# Telemarketing Sales Rule

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3AE9-19749

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** August 19, 2009
- **Citation:** 74 FR 41988

## Text

FEDERAL TRADE COMMISSION
16 CFR Part 310
Telemarketing Sales Rule

AGENCY:

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

ACTION:

Notice of Proposed Rulemaking; Announcement of Public Forum.

SUMMARY:

In this document, the FTC issues a Notice of Proposed Rulemaking (“NPRM” or “Notice”) to amend the FTC’s Telemarketing Sales Rule (“TSR” or “Rule”) to address the sale of debt relief services. The Commission seeks public comment on the proposed amendments, which would: define the term “debt relief service”; ensure that, regardless of the medium through which such services are initially advertised, telemarketing transactions involving debt relief services would be subject to the TSR; mandate certain disclosures and prohibit misrepresentations in the telemarketing of debt relief services; and prohibit any entity from requesting or receiving payment for debt relief services until such services have been fully performed and documented to the consumer.

This NPRM invites written comments on all issues raised by the proposed amendments and seeks answers to the specific questions set forth in Section VIII of this Notice. This document also contains an invitation to participate in a public forum, to be held following the close of the comment period, which will afford Commission staff and interested parties an opportunity to discuss the proposed amendments as well as any issues raised in comments in response thereto.

DATES:

Written comments must be received by October 9, 2009. For information on the public forum, please see the
SUPPLEMENTARY INFORMATION
section below.

ADDRESSES:

Interested parties are invited to submit written comments electronically or in paper form. For important information concerning the comments you file, please review the
SUPPLEMENTARY INFORMATION
section below. Comments in electronic form should be filed at the following electronic address: (
https://secure.commentworks.com/ftc-TSRDebtRelief
) (following the instructions on the web-based form). Comments in paper form should be mailed or delivered to the following address: Federal Trade Commission, Office of the Secretary, Room H-135 (Annex T), 600 Pennsylvania Avenue, NW, Washington, DC 20580, in the manner detailed in the
SUPPLEMENTARY INFORMATION
section below.

FOR FURTHER INFORMATION CONTACT:

Evan Zullow, Division of Financial Practices, Bureau of Consumer Protection, Federal Trade Commission, 600 Pennsylvania Avenue, NW, Washington, DC 20580, (202) 326-3224.

SUPPLEMENTARY INFORMATION:

The public forum will be held at the Federal Trade Commission. The Commission will post the date, time, and location of the public forum on its website no later than 30 days after the publication of this NPRM. The Commission will publish an agenda for the public forum on its website prior to the forum. Requests to participate as a panelist at the public forum must comply with all applicable requirements set forth in this document and must be received by October 9, 2009. To be considered as a panelist at the public forum, interested parties must submit both a request to participate and a comment in response to this NPRM. Further details regarding the public forum are included in Section IV of this Notice.

Requests to participate in the public forum, which must be filed separately from a party’s public comment, may be filed in paper form or sent via e-mail to: (
tsrdebtrelief@ftc.gov
) and should refer to “Telemarketing Sales Rule - Debt Relief Rulemaking Forum - Request to Participate, R411001” to facilitate organization of such requests.
1

Requests must comply with all other applicable requirements set forth in this section and elsewhere in this document. A request to participate filed in paper form should include this reference, both in the text and on the envelope, and should be mailed or delivered to: Federal Trade Commission/Office of the Secretary, Room H-135 (Annex T), 600 Pennsylvania Avenue, NW, Washington, DC 20580. Because paper mail in the Washington area, and specifically to the FTC, is subject to delay due to heightened security screening, please consider submitting your request to participate via e-mail to: (
tsrdebtrelief@ftc.gov.
)

1
Please note that your request constitutes a public filing before the Commission and will be placed on the public record of the proceeding, including on the publicly accessible FTC website, at (
www.ftc.gov/os/publiccomments.shtm
). Therefore, your request should not include any sensitive or confidential information. In particular, it should not include any sensitive personal information - such as any individual’s Social Security Number; date of birth; driver’s license number, other state identification number, or foreign country equivalent; passport number; financial account number; or credit or debit card number. Comments also should not include any sensitive health information, such as medical records or other individually identifiable health information. In addition, comments should not include any “[t]rade secret or any commercial or financial information which is obtained from any person and which is privileged or confidential,” as provided in Section 6(f) of the Federal Trade Commission Act (“FTC Act”), 15 U.S.C. 46(f), and FTC Rule 4.10(a)(2), 16 CFR 4.10(a)(2).

The Federal Trade Commission Act and other laws the Commission administers permit the collection of requests to participate in the above forum to consider and use in this proceeding as appropriate. As a matter of discretion, the Commission makes every effort to remove home contact information for individuals before placing requests to participate on the FTC website. More information, including routine uses permitted by the Privacy Act, may be found in the FTC’s privacy policy, at (
www.ftc.gov/ftc/privacy.shtm
).

Interested parties are invited to submit written comments electronically or in paper form. Comments should refer to “Telemarketing Sales Rule - Debt Relief Amendments, R411001” to facilitate the organization of comments. Please note that your comment - including your name and your state - will be placed on the public record of this proceeding, including on the publicly accessible FTC Website at (
www.ftc.gov/os/publiccomments.shtm
).

Because comments will be made public, they should not include any sensitive personal information, such as any individual’s: Social Security Number; date of birth; driver’s license number, other state identification number, or foreign country equivalent; passport number; financial account number; or credit or debit card number. Comments also should not include any sensitive health information, such as medical records or other individually identifiable health information. In addition, comments should not include any “[t]rade secret or any commercial or financial information which is obtained from any person and which is privileged orconfidential,” as provided in Section 6(f) of the Federal Trade Commission Act (“FTC Act”), 15 U.S.C. 46(f), and FTC Rule 4.10(a)(2), 16 CFR 4.10(a)(2). Comments containing material for which confidential treatment is requested must be filed in paper form, must be clearly labeled “Confidential,” and must comply with FTC Rule 4.9(c), 16 CFR 4.9(c).
2

2
The comment must be accompanied by an explicit request for confidential treatment, including the factual and legal basis for the request, and must identify the specific portions of the comment to be withheld from the public record. The request will be granted or denied by the Commission’s General Counsel, consistent with applicable law and the public interest.
See
FTC Rule 4.9(c), 16 CFR 4.9(c).

Because paper mail addressed to the FTC is subject to delay due to heightened security screening, please consider submitting your comments in electronic form. Comments filed in electronic form should be submitted by using the following weblink: (

https://

secure.commentworks.com/ftc-TSRDebtRelief

) (and following the instructions on the web-based form). To ensure that the Commission considers an electronic comment, you must file it on the web-based form at the weblink (
https://secure.commentworks.com/ftc-TSRDebtRelief
). If this Notice appears at (
www.regulations.gov/search/index.jsp
), you may also file an electronic comment through that website. The Commission will consider all comments that regulations.gov forwards to it. You may also visit the FTC Website at (
www.ftc.gov
) to read the Notice and the news release describing it.

