x) are common
misrepresentations observed in FTC and state law enforcement actions.
The Commission reiterates that these examples are not intended to be an
exhaustive list and that this provision encompasses any material
misrepresentation made in connection with any debt relief service.
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\555\ See, e.g., NACCA at 4 (recommending that the Commission
specifically prohibit misrepresentations concerning whether any
savings may be taxable income and the use of lead generators).
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2. Final Section 310.3(a)(2)(x)
a. Claims Other Than Savings Claims
Section 310.3(a)(2)(x), which is added to Sec. 310.3(a)(2) of the
TSR as a result of this rulemaking, prohibits material
misrepresentations specifically related to the sale of debt relief
services.\556\ The new provision lists several illustrative examples of
prohibited misrepresentations. Although the examples already may be
covered by the existing provisions of Sec. Sec. 310.3(a)(2) and
310.3(a)(4), including them explicitly provides additional guidance to
debt relief providers of their obligations to ensure that their claims
are true and substantiated.\557\
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\556\ See Deception Policy Statement, supra note 453, at 174-83.
\557\ NAAG concurred that the practices prohibited under Section
310(a)(2)(x) are likely already prohibited by the FTC Act and state
unfair and deceptive trade practices statutes, but agreed that
codifying them under the TSR will clarify the law and debt relief
providers' obligations. NAAG (Oct. 23, 2009) at 11; see also CFA at
3 (stating that Section 310.3(a)(2)(x) ``provides greater clarity to
debt relief service providers regarding the types of claims that the
FTC will consider to be deceptive'').
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With respect to the individual examples, Sec. 310.3(a)(2)(x) first
prohibits telemarketers of debt relief services from misrepresenting
``the amount of time necessary to achieve the promised results'' and
``the amount of money or the percentage of each outstanding debt that
the customer must accumulate before the provider of the debt relief
service will initiate attempts with the customer's creditors or debt
collectors or make a bona fide offer to negotiate, settle, or modify
the terms of the customer's debt.'' As set forth in detail above in the
discussion of Sec. 310.3(a)(1)(viii), consumers often have little
understanding of the mechanics of the debt relief process. According to
commenters, including those representing the industry, it usually takes
many months, if not years, for a provider, if it is even able to do so,
to achieve final resolution of all of a consumer's debts.\558\ This is
information that certainly would influence a reasonable consumer's
purchasing decisions. Often, however, telemarketers of these services
tell consumers that results can be achieved more quickly.\559\ Further,
in the context of debt settlement, providers may deceive consumers
about how their monthly payments are being used, suggesting that the
funds are being accumulated for settlements when, in fact, some or all
of them go towards the provider's fees.\560\ It is difficult to imagine
information
[[Page 48499]]
more critically material to a consumer in financial distress.
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\558\ See, e.g., CRN (Bovee), Tr. at 28; SBLS (Tyler), Tr. at
162; ACCORD (Oct. 9, 2009) at 2; CFA at 4.
\559\ See, e.g., FTC v. JPM Accelerated Servs., Inc., No. 09-CV-
2021 (M.D. Fla. Am. Compl. filed Jan. 19, 2010) (alleging that
defendant misrepresented that consumers could pay off debt three to
five times faster without increasing monthly payments); FTC v. Econ.
Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga. filed Nov. 30, 2009)
(same); FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill.
filed Nov. 30, 2009) (alleging that defendants misrepresented that
consumers could pay off debts three to five times faster); FTC v.
Debt Solutions, Inc., No. 06-0298 JLR (W.D. Wash. filed Mar. 6,
2006); FTC v. Integrated Credit Solutions, No. 06-806-SCB-TGW (M.D.
Fla. filed May 2, 2006) (alleging that defendants misrepresented
that debt relief would be achieved before consumers' next billing
cycle); FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4)
(D. Mass. filed Nov. 2, 2004)(alleging defendant told consumers it
could shorten period of time to pay off debts).
\560\ See supra notes 519-20.
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A second provision of Sec. 310.3(a)(2)(x) prohibits
misrepresentations regarding ``the effect of the service on a
customer's creditworthiness.'' As described earlier in this SBP,
representations on this topic are highly material to consumers for whom
lower credit scores will impair their ability to get credit, insurance,
or other benefits in the future.
Third, Sec. 310.3(a)(2)(x) prohibits a telemarketer from making
misrepresentations about the ``effect of the service on collection
efforts of the consumer's creditors or debt collectors.'' This
provision will ensure that providers do not misrepresent that they can
stop creditors or debt collectors from contacting or attempting to
collect from consumers, a practice in which a significant number of
providers have engaged.\561\ Again, this is highly material information
that consumers need to make an informed purchaser's decision.
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\561\ A coalition of consumer groups, in their written comments,
urged the Commission also to bar debt relief services from: (1)
instructing or advising consumers to stop making payments directly
to their creditors; (2) instructing or advising consumers to stop
communicating directly with their creditors; or (3) re-routing
consumers' bills so that creditors send them to the debt relief
service. See CFA at 2, 18. The Commission believes that the
disclosure requirements in Sec. 310.3(a)(1)(viii)(C) of the Final
Rule, along with the prohibition against material
misrepresentations, are sufficient to protect consumers.
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Fourth, Sec. 310.3(a)(2)(x) prohibits misrepresentations relating
to ``the percentage of customers who attain the represented results.''
As discussed above, debt relief providers covered by the Rule commonly
make success rate claims in their advertising and telemarketing.\562\
These claims are highly material to consumers' purchase decisions. Yet
a large percentage of customers of these providers do not obtain the
results promised.\563\ In fact, it appears that well over half of
consumers who enroll in these programs drop out before they have
completed them.\564\
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\562\ In its review of 100 debt settlement websites, supra note
50, FTC staff found that 86% of the 100 debt settlement websites
reviewed represented that the provider could achieve a specific
level of reduction in the amount of debt owed. Again, such claims
are highly material.
\563\ Data from the debt settlement industry support this
assertion. See supra Section III.C.2.a; see also FTC Case List,
supra note 27.
\564\ Supra Section III.C.2.a.1.
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Fifth, Sec. 310.3(a)(2)(x) prohibits misrepresentations about
``whether a service is offered or provided by a nonprofit
entity.''\565\ Such claims are material because they lend credibility
and trustworthiness to the entity making them. The Commission has
brought several law enforcement actions against entities that
masqueraded as nonprofits when, in fact, they operated for the profit
of their principals.\566\ This problem was particularly common in the
credit counseling industry before the IRS took action to scrutinize
and, where appropriate, decertify Sec. 501(c)(3) CCAs.
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\565\ This prohibition applies only to misrepresentations; thus,
it does not prevent a bona fide nonprofit entity from claiming that
it is a nonprofit. See, e.g., FECA (Oct. 26, 2009) at 10 (requesting
that the Commission clarify the scope of Sec. 310.3(a)(2)(x)
regarding the prohibition against misrepresenting nonprofit status).
\566\ Supra Section I.C.1.
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b. Savings Claims
The sixth example of a misrepresentation barred by Sec.
310.3(a)(2)(x) relates to claims about ``the amount of money or the
percentage of the debt amount that a customer may save by using such
service.'' Below, the Commission explains in some detail the nature of
these misrepresentations and how providers can make non-deceptive
claims.
A pivotal claim made in most debt relief advertising and
telemarketing pitches is that the offered plan can save the consumer
money, either by lowering monthly payments or by eliminating debt
altogether through substantially reduced, lump sum settlements. Many of
these claims are very specific, promising, for example, settlements for
40% to 60% of the debt owed.\567\ In many cases, however, these highly
material claims are false or misleading.\568\ In particular, the record
shows that many debt settlement providers have made specific and
unqualified claims about the savings enrollees will receive that
greatly exaggerate or misrepresent what consumers are likely to
experience.\569\
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\567\ See, e.g., FTC v. Credit Restoration Brokers, LLC, 2:10-
cv-00030-CEH-SPC (M.D. Fla. filed Jan. 19, 2010) (promising to
settle consumers' debts for between 30 cents to 50 cents on the
dollar); FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo. filed Mar.
19, 2007) (promising to reduce amount owed to 50% to 60% of amount
at time of enrollment); FTC v. Connelly,No. SA CV 06-701 DOC (RNBx)
(C.D. Cal. Am. Compl. filed Nov. 27, 2006) (promising to reduce
overall amount owed by up to 40% to 60%); FTC v. Nat'l Consumer
Council, Inc., No. SACV04-0474 CJC (JWJX) (C.D. Cal. filed Apr. 23,
2004); FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4)
(D. Mass. filed Nov. 2, 2004) (promising to reduce consumers' debts
by up to 50% to 70%); FTC v. Innovative Sys. Tech., Inc., No. CV04-
0728 GAF JTLx (C.D. Cal. filed Feb. 3, 2004) (representing it could
save consumers up to 70% of debt owed); FTC v. Jubilee Fin. Servs.,
Inc., No. 02-6468 ABC (Ex) (C.D. Cal. filed Aug. 19, 2002)
(promising to reduce debts by up to 60%); see also, e.g., FTC v.
Advanced Mgmt. Servs. NW, LLC, No. 10-148-LRS (E.D. Wash. filed May
10, 2010) (promising to save consumers $2,500 or more); FTC v. JPM
Accelerated Servs., Inc., No. 09-CV-2021 (M.D. Fla. Am. Compl. filed
Jan. 19, 2010) (promising to save consumers $2,500 or more); FTC v.
Econ. Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga. filed Nov. 30,
2009) (promising to save consumers $4,000); FTC v. 2145183 Ontario,
Inc., No. 09-CV-7423 (N.D. Ill. filed Nov. 30, 2009) (promising to
save consumers $2,500 or more); FTC v. Express Consolidation, No.
06-cv-61851-WJZ (S.D. Fla. Am. Compl. filed Mar. 21, 2007); U.S. v.
Credit Found. of Am., No. CV 06-3654 ABC(VBKx) (C.D. Cal. filed June
13, 2006); FTC v. Debt Mgmt. Found. Servs., Inc., No. 04-1674-T-17-
MSS (M.D. Fla. filed July 20, 2004); FTC v. Integrated Credit
Solutions, No. 06-806-SCB-TGW (M.D. Fla. filed May 2, 2006); see
also, e.g., Florida v. CSA - Credit Solutions of Am., Inc., No. 09-
CA-026438 (Fl. Cir. Ct. - 13th filed Oct. 2009) (alleging that
defendant represented that it could reduce consumers debts by 50% or
60% within 12 to 36 months); Press Release, Illinois Attorney
General, Attorney General Madigan Sues Two Debt Settlement Firms
(May 4, 2009) (alleging that defendant represented to consumers that
it could reduce their credit card debt by 40% to 60% and that
consumers would be debt free in as little as 36 months), available
at (http://www.illinoisattorneygeneral.gov/pressroom/2009_05/20090504.pdf); California v. Freedom Debt Relief, No. CIV477991
(Super. Ct. San Mateo Cty., consent judgment Oct. 30, 2008)
(defendant allegedly represented that it could reduce consumers'
debt by 40 to 60% and make consumers debt-free).
\568\ See supra note 567;see also, e.g., NAAG (Oct. 23, 2009) at
2 (``The primary consumer protection problem areas that have given
rise to the States' actions include . . . unsubstantiated claims of
consumer savings.''); CU (Hillebrand), Tr. at 164-65 (``I think when
you say consumers get 50 cents on the dollar is I'm going to save 50
cents on the dollar for all of my debt, and that does not account
for tax consequences, does not account for the very serious impact
of the unsettled debt . . . [and] it does not account for the fact
that many of those consumers are going to finish without settling
all of their debt.''); NFCC at 3; SBLS at 2-5.
\569\ Id.
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Based on the record, the Commission has identified four fundamental
deficiencies in the data that debt relief providers often use to
support their savings claims. All of these deficiencies inflate the
savings consumers are likely to obtain.
First, as described above, many providers calculate savings without
accounting for the additional debt and costs consumers incur as a
result of interest, late fees, and other charges imposed by the
creditor(s) or debt collector(s) during the course of the program.\570\
Second, providers often omit the fees consumers pay to the provider
from their calculations of the savings.\571\ By ignoring the creditor
and provider-associated costs, the claims overstate the amount
consumers actually save. Third, providers frequently exclude from their
calculation of savings those consumers who dropped out or were
otherwise unable to complete the program, and fourth, providers
frequently exclude individual accounts that were not settled
successfully.\572\ Thus, the savings claimed by the provider
[[Page 48500]]
represent only those of the successful cases, and not of consumers
generally.\573\
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\570\ Supra Section III.C.2.a.(3).
\571\ Id.
\572\ See id.
\573\ An advertiser cannot substantiate a claim based only on
supportive data, while ignoring the countervailing data. See, e.g.,
In re Kroger Co., 98 F.T.C. 639 (1979) (initial decision), aff'd, 98
F.T.C. at 721 (1981); FTC, Dietary Supplements: An Advertising Guide
for Industry (1994) (``Advertisers should consider all relevant
research relating to the claimed benefit of their supplement and
should not focus only on research that supports the effect, while
discounting research that does not.''), available at (http://www.ftc.gov/bcp/edu/pubs/business/adv/bus09.shtm).
Nonetheless, broadcast advertisements and websites for debt
settlement services routinely imply that these services can obtain
the represented savings for the typical consumer who enrolls in the
program. See supra note 567; see also, e.g., FTC v. Edge Solutions,
Inc., No. CV-07-4087, Mem. Supp. Mot. T.R.O. at 7, 11 (E.D.N.Y.
Sept. 28, 2007) (alleging that although defendants promised they
could settle consumers' debts for 50% to 60% of the amount owed,
they often settled just a single debt and ``allow[ed] other debts to
languish''); FTC v. Better Budget Fin. Servs., Inc., No. 04-12326
(WG4), Mem. Supp. Mot. T.R.O. at 8 (D. Mass. filed Nov. 2, 2004)
(alleging that ``defendants' program does not result in a 50%
savings on their debt, as promised by defendants . . . [because]
[m]any consumers find that defendants settle some of their accounts
but not others . . . [and some] consumers see none of their accounts
settled'').
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To comply with Sec. 310.3(a)(2)(x), providers' representations,
including those promising specific savings or other results, must be
truthful, and the provider must have a reasonable basis to substantiate
the claims.\574\ When a debt relief service provider represents that it
will save consumers a certain amount or reduce the debts by a certain
percentage, it also represents, by implication, that this savings claim
is supported by competent and reliable, methodologically sound evidence
showing that consumers generally who enroll in the program will obtain
the advertised results.\575\ When a debt relief service makes only
general savings claims (e.g., ``we will help you reduce your debts''),
without specifying a percentage or amount of debt reduction, these
claims are likely to convey that consumers can expect to achieve a
result that will be beneficial to them, and that the benefit will be
substantial.\576\ Generally, savings claims should reflect the
experiences of the provider's past customers\577\ and must account for
several key pieces of information.\578\ Below, the Commission provides
additional guidance on the proper methodology for doing this historical
experience analysis.\579\
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\574\ It is an unfair and deceptive practice to make an express
or implied objective claim without a reasonable basis supporting it.
See, e.g., FTC v. Pantron I Corp., 33 F.2d 1088, 1096 (9th Cir.
1994); Removatron Int'l Corp., 111 F.T.C. 206, 296-99 (1988), aff'd,
884 F.2d 1489 (1st Cir. 1989); In re Thompson Med. Co., 104 F.T.C.
648, 813 (1984), aff'd, 791 F.2d 189 (D.C. Cir. 1986), cert. denied,
479 U.S. 1086 (1987); see also generally 1984 Policy Statement
Regarding Advertising Substantiation, appended to Thompson Med. Co.,
104 F.T.C. at 813 (``Advertising Substantiation Policy Statement'');
see also Amended Franchise Rule, 16 CFR 436.5(s), 436.9(c); Amended
Franchise Rule Statement of Basis and Purpose, 72 FR 15444, 15449
(Mar. 30, 2007).
If the advertisement expressly or impliedly represents that it
is based on a particular level of support (e.g., ``tests prove''),
the advertiser must possess at least that support. See 1984 Policy
Statement Regarding Advertising Substantiation, appended to Thompson
Medical Co., 104 F.T.C. at 813; Removatron Int'l, 111 F.T.C. at 297.
If no specific level of support is stated, the necessary level of
substantiation is determined by consideration of certain factors,
including the type of claim, consequences of a false claim, and the
amount of substantiation that experts in the field believe is
reasonable. Id. Generally speaking, claims must be supported by
competent and reliable evidence. The reasonable basis test is an
objective standard; an advertiser's good faith belief that its claim
is substantiated is insufficient. See, e.g., FTC v. World Travel
Vacation Brokers, Inc., 861 F.2d 1020, 1029 (7th Cir. 1988); FTC v.
U.S. Sales Corp., 785 F. Supp. 737 (N.D. Ill. 1992). Similarly, the
existence of some satisfied customers does not constitute a
reasonable basis. See, e.g., FTC v. SlimAmerica, Inc., 77 F. Supp.
2d 1263, 1274 (S.D. Fla. 1999); In re Brake Guard Products, 125
F.T.C. 138, 244-45 (1998).
\575\ It is deceptive to make unqualified performance claims
that are only true for some consumers, because consumers are likely
to interpret such claims to apply to the typical consumer. See FTC
v. Five-Star Auto Club, Inc., 97 F. Supp. 2d 502, 528-29 (S.D.N.Y.
2000) (holding that, in the face of express earnings claims for
multi-level marketing scheme, it was reasonable for consumers to
have assumed the promised rewards were achieved by the typical Five
Star participant); Chrysler Corp. v. FTC, 561 F.2d 357, 363 (D.C.
Cir. 1977); In re Ford Motor Co., 87 F.T.C. 756, 778, aff'd in part
and remanded in part, 87 F.T.C. 792 (1976); In re J. B. Williams
Co., 68 F.T.C. 481, 539 (1965), aff'd as modified, 381 F.2d 884 (6th
Cir. 1967); FTC v. Feil, 285 F.2d 879, 885-87 & n.19 (9th Cir.
1960); cf. Guides Concerning the Use of Endorsements and
Testimonials in Advertising, 16 CFR 255.2 (``An advertisement
containing an endorsement relating the experience of one or more
consumers on a central or key attribute of the product or service
also will likely be interpreted as representing that the endorser's
experience is representative of what consumers will generally
achieve with the advertised product or service . . . .''); In re
Cliffdale Assocs., 103 F.T.C. 110, 171-73 (1984); Porter & Dietsch,
Inc. v. FTC, 605 F.2d 294, 302-03 (7th Cir. 1979).
\576\ An efficacy claim conveys to consumers that the result or
benefit will be meaningful and not de minimis. See P. Lorillard Co.
v. FTC, 186 F.2d 52, 57 (4th Cir. 1950) (challenging advertising
that claimed that the cigarette was lowest in nicotine, tar, and
resins in part because the difference was insignificant); In re Sun
Co., 115 F.T.C. 560 (1992) (consent order) (alleging that
advertising for high octane gasoline represented that it would
provide superior power ``that would be significant to consumers'');
Guides for the Use of Environmental Marketing Claims,16 CFR 260.6(c)
(1998) (``Marketers should avoid implications of significant
environmental benefits if the benefit is in fact negligible.''); FTC
Enforcement Policy Statement on Food Advertising, 59 FR 28388, 28395
& n.96 (June 1, 1994), available at (http://www.ftc.gov/bcp/policystmt/ad-food.shtm) (``The Commission shares FDA's view that
health claims should not be asserted for foods that do not
significantly contribute to the claimed benefit. A claim about the
benefit of a product carries with it the implication that the
benefit is significant.'').
\577\ Although providers may use samples of their historical
data to substantiate savings claims, these samples must be
representative of the entire relevant population of past customers.
Providers using samples must, among other things, employ appropriate
sampling techniques, proper statistical analysis, and safeguards for
reducing bias and random error. Providers may not cherry-pick
specific categories of consumers or exclude others in order to
inflate the savings. See, e.g., Kroger, 98 F.T.C. at 741-46 (1981)
(claims based on sampling were deceptive because certain categories
were systematically excluded and because the advertiser failed to
ensure that individuals who selected the sample were unbiased); FTC
v. Litton Indus., Inc., 97 F.T.C. 1, 70-72 (1981) (claims touting
superiority of microwave oven were deceptive because the advertiser
based them on a biased survey of ``Litton-authorized'' service
agencies), enforced as modified, 676 F.2d 364 (9th Cir. 1982);
Bristol Myers v. FTC, 185 F.2d 58 (1950) (holding advertisements to
be deceptive where they claimed that dentists used one brand of
toothpaste ``2 to 1 over any other [brand]'' when, in fact, the vast
majority of dentists surveyed offered no response). Additionally,
the relationship between past experience and anticipated future
results must be an ``apples-to-apples'' comparison. If there have
been material changes to the program that could affect the
applicability of historical experience to future results, any claims
must account for the likely effect of those changes. See Amended
Franchise Rule, 16 CFR 437.5(s)(3)(ii).
\578\ Providers should maintain historical data about their
business activities sufficient to meet the substantiation
requirements detailed in this Section. See, e.g., USDR (Johnson),
Tr. at 168-170 (``I'll speak specifically to my company, why we make
a general claim, is on the 40 to 60 reduction is because
historically our numbers for five years reflect that this is the
results that we get for the consumers.'').
Providers should be cautious in purporting to qualify their
savings claims to make sure that the qualifications are effectively
communicated to consumers. For example, phrases such as ``up to'' or
``as much as'' (e.g., ``up to 60% savings'') likely convey to
consumers that the product or service will consistently produce
results in the range of the stated percentage or amount. See, e.g.,
In re Automotive Breakthrough Sciences, Inc., 126 F.T.C. 229, 301
(1998).
