# Telemarketing Sales Rule

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2010-19412

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** August 10, 2010
- **Citation:** 75 FR 48458

## Text

FEDERAL TRADE COMMISSION
16 CFR Part 310
Telemarketing Sales Rule

AGENCY:

Federal Trade Commission (“Commission” or “FTC”).

ACTION:

Final rule amendments.

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 § 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.

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).

Beginning on September 27, 2010, sellers and telemarketers of debt relief services will be required to comply with the amended TSR requirements, except for § 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

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.

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

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.

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

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

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).

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

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).

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

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.

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

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.

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,

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

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.

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

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, § 701, et seq., tit. 32 § 6171, et seq. (limiting fees to $75 for set-up and $40 monthly charge); Md. Code Ann. § 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., § 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. § 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).

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

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 § 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).

Over the last several years, in response to abuses such as these, the

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 § 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, § 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

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.

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

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).

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

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.”).

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

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

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).

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

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

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).

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

rate at which consumers drop out of these programs before their debts are settled.

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.

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.

• 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

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.

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).

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

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

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. § 14:331, et seq.; N.D. Cen. Code § 13-06-02; Wyo. Stat. Ann. § 33-14-101, et seq.; Haw. Rev. Stat. Ann. § 446-2; Mass. Gen. Laws Ann. Ch. 180 § 4A; N.J. Stat. Ann. § 17:16G-2.

88
N.C. Gen. Stat. § 14-423 et seq.

89

See, e.g.,
Kan. Stat. Ann. § 50-1116, et seq.; Me. Rev. Stat. Ann. Tit. 17 § 701, et seq. & tit. 32 § 6171, et seq., 1101-03; N.H. Rev. Stat. Ann. § 339-D:1, et seq.; Va. Code Ann. § 6.1-363.2, et seq.

90

See, e.g,.
Kan. Stat. Ann. § 50-1116, et seq.; N.H. Rev. Stat. Ann. § 339-D:1, et seq.; S.C. Code Ann. § 37-7-101, et seq.; Wash. Rev. Code § 18.28.010, et seq.

91

See, e.g.,
S.C. Code Ann. § 37-7-101, et seq.; Va. Code Ann. § 6.1-363.2, et seq.; Wash. Rev. Code § 18.28.010, et seq.

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.

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
).

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.

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).

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.

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.

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

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.

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.

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.

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
).

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:

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).

• 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;

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

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.

As stated above, the FTC Act exempts nonprofit entities, and, pursuant to the

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

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

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.

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

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.

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

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

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.

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.

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

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

govern their behavior.
144
A different commenter, however, questioned whether state bar rules are effective in deterring unfair and deceptive practices.
145

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.

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.

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.

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

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

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.

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.

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”).

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

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

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.

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

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.

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.

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.

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.

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.

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.

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

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.

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).

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.

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2010-19412. Public record. Not legal advice.