A comment filed in paper form should include the “Telemarketing Sales Rule - Debt Relief Amendments - R411001” reference both in the text and on the envelope, and should be mailed or delivered to the following address: Federal Trade Commission, Office of the Secretary, Room H-135 (Annex T), 600 Pennsylvania Avenue, NW, Washington, DC 20580. The FTC requests that any comment filed in paper form be sent by courier or overnight service, if possible, to avoid security related delays.

Comments on any proposed filing, recordkeeping, or disclosure requirements that are subject to paperwork burden review under the Paperwork Reduction Act should additionally be submitted to: Office of Information and Regulatory Affairs, Office of Management and Budget (“OMB”), Attention: Desk Officer for Federal Trade Commission. Comments should be submitted via facsimile to (202) 395-5167 because U.S. postal mail at the OMB is subject to delays due to heightened security precautions.

The FTC Act and other laws the Commission administers permit the collection of public comments to consider and use in this proceeding as appropriate. The Commission will consider all timely and responsive public comments that it receives, whether filed in paper or electronic form. Comments received will be available to the public on the FTC website, to the extent practicable, at (
www.ftc.gov/os/publiccomments.shtm
). As a matter of discretion, the Commission makes every effort to remove home contact information for individuals from the public comments it receives before placing those comments on the FTC website. More information, including routine uses permitted by the Privacy Act, may be found in the FTC’s privacy policy, at (
www.ftc.gov/ftc/privacy.shtm
).

I. Background

A. Telemarketing and Consumer Fraud and Abuse Prevention Act

On August 16, 1994, the Telemarketing and Consumer Fraud and Abuse Prevention Act (“Telemarketing Act” or “Act”) was signed into law.
3
The purpose of the Act was to curb telemarketing deception and abuse and provide key anti-fraud and privacy protections for consumers receiving telephone solicitations to purchase goods or services. The Telemarketing Act directed the Commission to issue a rule defining and prohibiting deceptive and abusive telemarketing acts or practices, and specified that the FTC’s rule must address certain acts or practices. The Act directed the Commission to include provisions relating to three specific “abusive telemarketing acts or practices”: (1) a requirement that telemarketers may not undertake a pattern of unsolicited telephone calls which the reasonable consumer would consider coercive or abusive of his or her right to privacy; (2) restrictions on the time of day telemarketers may make unsolicited calls to consumers; and (3) a requirement that telemarketers promptly and clearly disclose in all sales calls to consumers “that the purpose of the call is to sell goods or services and make such other disclosures as the Commission deems appropriate, including the nature and price of the goods and services.”
4
The Act also directed the Commission to consider including recordkeeping requirements in the Rule.
5
Finally, the Act authorized state Attorneys General, other appropriate state officials, and private persons to bring civil actions in federal district court to enforce compliance with the FTC’s Rule.
6

3
15 U.S.C. 6101-6108.

4
15 U.S.C. 6102(a)(3).

5
15 U.S.C. 6102(a).

6
15 U.S.C. 6103, 6104.

B. Telemarketing Sales Rule

Pursuant to its authority under the Telemarketing Act, the FTC promulgated the TSR on August 16, 1995.
7
The Rule was subsequently amended on two occasions, first in 2003
8
and again in 2008.
9
As to the Rule’s scope, 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 . . . .”
10
However, the Telemarketing Act makes clear that the jurisdiction of the Commission in enforcing the Rule is coextensive with its jurisdiction under Section 5 of the FTC Act.
11
As a result, some entities and products fall outside the jurisdiction of the TSR.
12
Further, the Rule wholly or partially exempts from its coverage several types of calls.
13

7
The effective date of the original Rule was December 31, 1995.

8

See TSR; Final Amended Rule,
68 FR 4580 (Jan. 29, 2003).

9

See TSR; Final Rule Amendments,
73 FR 51164 (Aug. 29, 2008).

10
16 CFR 310.2(cc) (using the same definition as the Telemarketing Act, 15 U.S.C. 6106).

11
15 U.S.C. 6105(b).

12
15 U.S.C. 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). These entities include banks, savings and loan institutions, and certain federal credit unions. It should be noted, however, that although the Commission’s jurisdiction is limited with respect to the entities exempted by the FTC Act, the Commission has made clear that the Rule does apply to any third-party telemarketers those entities might use to conduct telemarketing activities on their behalf.
See TSR; Proposed Rule
, 67 FR 4492, 4497 (Jan. 30, 2002) (
citing TSR; Statement of Basis and Purpose and Final Rule
, 60 FR, 43842, 43843 (Aug. 23, 1995)) (“As the Commission stated when it promulgated the Rule, ‘[t]he Final Rule does not include special provisions regarding exemptions of parties acting on behalf of exempt organizations; where such a company would be subject to the FTC Act, it would be subject to the Final Rule as well.’ ”)

13
For example, Section 310.6(a) exempts telemarketing calls to induce charitable contributions from the Do Not Call Registry provisions of the Rule, but not from the Rule’s other requirements. In addition, there are exceptions to some exemptions that limit their reach.
See, e.g.,
16 CFR 310.6(b)(5)-(6).

The TSR sets forth rules governing communications between telemarketers and consumers, requiring certain disclosures
14
and prohibiting certain material misrepresentations.
15
Further, the TSR requires telemarketers to obtain consumers’ “express informed consent” to be charged on a particular account

before billing or collecting payment
16
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.
17
In addition, the Rule prohibits requesting or receiving payment of any fee or consideration in advance of obtaining any of three purported services that the Commission determined to be “fundamentally bogus”
18
: credit repair services,
19
recovery services,
20
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.
21
The Rule also prohibits credit card laundering
22
and other forms of assisting and facilitating fraudulent telemarketers.
23

14
The TSR requires that telemarketers soliciting sales of goods or services promptly disclose several key pieces of information: (1) the identity of the seller; (2) the fact that the purpose of the call is to sell goods or services; (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). Telemarketers must also, in any telephone sales call, disclose cost and certain other material information before consumers pay. 16 CFR 310.3(a)(1). In telemarketing calls soliciting charitable contributions, the Rule requires prompt disclosure of the identity of the charitable organization on behalf of which the request is being made and that the purpose of the call is to solicit a charitable contribution. 16 CFR 310.4(e).

15
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 a false or misleading statement to induce any person to pay for goods or services or to induce a charitable contribution. 16 CFR 310.3(a)(4).