\579\ In written comments and at the public forum, consumer
groups, noting that debt settlement companies often fail to
substantiate savings claims properly, urged the Commission to ban
outright any representations regarding savings amounts or rates, or,
alternatively, to require that the provider's historical data
demonstrate that it achieved the represented result for 80% of its
past customers. See CFA at 18-19; CFA (Grant), Tr. at 173 (``[W]e
think that any success claims are inherently misleading, and would
like to see them prohibited.''); see also CRN (Oct. 8, 2009) at 8.
Although the record shows that false or unsubstantiated savings
claims for debt relief services are common, the Commission does not
believe that savings claims are inherently deceptive and thus
concludes that they should not be prohibited outright. See Milavetz,
Gallop & Milavetz, P.A. v. US, 176 L. Ed. 2d 79 (2010) (restrictions
on nonmisleading commercial speech require a higher level of
scrutiny under the First Amendment than restrictions on misleading
speech); Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626
(1985) (same); Cent. Hudson Gas & Elec. Corp. v. Public Serv.
Comm'n, 447 U.S. 557 (1980). The Commission is confident that the
prohibition in the Final Rule on misrepresentations will be
sufficient to address the problem of false or unsubstantiated
savings claims without inadvertently stopping truthful claims that
may be valuable to consumers.
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First, savings claims must be calculated based on the amount of
debt
[[Page 48501]]
owed at the time of enrollment, rather than the amount at the time of
settlement, in order to account for (a) increases in debt levels from
creditor fees or interest charges that accrue during the period of the
program, and (b) fees the consumer pays to the provider. The following
---------------------------------------------------------------------------
example illustrates this principle:
A consumer enrolls a single $10,000 debt with a debt settlement
provider. However, between the time the consumer enrolls the debt and
the time the debt is settled, the amount owed grows to $13,000 because
of accrued interest and late fees. In addition, the consumer must pay
the settlement provider a fee of $2,000. The provider settles the debt
for $6,000, so that the total amount paid by the consumer is $8,000
($6,000 paid to settle the debt plus $2,000 in fees). The provider can
claim a savings rate of 20%.
Second, in making savings claims, a provider must take into account
the experiences of all of its past customers, including those who
dropped out or otherwise failed to complete the program. The following
example illustrates this principle:
A debt settlement provider has ten customers, each of whom has $10,000
in debt enrolled in the program, for a total of $100,000 in unpaid
debt. Five of those customers complete the program, each of whom saves
$2,000, for a total savings of $10,000. The remaining five customers
drop out of the program before making any settlements, and thus save
nothing. In total, the customers have saved $10,000 out of the
aggregate $100,000 enrolled in the program. The provider can claim a
savings rate of 10%.
Third, in making savings claims, a provider must include all of the
debts enrolled by each consumer in the program. The provider may not
exclude debts that it has failed to settle - including those associated
with consumers who dropped out of the program - from its calculation of
the average savings percentage or amount of its consumers' debt
reduction. The following example illustrates this principle:
A debt settlement provider has ten customers, each of whom has two
$1,000 debts enrolled in the program, for a total of 20 debts and
$20,000 in enrolled debt. The provider settles a single debt for each
of the ten customers for $800 per debt. The company fails to settle the
remaining debt for each of the ten customers. In total, the customers
have saved $2,000 out of the aggregate $20,000 enrolled in the program.
The provider can claim a savings rate of 10%.
3. Existing TSR Provisions Prohibiting Deceptive Representations and
Misleading Statements
In addition to Sec. 310(a)(2)(x) of the TSR, which has been added
as a result of this rulemaking, the existing Sec. Sec. 310.3(a)(2) and
310.3(a)(4) will now apply to inbound or outbound telemarketing of debt
relief services.\580\ These provisions prohibit misrepresentations of
the following information, much of which providers misrepresent in the
telemarketing of debt relief services:
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\580\ In fact, all of the TSR provisions will now cover this
industry, including, e.g., the provision prohibiting assisting and
facilitating another engaged in TSR violations, Sec. 310.3(b), the
prohibition on the use of threats or intimidating or profane
language, Sec. 310.4(a)(1), and the recordkeeping requirements,
Sec. 310.5.
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total costs to purchase, receive, or use, and the quantity
of, any goods or services that are the subject of the offer.\581\ This
provision parallels the required disclosure of total costs contained in
TSR Sec. 310.3(a)(1)(i).
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\581\ Sec. 310.3(a)(2)(i).Some providers request consumers'
billing information during the sales call or pressure consumers to
return payment authorization forms and signed contracts as quickly
as possible following the call. See, e.g., FTC v. Debt-Set, No.
1:07-cv-00558-RPM (D. Colo. filed Mar. 19, 2007) (alleging
``[c]onsumers who agree to enroll . . . are sent an initial set of
enrollment documents from Debt Set Colorado. During their telephone
pitches, the defendants' telemarketers also exhort consumers to fill
out the enrollment documents and return the papers as quickly as
possible . . . . Included in these documents are forms for the
consumer to authorize direct withdrawals from the consumer's
checking account, to identify the amounts owed to various creditors,
and a Client Agreement.''). The existing TSR prohibits telemarketers
from charging consumers' accounts without first obtaining express
informed consent in all transactions, and it requires express
verifiable authorization in cases where a consumer uses a payment
method other than a credit or debit card. See Sec. Sec.
310.3(a)(3), 310.4(a)(6). The amended Rule applies these existing
requirements to inbound debt relief telemarketing calls as well.
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material restrictions, limitations, or conditions to
purchase, receive, or use the offered goods or services.\582\ This
provision, too, has a parallel required disclosure in TSR Sec.
310.3(a)(1)(ii).
---------------------------------------------------------------------------
\582\ Sec. 310.3(a)(2)(ii).
---------------------------------------------------------------------------
any material aspect of the performance, efficacy, nature,
or central characteristics of the offered goods or services.\583\
---------------------------------------------------------------------------
\583\ Sec. 310.3(a)(2)(iii).
---------------------------------------------------------------------------
any material aspect of the nature or terms of the seller's
refund, cancellation, exchange, or repurchase policies.\584\ The
parallel disclosure requirement is in Sec. 310.3(a)(1)(iii) of the
TSR.
---------------------------------------------------------------------------
\584\ Sec. 310.3(a)(2)(iv).
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the seller's or telemarketer's affiliation with, or
endorsement or sponsorship by, any person or government entity.\585\
---------------------------------------------------------------------------
\585\ Sec. 310.3(a)(2)(vii). In several FTC law enforcement
actions, debt negotiation companies falsely represented that they
were affiliated with consumers' creditors. See, e.g., FTC v. Group
One Networks, Inc., No. 8:09-cv-352-T-26-MAP (M.D. Fla. Am. Compl.
filed Apr. 14, 2009); FTC v. Select Pers. Mgmt., Inc., No. 07-CV-
0529 (N.D. Ill. Am. Compl. filed Aug. 18, 2007). In other cases,
especially with the rise of government economic assistance programs,
providers have misrepresented their affiliation with the government
or bona fide nonprofits. See, e.g., FTC v. Dominant Leads, LLC, No.
1:10-cv-00997 (D.D.C. filed June 15, 2010); Minnesota v. Priority
Direct Marketing, No. 62-CV-09-10416 (Ramsey Cty., Minn. filed Sept.
21, 2009) (alleging that debt negotiator misrepresented that it was
affiliated with the President's stimulus plan); cf., e.g., FTC v.
Washington Data Res., Inc., No. 8:08-CV-02309-SDM (M.D. Fla. filed
Nov. 12, 2009) (alleging that defendants falsely represented that
they were affiliated with the United States government); FTC v.
Cantkier, No. 1:09-cv- 00894 (D.D.C. filed July 10, 2009) (alleging
defendants placed advertisements on Internet search engines that
refer consumers to websites that deceptively appear to be affiliated
with government loan modification programs).
---------------------------------------------------------------------------
any other statements to induce any person to pay for goods
or services.\586\
---------------------------------------------------------------------------
\586\ Sec. 310.3(a)(4). The FTC has brought cases against debt
relief providers alleging violations of Sec. 310.3(a)(4) for
misleading statements made in connection with outbound
telemarketing, including statements that the entity (a) will obtain
a favorable settlement of the consumer's debt promptly or in a
specific period of time (see, e.g., FTC v. Nat'l Consumer Council,
No. SACV04-0474 CJC (JWJX) (C.D. Cal. filed Apr. 23, 2004)); (b)
will stop or lessen creditors' collection efforts against the
consumer (see, e.g., id.; FTC v. Group One Networks, Inc., No. 8:09-
cv-352-T-26-MAP (M.D. Fla. Am. Compl. filed Apr. 14, 2009)); and (c)
will secure concessions, such as interest rate reductions, by
specific amounts or percentages (see, e.g., FTC v. Debt Mgmt. Found.
Servs., Inc., No. 04-1674-T-17-MSS (M.D. Fla. filed July 20, 2004)).
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F. Section 310.6: Exemptions
Section 310.6 sets forth the Rule's exemptions. In determining
which exemptions to grant, the Commission considered four factors: (1)
whether Congress intended a particular activity to be exempt from the
Rule; (2) whether the conduct or business in question is already the
subject of extensive federal or state regulation; (3) whether the
conduct at issue is suitable for the forms of abuse or deception the
Telemarketing Act was intended to address; and (4) whether the risk
that fraudulent sellers or telemarketers would avail themselves of the
exemption outweighs the burden to legitimate industry of compliance
with the Rule.\587\
---------------------------------------------------------------------------
\587\ TSR Final Rule, 60 FR at 43859; see also TSR Amended Rule
2008, 73 FR 51188 (discussing the Commission's legal authority to
exempt certain calls or callers from the TSR).
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The TSR generally exempts inbound calls placed by consumers in
response
[[Page 48502]]
to direct mail or general media advertising.\588\ The Final Rule in
this proceeding, consistent with the proposed rule, carves out inbound
calls made to debt relief services from that exemption.\589\ As a
result, virtually all debt relief telemarketing transactions are now
subject to the TSR.\590\
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\588\ See Sec. 310.6(b)(5) & (6).
\589\ The Commission previously had created certain carve-outs
to the general exemption for inbound calls made as part of the sale
of products or services that have been the subject of significant
fraudulent or deceptive telemarketing activity, such as
advertisements relating to investment opportunities and certain
business opportunities. Id.
\590\ Outbound calls to solicit the purchase of debt relief
services are already subject to the TSR, including the provisions of
Sec. 310.3. The Final Rule continues to exempt telemarketing of
debt relief services from compliance with most provisions of the
Rule where the sale is not completed, and payment or authorization
of payment is not required, until after a face-to-face sales
presentation.
---------------------------------------------------------------------------
Most commenters supported covering inbound calls made to debt
relief providers.\591\ On the other hand, one debt relief provider
opposed it, arguing that not all debt relief providers harm
consumers.\592\
---------------------------------------------------------------------------
\591\ See CFA at 20-21;Orion (Oct. 1, 2009) at 1.
\592\ Able (Oct. 21, 2009) at 29.
---------------------------------------------------------------------------
The Commission's decision to include inbound debt relief calls is
based on its law enforcement experience and the record in this
proceeding and is consistent with the existing TSR provisions covering
inbound calls related to investment opportunities, certain business
opportunities, credit card loss protection plans, credit repair
services, recovery services, and certain advance fee loans.\593\ Like
debt relief services, each of those services frequently has been
marketed through deceptive telemarketing campaigns that capitalize on
mass media or general advertising to entice their victims to place an
inbound telemarketing call. The modification to the exemptions will
ensure that sellers and telemarketers who market debt relief are
required to abide by the Rule regardless of the medium used to
advertise their services.
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\593\ Each of these categories is carved out from the exemptions
for inbound calls made in response to both general media and direct
mail advertising. Inbound prize promotion calls are carved out only
from the direct mail exemption.
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This provision will be effective September 27, 2010.\594\
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\594\ In addition, in three subsections of the Exemptions
section, the Commission has also made minor, non-substantive
amendments to Sec. Sec. 310.6(b)(2), (5), & (6) to reflect the fact
that the Commission has issued Disclosure Requirements and
Prohibitions Concerning Business Opportunities, 16 CFR 437 (the
``Business Opportunity Rule''). Prior to its issuance, this conduct
was addressed by 16 CFR 436 (the Franchise Rule) and, therefore, the
TSR previously cited only to the latter. Accordingly, Sec. Sec.
310.6(b)(2), (5), and (6) have been amended to expressly cite both
the Franchise Rule and the now-separate Business Opportunity Rule.
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G. Section 310.5: Recordkeeping
Section 310.5 of the TSR describes the types of records sellers or
telemarketers must keep and the time period for retention.\595\
Although the provisions of this section remain unchanged by these
amendments, the operation of the amendments will result in some
providers of debt relief services being subject to this provision of
the TSR for the first time. Very few comments were received on the
recordkeeping requirements. One commenter stated that it did not make
sense to limit the recordkeeping requirement to 24 months, when 36 to
60 months is typically required for most debt relief customers to
become debt free.\596\ This commenter also questioned whether the
requirement would reduce abuses and provide sufficiently useful data
for law enforcement or regulatory purposes.\597\ The FTC's law
enforcement experience demonstrates that recordkeeping requirements are
critical for enabling the agency to ensure compliance. The TSR has long
imposed a 24-month retention period, and the Commission does not see a
compelling reason to alter it for debt relief providers. To the extent
that providers make claims that rely on historical data for
substantiation, however, they must retain all material used to support
the claims.
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\595\ 16 CFR 310.5. Specifically, this provision requires that
telemarketers must keep for a period of 24 months: all substantially
different advertising, brochures, scripts, and promotional
materials; information about prize recipients; information about
customers, including what they purchased, when they made their
purchase, and how much they paid for the goods or services they
purchased; information about employees; and all verifiable
authorizations or records of express informed consent or express
agreement required to be provided or received under this Rule.
\596\ MD (Oct. 26, 2009) at 54.
\597\ Id.
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This provision will be effective September 27, 2010.
IV. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (``PRA''), as
amended,\598\ the Commission is seeking Office of Management and Budget
(``OMB'') approval of the Final Rule amendments to the TSR under OMB
Control No. 3084-0097. The disclosure and recordkeeping requirements
under the amendments to the TSR discussed above constitute
``collections of information'' for purposes of the PRA.\599\
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\598\ 44 U.S.C. 3501-3521.
\599\ See 5 CFR 1320.3(c).
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Upon publication of the NPRM, the FTC submitted the proposed rule
and a Supporting Statement to OMB. In response, OMB filed a comment
indicating that it was withholding approval pending: (1) discussion in
the preamble to the Final Rule of how the Commission has maximized the
practical utility of the collection of information and minimized the
related burden, and (2) the FTC's examination of the public comments in
response to the NPRM. The remainder of this section covers those
considerations and provides a revised PRA analysis, factoring in
relevant public comments and the Commission's resulting or self-
initiated changes to the proposed rule.
A. Practical Utility
According to OMB regulations, practical utility means the
usefulness of information to or for an agency.\600\ The Commission has
maximized the practical utility of the debt relief amendments contained
in the Final Rule. The Final Rule requires specific new disclosures in
the sale of a ``debt relief service,'' as that term is defined in Sec.
310.2(m). The disclosures will provide consumers critical information
before they enroll in a debt relief service. In addition, new
respondents will be subject to the existing provisions of the TSR,
including its general sales disclosures and recordkeeping
provisions.\601\ The required disclosures are necessary to inform
consumers of important information about the debt relief services being
offered. Commenters overwhelmingly supported the disclosures.\602\
Moreover, the Commission has removed three of the previously proposed
disclosures in order to avoid cluttering the most meaningful material
information for consumers and to enhance the comprehensibility of the
fewer
[[Page 48503]]
remaining disclosures. Finally, the recordkeeping requirements are
necessary to facilitate law enforcement by ensuring that debt relief
service providers retain records demonstrating their compliance with
the Rule.\603\
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\600\ 5 CFR 1320.3(l). In determining whether information will
have ``practical utility,'' OMB will consider ``whether the agency
demonstrates actual timely use for the information either to carry
out its functions or make it available to third-parties or the
public, either directly or by means of a third-party or public
posting, notification, labeling, or similar disclosure requirement,
for the use of persons who have an interest in entities or
transactions over which the agency has jurisdiction.'' Id.
\601\ See 16 CFR 310.3(a)(1); 16 CFR 310.5. (These provisions
have previously been reviewed and cleared by the OMB under the
above-noted control number.) Accordingly, as a result of the
exceptions to the general media and direct mail exemptions, entities
that currently engage exclusively in inbound telemarketing of debt
relief services, and thus are likely exempt under the current Rule,
would be covered by the amended Rule.
\602\ See, e.g., NAAG (Oct. 23, 2009) at 11; CFA at 2-3, 20; MN
AG at 2; FCS at 3; Able (Oct. 21, 2009) at 30; CareOne at 4; CSA at
1; DS at 18; DMB at 5; DSA/ADE at 1-2; FCS at 3. In fact, many
commenters recommended additional disclosures. Supra Section
III.D.5. The Commission added one additional disclosure that is
critical to consumers' understanding of the services.
\603\ Although the Commission received very few comments
addressing the recordkeeping requirements, one debt settlement
company stated that the recordkeeping requirements may impose a
minor cost but should not substantively affect the business. Able
(Oct. 21, 2009) at 32.
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Thus, the Final Rule will have significant practical utility.
B. Explanation of Burden Estimates Under the Final Rule
The PRA burden of the Final Rule's requirements will depend on
various factors, including the number of covered firms and the
percentage of such firms that conduct inbound or outbound
telemarketing. The definition of ``debt relief service'' in the Rule
includes debt settlement companies, for-profit credit counselors, and
debt negotiation companies. As before in the NPRM PRA analysis, staff
estimates that 2,000 entities will be covered by the Commission's Final
Rule.\604\ This includes existing entities already subject to the TSR
for which there would be new recordkeeping or disclosure requirements
(``existing respondents''), as well as existing entities that newly
will be subject to the TSR (``new respondents'').\605\ Staff arrived at
this estimate by using available figures obtained through research and
from industry sources of information about the number of debt
settlement companies\606\ and the number of for-profit credit
counselors.\607\ Although these inputs suggest that an estimate of
2,000 entities might be overstated, staff has used it in its burden
calculations in an effort to account for all entities that would be
subject to the amended Rule, including debt negotiation companies, for
which no reliable external estimates are available. No comments
provided specific information about the number of entities.\608\ Thus,
the FTC retains these estimates without modification.
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\604\ To err in favor of over inclusiveness, staff assumes that
every entity that sells debt relief services does so using
telemarketing.
\605\ Inbound telemarketing calls in response to advertisements
in any medium other than direct mail solicitation are generally
exempt from the Rule's coverage under the ``general media
exemption.'' 16 CFR 310.6(b)(5). Outbound telemarketing and non-
exempt inbound telemarketing of debt relief services are currently
subject to the TSR. Non-exempt inbound telemarketing would include
calls to debt relief service providers by consumers in response to
direct mail advertising that does not contain disclosures required
by Sec. 310.3(a)(1) of the Rule. See 16 CFR 310.6(b)(6) (providing
an exemption for ``[t]elephone calls initiated by a customer . . .
in response to a direct mail solicitation . . . that clearly,
conspicuously, and truthfully discloses all material information
listed in Sec. 310.3(a)(1) of this Rule . . . .'').
\606\ See David Streitfeld, Debt Settlers Offer Promises But
Little Help, N.Y. Times, Apr. 19, 2009 (stating, without
attribution, that ``[a]s many as 2,000 settlement companies operate
in the United States, triple the number of a few years ago'');
Weinstein (Oct. 26, 2009) at 9 (see attached Weinstein paper at 8)
(stating, without attribution, that ``some 2,000 firms market
themselves as providing `debt settlement services,'''); Jane
Birnbaum, Debt Relief Can Cause Headaches of Its Own, N.Y. Times,
Feb. 9, 2008 (noting that ``[a] thousand such [debt settlement]
companies exist nationwide, up from about 300 a couple of years ago,
estimated David Leuthold, vice president of the Association of
Settlement Companies, which has 70 members and is based in Madison,
Wis.''); Able Workshop Comment at 5 (``At the time of this FTC
Workshop there are nearly a thousand debt settlement companies
within the US and a few companies servicing US consumers from
outside the US with operations in Canada, Mexico, Argentina, India
and Malaysia.''). See also SIC Code 72991001 (``Debt Counseling or
Adjustment Service, Individuals''): 1,598 entities.
\607\ According to industry sources consulted by Commission
staff, there are believed to be fewer than 200 for-profit credit
counseling firms operating in the United States.
\608\ One commenter estimated that it manages between 6% to 8%
of all debt currently enrolled in debt settlement programs. FDR
(Oct. 26, 2009) at 5 n.7. In response to a follow-up question by FTC
staff, however, it stated that the statistic was a ``good faith
estimate based on our awareness of the industry'' but did not
elaborate further. FDR (Jan. 14, 2010) at 5.
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The Commission received two comments questioning the staff's
estimate that the proposed disclosures could be provided in 20 seconds.
Specifically, NACCA questioned whether it was realistic that the
proposed disclosures could be provided in 20 seconds.\609\ Moreover, a
debt settlement company stated that it provides consumers with 16
mandatory disclaimers and an additional six disclosures (if
applicable), and it estimated that reading those disclaimers and
allowing the consumer to respond to the disclosures requires
approximately four and a half minutes.\610\
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\609\ NACCA at 2 (``We find it difficult to believe that the
required information can be conveyed in 20 seconds or, if it can be
conveyed in 20 seconds, that a consumer who is already distressed
can fully understand the information being conveyed.'').
\610\ MD (Oct. 26, 2009) at 21. This equates to about 12.3
seconds per disclosure.
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The FTC's revised disclosure estimates, detailed below, consider
commenters' input while excluding time estimates for disclosures made
independently of the amended Rule. In addition, although the FTC
recognizes that certain entities may require more than the projected
time regarding the above-noted tasks, the estimates presented below are
intended as an approximate average of incremental burden incurred
across all businesses.