16
16 CFR 310.4(a)(6).

17
16 CFR 310.3(a)(3).

18

See TSR; Final Amended Rule,
68 FR at 4614.

19
16 CFR 310.4(a)(2).

20
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; Statement of Basis and Purpose and Final Rule
, 60 FR 43842, 43854 (Aug. 23, 1995).

21
16 CFR 310.4(a)(4).

22
16 CFR 310.3(c).

23
16 CFR 310.3(b).

The Rule restricts telemarketers from calling before 8:00 a.m. or after 9:00 p.m. (in the time zone where the consumer is located),
24
and from calling consumers whose numbers are on the National Do Not Call Registry (except when the seller has an established business relationship with the person called or has obtained the person’s express agreement, in writing, to receive telemarketing calls).
25
It also prohibits calling consumers who have specifically requested not to receive calls from a particular entity.
26
The TSR also requires that telemarketers transmit accurate Caller ID information
27
and places restrictions on calls made by predictive dialers
28
and calls delivering pre-recorded messages.
29

24
16 CFR 310.4(c).

25
16 CFR 310.4(b)(1)(iii)(B) (a safe harbor regarding Do Not Call violations can be found at 16 CFR 310.4(b)(3)).

26
16 CFR 310.4(b)(1)(iii)(A) (a safe harbor regarding Do Not Call violations can be found at 16 CFR 310.4(b)(3)).

27
16 CFR 310.4(a)(7).

28
16 CFR 310.4(b)(1)(iv) (a call abandonment safe harbor is found at 16 CFR 310.4(b)(4)).

29
16 CFR 310.4(b)(1)(v).

II. Overview of Debt Relief Services

Debt relief services - including credit counseling, debt management plans, debt settlement, and debt negotiation - are offered by a range of nonprofit and for-profit entities, often through telemarketing. As consumer debt has grown in recent years, so have the number and type of entities that provide, or purport to provide, services to consumers struggling with debt. Over the past several years, consumer protection concerns have arisen regarding the sale of debt relief services. The Commission has addressed these concerns in a variety of ways, including through law enforcement actions, consumer education, and outreach to industry. In September 2008, the Commission held a public workshop entitled “Consumer Protection and the Debt Settlement Industry” (“Workshop”),
30
which brought together stakeholders to discuss the current state of debt settlement services, one facet of the debt relief services industry. Based upon information provided in conjunction with the Workshop, as well as through its independent research and law enforcement efforts, the Commission provides the following description of the evolution and marketing practices of the debt relief services industry, with a particular focus on two primary types of service providers: credit counseling agencies and for-profit debt settlement service providers.

30
Materials from the Workshop, including an agenda and transcript, and link to public comments, are available at (
www.ftc.gov/bcp/workshops/debtsettlement/index.shtm
). Public comments associated with the Workshop are available at (
www.ftc.gov/os/comments/debtsettlementworkshop/index.shtm
). Attachment A to this Notice contains a list of commenters who submitted comments for the Workshop, together with the abbreviations used to identify each commenter referenced in this NPRM. Where a commenter has submitted multiple comments, the abbreviation used indicates - by reference to either its date or subject matter - which specific comment is being referenced in this NPRM. Attachment B to this Notice contains a list of Workshop participants, together with the abbreviations used to identify each participant referenced in this NPRM.

A. Credit Counseling Agencies

1) Background

For decades, debt relief services were almost exclusively the province of nonprofit credit counseling agencies (“CCAs”).
31
Beginning in the mid-1960s, creditor banks initiated this model, providing funding for CCAs with the intent of reducing personal bankruptcy filings.
32
CCA credit counselors work as a liaison between consumers and creditors to negotiate a “debt management plan” (“DMP”) - usually for the repayment of credit card and other unsecured debt. Typically, credit counselors also have provided educational counseling on financial literacy to assist consumers in developing a manageable budget and avoiding debt problems in the future.
33

31

But see
Credit Advisors at 1 (stating that the credit counseling industry “was founded as a for-profit industry, and was much more consumer oriented than under the subsequent nonprofit model”).

32

See
National Consumer Law Center, Inc. (“NCLC”) and Consumer Federation of America (“CFA”),
Credit Counseling in Crisis: The Impact on Consumers of Funding Cuts, Higher Fees and Aggressive New Market Entrants
, April 2003, at 6.

33

See
IRS (Grodnitzky) Tr. at 19 (noting that the IRS “issued two rulings, one in 1965 and one in 1969, and really kind of set up a framework for what a compliant credit counseling organization needs to look like. I think the overarching theme of these rulings were the organization, at least with respect to 501(c)(3), needs to educate, educate consumers, educate the public.”).

The hallmark of a traditional DMP is that it enables a consumer to repay the full amount owed to creditors, albeit under renegotiated terms that make repayment less onerous.
34
Thus, DMPs can be beneficial both to consumers, who receive more manageable terms, and to creditors, who are paid the outstanding balance. A credit counselor makes an initial determination about whether a DMP is a viable option for a consumer after obtaining the consumer’s full financial profile. Traditionally, to be eligible for a DMP, a consumer must have sufficient income to repay the full amount of his or her debts, provided that the terms are adjusted to make such repayment possible.
35

34

See Credit Counseling in Crisis
at 6. The study goes on to note that “a DMP is very similar to a chapter 13 bankruptcy ‘reorganization,’ through which a consumer submits a plan to repay creditors over time. The critical difference is that Chapter 13 plans allow consumers with sufficient income to pay back secured as well as unsecured creditors. For consumers trying to hold onto their homes or cars, this is a critical distinction.”
Id.
at 25-26.

35

See
Press Release, National Foundation for Credit Counseling,
Top Credit Card Issuers Support the NFCC’s “Call to Action” For Consumer Repayment Relief,
(Apr. 15, 2009) (also noting that “in these tough economic times, fewer consumers have sufficient income to be eligible for, or the ability to maintain, a traditional DMP, often leaving bankruptcy as the only option”),
available at
(
www.nfcc.org/NewsRoom/newsreleases/files09/NFCC_Call_Action.pdf
); CCFS (Manning) Tr. at 6.

Crafting a DMP begins when a credit counselor contacts each of a consumer’s unsecured creditors. 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. After negotiations with all of a consumer’s creditors are complete, the credit counselor finalizes the DMP and calculates the new repayment schedule. The traditional DMP typically calls for a consumer to repay the full balance of

unsecured debt to creditors by making reduced, consolidated monthly payments over a period of three to five years. The CCA receives these monthly payments over the term of the DMP and distributes the appropriate share to each of the consumer’s creditors.