Burden Statement:
Estimated Additional Annual Hours Burden: 43,375 hours
As explained below, the estimated annual burden for recordkeeping
attributable to the Rule amendments, averaged over a prospective three-
year PRA clearance, is 29,886 hours for all industry members affected
by the Rule. Although the first year of compliance will entail setting
up compliant recordkeeping systems, the PRA burden will decline in
succeeding years as they will then have in place such systems. The
estimated burden for the disclosures that the Rule requires, including
the new disclosures relating to debt relief services, is 13,489 hours
for all affected industry members, the same estimate used for the
proposed rule. Thus, the total PRA burden is 43,375 hours.
1. Number of Respondents
Based on its estimate that 2,000 entities sell debt relief
services, and on the assumption that each of these entities engages in
telemarketing as defined by the TSR, staff estimates that 879 new
respondents will be subject to the Rule as a result of the amendments.
The latter figure is derived by a series of calculations, beginning
with an estimate of the number of these entities that conduct inbound
versus outbound telemarketing of debt relief services. This added
estimate is needed to determine how many debt relief service providers
are existing respondents and how many are new respondents because their
respective PRA burdens will differ.
Staff is not aware of any source that directly states the number of
outbound or inbound debt relief telemarketers; instead, estimates of
these numbers are extrapolated from external data. According to the
Direct Marketing Association (``DMA''), 21% of all direct marketing in
2007 was by inbound telemarketing and 20% was by outbound
telemarketing.\611\ Using this relative weighting, staff estimates that
the number of inbound debt relief telemarketers is 1,024 (2,000 x 21 /
(20 + 21)) and the number of outbound telemarketers is 976 (2,000 x 20
/ (20 + 21)).
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\611\ See DMA Statistical Fact Book 1, 17(30\th\ ed. 2008)
(``DMA Statistical Fact Book'').
---------------------------------------------------------------------------
Of the estimated 1,024 entities engaged in inbound telemarketing of
debt relief services, an estimated 217 entities conduct inbound debt
relief telemarketing through direct mail; the remaining 807 entities do
so through general media advertising and have been thus far largely
exempt from the
[[Page 48504]]
Rule's current requirements.\612\ Of the 217 entities using direct
mail, staff estimates that 72, approximately one-third, make the
disclosures necessary to exempt them from the Rule's existing
requirements.\613\ Thus, an estimated 879 entities (807 + 72) are new
respondents that will be newly subject to the TSR and its PRA burden,
including burden derived from the new debt relief disclosures.
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\612\ According to the DMA, 21.2% of annual U.S. advertising
expenditures for direct marketing is through direct mail; the
remaining 78.8% is through all other forms of general media (e.g.,
newspapers, television, Internet, Yellow Pages). See id. at 11.
Thus, applying these percentages to the above estimate of 1,024
inbound telemarketers, 217 entities (21.2%) advertise by direct
mail, and 807 (78.8%) use general media.
\613\ The apportionment of one-third is a longstanding
assumption stated in past FTC analyses of PRA burden for the TSR.
See, e.g., Agency Information Collection Activities, 74 FR 25540,
25543 (May 28, 2009); Agency Information Collection Activities, 71
FR 28698, 28700 (May 17, 2006). No comments have been received to
date with an alternative apportionment or reasons to modify it.
---------------------------------------------------------------------------
The remaining 145 entities (217 - 72) conducting inbound
telemarketing for debt relief through direct mail would be existing
respondents because they receive inbound telemarketing calls in
response to direct mail advertisements that do not make the requisite
disclosures to qualify for the direct mail exemption.\614\ The
estimated 976 entities conducting outbound telemarketing of debt relief
services are already subject to the TSR and thus, too, would be
existing respondents. Accordingly, an estimated 1,121 telemarketers
selling debt relief services would be subject only to the additional
PRA burden imposed by the newly adopted debt relief disclosures in
amended Rule Sec. 310.3(a)(1)(viii).
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\614\ 16 CFR 310.6(b)(6).
---------------------------------------------------------------------------
2. Recordkeeping Hours
Staff estimates that in the first year following promulgation of
the Final Rule, it will take 100 hours for each of the 879 new
respondents identified above to set up compliant recordkeeping systems.
This estimate is consistent with the amount of time allocated in other
PRA analyses that have addressed new entrants, i.e., newly formed
entities subject to the TSR.\615\ The recordkeeping burden for these
entities in the first year following the amended Rule's adoption is
87,900 hours (879 new respondents x 100 hours each). In subsequent
years, when TSR-compliant recordkeeping systems will, presumably, have
already been established, the burden for these entities should parallel
the one hour of ongoing recordkeeping burden staff has previously
estimated for existing respondents under the Rule.\616\ Thus,
annualized over a prospective three-year PRA clearance period,
cumulative annual recordkeeping burden for the 879 new respondents
would be 29,886 hours (87,900 hours in Year 1: 879 hours for each of
Years 2 and 3). Burden accruing to new entrants, 100 hours apiece to
set up new recordkeeping systems compliant with the Rule, has already
been factored into the FTC's existing clearance from OMB for an
estimated 75 entrants per year, and is also incorporated within the
FTC's current clearance for the TSR under OMB Control No. 3084-
0097.\617\
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\615\ See, e.g., Agency Information Collection Activities, 74 FR
at 25542; Agency Information Collection Activities, 71 FR at 28699.
\616\ Id.
\617\ Agency Information Collection Activities, 74 FR at 25542
(``The Commission staff also estimates that 75 new entrants per year
would need to spend 100 hours each developing a recordkeeping system
that complies with the TSR for an annual total of 7,500 burden
hours.''). The term ``new entrant'' denotes an entity that has not
yet, but may in the future come into being.
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Staff believes that the 1,121 existing respondents identified above
will not have recordkeeping burden associated with setting up compliant
recordkeeping systems. These entities are already required to comply
with the Rule, and thus should already have recordkeeping systems in
place. As noted above, these existing respondents will each require
approximately one hour per year to file and store records required by
the TSR. Here, too, however, this recordkeeping task is already
accounted for in the FTC's existing PRA clearance totals and included
within the latest request for renewed OMB clearance for the TSR.\618\
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\618\ Id.
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3. Disclosure Hours
Industry comments stated that in the ordinary course of business a
substantial majority of sellers and telemarketers make the disclosures
the Rule requires because doing so constitutes good business
practice.\619\ To the extent this is so, the time and financial
resources needed to comply with disclosure requirements do not
constitute ``burden.''\620\ The Commission also streamlined the
disclosures required in the final Rule by eliminating three of the
disclosures initially proposed. Moreover, some state laws require the
same or similar disclosures as the Rule mandates. Thus, the disclosure
hours burden attributable to the Rule is far less than the total number
of hours associated with the disclosures overall. Staff continues to
assume that most of the disclosures the Rule requires would be made in
at least 75% of telemarketing calls even absent the Rule.\621\
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\619\ See, e.g., MD (Oct. 26, 2009) at 21 & 35-37; TASC (Oct.
26, 2009) at 5, 14-15; Franklin at 19-20; see also Agency
Information Collection Activities, 74 FR at 25542.
\620\ 16 CFR 1320.3(b)(2).
\621\ See, e.g., Agency Information Collection Activities, 74 FR
at 25543; Agency Information Collection Activities, 71 FR at 28699.
Accordingly, staff has continued to estimate that the hours burden
for most of the Rule's disclosure requirements is 25% of the total
hours associated with disclosures of the type the TSR requires.
---------------------------------------------------------------------------
To determine the number of outbound and inbound calls regarding
debt relief services, staff has combined external data with internal
assumptions. Staff assumes that outbound calls to sell and inbound
calls to buy debt relief services are made only to and by consumers who
are delinquent on one or more credit cards.\622\ For simplicity, and
lacking specific information to the contrary, staff further assumes
that each such consumer or household will receive one outbound call and
place one inbound call for these services.
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\622\ By extension upsells on these initial calls would not be
applicable. Moreover, staff believes that few, if any, upsells on
initial outbound and inbound calls would be for debt relief.
---------------------------------------------------------------------------
The PRA analysis in the NPRM focused on the number of U.S.
households having credit cards (91.1 million) as a base for further
calculations. One commenter noted that both individuals and couples
within a household may file for bankruptcy relief, and a large
proportion of households include more than two adults.\623\ In
response, FTC staff has refocused its analysis on an estimated number
of adult (ages 18 and over) decision makers within each household. With
that as the revised base, staff then applies the additional
calculations and assumptions presented below to project an estimated
number of consumers who will receive and place a call for debt relief
services in a given year.
---------------------------------------------------------------------------
\623\ RDRI at 2.
---------------------------------------------------------------------------
Based on U.S. Census Bureau data,\624\ FTC staff estimates that
there are 162,769,000 decision making units. This estimate is based on
the assumptions that couples constitute a single decision making unit,
as are single (widowed, divorced, separated, never married) adults
within each household. Using households as a proxy for individual
decision makers in applying again the previously stated percentage of
households (78%) that had one or more credit cards at the end of
2008,\625\ staff
[[Page 48505]]
further estimates that 126,959,820 consumers have one or more credit
cards. This figure, in turn, is then multiplied by the most recently
available Federal Reserve Board data regarding the delinquency rate for
credit cards. The Federal Reserve Board reported that the delinquency
rate for credit cards was 6.58% in the third quarter of 2009.\626\
Multiplying this delinquency rate by the estimated number of consumers
having one or more credit cards - 126,959,820 - results in an estimate
of 8,353,956 consumers with delinquent accounts. As before, staff
assumes that each of these consumers will receive and place a call for
debt relief services in a given year.
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\624\ U.S. Census Bureau, Current Population Survey, 2008 Annual
Social and Economic Supplement, Internet Release Date: January 2009.
\625\ See Ben Woolsey and Matt Schulz, Credit card statistics,
industry facts, debt statistics, available at (http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php.)
\626\ FRB, Federal Reserve Statistical Release: Charge Offs and
Delinquency Rates on Loans and Leases at Commercial Banks, available
at (http://www.federalreserve.gov/releases/chargeoff/delallsa.htm)
(reporting a 6.58% delinquency rate for credit cards for the third
quarter of 2009).
---------------------------------------------------------------------------
Because outbound calls are already subject to the existing
provisions of the TSR, each such call will entail only the incremental
PRA burden resulting from the new debt relief disclosures. For inbound
calls, however, there will be new respondents, and associated
underlying distinctions between current exemptions applicable to direct
marketing via direct mail and those for general media (discussed
further below). Accordingly, separate estimates are necessary for
inbound debt relief calls attributable to each.
To determine the number of inbound debt relief calls attributable
to general media advertising versus direct mail advertising, staff
relied upon the DMA estimate that 78.8% of direct marketing is done by
general media methods\627\ and that 21.2% of direct marketing is done
by direct mail.\628\ Applying these percentages to the above-noted
estimate of 8,353,956 inbound debt relief calls translates to 6,582,917
calls resulting from general media advertising and 1,771,039 calls
arising from direct mail. Staff then estimated that 1/3 of inbound
direct mail debt relief calls, or 590,346 such calls, are currently
exempt from the TSR because they are in response to direct mail
advertising that makes the requisite Sec. 310.3(a)(1) disclosures. The
remaining 2/3, or 1,180,692 inbound direct mail calls, are non-exempt.
---------------------------------------------------------------------------
\627\ Id.
\628\ DMA Statistical Fact Book at 17.
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a. Existing Respondents' Disclosure Burden
As discussed above, the amended Rule includes a new provision,
Sec. 310.3(a)(1)(viii), which includes four disclosures specific to
providers of debt relief services; moreover, the Commission eliminated
three disclosures set forth in the proposed rule. Staff estimates that
reciting these disclosures in each sales call pertaining to debt relief
services will take 10 seconds.\629\
---------------------------------------------------------------------------
\629\ This estimate considers commenters' input while excluding
the time pertaining to disclosures that are not invoked by the
amended Rule.
---------------------------------------------------------------------------
For outbound calls, the disclosure burden for existing entities
from the new debt relief disclosures is 4,112 hours (5,921,500 outbound
calls involving debt relief x 10 seconds each (for new debt relief
disclosures) x 25% TSR burden).
Similarly, currently non-exempt inbound calls - inbound calls
placed as a result of direct mail solicitations that do not include the
Sec. 310.3(a)(1) disclosures - will only entail the incremental PRA
burden resulting from the new debt relief disclosures. As noted above,
this totals 1,180,692 such calls each year. The associated disclosure
burden for these calls would be 820 hours (1,180,692 non-exempt direct
mail inbound calls x 10 seconds for debt relief disclosures x 25%
burden from TSR).
Thus, the total disclosure burden under the amended Rule for all
existing respondents is 4,932 hours (4,112 hours for entities
conducting outbound calls + 820 hours for entities conducting inbound,
non-exempt telemarketing).
b. New Respondents' Disclosure Burden
New respondents - those currently exempt from the Rule's coverage
as a result of the direct mail or general media exemptions for inbound
calls - will incur disclosure burden not only for the debt relief
disclosures in Sec. 310.3(a)(1)(viii), but also for the existing
general disclosures for which such entities will newly be
responsible.\630\
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\630\ See Agency Information Collection Activities, 74 FR at
25542.
---------------------------------------------------------------------------
As noted above, inbound calls responding to debt relief services
advertised in general media are currently exempt from the Rule.\631\
The disclosure burden for these calls would be 18 seconds each (8
seconds for existing Sec. 310.3(a)(1) disclosures + 10 seconds for
debt relief disclosures). Applying this unit measure to the estimated
6,582,917 inbound debt relief calls arising from general media
advertising, the cumulative disclosure burden is 8,229 hours per year
(6,582,917 inbound debt relief calls in response to general media
advertising x 18 seconds x 25% burden from TSR).
---------------------------------------------------------------------------
\631\ This is so because, at present, no limitation or exemption
would limit use of the general media exemption by those selling debt
relief services via inbound telemarketing. See 16 CFR 310.6(b)(5)
(the general media exemption, unlike the direct mail exemption, is
not conditional and does not presently except from its coverage debt
relief services).
---------------------------------------------------------------------------
Applying the previously stated estimates and assumptions, the
disclosure burden for new respondents attributable to currently exempt
inbound calls tied to direct mail (i.e., currently exempt when the
requisite Sec. 310.3(a)(1) disclosures are made), is 328 hours per
year (590,346 exempt inbound direct mail calls x 8 seconds x 25% burden
from TSR).
Thus, the total disclosure burden attributable to the Final Rule is
13,489 hours (4,932 + 8,229 + 328).
Estimated Annual Labor Cost: $945,361
Estimated Annual Non-Labor Cost: $58,753
4. Recordkeeping Labor and Non-Labor Costs
a. Labor Costs
Assuming a cumulative burden of 100 hours in Year 1 (of a
prospective three-year PRA clearance for the TSR) to set up compliant
recordkeeping systems for existing debt relief service providers newly
subject to the Rule (879 new respondents x 100 hours each in Year 1
only), and applying to that a skilled labor rate of $26/hour,\632\
labor costs would approximate $2,285,400 in the first year of
compliance for new respondents.\633\ As discussed above, however, in
succeeding years, recordkeeping associated with the Rule will only
require 879 hours, cumulatively, per year. Applied to a clerical wage
rate of $14/hour, this would amount to $12,306 in each of those years.
Thus, the estimated labor costs for recordkeeping associated with the
Final Rule, averaged over a prospective three-year clearance period, is
$770,004.
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\632\ This rounded figure is derived from the mean hourly
earnings shown for computer support specialists found in the
National Compensation Survey: Occupational Earnings in the United
States 2008, U.S. Department of Labor released August 2009, Bulletin
2720, Table 3 (``Full-time civilian workers,'' mean and median
hourly wages), available at (http://www.bls.gov/ncs/ncswage2008.htm#Wage_Tables).
\633\ As discussed above, existing respondents should already
have compliant recordkeeping systems and thus are not included in
this calculation.
---------------------------------------------------------------------------
b. Non-Labor Costs
Staff believes that the capital and start-up costs associated with
the TSR's information collection requirements are de minimis. The
Rule's recordkeeping
[[Page 48506]]
requirements mandate that companies maintain records, but not in any
particular form. While those requirements necessitate that affected
entities have a means of storage, industry members should have that
already regardless of the Rule. Even if an entity finds it necessary to
purchase a storage device, the cost is likely to be minimal, especially
when annualized over the item's useful life.
Affected entities need some storage media such as file folders,
electronic storage media or paper in order to comply with the Rule's
recordkeeping requirements. Although staff believes that most affected
entities would maintain the required records in the ordinary course of
business, staff estimates that the previously determined 879 new
respondents newly subject to the Final Rule will spend an annual amount
of $50 each on office supplies as a result of the Rule's recordkeeping
requirements, for a total recordkeeping cost burden of $43,950.
5. Disclosure Labor and Non-Labor Costs
a. Labor Costs
The estimated annual labor cost for disclosures under the Final
Rule is $175,357. This total is the product of applying an assumed
hourly wage rate of $13.00\634\ to the earlier stated estimate of
13,489 hours pertaining to general and specific disclosures in initial
outbound and inbound calls.
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\634\ This rounded figure is derived from the mean hourly
earnings shown for telemarketers found in the National Compensation
Survey: Occupational Earnings in the United States 2008, U.S.
Department of Labor released August 2009, Bulletin 2720, Table 3
(``Full-time civilian workers,'' mean and median hourly wages),
available at (http://www.bls.gov/ncs/ncswage2008.htm#Wage_Tables).
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b. Non-Labor Costs
Estimated outbound disclosure hours (4,112) per above multiplied by
an estimated commercial calling rate of 6 cents per minute ($3.60 per
hour) equals $14,803 in telephone-related costs.\635\
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\635\ Staff believes that remaining non-labor costs would
largely be incurred by affected entities, regardless, in the
ordinary course of business and/or marginally exceed such costs.
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V. Regulatory Analysis and Regulatory Flexibility Act Requirements
The Regulatory Flexibility Act of 1980 (``RFA'') \636\ requires a
description and analysis of proposed and final Rules that will have a
significant economic impact on a substantial number of small
entities.\637\ The RFA requires an agency to provide an Initial
Regulatory Flexibility Analysis (``IRFA'') \638\ with the proposed rule
and a Final Regulatory Flexibility Analysis (``FRFA'') \639\ with the
Final Rule, if any. The Commission is not required to make such
analyses if a Rule would not have such an economic effect.\640\
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\636\ 5 U.S.C. 601-612.
\637\ The RFA definition of ``small entity'' refers to the
definition provided in the Small Business Act, which defines a
``small-business concern'' as a business that is ``independently
owned and operated and which is not dominant in its field of
operation.'' 15 U.S.C. 632(a)(1).
\638\ 5 U.S.C. 603.
\639\ 5 U.S.C. 604.
\640\ 5 U.S.C. 605.
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As of the date of the NPRM, the Commission did not have sufficient
empirical data regarding the debt relief industry to determine whether
the proposed amendments to the Rule would impact a substantial number
of small entities as defined in the RFA.\641\ It was also unclear
whether the proposed amended Rule would have a significant economic
impact on small entities. Thus, to obtain more information about the
impact of the proposed rule on small entities, the Commission decided
to publish an IRFA pursuant to the RFA and to request public comment on
the impact on small businesses of its proposed amended Rule.
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\641\ In response to a request for comments issued in
conjunction with the Workshop, the Commission received no empirical
data regarding the revenues of debt relief companies generally, or
debt settlement companies specifically. One Workshop commenter
opined, without attribution, that the vast majority of debt
settlement companies have fewer than 100 employees. See Able
Workshop Comment at 6 (``[o]f the thousand plus or minus companies
whose business activities are related to debt settlement, the
estimates for the numbers of companies and the numbers of
individuals either working for or affiliated with them are as
follows: Two percent consist of more than 100 individuals; eight
percent consist of 25 to 100 individuals; and the remaining ninety
percent consist of less than 25 individuals.'').
---------------------------------------------------------------------------
In response to questions in the NPRM, the Commission did not
receive any comprehensive empirical data regarding the revenues of debt
relief companies or the impact on small businesses of the amended Rule.
A trade association stated that a significant number of companies that
would be harmed by the advance fee ban were small businesses.\642\ One
commenter asserted that there are tens of thousands of sole
practitioners engaged in financial consulting services that may fall
under the Rule's definition of debt relief services.\643\ It does not
appear, though, that the commenter considered that many sole
practitioners would not fall within the Rule's ambit because they meet
face-to-face with their customers.\644\ The commenter also opined that
the rule would subject small businesses to frivolous lawsuits that
could jeopardize their businesses.\645\ However, the commenter neither
provided support for the statement nor asserted that the impact would
be more significant on small businesses than large businesses.\646\
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\642\ USOBA (Oct. 26, 2009) at 20 (``95% of USOBA members would
`certainly' or `likely' be forced to lay off employees if the
advance fee ban were adopted [note that 72% of these USOBA members
were `small businesses' (firms of 25 people or less)]'').
\643\ Able (Oct. 21, 2009) at 28.
\644\ See 16 CFR 310.6(b)(3).
\645\ Able (Oct. 21, 2009) at 28.
\646\ Two other debt settlement companies stated that many small
business entities would not be able to enter the market due to
significant investment and overhead costs and extended break-even
time. SDS (Oct. 7, 2009) at 3; CRN (Oct. 8, 2009) at 5. Again, the
commenters did not provide support for the assertions and did not
explain why small businesses would fare differently than large
businesses in this regard.
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A. Need for and Objectives of the Rule
The objective of the amended Rule is to curb deceptive and abusive
practices occurring in the telemarketing of debt relief services. As
described in Sections II and III, above, the amendments are intended to
address consumer protection concerns regarding telemarketing of debt
relief services and are based on evidence in the record that deceptive
and abusive acts are common in telemarketing of debt relief services to
consumers.
B. Significant Issues Raised by Public Comment, Summary of the Agency's
Assessment of These Issues, and Changes, If Any, Made in Response to
Such Comments
As discussed in Section III above, commenters raised limited
concerns about the burden of the proposed disclosures.\647\ However,
commenters raised more significant concerns about the potential costs
and burdens of the advance fee ban, as discussed in Sections III.C.2.c-
e. Many of the commenters did not focus specifically on the costs faced
by small businesses relative to those that would be borne by other
firms.\648\ Rather, they argued that the costs to be borne by all firms
- including small firms - would be
[[Page 48507]]
excessive. As discussed in detail above, two debt settlement trade
associations and many debt settlement companies argued that numerous
companies would go out of business if the FTC imposes an advance fee
ban.\649\ A trade association submitted a survey of its members
reporting: (1) 84% would ``almost certainly'' or ``likely'' have to
shut down if an advance fee ban were enacted; (2) 95% would
``certainly'' or ``likely'' lay off employees under an advance fee ban;
and (3) 85% would stop offering debt settlement services to new and
existing consumers.\650\ These survey results, however, are not
persuasive, as the commenter did not provide basic information about
survey respondents and methodology. Moreover, the survey elicited self-
reported statements but did not verify the responses' accuracy in any
way. Individual debt settlement company commenters similarly asserted
that they would go out of business if the Commission imposed an advance
fee ban.\651\ These statements, however, did not have adequate support.
Moreover, the Final Rule permits debt relief providers to require
consumers to place funds for provider fees and payments to creditors or
debt collectors in a dedicated bank account, provided certain
conditions are met. This provision will assure providers that, once
they settle a consumer's debt, they will receive the appropriate fee.
---------------------------------------------------------------------------
\647\ With respect to the disclosures, NACCA questioned whether
it was realistic that the proposed disclosures could be provided in
20 seconds. NACCA at 2. Moreover, a debt settlement company stated
that it provides consumers with 16 mandatory disclaimers, and an
additional 6 disclosures if applicable - it estimates that reading
the disclaimers, and allowing the consumer to assent to the
disclosures, requires approximately four and a half minutes. MD
(Oct. 26, 2009) at 21.
\648\ One commenter stated that, as a ``smaller operation,'' it
would not be able to front employees salaries, as well as account
set-up and maintenance costs, but did not provide any data to
support these assertions or support the assertion that small
companies would have a harder time than large companies in
capitalizing expenses. See RADR at 1.
\649\ Supra Section III.C.2.c.
\650\ USOBA (Oct. 26, 2009) at 20.
\651\ SDS at 2; MD (Oct. 26, 2009) at 25; RADR at 1; Orion (Oct.
1, 2009) at 2; CDS at 1; D&A at 2; see also ULC at 6; CSA at 10
(stating generally that the advance fee ban ``could put a legitimate
company out of business''); FDR (Oct. 26, 2009) at 16-17; CCC at 1
(a for-profit credit counseling company stated that it would go out
of business if the Commission promulgates the advance fee ban).
---------------------------------------------------------------------------
C. Description and Estimate of the Number of Small Entities Subject to
the Final Rule or Explanation Why No Estimate Is Available
The amendments to the Rule will affect providers of debt relief
services engaged in ``telemarketing,'' as defined by the Rule to mean
``a plan, program, or campaign which is conducted to induce the
purchase of goods or services or a charitable contribution, by use of
one or more telephones and which involves more than one interstate
telephone call.''\652\ Staff estimates that the amended Rule will apply
to approximately 2,000 entities. Determining a precise estimate of how
many of these are small entities, or describing those entities further,
is not readily feasible because the staff is not aware of published
data that reports annual revenue figures for debt relief service
providers.\653\ Further, the Commission's requests for information
about the number and size of debt settlement companies yielded
virtually no information.\654\ Based on the absence of available data,
the Commission believes that a precise estimate of the number of small
entities that fall under the amendment is not currently feasible.
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\652\ 16 CFR 310.2(cc) (in the proposed amended Rule, this
definition is renumbered as Sec. 310.2(dd)).
\653\ Directly covered entities under the proposed amended Rule
are classified as small businesses under the Small Business Size
Standards component of the North American Industry Classification
System (``NAICS'') as follows: All Other Professional, Scientific
and TechnicalServices (NAICS code 541990) with no more than $7.0
million dollars in average annual receipts (no employee size limit
is listed). See SBA, Table of Small Business Size Standards Matched
to North American Industry Classification System codes (Aug. 22,
2008), available at (http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf/).
\654\ See Able Workshop Comment at 6 (there are a ``thousand
plus or minus companies whose business activities are related to
debt settlement'').
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D. Description of the Projected Reporting, Recordkeeping, and Other
Compliance Requirements of the Rule, Including an Estimate of the
Classes of Small Entities Which Will Be Subject to the Rule and the
Type of Professional Skills That Will Be Necessary to Comply
The Final Rule imposes disclosure and recordkeeping burden within
the meaning of the PRA. The Commission is seeking clearance from the
OMB for these requirements, and the Commission's Supporting Statement
submitted as part of that process is being made available on the public
record of this rulemaking. Specifically, the Final Rule requires
specific disclosures in telemarketing of debt relief services, and it
would subject inbound debt relief service telemarketing to the Rule's
requirements, including the existing disclosure and recordkeeping
provisions.\655\ In addition, the Final Rule prohibits a seller or
telemarketer of debt relief services from requesting or receiving a fee
in advance of providing the offered services.\656\
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\655\ See Rule Sec. 310.3(a)(1)(viii).
\656\ See Rule Sec. 310.4(a)(5).
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The classes of small entities affected by the amendments include
telemarketers or sellers engaged in acts or practices covered by the
Rule. The types of professional skills required to comply with the
Rule's recordkeeping, disclosure, or other requirements would include
attorneys or other skilled labor needed to ensure compliance.
E. Steps the Agency Has Taken to Minimize any Significant Economic
Impact on Small Entities, Consistent with the Stated Objectives of the
Applicable Statutes
In drafting the amended Rule, the Commission has made every effort
to avoid unduly burdensome requirements for entities. The Commission
believes that the amendments - including the new disclosures for debt
relief services, prohibited misrepresentations, and the advance fee ban
- are necessary in order to protect consumers considering the purchase
of debt relief services. Similarly, the Commission is extending the
coverage of the existing provisions of the Rule to inbound
telemarketing of debt relief services. This amendment is designed to
ensure that in telemarketing transactions to sell debt relief services,
consumers receive the benefit of the Rule's protections. For each of
these amendments, the Commission has attempted to tailor the provision
to the concerns evidenced by the record to date. In fact, in
determining the Final Rule's requirements, the FTC reduced the number
of debt relief-specific disclosures from six initially proposed in the
NPRM to four in order to reduce the burden on business, including small
entities. On balance, the Commission believes that the benefits to
consumers of each of the Rule's requirements outweigh the costs to
industry of implementation.
The Commission considered, but decided against, providing an
exemption for small entities in the amended Rule. The protections
afforded to consumers from the amendments are equally important
regardless of the size of the debt relief service provider with whom
they transact. Indeed, small debt relief service providers have no
unique attributes that would warrant exempting them from provisions,
such as the required debt relief disclosures. The information provided
in the disclosures is material to the consumer regardless of the size
of the entity offering the services. Similarly, the protections
afforded to consumers by the advance fee ban are equally necessary
regardless of the size of the entity providing the services. Thus, the
Commission believes that creating an exemption for small businesses
from compliance with the amendments would be contrary to the goals of
the amendments because it would arbitrarily limit their reach to the
detriment of consumers.
Nonetheless, the Commission has taken care in developing the
amendments to set performance standards, which establish the objective
results that must be achieved by
[[Page 48508]]
regulated entities, but do not establish a particular technology that
must be employed in achieving those objectives. For example, the
Commission does not specify the form in which records required by the
TSR must be kept. Moreover, the Rule's disclosure requirements are
format-neutral; sellers and telemarketers may make the disclosures in
writing or orally, as long as they are clear and conspicuous.\657\ In
sum, the agency has worked to minimize any significant economic impact
on small entities.
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\657\ If the disclosures are made in writing, they are
considered clear and conspicuous ``only if they are sent close
enough in time to the call so that the consumer associates the call
with the written disclosures.'' FTC, Complying With the
Telemarketing Sales Rule (May 2009), available at (http://www.ftc.gov/bcp/edu/pubs/business/marketing/bus27.shtm).
List of Commenters and Short-Names/Acronyms Cited in the SBP
TSR Debt Relief Final Rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
Short-name/Acronyms Commenter
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allen Charles Allen
Arnold & Porter Arnold & Porter on behalf of National Consumer Council
ART A.R. Trust Services, Inc.
Able Able Debt Settlement, Inc.
ACA ACA International
ACCORD American Coalition of Companies Organized to Reduce Debt
AFSA American Financial Services Association
AICCCA Association of Independent Consumer Credit Counseling Agencies
AADMO American Association of Debt Management Organizations
ABA American Bankers Association
AMCA American Credit Alliance
Atkins Anthony Atkins
BBB Better Business Bureau of the Southland
Briesch Richard Briesch
Brodie Jessica Brodie
CDS Tim Harris, on behalf of CDS
CCC Edward McTaggart, on behalf of CCC
Cambridge Cambridge Credit Counseling Corp.
Clement Bryan Scott Clement
CRN Consumer Recovery Network
CareOne Care One Services
Centricity Centricity, Inc.
Cheney Gabriel Cheney
CO AG Office of the Colorado Attorney General
CCCS CNY Consumer Credit Counseling Service of Central New York
CFA Consumer Federation of America, Consumers Union, Consumer Action, National Consumer Law Center, Center for
Responsible Lending, National Association of Consumer Advocates, National Consumers League, US Public Interest
Research Group, Privacy Rights Clearinghouse, Arizona Consumers Council, Chicago Consumer Coalition, Consumer
Assistance Council, Community Reinvestment Association of North Carolina, Consumer Federation of the Southeast,
Grass Roots Organizing, Jacksonville Area Legal Aid, Inc., Maryland Consumer Rights Coalition, Mid-Minnesota Legal
Assistance, and Virginia Citizens Consumer Council
CU Consumer's Union
CSA Morrison & Foerster, LLP on behalf of Credit Solutions of America
D&A Davis & Associates
Davis Robert Davis, engaged by AADMO
Debthelper Debthelper
DRS Debt Remedy Solutions
DS Debt Shield, Inc.
DSUSA Debt Settlement USA
DMB DMB Financial, LLC
DSA/ADE Debt Settlement America, Inc. and American Debt Exchange, Inc.
FCS Financial Consulting Services, LLC
FECA Financial Education and Counseling Alliance
Figliuolo Michael Figliuolo
FSR Financial Services Roundtable
FDR Freedom Debt Relief, LLC
Franklin Franklin Debt Relief
Garner Garner
GCS Global Client Solutions, LLC
Gecha Gecha
Greenfield Professor Michael Greenfield
GP GreenPath, Inc.
Hargrove Jason Hargrove
Hinksor Eric Hinksor
Ho Andy Ho
Houghton Rebecca Houghton
Hunter Hunter Business Solutions
JH J. Haas Group
Kaiser Karen Kaiser
[[Page 48509]]
Loeb Loeb & Loeb, LLC
MP Manchester Publishing Company, Inc.
McInnis Saundra McInnis
MD Morgan Drexen, Inc.
MD AG Office of the Maryland Attorney General
MN AG Office of the Minnesota Attorney General
MN LA Mid-Minnesota Legal Assistance
NACCA National Association of Consumer Credit Administrators
NAAG National Association of Attorneys General
Neal Erin Neal
NYC DCA N.Y.C. Dept. of Consumer Affairs
NFCC National Foundation for Credit Counseling
NWS Nationwide Support Services, Inc.
Orion Orion Processing, LLC
Palmiero Diane Palmiero, on behalf of Century Negotiations, Inc.
Paquette Barbara Paquette
Patel David Patel
Pratt Vincent Pratt
QSS Quality Survey Services
QLS Queens Legal Services
RDRI Responsible Debt Relief Institute
RADR Rise Above Debt Relief
SBLS South Brooklyn Legal Services
Seigle John Seigle
Silverman Jeffrey Silverman
SOLS Southeastern Ohio Legal Services
SDS Superior Debt Services
Smith Andrew Smith
Taillie Alex Taillie
TASC The Association of Settlement Companies
TBDR Two Bridge Debt Resolutions
ULC Uniform Law Commission/National Conference of Commissioners on Uniform State Laws
USOBA United States Organizations for Bankruptcy Alternatives
USDR US Debt Resolve, Inc.
Weinstein Bernard Weinstein
Wheat Sharon Wheat
WV AG Office of the West Virginia Attorney General
--------------------------------------------------------------------------------------------------------------------------------------------------------
List of FTC Law Enforcement Actions Against Debt Relief Companies
1. FTC v. Dominant Leads, LLC, No. 1:10-cv-00997 (D.D.C. filed June
15, 2010) (debt settlement)
2. FTC v. Asia Pacific Telecom, Inc., No. 10 C 3168 (N.D. Ill.
filed May 24, 2010) (debt negotiation)
3. FTC v. Advanced Mgmt. Servs. NW, LLC, No. 10-148-LRS (E.D. Wash.
filed May 10, 2010) (debt negotiation)
4. FTC v. Credit Restoration Brokers, LLC, No. 2:10-cv-0030-CEH-SPC
(M.D. Fla. filed Jan. 19, 2010) (debt settlement and credit repair)
5. FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill.,
preliminary injunction issued Dec. 17, 2009) (debt negotiation)
6. FTC v. Econ. Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga.,
preliminary injunction issued Dec. 14, 2009) (debt negotiation)
7. FTC v. JPM Accelerated Servs., Inc., No. 09-CV-2021 (M.D. Fla.,
preliminary injunction issued Dec. 31, 2009) (debt negotiation)
8. FTC v. MCS Programs, LLC, No. 09-CV-5380 (W.D. Wash., final
order July 19, 2010) (debt negotiation)
9. FTC v. Group One Networks, Inc., No. 09-CV-00352 (M.D. Fla.,
preliminary injunction issued March 25, 2009) (debt negotiation)
10. FTC v. Edge Solutions, Inc., No. CV 07-4087-JG-AKT (E.D.N.Y.,
final order Aug. 29, 2008) (debt settlement)
11. FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo., final order
Apr. 11, 2008) (debt settlement)
12. FTC v. Select Pers. Mgmt., Inc., No. 07-CV-0529 (N.D. Ill.,
final order May 15, 2009) (debt negotiation)
13. FTC v. Express Consolidation, No. 0:06-CV-61851-WJZ (S.D. Fla.,
final order May 5, 2007) (credit counseling)
14. FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal., final
order Oct. 2, 2008) (debt settlement)
15. United States v. Credit Found. of Am., No. CV06-3654 ABC (VBKx)
(C.D. Cal., final order June 16, 2006) (credit counseling)
16. FTC v. Integrated Credit Solutions, Inc., No. 8:06-CV-00806-
SCB-TGW (M.D. Fla., final order Oct. 16, 2006) (credit counseling)
17. FTC v. Debt Solutions, Inc., No. CV06-0298 (W.D. Wash., final
order June 18, 2007) (debt negotiation)
18. FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC(Ex) (C.D.
Cal., final order Dec. 12, 2004) (debt settlement)
19. FTC v. Nat'l Consumer Council, Inc., No. ACV04-0474CJC (JWJX)
(C.D. Cal., final order Apr. 1, 2005) (credit counseling and debt
settlement)
20. FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4) (D.
Mass., final order Mar. 28, 2005) (debt settlement)
21. FTC v. Debt Mgmt. Found. Servs., Inc., No. 8:04-CV-1674-T-17MSS
(M.D. Fla., final order Mar. 30, 2005) (credit counseling)
22. FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 (C.D. Cal.,
final order July 13, 2005) (debt settlement)
23. FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md., final order
May 17, 2006) (credit counseling)
[[Page 48510]]
List of State Law Enforcement Actions Against Debt Relief Companies
Debt Settlement
Attorney General Actions
1. Alabama v. Allegro Law LLC, No. 2:09cv729 (M.D. Ala. 2009).
Press Release, Alabama Attorney General, A.G. King and Securities
Commission Sue Prattville Companies Operating Alleged National Debt
Settlement Scheme (July 10, 2009), available at (http://www.ago.state.al.us/news_template.cfm?Newsfile=www.ago.alabama.gov/news/07102009.htm)
2. California v. Freedom Debt Relief, No. CIV477991 (Cal. Super.
Ct. San Mateo County 2008). Consent Judgment, Stipulation for Entry of
Consent Judgment, and Complaint, available at (http://www.corp.ca.gov/ENF/pdf/f/FDR.pdf)
3. In re Clearone Advantage, LLC (Colo. 2009). Press Release,
Colorado Attorney General, Eleven Companies Settle with the State Under
New Debt-Management and Credit Counseling Regulations (Mar. 12, 2009),
available at (http://www.coloradoattorneygeneral.gov/press/news/2009/03/12/eleven_companies_settle_state_under_new_debt_management_and_credit_counseling_)
4. In re Credit Answers, LLC (Colo. 2009). Press Release, supra
item 3.
5. In re Debt Relief of Am. (Colo. 2009). Press Release, supra item
3.
6. In re Fin. Freedom Res., Inc. (Colo. 2009). Press Release, supra
item 3.
7. In re Freedom Debt Relief (Colo. 2009). Press Release, supra
item 3.
8. In re New Beginnings Debt Settlement, LLC (Colo. 2009). Press
Release, supra item3.
9. In re New Life Debt Relief Corp. (Colo. 2009). Press Release,
supra item 3.
10. In re PDL Assistance, Inc. (Colo. 2009). Press Release, supra
item 3.
11. In re Pemper Cos., Inc. (Colo. 2009). Press Release, supra
item3.
12. Colorado v. ADA Tampa Bay, Inc. dba Am. Debt Arbitration, FGL
Clearwater, Inc. dba Am. Debt Arbitration, and Glenn P. Stewart (Colo.
2010).
13. Florida v. Hess Kennedy Chartered LLC, No. 08007686 (Fla. Cir.
Ct. - 17th 2008). Complaint, available at (http://myfloridalegal.com/
webfiles.nsf/WF/MRAY-7C2GSH/$file/HessComplaint.pdf)
14. Florida v. New Leaf Assocs., LLC, No. 05-4612-CI-20 (Fla. Cir.
Ct. - 6th 2008). Complaint, available at (http://myfloridalegal.com/
webfiles.nsf/wf/mray-6e3juf/$file/newleafcomplaint.pdf)
15. Florida v. Hacker, (Fla. Cir. Ct. - 4th 2008). Complaint,
available at (http://myfloridalegal.com/webfiles.nsf/WF/MRAY-7C2GRC/
$file/HackerandCaparellaComplaint.pdf)
16. Florida v. Ryan Boyd, No. 16-2008-CA-002909 (Fla. Cir. Ct. -
4th 2008). Press Release, Florida Attorney General, Two Duval County
Debt Negotiation Companies Sued for Alleged Deceptions (Mar. 5, 2008),
available at (http://myfloridalegal.com/__852562220065EE67.nsf/0/1E9B7637235FE16C85257403005C595F?Open&Highlight=0,ryan,boyd)
17. Florida v. Credit Solutions of Am., Inc., No. 09-CA-026438
(Fla. Cir. Ct. - 13th 2009). Complaint, available at (http://
myfloridalegal.com/webfiles.nsf/WF/KGRG-7WYJAU/$file/CSAcomplaint.pdf)
18. Florida v. Nationwide Asset Servs., Inc., et al. (Fla. Cir. Ct.
- 6th 2009). Complaint, available at (http://myfloridalegal.com/
webfiles.nsf/WF/KGRG-7WYJCD/$file/ADAcomplaint.pdf)
19. In re Christian Crossroads. Notice of Active Public Consumer-
Related Investigation, Florida Attorney General, available at (http://myfloridalegal.com/85256309005085AB.nsf/0/3BEE2927780BC9468525765D0044C534?Open&Highlight=0,christian,crossroads)
20. In re Clear Fin. Solutions. Notice of Active Public Consumer-
Related Investigation, Florida Attorney General, available at (http://myfloridalegal.com/__85256309005085AB.nsf/0/C0634690070A696285257585005670EB?Open&Highlight=0,clear,financial)
21. In re Clearview Credit, Inc. Notice of Active Public Consumer-
Related Investigation, Florida Attorney General, available at (http://myfloridalegal.com/__85256309005085AB.nsf/0/7FAE8CB0EA0BCE5F852575BD0066D4BD?Open&Highlight=0,clearview,credit)
22. In re Debt Settlement USA. Notice of Active Public Consumer-
Related Investigation, Florida Attorney General, available at (http://myfloridalegal.com/__85256309005085AB.nsf/0/21B6A5099EFC61FE852576A500751189?Open&Highlight=0,debt,services)
23. In re Emergency Debt Relief, Inc. Press Release, Florida
Attorney General, Crist Reaches $230,000 Settlement with Debt Relief
Company (Fla. Apr. 27, 2006), available at (http://myfloridalegal.com/__852562220065EE67.nsf/0/EA12BA531A5B606A8525715D00602067?Open&Highlight=0,emergency,debt)
24. In re Genesis Capital Mgmt., Inc. Notice of Active Public
Consumer-Related Investigation, Florida Attorney General, available at
(http://myfloridalegal.com/85256309005085AB.nsf/0/ACF49525909A2F3585257632005F0071?Open&Highlight=0,genesis)
25. In re M & J Life Mgmt. Notice of Active Public Consumer-Related
Investigation, Florida Attorney General, available at (http://myfloridalegal.com/__85256309005085AB.nsf/0/A2F454A33AEC8213852574DA0066174E?Open&Highlight=0,life,management)
26. In re Sapphire Mktg. Notice of Active Public Consumer-Related
Investigation, Florida Attorney General, available at (http://myfloridalegal.com/__85256309005085AB.nsf/0/CF68D500F2C776FD85257633004B8AE6?Open&Highlight=0,sapphire)
27. Illinois v. SDS West Corp., No. 09CH368 (Ill. Cir. Ct. - 7th
2009). Press Release, Illinois Attorney General, Attorney General
Madigan Sues Two Debt Settlement Firms (May 4, 2009), available at
(http://www.illinoisattorneygeneral.gov/pressroom/2009_05/20090504.pdf)
28. Illinois v. Debt Relief USA, Inc., No. 09CH367 (Ill. Cir. Ct. -
7th 2009). Press Release, supra item 27.