In response to the recent economic downturn and increase in consumer debt, the National Foundation for Credit Counseling (“NFCC”) - the umbrella organization for more than one hundred nonprofit credit counseling organizations - announced on April 15, 2009, that the top ten credit card issuers in the U.S. had agreed to provide additional concessions to ensure that even consumers in significant financial straits may be able to use a DMP as a means to extricate themselves from indebtedness.
36
According to the NFCC, this initiative came in response to its October 2008 “Call to Action,” which urged creditors to “make DMPs more affordable for people in troubled financial circumstances.”
37

36

Id.
The participating creditors include: American Express, Bank of America, Capital One, Chase Card Services, Citi, Discover Financial Services, GE Money, HSBC Card Services, U.S. Bank, and Wells Fargo Card Services.

37

Id.
These credit card issuers endorsed two new plans: a “more affordable ‘Standard’ DMP” and a “‘Hardship’ DMP,” specifically designed to enable consumers who have lost their jobs or experienced other serious financial problems to qualify. Like traditional DMPs, these so-called “Call to Action DMPs” provide for a five-year repayment term, but they allow a consumer to make more affordable, fixed monthly payments and establish an emergency savings fund rather than using all disposable income to repay existing debt.
Id.

For their efforts, CCAs, which operate as nonprofit entities, receive funding from two sources.
38
First, consumers now typically pay for services,
39
although this was not always the case.
40
According to the NFCC, as of 2001, consumers paid on average about $20 to enroll in a DMP, and then paid a monthly service fee of about $12.
41
These fees have increased over the last decade, and now average approximately $25 to enroll, plus $25 per month.
42
The second source of funding is creditors themselves. Traditionally, after a consumer enrolls in a DMP, the consumer’s creditors pay the CCA a percentage of the monthly payments the CCA receives.
43
This funding mechanism, known as a “fair share” contribution, historically has provided the bulk of a CCA’s operating revenue.
44
For many years, creditors’ fair share payments ranged from 12 to 15% of the amount received as a result of the DMP, but that amount has decreased over time to between 0% and 10%.
45

38

See Consumer Protection Issues in the Credit Counseling Industry: Hearing Before the Permanent Subcommittee on Investigations Senate Committee on Governmental Affairs
, 108 th Cong. 2d Sess. (2004) (Testimony of the FTC),
available at
(
www.ftc.gov/os/2004/03/040324testimony.shtm
). Binzell Tr. at 37 (“If we had to do it all over again, we could go back 50 years, that fair share would have never existed. We think it’s important. We think creditors have a very important role and should be responsible for helping to fund credit counseling and financial literacy. I mean, they have a vested interest and they should be supporting it. The fact that it’s tied to DMPs, again, it started long before I got involved and it probably ought to be something different.”).

39
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, $40 monthly charge, and 15% of reduction for any settlement of debt); Md. Code Ann. § 12-901
et seq.
(limiting 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.
(capping initial and monthly credit counseling fees).

40

See Credit Counseling in Crisis
at 13-14 (“charging consumers was virtually unheard of even a decade ago” but, in 2001, “about 88% of [NFCC] agencies were charging monthly fees, a little more than half charged enrollment fees, and almost 25% were charging for counseling.”).

41

See id
.

42

See
Cards & Payments, Vol. 22, Issue 2,
Credit Concessions: Assistance for Borrowers on the Brink
(Feb. 1, 2009) (noting that “nonprofit agencies’ counseling fees average about $25 per month”); Miami Herald,
Credit Counselors See Foreclosures on the Rise
(July 13, 2008) (noting that CCAs charge an initial fee of $25, and a $25 monthly fee).

43

See
Letter from NFCC to Lucy Morris, Attorney, Federal Trade Commission (Feb. 27, 1997) (proposing CCA disclosure that creditor contributions are usually calculated as a percentage of “each payment received”),
available at
(
www.ftc.gov/os/1997/03/nfcc2.pdf
).

44

See
NFCC,
FAQs
(“The majority of agency funding comes from voluntary contributions from creditors who participate in Debt Management Plans.”),
available at
(
www.nfcc.org/aboutus/aboutus_04.html#7
); NFCC (Binzel) Tr. at 37. Some have since questioned the appropriateness of the “fair share” model.
See, e.g.,
NFCC (Binzel) Tr. at 37 (“If we had to do it all over again . . . fair share would have never existed . . . . We think creditors have a very important role and should be responsible for helping to fund credit counseling and financial literacy. I mean, they have a vested interest and they should be supporting it. The fact that it’s tied to DMPs, again, it started long before I got involved and it probably ought to be something different.”).

45

See Credit Counseling in Crisis
at 10-12.

2) Abuse and Crackdown in the Credit Counseling Industry

Responding to the rise in consumer debt and the concomitant increase in defaults, many new entities entered the credit counseling field during the last decade.
46
The advent of these new credit counseling entities - many of which, unlike traditional CCAs, operated on a for-profit basis - appeared to increase the options for indebted consumers.
47
At the same time consumer protection concerns emerged with regard to these new credit counselors. Research by consumer advocates and congressional scrutiny highlighted troubling trends in the credit counseling industry, including: deceptive and unfair practices; excessive fees; and the abuse of nonprofit status.
48
These abuses prompted an array of responses over the past decade, including law enforcement, regulatory, legislative, educational,
49
and self-regulatory
50
actions.

46

See
IRS (Grodnitzky) Tr. at 19-21 (noting that in the past 10 years, the IRS observed that new entities, which looked more like commercial entities than nonprofits, entered the CCA marketplace); AADMO (Guimond) Tr. at 40 (“Everybody saw the AmeriDebt nightmare, all the horror stories that were on the news.”);
see also Credit Counseling in Crisis
at 7 (“Ten years ago, there were about 200 credit counseling organizations in the country, with 90% affiliated with NFCC. By 2002, there were more than 1,000 credit and debt management organizations in the country.”).

47

See Credit Counseling in Crisis
at 8 (“These [new] agencies have pioneered more business-like methods of making debt management plans convenient for consumers, including flexible hours, phone and Internet counseling, and electronic payments. These improvements, in turn, have forced the ‘old guard’ to be more responsive to their clients. Some of these newer agencies are responsible, effective and sensitive to their client’s needs. However, as the newer agencies have gained market share, a number of serious problems have surfaced as well.”).

48

See generally id
;
see also
IRS (Grodnitzsky) Tr. at 20; NFCC (Binzel) Tr. at 28-29 (noting that “when profit motive is injected into a non-profit industry, it should come as no surprise that harm to consumers will follow.”). In March of 2004, the Senate Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs conducted an investigation and held hearings on the industry. The Subcommittee’s report, issued in April 2005, concluded that “[c]learly, something is wrong with the credit counseling industry.” S. Rep. No. 109-55, at 1 (2005).