29. Illinois v. Clear Your Debt, LLC, No. 2010CH00167 (Ill. Cir.
Ct. - 7th 2010). Press Release, Illinois Attorney General, Madigan Sues
Four Debt Settlement Firms to Stop Abusive, Deceptive Practices (Feb.
10, 2010), available at (http://www.ag.state.il.us/pressroom/2010_02/20100210.html)
30. Illinois v. Endebt Solutions, LLC, d/b/a DebtOne Fin., No.
2010CH00165 (Ill. Cir. Ct. - 7th 2010). Press Release, supra item 29.
31. Illinois v. Debt Consultants of Am., Inc., No. 2010CH00168
(Ill. Cir. Ct. - 7th 2010). Press Release, supra item 29.
32. Illinois v. Am. Debt Arbitration et al., No. 2010CH00166 (Ill.
Cir. Ct. - 7th 2010). Press Release, supra item 29.
33. Indiana v. Debt Settlement Amer., Inc., No. 87C01-1002-PL-068
(Ind. Cir. Ct. Warrick County 2010).
34. Kansas v. Philip Manger, Robert Lock, Jr. and CCDN, LLC dba
Credit Collection Def. Network (Kan. 2010).
35. Kansas v. Blue Harbor Fin., No. 10C10 (Kan. Dist. Ct. Shawnee
County 2010).
[[Page 48511]]
36. Kansas v. Equity First Fin., No. 09C1878 (Kan. Dist. Ct.
Shawnee County 2009).
37. Maine v. Credit Solutions of America, No. BCD-WB-CV-10-02. (Me.
Super. Ct. 2009). Complaint, available at (http://www.maine.gov/ag/news/cases_of_interest.shtml)
38. Maryland Attorney General v. Law Offices of Richard A. Brennan,
No. 10-C-08-00503-OC (Md. Cir. Ct. Frederick County 2007). Press
Release, Maryland Attorney General, Attorney General Settles with
Companies Selling Debt Repayment Services (Oct. 19, 2007), available at
(http://www.oag.state.md.us/Press/2007/101907.htm)
39. Minnesota v. Am. Debt Settlement Solutions, Inc., No. 70-CV-10-
4478 (Minn. Dist. Ct. - 1\st\ 2010). Complaint, Minnesota Attorney
General comment (Feb. 23, 2010), available at (http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00332.pdf)
40. Minnesota v. Debt Rx USA, LLC (Minn. Dist. Ct. - 4th 2010).
Complaint, supra item 39.
41. Minnesota v. FH Fin. Serv., Inc. (Minn. Dist. Ct. - 6th 2010).
Complaint, supra item 39.
42. Minnesota v. Morgan Drexen (Minn. Dist. Ct. - 4th 2010).
Complaint, supra item 39.
43. Minnesota v. Pathway Fin. Mgmt., Inc. (Minn. Dist. Ct. - 4th
2010). Complaint, supra item 39.
44. Minnesota v. State Capital Fin., Inc., No. 34-CV-10-117 (Minn.
Dist. Ct. - 8th 2010). Complaint, supra item 39.
45. Missouri v. Credit Solutions of Am., No. 0922-CC02228 (Mo. Cir.
Ct. St. Louis 2009). Press Release, Missouri Attorney General, Attorney
General Koster Files Suit to Stop Company from Falsely Promising
Credit-Card Debt Help (June 2, 2009), available at (http://ago.mo.gov/newsreleases/2009/AG_Koster_Suit_Against_Credit_Solutions)
46. Missouri v. Credit Repair and Counseling Specialists, LLC, No.
1031-CV03404 (Mo. Cir. Ct. Green County 2010). Press Release, Missouri
Attorney General, Attorney General Koster Warns, ``No Quick Fix'' (Mar.
9, 2010), available at (http://ago.mo.gov/newsreleases/2010/Consumer_protection_week_scam_of_the_day_alert_credit_repair/)
47. New York v. Credit Solutions of Am., Inc., No. 401225/2009
(N.Y. Sup. Ct. New York County 2009). Press Release, New York Attorney
General, Attorney General Cuomo Sues Debt Settlement companies for
Deceiving and Harming Consumers (May 19, 2009), available at (http://www.ag.ny.gov/media_center/2009/may/may19b_09.html)
48. New York v. Nationwide Asset Servs., Inc., No. 5710/2009 (N.Y.
Sup. Ct. Erie County 2009). Press Release, supra item 47.
49. North Carolina v. Daly & Sinnott Law Ctr., PLLC d/b/a The Law
Ctrs. for Consumer Prot., et al., No. 01CV013603 (N.C. Super. Ct. Wake
County 2002). Press release, North Carolina Attorney General, Debt
Relief Company to Return Money to Consumers, Announces A.G. Cooper
(Jan. 11, 2005), available at (http://www.ncdoj.gov/News-and-Alerts/News-Releases-and-Advisories/Press-Releases/Debt-relief-company-to-return-money-to-consumers,-.aspx)
50. North Carolina v. Knight Credit Servs., Inc., et al., No.
04CVS8345 (N.C. Super Ct. Cumberland County 2004).
51. North Carolina v. Commercial Credit Counseling Servs., Inc. d/
b/a Corporate Turnaround, No. 06CV14672 (N.C. Super. Ct. Wake County
2006).
52. North Carolina v. Hess Kennedy Chartered, LLC, No. 08CV2310
(N.C. Super. Ct. Wake County 2008). Press Release, North Carolina
Attorney General, Debt Relief Firms Ordered to Stop Taking Money in NC,
Says A.G. (Feb. 15, 2008), available at (http://www.ncdoj.gov/News-and-Alerts/News-Releases-and-Advisories/Press-Releases/Debt-relief-firms-ordered-to-stop-taking-money-in-.aspx)
53. In re Morgan Drexen (N.C. 2009)
54. In re Credit Solutions of America (Or. 2010). Press Release,
Oregon Attorney General, Attorney General John Kroger Bans Nation's
Largest Debt Settlement Company From Doing Business in Oregon (May 7,
2010), available at (http://www.doj.state.or.us/releases/2010/rel050710.shtml)
55. Texas v. Debt Relief USA, No. D-1-GV-09-001570 (Tex. Dist. Ct.
- 53\rd\ Travis County 2009). Complaint, available at (http://www.oag.state.tx.us/newspubs/releases/2009/081809debtrelief_pop.pdf)
56. Texas v. BC Credit Solution, LLC, et al. (Tex. Dist. Ct. Travis
County 2009). Plaintiff's Original Petition, available at (http://www.oag.state.tx.us/newspubs/releases/2009/052009bccredit_pop.pdf)
57. Texas v. FH1 Fin. Servs., Inc. d/b/a FH Fin. Serv. (Tex. Dist.
Ct. Travis County 2009). Plaintiff's Original Petition, available at
(http://www.oag.state.tx.us/newspubs/releases/2009/052009lhfinancial_pop.pdf)
58. Texas v. Four Peaks Fin. Servs., LLC (Tex. Dist. Ct. Travis
County 2009). Plaintiff's Original Petition, available at (http://www.oag.state.tx.us/newspubs/releases/2009/052009fourpeaks_pop.pdf)
59. Texas v. HABR, LLC d/b/a Debtor Solution (Tex. Dist. Ct. Travis
County 2009). Plaintiff's Original Petition, available at (http://www.oag.state.tx.us/newspubs/releases/2009/052009debtsolution_pop.pdf)
60. Texas v. Credit Solutions of Am., Inc., No. D-1-GV-09-000417
(Tex. Dist. Ct. - 261\st\ 2009). Plaintiff's Original Petition,
available at (http://www.oag.state.tx.us/newspubs/releases/2009/032509csa_op.pdf)
61. Texas v. DebtXS, L.P. (Tex. Dist. Ct. Travis County 2006).
Press Release, Texas Attorney General, Attorney General Abbott Gets
Debt Settlement Firm to Change Business Practices Harming Consumers
(Sept. 11, 2006), available at (http://www.oag.state.tx.us/oagNews/release.php?id=1729)
62. Vermont v. Daly and Sinnott Law Ctrs. (Vt. 2002). Press
Release, Vermont Attorney General, Consumer Update: Daly and Sinnott
``Law Centers for Consumer Protection'' (Jan. 27, 2003), available at
(http://www.atg.state.vt.us/issues/consumer-protection/documents-and-resources/consumer-update-daly-and-sinnott-law-centers-for-consumer-protection.php)
63. In re Boston Debt Solutions, LLC, No. 1302-09WNCV (Vt. Super.
Ct. Washington County 2009). Press Release, Vermont Attorney General,
Debt Adjuster Sanctioned for Violating Licensing and Consumer Laws
(Mar. 9, 2009), available at (http://www.atg.state.vt.us/news/debt-adjuster-sanctioned-for-violating-licensing-and-consumer-laws.php);
Assurance of Discontinuance, available at (http://www.atg.state.vt.us/assets/files/Boston%20Debt%20Solutions%202-26-09.pdf)
64. In re Century Negotiations, Inc., No. 489-7-09WNCV (Vt. Super.
Ct. Washington County 2009). Press Release, Vermont Attorney General,
Debt Settlement Company Settles Consumer Claims (July 14, 2009),
available at (http://www.atg.state.vt.us/news/debt-settlement-company-settles-consumer-claims3.php); Assurance of Discontinuance, available
at (http://www.atg.state.vt.us/assets/files/Century%20Negotiations%20-%207-2-09.pdf)
65. In re Clear Your Debt, LLC, No. 56-1-10WNCV (Vt. Super. Ct.
Washington County 2009) (Joint action by Attorney General and State
Regulator). Press Release, Vermont Attorney General, Debt Settlement
Company Settles Consumer Claims (July 23, 2009), available at (http://www.atg.state.vt.us/news/debt-settlement-company-settles-consumer-claims1.php); Assurance of Discontinuance, available at (http://
www.atg.state.vt.us/assets/files/
[[Page 48512]]
Debt%20Settlement%20 America%20AOD%20-%202010-1-27.pdf)
66. In re CreditAnswers LLC, No. 766-10-09WNCV (Vt. Super. Ct.
Washington County 2009). Press Release, Vermont Attorney General, Two
More Debt Settlement Companies Settle Consumer Claims (Oct. 13, 2009),
available at (http://www.atg.state.vt.us/news/two-more-debt-settlement-companies-settle-consumer-claims.php); Assurance of Discontinuance,
available at (http://www.atg.state.vt.us/assets/files/Credit%20Answers%20AOD.pdf)
67. In re Liberty Banc Mortgage Group, Inc. dba Liberty Settlement
Group, No. 767-10-09WNCV (Vt. Super. Ct. Washington County 2009). Press
Release and Assurance of Discontinuance, supra item 66.
68. In re Debt Remedy Solutions, LLC, No. 377-5-09WNCV (Vt. Super.
Ct. Washington County 2009). Press Release, Vermont Attorney General,
Debt Settlement Company Settles Consumer Claims (May 27, 2009),
available at (http://www.atg.state.vt.us/news/debt-settlement-company-settles-consumer-claims2.php); Assurance of Discontinuance, available
at (http://www.atg.state.vt.us/assets/files/Debt%20Remedy%20Solutions%20LLC.pdf)
69. In re Debt Settlement USA, Inc., No. 867-11-09WNCV (Vt. Super.
Ct. Washington County 2009). Press Release, Vermont Attorney General,
Attorney General Settles Consumer Claims with Two More Debt Settlement
Companies (Nov. 30, 2009), available at (http://www.atg.state.vt.us/news/attorney-general-settles-consumer-claims-with-two-more-debt-settlement-companies.php); Assurance of Discontinuance, available at
(http://www.atg.state.vt.us/assets/files/Debt%20Settlement%20USA%20Inc%20AOD.pdf)
70. In re Fin. Freedom of Am., Inc., No. 897-11-09WNCV (Vt. Super.
Ct. Washington County 2009). Press Release and Assurance of
Discontinuance, supra item 69.
71. In re Credit Alliance Group, No. 172-3-10WNCV (Vt. Super. Ct.
Washington County 2010). Assurance of Discontinuance, available at
(http://www.atg.state.vt.us/assets/files/Credit%20Alliance%20Group%20AOD.pdf)
72. In re Debt Settlement Am. (Vt. 2010). Press Release, Vermont
Attorney General, Attorney General Settles Consumer Claims With Debt
Settlement Company (Feb. 2, 2010), available at (http://www.atg.state.vt.us/news/attorney-general-settles-consumer-claims-with-debt-settlement-company.php); Assurance of Discontinuance, available at
(http://www.atg.state.vt.us/assets/files/Debt%20Settlement%20America%20AOD%20-%202010-1-27.pdf)
73. State ex rel. McGraw v. Able Debt Settlement, Inc. (W. Va.
2009). Press Release, West Virginia Attorney General, Texas-based Debt
Settlement Company, Able Debt Settlement, is Enjoined from Doing
Business in West Virginia (May 15, 2009), available at (http://www.wvago.gov/press.cfm?ID=476&fx=more)
74. State ex rel. McGraw v. Patriot Debt Solutions Corp., No. 07-
Misc.-309 (W. Va. Cir. Ct. Kanawha County 2007).
75. State ex rel. McGraw v. Credit Collections Defense Network, No.
09-Misc.-77 (W. Va. Cir. Ct. Kanawha County 2009). Press Release, West
Virginia Attorney General, Illinois Attorney Enjoined from Continuing
Debt Settlement Business Until He Complies with Attorney General's
Investigation (Apr. 1, 2009), available at (http://www.wvago.gov/press.cfm?fx=more&ID=471)
76. State ex rel. McGraw v. Hess Kennedy Chartered LLC, No. 07-
Misc.-454 (W. Va. Cir. Ct. Kanawha County 2008). Press Release, West
Virginia Attorney General, Florida Attorneys Prevented From Continuing
Debt Settlement Business in WV Until They Comply with Attorney
General's Investigation (Dec. 21, 2007), available at (http://www.wvago.gov/press.cfm?ID=417&fx=more)
77. State ex rel. McGraw v. Debt Mgmt. Credit Counseling Corp. (W.
Va. 2006). Press Release, West Virginia Attorney General, McGraw
Recovers Nearly $92,000 in Overages (Jan. 31, 2006), available at
(http://www.wvago.gov/press.cfm?ID=62&fx=more)
78. In re Excess Debt Solutions, LLC (W. Va. 2010).
79. In re Am. Debt Solutions (W. Va. 2008).
80. State ex rel. McGraw v. PDM Int'l, Inc. (W. Va. 2007). Press
Release, West Virginia Attorney General, Attorney General Darrell
McGraw Obtains $35,345.00 in Refunds for 38 West Virginia Consumers
Misled by a Texas Debt Relief Company (Feb. 18, 2009), available at
(http://www.wvago.gov/press.cfm?ID=465&fx=more)
81. In re Accelerated Fin. Ctrs. (W. Va. 2010).
82. In re Active Debt Solutions (W. Va. 2009).
83. In re Elimidebt Mgmt. Servs. (W. Va. 2009).
84. State ex rel. McGraw v. CCDN, LLC, No. 10-C-632 (W. Va. Cir.
Ct. Kanawha County 2010). Press Release, West Virginia Attorney
General, A.G. McGraw Sues to Stop CCDN's Deceptive Debt Settlement
Business (Apr. 12, 2010), available at (http://www.wvago.gov/press.cfm?ID=521&fx=more)
State Regulator Actions
1. In re Nationwide Asset Servs., Inc., (California Dep't of Corps.
2005). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2005/Nationwide.pdf)
2. In re First Am. Debt Relief (Adm'r of the Colo. Unif. Consumer
Credit Code 2009).
3. In re First Choice Fin. Solutions LLC (Adm'r of the Colo. Unif.
Consumer Credit Code 2009).
4. In re Franklin Debt Relief (Adm'r of the Colo. Unif. Consumer
Credit Code 2009).
5. In re Freedom Fin. Mgmt., Inc. (Adm'r of the Colo. Unif.
Consumer Credit Code 2009).
6. In re Interservice Fin. Solutions (Adm'r of the Colo. Unif.
Consumer Credit Code 2009).
7. In re Law Ctr. for Debt Settlement Servs. (Adm'r of the Colo.
Unif. Consumer Credit Code 2009).
8. In re Nationwide Asset Services, Inc. (Adm'r of the Colo. Unif.
Consumer Credit Code 2009).
9. In re Nationwide Support Servs., Inc. (Adm'r of the Colo. Unif.
Consumer Credit Code 2009).
10. In re Optimal Debt Solutions (Adm'r of the Colo. Unif. Consumer
Credit Code 2009).
11. In re Pacific Debt, Inc. (Adm'r of the Colo. Unif. Consumer
Credit Code 2009).
12. In re SDS West Corp. (Adm'r of the Colo. Unif. Consumer Credit
Code 2010).
13. In re Debt Regret, Inc. (Adm'r of the Colo. Unif. Consumer
Credit Code 2009).
14. In re SCK Solutions, LLC dba Family Debt Ctr. (Adm'r of the
Colo. Unif. Consumer Credit Code 2009).
15. In re Safeguard Credit Counseling Servs., Inc. (Adm'r of the
Colo. Unif. Consumer Credit Code 2009).
16. In re The Achievable Inc dba Achievable Fin. Solutions (Adm'r
of the Colo. Unif. Consumer Credit Code 2009).
17. In re Triumph Fin. Group, Inc (Adm'r of the Colo. Unif.
Consumer Credit Code 2009).
18. In re CSA-Credit Solutions of Am., LLC (Adm'r of the Colo.
Unif. Consumer Credit Code 2010).
[[Page 48513]]
19. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v.
Debt Relief of Am., No. 2005CV109801 (Ga. Super. Ct. Fulton County
2005).
20. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v.
Debt Remedy Solutions, LLC, No. 2008CV147250 (Ga. Super. Ct. Fulton
County 2008).
21. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v.
DebtXS, LP, No. 2007CV128094 (Ga. Super. Ct. Fulton County 2007).
22. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v.
Brauer Law Offices, PLC., No. 10-1-0681-34 (Ga. Super. Ct. Cobb County
2010).
23. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v.
Bella Fin., Inc. d/b/a Debt-By-Debt Settlement Servs., No. 2010CV183079
(Ga. Super. Ct. Fulton County 2010).
24. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v.
Rescue Debt, Inc., No. 2006CV125866 (Ga. Super. Ct. Fulton County
2006). Information, 2006 Accomplishments - Enforcement, available at
(http://consumer.georgia.gov/00/article/0,2086,5426814_39039081_74269691,00.html)
25. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. P &
E Holdings, LLC, Greenwood Fin. Solutions, LLC & Eddie Zucker, No.
2007CV137759 (Ga. Super. Ct. Fulton County 2007).
26. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v.
Debt Relief USA, Inc., No. 2009CV166354 (Ga. Super. Ct. Fulton County
2009). Press Release, Georgia Governor's Office of Consumer Affairs,
Debt Relief USA to Pay Georgia Consumers Over $500,000 in Refunds (Mar.
18, 2009), available at (http://consumer.georgia.gov/00/press/detail/0,2668,5426814_94800056_135944239,00.html)
27. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v.
Jeremy Wright and Liberty Debt Mgmt., No. 2007CV130515 (Ga. Super. Ct.
Fulton County 2007).
28. South Carolina Dep't of Consumer Affairs v. Debt Relief of Am.,
LP, No. 06-ALJ-30-0671-CC (S.C. Admin. Law Ct. 2006). Information,
available at (http://www.scconsumer.gov/licensing/credit_counseling/06-alj-30-0671-cc.htm)
29. South Carolina Dep't of Consumer Affairs v. Credit Solutions,
Inc, No. 07-ALJ-30-0518-IJ (S.C. Admin. Law Ct. 2009). Administrative
Law Court Decision, available at (http://www.scalc.net/decisions.aspx?q=4&id=10745)
30. In re Am. Credit Counselors, Inc. (S.C. Dep't of Consumer
Affairs 2009).
31. In re Am. Debt Found., Inc. (S.C. Dep't of Consumer Affairs
2007).
32. In re Am. Liberty Fin., Inc. (S.C. Dep't of Consumer Affairs
2007).
33. In re Debt Resolution Assocs., Inc. (S.C. Dep't of Consumer
Affairs 2008).
34. In re Debt Settlement USA, Inc. (S.C. Dep't of Consumer Affairs
2008).
35. In re Endebt Solutions, LLC dba DebtOne Fin. Solutions (S.C.
Dep't of Consumer Affairs 2008).
36. In re Freedom Fin. Mgmt., Inc. (S.C. Dep't of Consumer Affairs
2010).
37. In re NewPath Fin., Inc. (S.C. Dep't of Consumer Affairs 2010).
38. In re Safeguard Credit Counseling Servs., Inc. (S.C. Dep't of
Consumer Affairs 2009).
39. In re U.S. Fin. Mgmt., Inc. (S.C. Dep't of Consumer Affairs
2007).
40. In re Allegro Law Firm, LLC and Keith Anderson Nelms (S.C.
Dep't of Consumer Affairs 2009). Press Release, South Carolina Dep't of
Consumer Affairs, SC Consumers May be Affected by Alabama Court Ruling
(Nov. 6, 2009), available at (http://www.scconsumer.gov/press_releases/2009/09085.pdf)
41. Lexington Law Firm v. South Carolina Dep't of Consumer Affairs,
No. 06-ALJ-30-0935-CC (S.C. Admin. Law Ct. 2009). Press Release, South
Carolina Dep't of Consumer Affairs, SC Supreme Court Rules in Favor of
Consumer Affairs (May 14, 2009), available at (http://www.scconsumer.gov/press_releases/2009/09047.pdf)
42. In re Credit First Fin. Solutions, LLC (Utah Dep't of Commerce
2009).
43. In re North 83 rd Debt Resolution, LLC (Wis. Dep't of Fin.
Insts., Div. of Banking 2008). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/mb_2008/North83rdDebtResolutionLLC.pdf)
Publicly-Announced Investigations
New York Investigations
Press Release, New York Attorney General, Attorney General Cuomo
Announces Nationwide Investigation Into Debt Settlement Industry (May
7, 2009), available at (http://www.ag.ny.gov/media_center/2009/may/may7a_09.html)
1. Am. Debt Found. (2009).
2. Am. Fin. Serv. (2009).
3. Consumer Debt Solutions (2009).
4. Credit Answers, LLC (2009).
5. Debt Remedy Solutions (2009).
6. Debt Settlement Am. (2009).
7. Debt Settlement USA (2009).
8. Debtmerica Relief (2009).
9. DMB Fin., LLC (2009).
10. Freedom Debt Relief (2009).
11. New Era Debt Solutions (2009).
12. New Horizons Debt Relief Inc. (2009).
13. Preferred Fin. Servs., Inc. (2009).
14. U.S. Fin. Mgmt. Inc. (d.b.a. My Debt Negotiation) (2009).
15. Allegro Law Firm (2009).
Florida Investigations
Press Release, Florida Attorney General, Attorney General Announces
Initiative to Clean Up Florida's Debt Relief Industry (Oct. 15, 2008),
available at (http://myfloridalegal.com/newsrel.nsf/newsreleases/BD3AB29E6DDAF150852574E3004DFACD 4DFACD)
1. Fin. Freedom Resources, Inc. (2008).
2. Specialized Funding (2008).
3. Nodelay Enterprises, Inc. (2008).
4. Equity First Fin. Corp. (2008).
Debt Negotiation
Attorney General Actions
1. Colorado v. Nat'l Found. for Debt Mgmt., Inc. (Colo. 2009).
Press Release, Colorado Attorney General, Eleven Companies Settle with
the State Under New Debt-Management and Credit Counseling Regulation
(Mar. 12, 2009), available at (http://www.coloradoattorneygeneral.gov/press/news/2009/03/12/eleven_companies_settle_state_under_new_debt_management_and_credit_counseling_)
2. Florida v. IXE Accelerated Fin. Servs. (Fla. 2008). Press
Release, Florida Attorney General, Attorney General Announces
Initiative to Clean Up Florida's Debt Relief Industry (Oct. 15, 2008),
available at (http://myfloridalegal.com/newsrel.nsf/newsreleases/BD3AB29E6DDAF150852574E3004DFACD 004DFACD)
3. Kansas v. Genesis Capital Mgmt., Inc., No. 09C2012 (Kan. Dist.
Ct. Shawnee County 2009).
4. Minnesota v. Priority Direct Mktg., No. 62-CV-10416 (Minn. Dist.
Ct. Ramsey County 2009). Press Release, Minnesota Attorney General,
Attorney General Swanson Files Three Lawsuits Against companies
Claiming to Help Consumers Lower Their Credit Card Interest Rates
(Sept. 22, 2009), available at (http://www.ag.state.mn.us/consumer/pressrelease/090922ccinterestrates.asp)
5. Minnesota v. Clear Fin. Solutions, No. 62-CV-10410 (Minn. Dist.
Ct. Ramsey County 2009). Press Release, supra item 4.
6. Minnesota v. Moneyworks, LLC, No. 62-CV-09-10411 (Minn. Dist.
Ct. Ramsey
[[Page 48514]]
County 2009). Press Release, supra item 4.
7. Minnesota v. One Source, Inc., No. 40-CV-135 (Minn. Dist. Ct. Le
Sueur County 2010). Complaint, available at (http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00332.pdf)
8. Washington v. Debt Solutions, Inc., No. CV06-0298 (W.D. Wash.
2006). Complaint, available at (http://www.atg.wa.gov/uploadedFiles/Home/News/Press_Releases/2007/DSIcomplaint6-3-06.pdf)
9. In re Clear Fin. Solutions (W. Va. 2009). Press Release, West
Virginia Attorney General, Attorney General McGraw Announces WV Refunds
of $214,000 in Debt Relief Companies Settlement (Jan. 13, 2010),
available at (http://www.wvago.gov/press.cfm?ID=500&fx=more)
State Regulator Actions
1. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. Am.
Debt Negotiators, Inc., No. 2006CV123869 (Ga. Super. Ct. Fulton County
2006). Information, 2006 Accomplishments - Enforcement, available at
(http://consumer.georgia.gov/00/article/0,2086,5426814_39039081_74269691,00.html)
2. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. Debt
Freedom, Inc. and Joshua Autenreith, No. 2008CV158957 (Ga. Super. Ct.
Fulton County 2008).
3. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v.
Smart Credit Mgmt. Group, Inc., No. 2007CV134220 (Ga. Super. Ct. Fulton
County 2007).
4. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v.
Consumer Credit Counseling Found., No. 2006CV120087 (Ga. Super. Ct.
Fulton County 2006).
Credit Counseling
Attorney General Actions
1. Connecticut v. J.K. Harris Fin. Recovery Sys., LLC (Conn. 2006).
Press Release, Connecticut Attorney General, Attorney General Sues J.K.
Harris for Deceptive Mailings Offering Help With Nonexistent Court
Cases (Feb. 11, 2004), available at (http://www.ct.gov/ag/cwp/view.asp?A=1779&Q=284302)
2. Illinois v. Cambridge Credit Counseling Corp. (Ill. 2007). Press
Release, Illinois Attorney General, Attorney General Madigan Continues
Crackdown on Debt Settlement Industry (Sept. 30, 2009), available at
(http://www.ag.state.il.us/pressroom/2009_09/20090930.html)
3. Illinois v. AmeriDebt, Inc. (Ill. 2005). Press Release, supra
item 2.
4. In re Michael Kiefer (Md. 2005). Press Release, Maryland
Attorney General, Attorney General's Office Settles with Former Officer
of Debtworks (Sept. 19, 2005), available at (http://www.oag.state.md.us/press/2005/091905.htm)
5. In re Ballenger Group, LLC, (Md. 2005). Press Release, Maryland
Attorney General, Attorney General's Office Settles with Debt
Management Servicer (Mar. 22, 2005), available at (http://www.oag.state.md.us/Press/2005/032205.htm)
6. In re Debtscape, Inc. (Md. 2005). Press Release, Maryland
Attorney General, Attorney General's Office Settles with Credit
Counseling Agency (Oct. 12, 2005), available at (http://www.oag.state.md.us/press/2005/101205.htm)
7. In re Fin. Freedom Int'l (Md. 2005). Press Release, Maryland
Attorney General, Attorney General's Office Settles with Credit
Counseling Agency that Targeted Spanish Speakers (Nov. 22, 2005),
available at (http://www.oag.state.md.us/Press/2005/112205a.htm)
8. Massachusetts v. Cambridge Credit Counseling Corp., No. 2004-
01436-F (Mass. Super. Ct. 2004).
9. Minnesota v. AmeriDebt, Inc. (Minn. 2003).
10. Missouri ex rel. Nixon v. AmeriDebt, Inc. (Mo. 2003).
11. New Jersey v. United Credit Adjusters, No. MON-C-158-08 (N.J.
Super. Ct. Monmouth County 2008). Final Consent Judgment, available at
(http://www.nj.gov/oag/newsreleases09/pr20090730b-UnitedCreditAdjusters-FinalConsentJudgment.pdf)
12. North Carolina v. Cambridge Credit Counseling Corp., No.
04CVS005155 (N.C. Super. Ct. Wake County 2004).
13. Texas v. AmeriDebt, Inc. (Tex. 2003). Press Release, Texas
Attorney General, Attorney General Abbot Files Suit Against Non-Profit
Credit Counseling Service (Nov. 19, 2003), available at (http://www.oag.state.tx.us/oagNews/release.php?id=284)
14. State ex rel. McGraw v. Cambridge Credit Counseling Corp. (W.
Va. 2006). Press Release, West Virginia Attorney General, Attorney
General Secures Settlement Agreement with Cambridge (May 25, 2006),
available at (http://www.wvago.gov/press.cfm?ID=35&fx=more)
15. State ex rel. McGraw v. Family Credit Counseling Corp. (W. Va.
2009). Press Release, West Virginia Attorney General, Attorney General
McGraw Sues James R. Armstrong, Jr. And His Web of Florida Shell
Companies over Fraudulent Credit Counseling Scheme (May 8, 2009),
available at (http://www.wvago.gov/press.cfm?fx=more&ID=475)
16. State ex rel. McGraw v. Help Ministries dba Debt Free (W. Va.
2006). Press Release, West Virginia Attorney General, Attorney General
McGraw Secures Settlement With Debt Free (Sept. 13, 2006), available at
(http://www.wvago.gov/press.cfm?ID=83&fx=more)
State Regulator Actions
1. California Dep't of Corps. v. Express Consolidation, Inc.,
Department of Corporations No. 943-0122 (Cal. 2008). Statement of
Issues, available at (http://www.corp.ca.gov/ENF/pdf/e/ExpressConsolidation_si.pdf)
2. In re Money Mgmt. by Mail, Inc. (California Dep't of Corps.
2005). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2005/MoneyManagement.pdf)
3. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. Debt
Mgmt. Credit Counseling Corp. (Ga. 2005). Information, 2005
Accomplishments - Enforcement, available at (http://consumer.georgia.gov/00/article/0,2086,5426814_39039081_49161506,00.html)
4. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. Fin.
Freedom Resources, Inc., No. 2007-RCCV-781 (Ga. Super. Ct. Richmond
County 2008).
5. South Carolina Dep't of Consumer Affairs v. Vision Fin. Mgmt.,
LLC and Nelzarie Wynn, No. 08-ALJ-30-0043-IJ (S.C. Admin. Law Ct.
2008). Administrative Law Court Decision, available at (http://www.scalc.net/decisions.aspx?q=4&id=11007)
Failure to Register
Attorney General Actions
1. In re Century Negotiations, Inc. (Colo. 2009). Press Release,
Colorado Attorney General, Eleven Companies Settle With the State Under
New Debt-Management and Credit Counseling Regulations (Mar. 12, 2009),
available at (http://www.coloradoattorneygeneral.gov/press/news/2009/03/12/eleven_companies_settle_state_under_new_debt_management_and_credit_counseling_)
2. Delaware v. Freedom Debt Relief, LLC (Del. 2009). Press Release,
Delaware Attorney General, Consumer Protection Unit Acts to Safeguard
Delawareans in Debt (Sept. 28, 2009), available at (http://
attorneygeneral.delaware.gov/media/releases/2009/Consumer%20Protection
%20Unit%20acts%20to %20safeguard%20
[[Page 48515]]
Delawareans%20 in%20debt.pdf)
3. Idaho v. Debt Relief USA, Inc. (Idaho 2008). Press Release,
Idaho Department of Finance, Department of Finance Reaches Agreements
with Out-of-State Debt Settlement Companies (Sept. 19, 2008), available
at (http://finance.idaho.gov/PR/2008/GSpressRelDebtStlmntCoSettlements9-08.pdf)
4. Idaho v. DMB Fin. (Idaho 2008). Press Release, supra item 3.
5. Idaho v. Debt Settlement USA, Inc. (Idaho 2008). Press Release,
supra item 3.
6. Idaho v. Credit Solutions of Am., Inc. (Idaho 2008). Press
Release, Idaho Department of Finance, Idaho Department of Finance
Settles with Credit Solutions of America (Jan. 15, 2008), available at
(http://spokane.bbb.org/article/idaho-department-of-finance-settles-with-credit-solutions-ofamerica-inc-3086)
7. New Hampshire v. Debt Relief USA, et al., Banking Department No.
08-361 (N.H. 2008). Order of License Denial, available at (http://www.nh.gov/banking/Order08_361DebtReliefUSA_DO.pdf)
8. In re Help With Debt, LLC and David A. Gelinas (N.H. 2007) .
Cease and Desist Order, available at (http://www.nh.gov/banking/Order07_047HelpWithDebt_CD.pdf)
9. In re Peoples First Fin. (Utah Dep't of Commerce, 2009).
10. In re Consumer Law Ctr. (Utah Dep't of Commerce, 2008).
11. In re Associated Tax Relief, Inc. (Utah Dep't of Commerce,
2009).
12. In re Liberty Am., LLC (Utah Dep't of Commerce, 2009).
13. In re Reliance Debt Relief, LLC (Utah Dep't of Commerce, 2009).
14. State ex rel. McGraw v. Debt Relief of Am. LLP (W. Va. 2007).
Press Release, West Virginia Attorney General, Attorney General McGraw
Reaches Settlement with Four Debt Relief Companies for 366 Consumers
(May 16, 2007), available at (http://www.wvago.gov/press.cfm?ID=343&fx=more)
15. State ex rel. McGraw v. Fidelity Debt Consultants, Inc. (W. Va.
2007). Press Release, supra item 14.
16. State ex rel. McGraw v. David Huffman d/b/a Freedom Group (W.
Va. 2007) . Press Release, supra item 14.
17. State ex rel. McGraw v. New Horizons Debt Relief (W. Va. 2007)
. Press Release, supra item 14.
18. State ex rel. McGraw v. Consumer Credit Counseling of Am., Inc.
(W. Va. 2008). Press Release, West Virginia Attorney General, Attorney
General McGraw Reaches Agreement with Three More ``Debt Settlement''
Companies; Refunds of $375K to 141 WV Consumers (Sept. 3, 2008),
available at (http://www.wvago.gov/press.cfm?fx=more&ID=446)
19. In re Debt Relief USA Inc. (W. Va. 2008). Press Release, supra
item 18.
20. In re Acushield Fin. Servs. (W. Va. 2008). Press Release, supra
item 18.
State Regulator Actions
1. In re AmeriDebt, Inc. (Cal. Dep't of Corps. 2002). Desist and
Refrain Order, available at (http://www.corp.ca.gov/enf/pdf/2002/ameridebt.pdf)
2. In re Blue Chip Fin. Network, Inc. (Cal. Dep't of Corps. 2009).
Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2009/BlueChip_dr.pdf)
3. In re AAA Fin. Servs., Neo Fin. Servs. (Cal. Dep't of Corps.
2003). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2003/neo.pdf)
4. In re Boris Isaacson d/b/a Debt Payment Club (Cal. Dep't of
Corps. 2002). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2002/debt.pdf)
5. In re Brite Start Consulting Corp. (Cal. Dep't of Corps. 2004).
Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2004/BriteStartConsultingCorp.pdf)
6. In re Brandon Gutman, Ann Gutman, William Troy, Credit
Counseling Express, Inc. (Cal. Dep't of Corps. 2004). Desist and
Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2004/CreditCounselingExpressInc.pdf)
7. In re DebtWorks, Inc. and The Ballenger Group, LLC (Cal. Dep't
of Corps. 2004). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2004/Debtworks.pdf)
8. In re Edward J. Silva d/b/a Credit Xpress and Creditxpress (Cal.
Dep't of Corps. 2005). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2005/creditxpress.pdf)
9. In re Harbour Credit Counseling Servs., Inc. (California Dep't
of Corps. 2002). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2002/harbour.pdf)
10. In re InCharge Inst. of Am., Inc. (Cal. Dep't of Corps. 2002).
Consent Order, available at (http://www.corp.ca.gov/ENF/pdf/2002/inchargeconsentorder.pdf)
11. In re MyVesta.org, Inc. (Cal. Dep't of Corps. 2002). Desist and
Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2002/myvesta.pdf)
12. In re Innovative Sys. Tech., Inc. (Cal. Dep't of Corps. 2002).
Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2002/briggs.pdf)
13. In re Nat'l Consumer Council, Inc. (Cal. Dep't of Corps. 2004).
Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2004/NationalConsumerCouncilInc.pdf)
14. In re Positive Return, Inc. (Cal. Dep't of Corps. 2004). Desist
and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2004/Positive.pdf)
15. California Dep't of Corps. v. U.S. Fin. Mgmt., No. D052320
(Cal. App. & Sup. Ct. - 4 2008). Petition for Order, available at
(http://www.corp.ca.gov/ENF/pdf/u/usfinman-petition.pdf)
16. In re The Consumer Protection Law Ctr. (Cal. Dep't of Corps.
2009). Amended Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2009/Mezey_adr.pdf)
17. In re Acu-Shield (Cal. Dep't of Corps. 2008). Desist and
Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2008/AcuShieldFin_dr.pdf)
18. In re Am. Debt Negotiation & Settlement, LLC (Cal. Dep't of
Corps. 2008). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2008/ADNS_dr.pdf)
19. In re Am. Debt Mgmt. Servs., Inc., No. DFP EU 2007-120 (Md.
Comm'r of Fin. Regulation 2007). Final Order to Cease and Desist,
available at (http://www.dllr.state.md.us/finance/consumers/pdf/eandamdebtmgmt.pdf)
20. In re North Seattle Cmty. College Found. d/b/a AFS Credit
Counseling (N.H. Banking Dep't 2007). Consent Agreement, available at
(http://www.nh.gov/banking/Order06_072NorthSeattleCCFound_CA.pdf)
21. In re Freedom Fin. Network LLC (R.I. Dep't of Bus. Regulation
2009). Consent Order, available at (http://www.dbr.ri.gov/documents/decisions/BK-Freedom_Financial-Consent_Order.pdf)
22. In re 6:10 Services dba Debt-Free Am. (R.I. Dep't of Bus.
Regulation 2008). Order Revoking License, available at (http://www.dbr.ri.gov/documents/decisions/BK-Order-Debt-Free.pdf)
23. In re ClearPoint Fin. Solutions fka Consumer Credit Counseling
Servs. of Am., Inc. dba Credit Counselors of Rhode Island (R.I. Dep't
of Bus. Regulation 2006).
24. In re CRS Fin. Servs., Inc. (R.I. Dep't of Bus. Regulation
2009). Order to Cease and Desist, available at (http://www.dbr.ri.gov/documents/decisions/BK-CRS-Order_Cease-Desist.pdf)
25. In re Lighthouse Credit Found., Inc. (R.I. Dep't of Bus.
Regulation 2008).
26. In re Debt Consolidation Co., Inc. (R.I. Dep't of Bus.
Regulation 2009).
[[Page 48516]]
Order to Cease and Desist, available at (http://www.dbr.ri.gov/documents/decisions/BK-CRS-Order_Cease-Desist.pdf)
27. In re Debt Mgmt. Credit Counseling Corp. (R.I. Dep't of Bus.
Regulation 2007).
28. In re Consumer Credit Counseling Serv. of Southern New England,
Inc. (R.I. Dep't of Bus. Regulation 2009).
29. In re Credit Solutions of Am., Inc. (S.C. Dep't of Consumer
Affairs 2007).
30. South Carolina Dep't of Consumer Affairs v. Rescue Debt, Inc.,
No. 06-ALJ-30-0645-IJ (S.C. Admin. Law Ct. 2006). Administrative Law
Court Decision, available at (http://www.scalc.net/decisions.aspx?q=4&id=6934)
31. In re Discount Debt Solutions, Inc. (S.C. Dep't of Consumer
Affairs 2009).
32. In re United Savings Ctr., Inc. dba Mutual Consol. Savings
(S.C. Dep't of Consumer Affairs 2008).
33. In re Freedom Fin. Network, LLC (S.C. Dep't of Consumer Affairs
2007).
34. In re MyDebtRelief.com, LP (S.C. Dep't of Consumer Affairs
2008).
35. In re Able Debt Settlement (Wisc. Dep't of Fin. Insts., Dep't
of Banking 2008). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/lfs_2008/AbleDebtSettlementInc.pdf)
36. In re Debt Settlement of Am. (Wisc. Dep't of Fin. Insts., Dep't
of Banking 2008). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/lfs_2008/DebtSettlementAmerica.pdf)
37. In re The Debt Settlement Co. (Wisc. Dep't of Fin. Insts.,
Dep't of Banking 2008). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/lfs_2008/TheDebtSettlementCompany.pdf)
38. In re Global Econ. Corp. (Wisc. Dep't of Fin. Insts., Dep't of
Banking 2008). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/lfs_2008/TheDebtSettlementCompany.pdf)
39. In re Nat'l Legal Debt Ctrs. (Wisc. Dep't of Fin. Insts., Dep't
of Banking 2007). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/mb_2007/NationalLegalDebtCenters.pdf)
40. In re Debt Relief Network, Inc. (Wisc. Dep't of Fin. Insts.,
Dep't of Banking 2007). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/mb_2007/DebtReliefNetworkInc.pdf)
41. In re Fin. Freedom Through Negotiations (Wisc. Dep't of Fin.
Insts., Dep't of Banking 2007). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/mb_2007/FinancialFreedom.pdf)
42. Wisconsin, Dep't of Fin. Insts., Dep't of Banking v. Eruditio
Debt Mgmt. Corp. (Wisc. 2007). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/mb_2007/EruditioDebtManagementCorp.pdf)
43. Wisconsin, Dep't of Fin. Insts., Dep't of Banking v. Worldwide
Fin. Servs., Inc. (Wisc. 2007). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/mb_2007/WorldwideFinancialServicesInc.pdf)
44. In re Credit Solutions of Am. (Wisc. Dep't of Fin. Insts.,
Dep't of Banking 2009). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/lfs_2007/CreditSolutionsAmerica.pdf)\658\
---------------------------------------------------------------------------
\658\ In addition to the state cases provided in this List, the
Commission is aware of 10 additional matters submitted by NAAG in a
supplemental comment dated July 6, 2010: In re United Debt Svcs.,
LLC (W. Va. 2010); West Virginia v. Nat'l Credit Solutions (W. Va.