49
The FTC and IRS, as well as other entities, have created and disseminated education materials to help consumers understand the fundamentals of credit counseling and learn how to select a reputable CCA.
See, e.g.,
FTC,
Fiscal Fitness: Choosing a Credit Counselor, available at
(
www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm
); FTC,
Knee Deep in Debt
,
available at
(
www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm
); IRS,
Credit Counseling Organizations - Questions and Answers about New Requirements
,
available at
(
www.irs.gov/charities/article/0,,id=163180,00.html
).

50
Some industry associations have created or enhanced self-regulatory codes.
See, e.g.,
NFCC, Member Application (Attachments A-C),
available at
(
www.nfcc.org/NFCC_MemberApplicationFINAL_REV071006.pdf
); AICCA Certification of Compliance,
available at
(
www.aiccca.org/images/CertificateofCompliance.pdf
); AADMO (Guimond) Tr. at 43 (AADMO “created the first nationwide accreditation program for for-profit credit counselors”).

The FTC and state Attorneys General have targeted unscrupulous practices by some CCAs in a number of law enforcement actions.
51
Since 2003, the

Commission has brought six cases against credit counseling entities for deceptive and abusive practices, including a seminal action against AmeriDebt, Inc., which was, at the time, one of the largest CCAs.
52
The defendants in these cases allegedly engaged in several common patterns of deceptive conduct in violation of Section 5 of the FTC Act.
53
First, most made deceptive statements regarding their nonprofit status.
54
Second, they allegedly frequently misrepresented the scope, benefits, and likelihood of success consumers could expect from their services. Misrepresentations included false promises to provide counseling and education services
55
and overstatements of the amount or percentage of interest charges a consumer might save using the services.
56
Third, these entities allegedly commonly misrepresented material information regarding their fees, including making false claims that they did not charge up-front fees
57
or that fees were tax deductible.
58
In addition to allegedly violating the FTC Act, some of these entities also allegedly engaged in violations of the TSR, particularly the Rule’s disclosure and misrepresentation provisions and the abusive practices section, including the National Do Not Call Registry provision.
59

51
State enforcers have sued CCAs for violations of state consumer protection laws.
See, e.g.,
Colorado Office of the Attorney General Press Release,
Eleven Companies Settle With The State Under New Debt-Management And Credit Counseling Regulations
(Mar. 12, 2009),
available at
(
www.ago.state.co.us/press_detail.cfmpressID=957.html
); Press Release of

the N.J. Department of Public Affairs,
State Files Suit Against United Credit Adjusters and Related Companies
(Oct. 15, 2008),
available at
(
www.nj.gov/lps/ca/press/creditadjusters.htm
); North Carolina Office of Attorney General Press Release,
AG Cooper Seeks to Stop Sham Credit Counselor
(Oct. 10, 2006),
available at
(
www.ncdoj.gov/DocumentStreamerClient?directory=PressReleases/&file=Commercial Credit Counseling final.pdf
);
State Accuses Columbus Man of Credit-Counseling Scam,
Columbus Dispatch (July 12, 2006),
available at
(
www.columbusdispatch.com/live/contentbe/dispatch/2006/07/12/20060712-D1-01.html
); New York Office the Attorney General,
State Wins Order to Shut Down Bogus Debt Counseling Agencies in Queens
(Oct. 17, 2000),
available at
(
www.oag.state.ny.us/media_center/2000/oct/oct17a_00.html
)
.

52

See FTC v. Express Consolidation
, No. 06-cv-61851-WJZ (S.D. Fla. 2006);
United States v. Credit Found. of Am.,
No. CV 06-3654 ABC(VBKx) (C.D. Cal. 2006);
FTC v. Integrated Credit Solutions
, No. 06-806-SCB-TGW (M.D. Fla. 2006);
FTC v. Nat’l Consumer Council
, No. SACV04-0474 CJC(JWJX) (C.D. Ca. 2004);
FTC v. Debt Mgmt. Found. Svcs.
, No. 04-1674-T-17-MSS (M.D. Fla. 2004);
FTC v. AmeriDebt, Inc.
, No. PJM 03-3317 (D. Md. 2003). AmeriDebt was also the subject of law enforcement actions by several states.
See, e.g.
,
State of Missouri ex rel. Nixon v. AmeriDebt, Inc.
, No. 03-402378 (St. Louis City Circuit Court, Sept. 11, 2003);
State of Texas v. AmeriDebt, Inc.
, No. GV-304638 (Dist. Ct. Travis County, Texas, Nov. 19, 2003);
State of Minnesota v. AmeriDebt, Inc.
, Case No. MC 03-018388 (Hennepin County Dist. Ct., Nov. 19, 2003).

53

See, e.g., FTC v. Debt Solutions, Inc.,
No. 06-0298 JLR (W.D. Wash. 2006);
United States v. Credit Found. of Am.,
No. CV 06-3654 ABC(VBKx) (C.D. Cal. 2006);
FTC v. Nat’l Consumer Council
, No. SACV04-0474 CJC(JWJX) (C.D. Cal. 2004).

54

See FTC v. Integrated Credit Solutions, Inc.,
No. 06-806-SCB-TGW (M.D. Fla. 2006);
FTC v. Express Consolidation
, No. 06-cv-61851-WJZ (S.D. Fla. 2006);
FTC v. Debt Mgmt. Found. Svcs., Inc.
, No. 04-1674-T-17-MSS (M.D. Fla. 2004);
FTC v. AmeriDebt, Inc.,
No. PJM 03-3317 (D. Md. 2003). 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. 2006)
.

55

See, e.g., FTC v. Integrated Credit Solutions
, No. 06-806-SCB-TGW (M.D. Fla. 2006);
United States v. Credit Found. of Am.,
No. CV 06-3654 ABC(VBKx) (C.D. Cal. 2006);
FTC v. Nat’l Consumer Council
, No. SACV04-0474 CJC(JWJX) (C.D. Cal. 2004).

56

See United States v. Credit Found. of Am.,
No. CV 06-3654 ABC(VBKx) (C.D. Cal. 2006);
FTC v. Integrated Credit Solutions, Inc.,
No. 06-806-SCB-TGW (M.D. Fla. 2006);
FTC v. Debt Mgmt. Found. Svcs., Inc.
, No. 04-1674-T-17-MSS (M.D. Fla. 2004).

57

See FTC v. Express Consolidation
, No. 06-cv-61851-WJZ (S.D. Fla. 2006);
FTC v. AmeriDebt, Inc.
, No. PJM 03-3317 (D. Md. 2003).

58

See FTC v. Integrated Credit Solutions
, No. 06-806-SCB-TGW (M.D. Fla. 2006);
United States v. Credit Found. of Am.,
No. CV 06-3654 ABC(VBKx) (C.D. Cal. 2006).