2010); West Virginia v. Sherman Enters., LC dba Nationwide Credit
Solutions, GSV Ltd., and Glen S. Vondielingen (W. Va. 2009); Joseph
B. Doyle, Adm'r, Fair Bus. Practices Act v. Solve Debts, Inc., No.
2009-CV-1777490 (Ga. 2009); Joseph B. Doyle, Adm'r, Fair Bus.
Practices Act v. The Credit Exch. Corp., No. 2009-CV-179467 (Ga.
2009); Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. Beacon
Debt Settlement, Inc., No. 2010-CV-185216 (Ga. 2010); Joseph B.
Doyle, Adm'r, Fair Bus. Practices Act v. Johnson Law Group (Ga.
2010).
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VI. Final Amendments
List of Subjects in 16 CFR part 310
Telemarketing, Trade practices.
0
For the reasons discussed in the preamble, the Federal Trade Commission
revises 16 CFR part 310 to read as follows:
TELEMARKETING SALES RULE 16 CFR PART 310
Sec.
310.1 Scope of regulations in this part.
310.2 Definitions.
310.3 Deceptive telemarketing acts or practices.
310.4 Abusive telemarketing acts or practices.
310.5 Recordkeeping requirements.
310.6 Exemptions.
310.7 Actions by states and private persons.
310.8 Fee for access to the National Do Not Call Registry.
310.9 Severability.
Authority: 15 U.S.C. 6101-6108.
Source: 68 FR 4669, Jan. 29, 2003, unless otherwise noted.
Sec. 310.1 Scope of regulations in this part.
This part implements the Telemarketing and Consumer Fraud and Abuse
Prevention Act, 15 U.S.C. 6101-6108, as amended.
Sec. 310.2 Definitions.
(a) Acquirer means a business organization, financial institution,
or an agent of a business organization or financial institution that
has authority from an organization that operates or licenses a credit
card system to authorize merchants to accept, transmit, or process
payment by credit card through the credit card system for money, goods
or services, or anything else of value.
(b) Attorney General means the chief legal officer of a state.
(c) Billing information means any data that enables any person to
access a customer's or donor's account, such as a credit card,
checking, savings, share or similar account, utility bill, mortgage
loan account, or debit card.
(d) Caller identification service means a service that allows a
telephone subscriber to have the telephone number, and, where
available, name of the calling party transmitted contemporaneously with
the telephone call, and displayed on a device in or connected to the
subscriber's telephone.
(e) Cardholder means a person to whom a credit card is issued or
who is authorized to use a credit card on behalf of or in addition to
the person to whom the credit card is issued.
(f) Charitable contribution means any donation or gift of money or
any other thing of value.
(g) Commission means the Federal Trade Commission.
(h) Credit means the right granted by a creditor to a debtor to
defer payment of debt or to incur debt and defer its payment.
(i) Credit card means any card, plate, coupon book, or other credit
device existing for the purpose of obtaining money, property, labor, or
services on credit.
(j) Credit card sales draft means any record or evidence of a
credit card transaction.
(k) Credit card system means any method or procedure used to
process credit card transactions involving credit cards issued or
licensed by the operator of that system.
(l) Customer means any person who is or may be required to pay for
goods or services offered through telemarketing.
(m) Debt relief service means any program or 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 person and
one or more unsecured creditors or debt collectors, including, but not
limited to, a reduction in the
[[Page 48517]]
balance, interest rate, or fees owed by a person to an unsecured
creditor or debt collector.
(n) Donor means any person solicited to make a charitable
contribution.
(o) Established business relationship means a relationship between
a seller and a consumer based on:
(1) the consumer's purchase, rental, or lease of the seller's goods
or services or a financial transaction between the consumer and seller,
within the eighteen (18) months immediately preceding the date of a
telemarketing call; or
(2) the consumer's inquiry or application regarding a product or
service offered by the seller, within the three (3) months immediately
preceding the date of a telemarketing call.
(p) Free-to-pay conversion means, in an offer or agreement to sell
or provide any goods or services, a provision under which a customer
receives a product or service for free for an initial period and will
incur an obligation to pay for the product or service if he or she does
not take affirmative action to cancel before the end of that period.
(q) Investment opportunity means anything, tangible or intangible,
that is offered, offered for sale, sold, or traded based wholly or in
part on representations, either express or implied, about past,
present, or future income, profit, or appreciation.
(r) Material means likely to affect a person's choice of, or
conduct regarding, goods or services or a charitable contribution.
(s) Merchant means a person who is authorized under a written
contract with an acquirer to honor or accept credit cards, or to
transmit or process for payment credit card payments, for the purchase
of goods or services or a charitable contribution.
(t) Merchant agreement means a written contract between a merchant
and an acquirer to honor or accept credit cards, or to transmit or
process for payment credit card payments, for the purchase of goods or
services or a charitable contribution.
(u) Negative option feature means, in an offer or agreement to sell
or provide any goods or services, a provision under which the
customer's silence or failure to take an affirmative action to reject
goods or services or to cancel the agreement is interpreted by the
seller as acceptance of the offer.
(v) Outbound telephone call means a telephone call initiated by a
telemarketer to induce the purchase of goods or services or to solicit
a charitable contribution.
(w) Person means any individual, group, unincorporated association,
limited or general partnership, corporation, or other business entity.
(x) Preacquired account information means any information that
enables a seller or telemarketer to cause a charge to be placed against
a customer's or donor's account without obtaining the account number
directly from the customer or donor during the telemarketing
transaction pursuant to which the account will be charged.
(y) Prize means anything offered, or purportedly offered, and
given, or purportedly given, to a person by chance. For purposes of
this definition, chance exists if a person is guaranteed to receive an
item and, at the time of the offer or purported offer, the telemarketer
does not identify the specific item that the person will receive.
(z) Prize promotion means:
(1) A sweepstakes or other game of chance; or
(2) An oral or written express or implied representation that a
person has won, has been selected to receive, or may be eligible to
receive a prize or purported prize.
(aa) Seller means any person who, in connection with a
telemarketing transaction, provides, offers to provide, or arranges for
others to provide goods or services to the customer in exchange for
consideration.
(bb) State means any state of the United States, the District of
Columbia, Puerto Rico, the Northern Mariana Islands, and any territory
or possession of the United States.
(cc) Telemarketer means any person who, in connection with
telemarketing, initiates or receives telephone calls to or from a
customer or donor.
(dd) Telemarketing means a plan, program, or campaign which is
conducted to induce the purchase of goods or services or a charitable
contribution, by use of one or more telephones and which involves more
than one interstate telephone call. The term does not include the
solicitation of sales through the mailing of a catalog which: contains
a written description or illustration of the goods or services offered
for sale; includes the business address of the seller; includes
multiple pages of written material or illustrations; and has been
issued not less frequently than once a year, when the person making the
solicitation does not solicit customers by telephone but only receives
calls initiated by customers in response to the catalog and during
those calls takes orders only without further solicitation. For
purposes of the previous sentence, the term ``further solicitation''
does not include providing the customer with information about, or
attempting to sell, any other item included in the same catalog which
prompted the customer's call or in a substantially similar catalog.
(ee) Upselling means soliciting the purchase of goods or services
following an initial transaction during a single telephone call. The
upsell is a separate telemarketing transaction, not a continuation of
the initial transaction. An ``external upsell'' is a solicitation made
by or on behalf of a seller different from the seller in the initial
transaction, regardless of whether the initial transaction and the
subsequent solicitation are made by the same telemarketer. An
``internal upsell'' is a solicitation made by or on behalf of the same
seller as in the initial transaction, regardless of whether the initial
transaction and subsequent solicitation are made by the same
telemarketer.
Sec. 310.3 Deceptive telemarketing acts or practices.
(a) Prohibited deceptive telemarketing acts or practices. It is a
deceptive telemarketing act or practice and a violation of this Rule
for any seller or telemarketer to engage in the following conduct:
(1) Before a customer consents to pay \659\ for goods or services
offered, failing to disclose truthfully, in a clear and conspicuous
manner, the following material information:
---------------------------------------------------------------------------
\659\ When a seller or telemarketer uses, or directs a customer
to use, a courier to transport payment, the seller or telemarketer
must make the disclosures required by Sec. 310.3(a)(1) before
sending a courier to pick up payment or authorization for payment,
or directing a customer to have a courier pick up payment or
authorization for payment. In the case of debt relief services, the
seller or telemarketer must make the disclosures required by Sec.
310.3(a)(1) before the consumer enrolls in an offered program.
---------------------------------------------------------------------------
(i) The total costs to purchase, receive, or use, and the quantity
of, any goods or services that are the subject of the sales offer;
\660\
---------------------------------------------------------------------------
\660\ For offers of consumer credit products subject to the
Truth in Lending Act, 15 U.S.C. 1601 et seq., and Regulation Z, 12
CFR 226, compliance with the disclosure requirements under the Truth
in Lending Act and Regulation Z shall constitute compliance with
Sec. 310.3(a)(1)(i) of this Rule.
---------------------------------------------------------------------------
(ii) All material restrictions, limitations, or conditions to
purchase, receive, or use the goods or services that are the subject of
the sales offer;
(iii) If the seller has a policy of not making refunds,
cancellations, exchanges, or repurchases, a statement informing the
customer that this is the seller's policy; or, if the seller or
telemarketer makes a representation about a refund, cancellation,
exchange, or repurchase policy, a statement of all material terms and
conditions of such policy;
(iv) In any prize promotion, the odds of being able to receive the
prize, and,
[[Page 48518]]
if the odds are not calculable in advance, the factors used in
calculating the odds; that no purchase or payment is required to win a
prize or to participate in a prize promotion and that any purchase or
payment will not increase the person's chances of winning; and the no-
purchase/no-payment method of participating in the prize promotion with
either instructions on how to participate or an address or local or
toll-free telephone number to which customers may write or call for
information on how to participate;
(v) All material costs or conditions to receive or redeem a prize
that is the subject of the prize promotion;
(vi) In the sale of any goods or services represented to protect,
insure, or otherwise limit a customer's liability in the event of
unauthorized use of the customer's credit card, the limits on a
cardholder's liability for unauthorized use of a credit card pursuant
to 15 U.S.C. 1643;
(vii) If the offer includes a negative option feature, all material
terms and conditions of the negative option feature, including, but not
limited to, the fact that the customer's account will be charged unless
the customer takes an affirmative action to avoid the charge(s), the
date(s) the charge(s) will be submitted for payment, and the specific
steps the customer must take to avoid the charge(s); and
(viii) In the sale of any debt relief service:
(A) the amount of time necessary to achieve the represented
results, and to the extent that the service may include a settlement
offer to any of the customer's creditors or debt collectors, the time
by which the debt relief service provider will make a bona fide
settlement offer to each of them;
(B) to the extent that the service may include a settlement offer
to any of the customer's creditors or debt collectors, the amount of
money or the percentage of each outstanding debt that the customer must
accumulate before the debt relief service provider will make a bona
fide settlement offer to each of them;
(C) to the extent that any aspect of the debt relief service relies
upon or results in the customer's failure to make timely payments to
creditors or debt collectors, that the use of the debt relief service
will likely adversely affect the customer's creditworthiness, may
result in the customer being subject to collections or sued by
creditors or debt collectors, and may increase the amount of money the
customer owes due to the accrual of fees and interest; and
(D) to the extent that the debt relief service requests or requires
the customer to place funds in an account at an insured financial
institution, that the customer owns the funds held in the account, the
customer may withdraw from the debt relief service at any time without
penalty, and, if the customer withdraws, the customer must receive all
funds in the account, other than funds earned by the debt relief
service in compliance with Sec. 310.4(a)(5)(i)(A) through (C).
(2) Misrepresenting, directly or by implication, in the sale of
goods or services any of the following material information:
(i) The total costs to purchase, receive, or use, and the quantity
of, any goods or services that are the subject of a sales offer;
(ii) Any material restriction, limitation, or condition to
purchase, receive, or use goods or services that are the subject of a
sales offer;
(iii) Any material aspect of the performance, efficacy, nature, or
central characteristics of goods or services that are the subject of a
sales offer;
(iv) Any material aspect of the nature or terms of the seller's
refund, cancellation, exchange, or repurchase policies;
(v) Any material aspect of a prize promotion including, but not
limited to, the odds of being able to receive a prize, the nature or
value of a prize, or that a purchase or payment is required to win a
prize or to participate in a prize promotion;
(vi) Any material aspect of an investment opportunity including,
but not limited to, risk, liquidity, earnings potential, or
profitability;
(vii) A seller's or telemarketer's affiliation with, or endorsement
or sponsorship by, any person or government entity;
(viii) That any customer needs offered goods or services to provide
protections a customer already has pursuant to 15 U.S.C. 1643;
(ix) Any material aspect of a negative option feature including,
but not limited to, the fact that the customer's account will be
charged unless the customer takes an affirmative action to avoid the
charge(s), the date(s) the charge(s) will be submitted for payment, and
the specific steps the customer must take to avoid the charge(s); or
(x) Any material aspect of any debt relief service, including, but
not limited to, the amount of money or the percentage of the debt
amount that a customer may save by using such service; the amount of
time necessary to achieve the represented results; the amount of money
or the percentage of each outstanding debt that the customer must
accumulate before the provider of the debt relief service will initiate
attempts with the customer's creditors or debt collectors or make a
bona fide offer to negotiate, settle, or modify the terms of the
customer's debt; the effect of the service on a customer's
creditworthiness; the effect of the service on collection efforts of
the customer's creditors or debt collectors; the percentage or number
of customers who attain the represented results; and whether a debt
relief service is offered or provided by a non-profit entity.
(3) Causing billing information to be submitted for payment, or
collecting or attempting to collect payment for goods or services or a
charitable contribution, directly or indirectly, without the customer's
or donor's express verifiable authorization, except when the method of
payment used is a credit card subject to protections of the Truth in
Lending Act and Regulation Z,\661\ or a debit card subject to the
protections of the Electronic Fund Transfer Act and Regulation E.\662\
Such authorization shall be deemed verifiable if any of the following
means is employed:
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\661\ Truth in Lending Act, 15 U.S.C. 1601 et seq., and
Regulation Z, 12 CFR part 226.
\662\ Electronic Fund Transfer Act, 15 U.S.C. 1693 et seq., and
Regulation E, 12 CFR part 205.
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(i) Express written authorization by the customer or donor, which
includes the customer's or donor's signature;\663\
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\663\ For purposes of this Rule, the term ``signature'' shall
include an electronic or digital form of signature, to the extent
that such form of signature is recognized as a valid signature under
applicable federal law or state contract law.
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(ii) Express oral authorization which is audio-recorded and made
available upon request to the customer or donor, and the customer's or
donor's bank or other billing entity, and which evidences clearly both
the customer's or donor's authorization of payment for the goods or
services or charitable contribution that are the subject of the
telemarketing transaction and the customer's or donor's receipt of all
of the following information:
(A) The number of debits, charges, or payments (if more than one);
(B) The date(s) the debit(s), charge(s), or payment(s) will be
submitted for payment;
(C) The amount(s) of the debit(s), charge(s), or payment(s);
(D) The customer's or donor's name;
(E) The customer's or donor's billing information, identified with
sufficient specificity such that the customer or donor understands what
account will be used to collect payment for the goods or services or
charitable contribution that are the subject of the telemarketing
transaction;
[[Page 48519]]
(F) A telephone number for customer or donor inquiry that is
answered during normal business hours; and
(G) The date of the customer's or donor's oral authorization; or
(iii) Written confirmation of the transaction, identified in a
clear and conspicuous manner as such on the outside of the envelope,
sent to the customer or donor via first class mail prior to the
submission for payment of the customer's or donor's billing
information, and that includes all of the information contained in
Sec. Sec. 310.3(a)(3)(ii)(A)-(G) and a clear and conspicuous statement
of the procedures by which the customer or donor can obtain a refund
from the seller or telemarketer or charitable organization in the event
the confirmation is inaccurate; provided, however, that this means of
authorization shall not be deemed verifiable in instances in which
goods or services are offered in a transaction involving a free-to-pay
conversion and preacquired account information.
(4) Making a false or misleading statement to induce any person to
pay for goods or services or to induce a charitable contribution.
(b) Assisting and facilitating. It is a deceptive telemarketing act
or practice and a violation of this Rule for a person to provide
substantial assistance or support to any seller or telemarketer when
that person knows or consciously avoids knowing that the seller or
telemarketer is engaged in any act or practice that violates Sec. Sec.
310.3(a), (c) or (d), or Sec. 310.4 of this Rule.
(c) Credit card laundering. Except as expressly permitted by the
applicable credit card system, it is a deceptive telemarketing act or
practice and a violation of this Rule for:
(1) A merchant to present to or deposit into, or cause another to
present to or deposit into, the credit card system for payment, a
credit card sales draft generated by a telemarketing transaction that
is not the result of a telemarketing credit card transaction between
the cardholder and the merchant;
(2) Any person to employ, solicit, or otherwise cause a merchant,
or an employee, representative, or agent of the merchant, to present to
or deposit into the credit card system for payment, a credit card sales
draft generated by a telemarketing transaction that is not the result
of a telemarketing credit card transaction between the cardholder and
the merchant; or
(3) Any person to obtain access to the credit card system through
the use of a business relationship or an affiliation with a merchant,
when such access is not authorized by the merchant agreement or the
applicable credit card system.
(d) Prohibited deceptive acts or practices in the solicitation of
charitable contributions. It is a fraudulent charitable solicitation, a
deceptive telemarketing act or practice, and a violation of this Rule
for any telemarketer soliciting charitable contributions to
misrepresent, directly or by implication, any of the following material
information:
(1) The nature, purpose, or mission of any entity on behalf of
which a charitable contribution is being requested;
(2) That any charitable contribution is tax deductible in whole or
in part;
(3) The purpose for which any charitable contribution will be used;
(4) The percentage or amount of any charitable contribution that
will go to a charitable organization or to any particular charitable
program;
(5) Any material aspect of a prize promotion including, but not
limited to: the odds of being able to receive a prize; the nature or
value of a prize; or that a charitable contribution is required to win
a prize or to participate in a prize promotion; or
(6) A charitable organization's or telemarketer's affiliation with,
or endorsement or sponsorship by, any person or government entity.
Sec. 310.4 Abusive telemarketing acts or practices.
(a) Abusive conduct generally. It is an abusive telemarketing act
or practice and a violation of this Rule for any seller or telemarketer
to engage in the following conduct:
(1) Threats, intimidation, or the use of profane or obscene
language;
(2) Requesting or receiving payment of any fee or consideration for
goods or services represented to remove derogatory information from, or
improve, a person's credit history, credit record, or credit rating
until:
(i) The time frame in which the seller has represented all of the
goods or services will be provided to that person has expired; and
(ii) The seller has provided the person with documentation in the
form of a consumer report from a consumer reporting agency
demonstrating that the promised results have been achieved, such report
having been issued more than six months after the results were
achieved. Nothing in this Rule should be construed to affect the
requirement in the Fair Credit Reporting Act, 15 U.S.C. 1681, that a
consumer report may only be obtained for a specified permissible
purpose;
(3) Requesting or receiving payment of any fee or consideration
from a person for goods or services represented to recover or otherwise
assist in the return of money or any other item of value paid for by,
or promised to, that person in a previous telemarketing transaction,
until seven (7) business days after such money or other item is
delivered to that person. This provision shall not apply to goods or
services provided to a person by a licensed attorney;
(4) Requesting or receiving payment of any fee or consideration in
advance of obtaining a loan or other extension of credit when the
seller or telemarketer has guaranteed or represented a high likelihood
of success in obtaining or arranging a loan or other extension of
credit for a person;
(5) (i) Requesting or receiving payment of any fee or consideration
for any debt relief service until and unless:
(A) the seller or telemarketer has renegotiated, settled, reduced,
or otherwise altered the terms of at least one debt pursuant to a
settlement agreement, debt management plan, or other such valid
contractual agreement executed by the customer;
(B) the customer has made at least one payment pursuant to that
settlement agreement, debt management plan, or other valid contractual
agreement between the customer and the creditor or debt collector; and
(C) to the extent that debts enrolled in a service are
renegotiated, settled, reduced, or otherwise altered individually, the
fee or consideration either:
(1) bears the same proportional relationship to the total fee for
renegotiating, settling, reducing, or altering the terms of the entire
debt balance as the individual debt amount bears to the entire debt
amount. The individual debt amount and the entire debt amount are those
owed at the time the debt was enrolled in the service; or
(2) is a percentage of the amount saved as a result of the
renegotiation, settlement, reduction, or alteration. The percentage
charged cannot change from one individual debt to another. The amount
saved is the difference between the amount owed at the time the debt
was enrolled in the service and the amount actually paid to satisfy the
debt.
(ii) Nothing in Sec. 310.4(a)(5)(i) prohibits requesting or
requiring the customer to place funds in an account to be used for the
debt relief provider's fees and for payments to creditors or debt
collectors in connection with the renegotiation, settlement, reduction,
or other alteration of the terms of payment or other terms of a debt,
provided that:
(A) the funds are held in an account at an insured financial
institution;
[[Page 48520]]
(B) the customer owns the funds held in the account and is paid
accrued interest on the account, if any;
(C) the entity administering the account is not owned or controlled
by, or in any way affiliated with, the debt relief service;
(D) the entity administering the account does not give or accept
any money or other compensation in exchange for referrals of business
involving the debt relief service; and
(E) the customer may withdraw from the debt relief service at any
time without penalty, and must receive all funds in the account, other
than funds earned by the debt relief service in compliance with Sec.
310.4(a)(5)(i)(A) through (C), within seven (7) business days of the
customer's request.