59

See FTC v. Express Consolidation
, No. 06-cv-61851-WJZ (S.D. Fla. 2006);
United States v. Credit Found. of Am.,
No. CV 06-3654 ABC(VBKx) (C.D. Cal. 2006).

The IRS has played a key role in regulating CCAs based on its authority to regulate nonprofit entities under Section 501(c)(3) of the Internal Revenue Code (“IRC”). In 2003, in response to the abuses arising from for-profit entities masquerading as nonprofits, the IRS announced its intention to re-examine CCAs with 501(c)(3) status to determine whether they were complying with the laws and regulations governing tax-exempt status.
60
Ultimately, this initiative expanded into a full-scale program to examine all tax-exempt CCAs, resulting in “widespread revocation, proposed revocation or other termination of tax-exempt status,” of many organizations,
61
as well as increased scrutiny of new applications for tax-exempt status by credit counseling agencies.
62

60

See
IRS (Grodnitzky) Tr. at 19-23;
see also
IRS, Press Release,
IRS Takes Steps to Ensure Credit Counseling Organizations Comply with Requirements for Tax-Exempt Status
(Oct. 17, 2003),
available at
(
www.irs.gov/newsroom/article/0,,id=114575,00.html
).

61
A list of entities whose tax exempt status has been revoked can be found at (
www.irs.gov/charities/charitable/article/0,,id=164392,00.html
)
.
See also
IRS (Grodnitzky) Tr. at 20-23 (noting that of the initial 63 CCAs reviewed, the vast majority of them had their 501(c)(3) status revoked, or were issued notices of revocation).

62
IRS, Press Release,
IRS Takes New Steps on Credit Counseling Groups Following Widespread Abuse
(May 15, 2006),
available at
(
www.irs.ustreas.gov/newsroom/article/0,,id=156996,00.html
).

To enhance the IRS’s ability to oversee CCAs, in 2006 Congress amended the IRC, adding Section 501(q) to provide specific eligibility criteria for CCAs seeking tax-exempt status as well as criteria for retaining that status.
63
Among other things, Section 501(q) of the IRC prohibits tax-exempt CCAs from: making or negotiating loans to or on behalf of a client; engaging in credit repair activities, if those activities are not incidental to the provision of credit counseling, or charging a separate fee for credit repair activities; or refusing to provide credit counseling services due to a consumer’s inability to pay or a consumer’s ineligibility or unwillingness to agree to enroll in a DMP.
64
In addition, Section 501(q) provides that tax-exempt credit counselors may only charge reasonable fees for services; must allow fee waivers if a consumer is unable to pay; and may not, unless allowed by state law, base fees on a percentage of a client’s debt, DMP payments, or savings from enrolling in a DMP.
65
Section 501(q) also limits the aggregate revenues that a tax-exempt CCA may receive from creditors for DMPs.
66
Under Section 501(q), tax-exempt CCAs also are prohibited from making or receiving referral fees and from soliciting voluntary contributions from a client.
67

63
Pension Protection Act of 2006, P.L. 109-280, Section 1220 (Aug. 2006),
codified as
26 U.S.C. 501(q).

64

See
26 U.S.C. 501(q).

65

See id.

66
26 U.S.C. 501(q)(2) (requiring that “[t]he aggregate revenues of the organization which are from payments of creditors of consumers of the organization and which are attributable to debt management plan services do not exceed the applicable percentage [that is being phased in and that will go down to 50%] of the total revenues of the organization.”).

67

See
26 U.S.C. 501(q)(1)(C). In addition to government efforts to regulate CCAs, some industry trade associations have imposed registration and/or certification requirements on their members requiring, among other things, that members maintain nonprofit status, provide counseling and education services, and provide counseling services to consumers regardless of ability to pay.
See
NFCC Member Application (Attachments A-C),
available at
(
www.nfcc.org/NFCC_MemberApplicationFINAL_REV071006.pdf
); AICCA Certification of Compliance,
available at
(
www.aiccca.org/images/CertificateofCompliance.pdf.
)

In addition to receiving regulatory scrutiny from the IRS, as a result of changes in the federal bankruptcy code, certain nonprofit CCAs have been subjected to rigorous screening by the Department of Justice’s Executive Office of the U.S. Trustee (“EOUST”). 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.
68
Under the established processes, 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.
69

68

See
Pub L. No. 109-8, 119 Stat. 23 (codified as amended at 11 U.S.C. 101 et seq.).

69

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 to remain, approved nonprofit budget and credit counseling agencies). The proposed rule and public comments are available at (
www.regulations.gov
). A list of EOUST-approved credit counselors is available to consumers at (
www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm
).

B. For-profit Debt Settlement Services

1) Background

As detailed above, the last decade has seen tremendous change in the debt relief industry. Historic levels of consumer debt
70
have dramatically increased the demand for debt relief services, but traditional DMPs have become less available to consumers who increasingly have insufficient income to repay their debts under such plans.
71
At the same time, CCAs have been under significant pressure due to decreases in fair share funding and new regulatory constraints.
72
These developments have created an opportunity for a new debt relief business model offered by for-profit debt settlement companies.
73
These companies commonly use radio, television, and Internet advertising to entice consumers with the prospect of lump sum settlements for less than the full outstanding balance of their unsecured debts.
74
In many cases, they purport to offer consumers a way to pay off their unsecured debt obligations for pennies on the dollar. Unlike a DMP, the goal of a debt settlement plan is for the consumer to repay only a portion of the total owed. Thus, debt settlement may appeal to a wide range of indebted consumers, including: those who are ineligible for a DMP because their income is insufficient to enable them to repay their total debt in three to five years; those who would be able to repay their debts in full, but are unaware of the existence of or uninterested in the DMP option; and even those who might be better off declaring bankruptcy due to the extent of their indebtedness or other specifics of their particular situation.
75

70

See
CCFS (Manning) Tr. at 54-57 (noting “unprecedented levels of debt” and explaining that at least $350 billion in credit card debt was refinanced into home equity loans and mortgages between 2001 and 2007).

71

See
CCFS (Manning) Tr. at 65; FTC (Parnes) Tr. at 6-7; Care One at 2, 5 (estimating that six million consumers a year are unable to qualify for a traditional DMP because “[t]he traditional [DMP] supported by creditors is not sufficient to help consumers impacted by the downturn in the economy and the increased availability and use of unsecured debt.”);
see also supra
notes 35-38 and accompanying text.

72
This pressure may be responsible for a reduction in entities seeking to engage in credit counseling on a nonprofit basis.
See, e.g.,
IRS (Grodnitzky) Tr. at 25 (noting that “since 2006, [the IRS has] received very few new applications from organizations wishing to engage in credit counseling”).

73

See
NFCC (Binzel) Tr. at 29 (“what we’ve seen as a result of companies being pushed out of 501(c), many have reemerged or are morphing into for profit entities and, in some cases, debt settlement companies.”); IRS (Grodnitzky) Tr. at 66; EFA Data Processing (Ansbach) Tr. at 81 (“There are more and more debt settlement companies that join us every day. Some are certainly well organized. Others are not. Some certainly join us with a tremendous amount of expertise. Others do not.”); Debt Settlement USA (Craven) Tr. at 88 (“In the past year alone, we have experienced a more than 50% increase in the number of consumers who have turned to us and turned to debt settlement as an alternative to bankruptcy.”).

74

See
NFCC (Binzel) Tr. at 31.

75

See
CCFS (Manning) Tr. at 61-62 (“If people are in financial distress, we should be able to essentially underwrite them through a means test provision and say which program they should go into, and most importantly, what the debt concessions should look like. . . . We need to have a means test that says people are going to pay what they can afford to pay.”).

Many consumers seeking information about debt settlement are already behind on their debt payments and subject to the attendant stresses of their financial situations, including fielding multiple debt collection calls, struggling to make even minimum payments on their credit cards, and, in many instances, struggling to pay their mortgages. Thus, the prospect of alleviating these stresses has undeniable appeal. Advertisements for debt settlement services typically direct consumers to call for more information, and the resulting telemarketing transactions often occur when consumers are extremely vulnerable.
76

76

See
CFA (Plunkett) Tr. at 103; EFA Data Processing (Ansbach) Tr. at 83 (“These are consumers that are distraught, these are consumers that are crying, and I am sad to report to you that more often than not my representatives shared with me that these are people that are actually suicidal.”).

The debt settlement business model appears to depend on the ability of the debt settlement provider to time a consumer’s delinquency and rate of savings to coincide with a creditor’s or debt collector’s incentive to settle.
77
According to debt settlement industry representatives, settling a debt for less than the full principal value becomes more attractive to creditors as their internal charge-off deadlines approach.
78
The delinquency, charge-off, and collection process varies from creditor to creditor, but some commonalities exist. Generally, after a credit card account is delinquent for some period of time (most often between six months and a year) the issuer will “charge off the account.”
79
Once the creditor charges off the account, it is no longer listed as an account receivable, and its value is charged against the creditor’s reserves for losses.
80
At the time of charge-off, the issuer may assign or sell the debt to a debt collector - whether a contingency collection agency, collection law firm, or debt buyer -who will then attempt to collect the debt directly from the consumer.
81
Debt settlement companies often negotiate with debt collectors regarding accounts that are, due to their delinquency status, no longer in the creditor’s portfolio.
82

77

See
USOBA at 7;
see also generally
US Debt Resolve (Johnson) Tr. at 71-75 (discussing the debt settlement business model).

78

See
USOBA at 7 (asserting that debt settlement offers are more likely to be accepted on accounts that are at least 120 days delinquent).

79

See
FTC,
Collecting Consumer Debts, The Challenges of Change: A Workshop Report
(Feb. 2009), at 2-3; Kaulkin Ginsberg,
The Kaulkin Report: The Future of Receivables Management
37 (7th ed. 2007).

80

See
NCLC,
Fair Debt Collection
14-15 (6th ed. 2008).

81

See id.
Of course, many creditors use contingency collection agencies to collect debts that are delinquent but not charged-off. Once the debt is charged-off, “[c]ollection efforts continue on many charged-off debts for a substantial period of time . . . . Any payment on the charged-off debt is then treated as income - a recovery on a bad debt - on the debt collector’s books.”
Id.
(citing Uniform Retail Credit Classification and Account Management Policy, 65 FR 36,903 (June 12, 2000)). The use of the term “debt collector” to include contingency collection agencies, collection law firms, and debt buyers is consistent with the Commission’s interpretations of the Fair Debt Collection Practices Act (“FDCPA”).
See
FTC,
Collecting Consumer Debts, The Challenges of Change: A Workshop Report
(Feb. 2009), at 2-3.

82

See
ACA (Feb. 20, 2009) at 2 (reporting the results of a survey ACA conducted to determine its members’ experiences with debt settlement companies).

Debt settlement industry representatives assert that they assess the information about a particular consumer’s financial condition and, based on that individualized assessment, calculate a monthly payment.
83
Depending on the debt

settlement company, the consumer may make the payment to the debt settlement company or to a third-party escrow company.
84
Consumers are typically told that the monthly payments - often in the range of 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. During this time, the debt settlement provider often instructs the consumer not to talk to his or her creditors or debt collectors.
85
To effectuate what appears to be a “communication blackout,” debt settlement companies often instruct consumers to assign them power of attorney
86
and to send creditors (directly or through the debt settlement provider) a cease communication notice.
87
In some cases, the debt settlement provider may even execute a change of address form substituting its address for the consumer’s, redirecting billing statements and collections notices so that the consumer does not receive them.
88
A company may assure the consumer that it is in contact with the creditors or debt collectors directly and represent that collection calls and lawsuits will cease upon enrollment in the debt settlement program.

83

See, e.g.,
USOBA at 7 (“Once a consumer has preliminarily qualified for and decided upon a debt settlement company, the consumer receives an agreement for services, a creditor information form, a budget form, limited power of attorney, a permission to communicate form, and instructions on how to complete the package. Once the consumer has completed the package . . . [the company] is responsible for reviewing the package to ensure that the consumer meets the criteria to qualify for the program. The qualification process is a timely process, which includes a complete review of the client’s monthly budget form, the list of creditors on the creditor worksheet, the client’s

history with those creditors (current, delinquent, how long the account has been open, cash advances, balance transfers), and the client’s ability to make the recommended monthly payment.”).

84
In many instances, consumers are requested or required to send funds to the debt settlement company to be escrowed. One debt settlement provider at the Workshop noted, however, that no “legitimate debt settlement company [should] pay creditors on behalf of the consumer.” Debt Settlement USA (Craven) Tr. at 91. The Commission’s law enforcement shows the dangers of the escrow model.
See, e.g., FTC v. Jubilee Fin. Servs., Inc.
, No. 02-6468 ABC (Ex) (C.D. Cal. 2002) (alleging that defendants regularly withdrew money from consumers’ trust accounts to pay their operating expenses);
FTC v. Edge Solutions
, No. CV-07-4087 (E.D.N.Y.), First Interim Report of Temporary Receiver (Oct. 23, 2007), at 3 (noting that “customer funds in the amount of $601,520 were missing from the receivership defendants’ accounts and unaccounted for by the receivership defendants”).