(6) Disclosing or receiving, for consideration, unencrypted
consumer account numbers for use in telemarketing; provided, however,
that this paragraph shall not apply to the disclosure or receipt of a
customer's or donor's billing information to process a payment for
goods or services or a charitable contribution pursuant to a
transaction;
(7) Causing billing information to be submitted for payment,
directly or indirectly, without the express informed consent of the
customer or donor. In any telemarketing transaction, the seller or
telemarketer must obtain the express informed consent of the customer
or donor to be charged for the goods or services or charitable
contribution and to be charged using the identified account. In any
telemarketing transaction involving preacquired account information,
the requirements in paragraphs (a)(6)(i) through (ii) of this section
must be met to evidence express informed consent.
(i) In any telemarketing transaction involving preacquired account
information and a free-to-pay conversion feature, the seller or
telemarketer must:
(A) obtain from the customer, at a minimum, the last four (4)
digits of the account number to be charged;
(B) obtain from the customer his or her express agreement to be
charged for the goods or services and to be charged using the account
number pursuant to paragraph (a)(6)(i)(A) of this section; and,
(C) make and maintain an audio recording of the entire
telemarketing transaction.
(ii) In any other telemarketing transaction involving preacquired
account information not described in paragraph (a)(6)(i) of this
section, the seller or telemarketer must:
(A) at a minimum, identify the account to be charged with
sufficient specificity for the customer or donor to understand what
account will be charged; and
(B) obtain from the customer or donor his or her express agreement
to be charged for the goods or services and to be charged using the
account number identified pursuant to paragraph (a)(6)(ii)(A) of this
section; or
(8) Failing to transmit or cause to be transmitted the telephone
number, and, when made available by the telemarketer's carrier, the
name of the telemarketer, to any caller identification service in use
by a recipient of a telemarketing call; provided that it shall not be a
violation to substitute (for the name and phone number used in, or
billed for, making the call) the name of the seller or charitable
organization on behalf of which a telemarketing call is placed, and the
seller's or charitable organization's customer or donor service
telephone number, which is answered during regular business hours.
(b) Pattern of calls.
(1) It is an abusive telemarketing act or practice and a violation
of this Rule for a telemarketer to engage in, or for a seller to cause
a telemarketer to engage in, the following conduct:
(i) Causing any telephone to ring, or engaging any person in
telephone conversation, repeatedly or continuously with intent to
annoy, abuse, or harass any person at the called number;
(ii) Denying or interfering in any way, directly or indirectly,
with a person's right to be placed on any registry of names and/or
telephone numbers of persons who do not wish to receive outbound
telephone calls established to comply with Sec. 310.4(b)(1)(iii);
(iii) Initiating any outbound telephone call to a person when:
(A) that person previously has stated that he or she does not wish
to receive an outbound telephone call made by or on behalf of the
seller whose goods or services are being offered or made on behalf of
the charitable organization for which a charitable contribution is
being solicited; or
(B) that person's telephone number is on the ``do-not-call''
registry, maintained by the Commission, of persons who do not wish to
receive outbound telephone calls to induce the purchase of goods or
services unless the seller
(i) has obtained the express agreement, in writing, of such person
to place calls to that person. Such written agreement shall clearly
evidence such person's authorization that calls made by or on behalf of
a specific party may be placed to that person, and shall include the
telephone number to which the calls may be placed and the
signature\664\ of that person; or
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\664\ For purposes of this Rule, the term ``signature'' shall
include an electronic or digital form of signature, to the extent
that such form of signature is recognized as a valid signature under
applicable federal law or state contract law.
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(ii) as an established business relationship with such person, and
that person has not stated that he or she does not wish to receive
outbound telephone calls under paragraph (b)(1)(iii)(A) of this
section; or
(iv) Abandoning any outbound telephone call. An outbound telephone
call is ``abandoned'' under this section if a person answers it and the
telemarketer does not connect the call to a sales representative within
two (2) seconds of the person's completed greeting.
(v) Initiating any outbound telephone call that delivers a
prerecorded message, other than a prerecorded message permitted for
compliance with the call abandonment safe harbor in Sec.
310.4(b)(4)(iii), unless:
(A) in any such call to induce the purchase of any good or service,
the seller has obtained from the recipient of the call an express
agreement, in writing, that:
(i) The seller obtained only after a clear and conspicuous
disclosure that the purpose of the agreement is to authorize the seller
to place prerecorded calls to such person;
(ii) The seller obtained without requiring, directly or indirectly,
that the agreement be executed as a condition of purchasing any good or
service;
(iii) Evidences the willingness of the recipient of the call to
receive calls that deliver prerecorded messages by or on behalf of a
specific seller; and
(iv) Includes such person's telephone number and signature;\665\
and
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\665\ For purposes of this Rule, the term ``signature'' shall
include an electronic or digital form of signature, to the extent
that such form of signature is recognized as a valid signature under
applicable federal law or state contract law.
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(B) In any such call to induce the purchase of any good or service,
or to induce a charitable contribution from a member of, or previous
donor to, a non-profit charitable organization on whose behalf the call
is made, the seller or telemarketer:
(i) Allows the telephone to ring for at least fifteen (15) seconds
or four (4) rings before disconnecting an unanswered call; and
(ii) Within two (2) seconds after the completed greeting of the
person called, plays a prerecorded message that promptly provides the
disclosures required by Sec. 310.4(d) or (e), followed immediately by
a disclosure of one or both of the following:
[[Page 48521]]
(A) In the case of a call that could be answered in person by a
consumer, that the person called can use an automated interactive voice
and/or keypress-activated opt-out mechanism to assert a Do Not Call
request pursuant to Sec. 310.4(b)(1)(iii)(A) at any time during the
message. The mechanism must:
(1) Automatically add the number called to the seller's entity-
specific Do Not Call list;
(2) Once invoked, immediately disconnect the call; and
(3) Be available for use at any time during the message; and
(B) In the case of a call that could be answered by an answering
machine or voicemail service, that the person called can use a toll-
free telephone number to assert a Do Not Call request pursuant to Sec.
310.4(b)(1)(iii)(A). The number provided must connect directly to an
automated interactive voice or keypress-activated opt-out mechanism
that:
(1) Automatically adds the number called to the seller's entity-
specific Do Not Call list;
(2) Immediately thereafter disconnects the call; and
(3) Is accessible at any time throughout the duration of the
telemarketing campaign; and
(iii) Complies with all other requirements of this part and other
applicable federal and state laws.
(C) Any call that complies with all applicable requirements of this
paragraph (v) shall not be deemed to violate Sec. 310.4(b)(1)(iv) of
this part.
(D) This paragraph (v) shall not apply to any outbound telephone
call that delivers a prerecorded healthcare message made by, or on
behalf of, a covered entity or its business associate, as those terms
are defined in the HIPAA Privacy Rule, 45 CFR 160.103.
(2) It is an abusive telemarketing act or practice and a violation
of this Rule for any person to sell, rent, lease, purchase, or use any
list established to comply with Sec. 310.4(b)(1)(iii)(A), or
maintained by the Commission pursuant to Sec. 310.4(b)(1)(iii)(B), for
any purpose except compliance with the provisions of this Rule or
otherwise to prevent telephone calls to telephone numbers on such
lists.
(3) A seller or telemarketer will not be liable for violating Sec.
310.4(b)(1)(ii) and (iii) if it can demonstrate that, as part of the
seller's or telemarketer's routine business practice:
(i) It has established and implemented written procedures to comply
with Sec. 310.4(b)(1)(ii) and (iii);
(ii) It has trained its personnel, and any entity assisting in its
compliance, in the procedures established pursuant to Sec.
310.4(b)(3)(i);
(iii) The seller, or a telemarketer or another person acting on
behalf of the seller or charitable organization, has maintained and
recorded a list of telephone numbers the seller or charitable
organization may not contact, in compliance with Sec.
310.4(b)(1)(iii)(A);
(iv) The seller or a telemarketer uses a process to prevent
telemarketing to any telephone number on any list established pursuant
to Sec. 310.4(b)(3)(iii) or 310.4(b)(1)(iii)(B), employing a version
of the ``do-not-call'' registry obtained from the Commission no more
than thirty-one (31) days prior to the date any call is made, and
maintains records documenting this process;
(v) The seller or a telemarketer or another person acting on behalf
of the seller or charitable organization, monitors and enforces
compliance with the procedures established pursuant to Sec.
310.4(b)(3)(i); and
(vi) Any subsequent call otherwise violating Sec. 310.4(b)(1)(ii)
or (iii) is the result of error.
(4) A seller or telemarketer will not be liable for violating Sec.
310.4(b)(1)(iv) if:
(i) The seller or telemarketer employs technology that ensures
abandonment of no more than three (3) percent of all calls answered by
a person, measured over the duration of a single calling campaign, if
less than 30 days, or separately over each successive 30-day period or
portion thereof that the campaign continues.
(ii) The seller or telemarketer, for each telemarketing call
placed, allows the telephone to ring for at least fifteen (15) seconds
or four (4) rings before disconnecting an unanswered call;
(iii) Whenever a sales representative is not available to speak
with the person answering the call within two (2) seconds after the
person's completed greeting, the seller or telemarketer promptly plays
a recorded message that states the name and telephone number of the
seller on whose behalf the call was placed\666\; and
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\666\ This provision does not affect any seller's or
telemarketer's obligation to comply with relevant state and federal
laws, including but not limited to the TCPA, 47 U.S.C. 227, and 47
CFR part 64.1200.
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(iv) The seller or telemarketer, in accordance with Sec. 310.5(b)-
(d), retains records establishing compliance with Sec. 310.4(b)(4)(i)-
(iii).
(c) Calling time restrictions. Without the prior consent of a
person, it is an abusive telemarketing act or practice and a violation
of this Rule for a telemarketer to engage in outbound telephone calls
to a person's residence at any time other than between 8:00 a.m. and
9:00 p.m. local time at the called person's location.
(d) Required oral disclosures in the sale of goods or services. It
is an abusive telemarketing act or practice and a violation of this
Rule for a telemarketer in an outbound telephone call or internal or
external upsell to induce the purchase of goods or services to fail to
disclose truthfully, promptly, and in a clear and conspicuous manner to
the person receiving the call, the following information:
(1) The identity of the seller;
(2) That the purpose of the call is to sell goods or services;
(3) The nature of the goods or services; and
(4) That no purchase or payment is necessary to be able to win a
prize or participate in a prize promotion if a prize promotion is
offered and that any purchase or payment will not increase the person's
chances of winning. This disclosure must be made before or in
conjunction with the description of the prize to the person called. If
requested by that person, the telemarketer must disclose the no-
purchase/no-payment entry method for the prize promotion; provided,
however, that, in any internal upsell for the sale of goods or
services, the seller or telemarketer must provide the disclosures
listed in this section only to the extent that the information in the
upsell differs from the disclosures provided in the initial
telemarketing transaction.
(e) Required oral disclosures in charitable solicitations. It is an
abusive telemarketing act or practice and a violation of this Rule for
a telemarketer, in an outbound telephone call to induce a charitable
contribution, to fail to disclose truthfully, promptly, and in a clear
and conspicuous manner to the person receiving the call, the following
information:
(1) The identity of the charitable organization on behalf of which
the request is being made; and
(2) That the purpose of the call is to solicit a charitable
contribution.
Sec. 310.5 Recordkeeping requirements.
(a) Any seller or telemarketer shall keep, for a period of 24
months from the date the record is produced, the following records
relating to its telemarketing activities:
(1) All substantially different advertising, brochures,
telemarketing scripts, and promotional materials;
(2) The name and last known address of each prize recipient and the
prize awarded for prizes that are represented, directly or by
implication, to have a value of $25.00 or more;
(3) The name and last known address of each customer, the goods or
services purchased, the date such goods or
[[Page 48522]]
services were shipped or provided, and the amount paid by the customer
for the goods or services;\667\
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\667\ For offers of consumer credit products subject to the
Truth in Lending Act, 15 U.S.C. 1601 et seq., and Regulation Z, 12
CFR 226, compliance with the recordkeeping requirements under the
Truth in Lending Act, and Regulation Z, shall constitute compliance
with Sec. 310.5(a)(3) of this Rule.
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(4) The name, any fictitious name used, the last known home address
and telephone number, and the job title(s) for all current and former
employees directly involved in telephone sales or solicitations;
provided, however, that if the seller or telemarketer permits
fictitious names to be used by employees, each fictitious name must be
traceable to only one specific employee; and
(5) All verifiable authorizations or records of express informed
consent or express agreement required to be provided or received under
this Rule.
(b) A seller or telemarketer may keep the records required by Sec.
310.5(a) in any form, and in the same manner, format, or place as they
keep such records in the ordinary course of business. Failure to keep
all records required by Sec. 310.5(a) shall be a violation of this
Rule.
(c) The seller and the telemarketer calling on behalf of the seller
may, by written agreement, allocate responsibility between themselves
for the recordkeeping required by this Section. When a seller and
telemarketer have entered into such an agreement, the terms of that
agreement shall govern, and the seller or telemarketer, as the case may
be, need not keep records that duplicate those of the other. If the
agreement is unclear as to who must maintain any required record(s), or
if no such agreement exists, the seller shall be responsible for
complying with Sec. Sec. 310.5(a)(1)-(3) and (5); the telemarketer
shall be responsible for complying with Sec. 310.5(a)(4).
(d) In the event of any dissolution or termination of the seller's
or telemarketer's business, the principal of that seller or
telemarketer shall maintain all records as required under this section.
In the event of any sale, assignment, or other change in ownership of
the seller's or telemarketer's business, the successor business shall
maintain all records required under this section.
Sec. 310.6 Exemptions.
(a) Solicitations to induce charitable contributions via outbound
telephone calls are not covered by Sec. 310.4(b)(1)(iii)(B) of this
Rule.
(b) The following acts or practices are exempt from this Rule:
(1) The sale of pay-per-call services subject to the Commission's
Rule entitled ``Trade Regulation Rule Pursuant to the Telephone
Disclosure and Dispute Resolution Act of 1992,'' 16 CFR Part 308,
provided, however, that this exemption does not apply to the
requirements of Sec. Sec. 310.4(a)(1), (a)(7), (b), and (c);
(2) The sale of franchises subject to the Commission's Rule
entitled ``Disclosure Requirements and Prohibitions Concerning
Franchising,'' (``Franchise Rule'') 16 CFR Part 436, and the sale of
business opportunities subject to the Commission's Rule entitled
``Disclosure Requirements and Prohibitions Concerning Business
Opportunities,'' (``Business Opportunity Rule'') 16 CFR Part 437,
provided, however, that this exemption does not apply to the
requirements of Sec. Sec. 310.4(a)(1), (a)(7), (b), and (c);
(3) Telephone calls in which the sale of goods or services or
charitable solicitation is not completed, and payment or authorization
of payment is not required, until after a face-to-face sales or
donation presentation by the seller or charitable organization,
provided, however, that this exemption does not apply to the
requirements of Sec. Sec. 310.4(a)(1), (a)(7), (b), and (c);
(4) Telephone calls initiated by a customer or donor that are not
the result of any solicitation by a seller, charitable organization, or
telemarketer, provided, however, that this exemption does not apply to
any instances of upselling included in such telephone calls;
(5) Telephone calls initiated by a customer or donor in response to
an advertisement through any medium, other than direct mail
solicitation, provided, however, that this exemption does not apply to
calls initiated by a customer or donor in response to an advertisement
relating to investment opportunities, debt relief services, business
opportunities other than business arrangements covered by the Franchise
Rule or Business Opportunity Rule, or advertisements involving goods or
services described in Sec. Sec. 310.3(a)(1)(vi) or 310.4(a)(2)-(4); or
to any instances of upselling included in such telephone calls;
(6) Telephone calls initiated by a customer or donor in response to
a direct mail solicitation, including solicitations via the U.S. Postal
Service, facsimile transmission, electronic mail, and other similar
methods of delivery in which a solicitation is directed to specific
address(es) or person(s), that clearly, conspicuously, and truthfully
discloses all material information listed in Sec. 310.3(a)(1) of this
Rule, for any goods or services offered in the direct mail
solicitation, and that contains no material misrepresentation regarding
any item contained in Sec. 310.3(d) of this Rule for any requested
charitable contribution; provided, however, that this exemption does
not apply to calls initiated by a customer in response to a direct mail
solicitation relating to prize promotions, investment opportunities,
debt relief services, business opportunities other than business
arrangements covered by the Franchise Rule or Business Opportunity
Rule, or goods or services described in Sec. Sec. 310.3(a)(1)(vi) or
310.4(a)(2)-(4); or to any instances of upselling included in such
telephone calls; and
(7) Telephone calls between a telemarketer and any business, except
calls to induce the retail sale of nondurable office or cleaning
supplies; provided, however, that Sec. 310.4(b)(1)(iii)(B) and Sec.
310.5 of this Rule shall not apply to sellers or telemarketers of
nondurable office or cleaning supplies.
Sec. 310.7 Actions by states and private persons.
(a) Any attorney general or other officer of a state authorized by
the state to bring an action under the Telemarketing and Consumer Fraud
and Abuse Prevention Act, and any private person who brings an action
under that Act, shall serve written notice of its action on the
Commission, if feasible, prior to its initiating an action under this
Rule. The notice shall be sent to the Office of the Director, Bureau of
Consumer Protection, Federal Trade Commission, Washington, D.C. 20580,
and shall include a copy of the state's or private person's complaint
and any other pleadings to be filed with the court. If prior notice is
not feasible, the state or private person shall serve the Commission
with the required notice immediately upon instituting its action.
(b) Nothing contained in this Section shall prohibit any attorney
general or other authorized state official from proceeding in state
court on the basis of an alleged violation of any civil or criminal
statute of such state.
Sec. 310.8 Fee for access to the National Do Not Call Registry.
(a) It is a violation of this Rule for any seller to initiate, or
cause any telemarketer to initiate, an outbound telephone call to any
person whose telephone number is within a given area code unless such
seller, either directly or through another person, first has paid the
annual fee, required by Sec. 310.8(c), for access to telephone numbers
within that area code that are included in the National Do Not Call
Registry
[[Page 48523]]
maintained by the Commission under Sec. 310.4(b)(1)(iii)(B); provided,
however, that such payment is not necessary if the seller initiates, or
causes a telemarketer to initiate, calls solely to persons pursuant to
Sec. Sec. 310.4(b)(1)(iii)(B)( i ) or ( ii ), and the seller does not
access the National Do Not Call Registry for any other purpose.
(b) It is a violation of this Rule for any telemarketer, on behalf
of any seller, to initiate an outbound telephone call to any person
whose telephone number is within a given area code unless that seller,
either directly or through another person, first has paid the annual
fee, required by Sec. 310.8(c), for access to the telephone numbers
within that area code that are included in the National Do Not Call
Registry; provided, however, that such payment is not necessary if the
seller initiates, or causes a telemarketer to initiate, calls solely to
persons pursuant to Sec. Sec. 310.4(b)(1)(iii)(B)( i ) or ( ii ), and
the seller does not access the National Do Not Call Registry for any
other purpose.
(c) The annual fee, which must be paid by any person prior to
obtaining access to the National Do Not Call Registry, is $54 for each
area code of data accessed, up to a maximum of $14,850; provided,
however, that there shall be no charge to any person for accessing the
first five area codes of data, and provided further, that there shall
be no charge to any person engaging in or causing others to engage in
outbound telephone calls to consumers and who is accessing area codes
of data in the National Do Not Call Registry if the person is permitted
to access, but is not required to access, the National Do Not Call
Registry under this Rule, 47 CFR 64.1200, or any other Federal
regulation or law. Any person accessing the National Do Not Call
Registry may not participate in any arrangement to share the cost of
accessing the registry, including any arrangement with any telemarketer
or service provider to divide the costs to access the registry among
various clients of that telemarketer or service provider.
(d) Each person who pays, either directly or through another
person, the annual fee set forth in Sec. 310.8(c), each person
excepted under Sec. 310.8(c) from paying the annual fee, and each
person excepted from paying an annual fee under Sec.
310.4(b)(1)(iii)(B), will be provided a unique account number that will
allow that person to access the registry data for the selected area
codes at any time for the twelve month period beginning on the first
day of the month in which the person paid the fee (``the annual
period''). To obtain access to additional area codes of data during the
first six months of the annual period, each person required to pay the
fee under Sec. 310.8(c) must first pay $54 for each additional area
code of data not initially selected. To obtain access to additional
area codes of data during the second six months of the annual period,
each person required to pay the fee under Sec. 310.8(c) must first pay
$27 for each additional area code of data not initially selected. The
payment of the additional fee will permit the person to access the
additional area codes of data for the remainder of the annual period.
(e) Access to the National Do Not Call Registry is limited to
telemarketers, sellers, others engaged in or causing others to engage
in telephone calls to consumers, service providers acting on behalf of
such persons, and any government agency that has law enforcement
authority. Prior to accessing the National Do Not Call Registry, a
person must provide the identifying information required by the
operator of the registry to collect the fee, and must certify, under
penalty of law, that the person is accessing the registry solely to
comply with the provisions of this Rule or to otherwise prevent
telephone calls to telephone numbers on the registry. If the person is
accessing the registry on behalf of sellers, that person also must
identify each of the sellers on whose behalf it is accessing the
registry, must provide each seller's unique account number for access
to the national registry, and must certify, under penalty of law, that
the sellers will be using the information gathered from the registry
solely to comply with the provisions of this Rule or otherwise to
prevent telephone calls to telephone numbers on the registry.
Sec. 310.9 Severability.
The provisions of this Rule are separate and severable from one
another. If any provision is stayed or determined to be invalid, it is
the Commission's intention that the remaining provisions shall continue
in effect.
By direction of the Commission, Commissioner Rosch dissenting.
Donald S. Clark,
Secretary.
[FR Doc. 2010-19412 Filed 8-9-10: 8:45 am]
BILLING CODE 6750-01-S