85

See, e.g., FTC v. Connelly
, No. SA CV 06-701 DOC(RNBx) (C.D. Cal. 2006);
FTC v. Jubilee Fin. Servs., Inc
., No. 02-6468 ABC(Ex) (C.D. Cal. 2002).

86

See
ACA (Dec. 1, 2008) at 5 (“ACA members routinely receive letters from debt settlement companies or law firms claiming to represent consumers. Commonly the letters include [power of attorney documents] that purport to be signed by the consumer authorizing the attorney to act on behalf of the consumer. The attorney then directs the credit-grantor or collection agency to work with a debt settlement company to resolve the debt.”);
see also, e.g., FTC v. Debt-Set, Inc.,
No. 1:07-cv-00558-RPM (D. Colo. 2007)(alleging defendants send power of attorney documents to consumers);
FTC v. Better Budget Fin. Servs., Inc.,
No. 04-12326(WG4) (D. Mass. 2004) (alleging that consumers were instructed to sign power of attorney forms);
FTC v. National Credit Council
, Case. No. SACV04-0474 CJC(JWJx) (C.D. Cal. 2004) (alleging that defendants used power of attorney documents).

In a comment submitted to the Commission in connection with the Workshop, ACA International (a trade organization representing third-party debt collectors) claimed that the power of attorney documents prepared by debt settlement companies are frequently legally deficient under state law.
See
ACA (Dec. 1, 2008) at 5-8. Moreover, unless presented by an attorney, a power of attorney may permit, but does not require, a creditor to contact the debt settlement company. Accordingly, it appears that this strategy often does not stop contacts between creditors and consumers, collection calls, or lawsuits/garnishment proceedings, but instead has the propensity to escalate the collection process.

87

See
ACA (Dec. 1, 2008) at 7 (“The increase in for-profit debt settlement companies has resulted in more of these companies seeking to interpose themselves between consumers and credit-grantors or collectors.”). Workshop comments from the Community Bankers Association (CBA), the American Financial Services Association (AFSA) and ACA International, as well as statements by banking representatives at the workshop, indicate debt settlement companies often use power of attorney and cease and desist letters to stop contacts between creditor and consumer.
See
ACA (Dec. 1, 2008) at 4-7; CBA at 2-3; AFSA at 3. Creditors express displeasure, however, that once debt settlement companies intercede on behalf of consumers, the debt settlement companies are non-responsive to creditor contacts.
See, e.g.,
AFSA at 3. 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 failure to make payments.
See
ABA (O’Neill) Tr. at 96.

88

See, e.g., FTC v. Jubilee Fin. Servs., Inc.
, No. 02-6468 ABC (Ex) (C.D. Cal 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 Ex. 7 (D. Colo. 2007) (same).

The Workshop record indicates that there are three common fee models in the debt settlement industry. The first is the “front-end fee model.” Although this model has some variations, debt settlement companies that charge front-end fees generally require consumers to pay as much as 40% or more of the fee within the first three or four months of enrollment, and collect the remaining fee over an ensuing period of 12 months or less,
89
whether or not any settlements have been attempted or achieved.
90
This model is apparently becoming the most prevalent.
91
Additionally, depending on the debt settlement company, consumers may be required to pay a substantial percentage or even the full fee before any portion of their funds are paid to creditors - and perhaps before the debt settlement company makes any contact with creditors.
92
As a result, consumers may pay hundreds of dollars in up-front fees before any of their funds are escrowed for the settlement fund.

89

See
US Debt Resolve (Johnson) Tr. at 72-74 (“It is my opinion that a front end-loaded model looks at that [sic] 40 percent or more of the service fee is collected within the first three or four months and, then typically, the remainder of the service fee paid by the consumer to the company is paid over a 12-month period of time, sometimes even less.”); TASC,
General Response
(Dec. 1, 2008), at 2 (“The settlement savings fee model bases the majority of the fee on a percentage of the savings realized by the consumer. In most instances the fees for this model equate to around 20%. Companies using the settlement savings model generally charge an initial fee collected over the first one to three months followed by a lower monthly fee over the life of the program.”); USOBA at 12 (“Some business models call for the fee to be paid up front in its entirety, over the first several months of the program prior to any negotiating with creditors takes [sic] place. Other business models include this percentage fee into a consumer’s monthly payment, deducting a portion of the monthly payment and applying that portion towards the overall fee amount.”);
see also, e.g., FTC v. Connelly,
No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006) (alleging that defendants required consumers to make a “down payment” of 30% to 40% of total fee in first two or three months with the remainder paid over the following 6 to 12 months).

90

See
US Debt Resolve (Johnson) Tr. at 73 (noting that the cost of a program may be tied to a percentage of the debt owed when the consumer enrolls in the program or based on an estimate of the amount of money the consumer may save);
see also
CFA (Plunkett) Tr. at 103, 110 (“Fifteen to 20 percent of the total debt enrolled in the program is collected in the first year of the program. So, if you have $50,000 in debt, we’re talking about $7,500 or more in the first year . . . [T]hat makes it very difficult for most people to afford a program for which they have received nothing at that point.”).

91

See
CFA (Plunkett) Tr. at 103.

92

See, e.g., FTC v. Debt-Set, Inc.,
No. 1:07-cv-00558-RPM (D. Colo. 2007)(alleging defendant required full payment of fee - 8% of consumer’s total unsecured debt - before contacting any creditors);
FTC v. Innovative Sys. Tech., Inc.,
No. CV04-0728 GAF JTLx (C.D. Cal. 2004) (alleging defendants required payment of “all or some of the fee” before they would perform services); US Debt Resolve (Johnson) Tr. at 108 (“I think there is concern on protection for the consumer because at different points in time[] the settlement firm will collect 65% of the fees in six months and the client won’t have any results at that point in time.”);
id
. Tr. at 74 (“Typically on a front-end loaded program - I’m not saying that it’s incorrect - but the opportunity for the average consumer will not have the ability to settle.”);
see also
USOBA Comment at 12 (“Some business models call for the fee to be paid up front in its entirety, over the first several months of the program prior to any negotiating with creditors takes place.”);
FTC v. National Credit Council,
Case. No. SACV04-0474 CJC (JWJx) (C.D. Cal. 2004) (alleging “[o]nly after these [up-front] fees are paid in full do defendants begin to apply a consumer’s monthly payments to his NCC-administered trust account for use in settling his debts”).

The second common fee structure is the “flat fee model,” in which the entire fee is collected over approximately the first half of the total enrollment period.
93
Finally, the “back-end model” contemplates the consumer paying a small monthly fee for the duration of the plan, and then, upon program completion, paying a fee equal to a percentage of total savings.
94

93

See
US Debt Resolve (Johnson) Tr. at 73.

94

See id.
at 73-74.

Debt settlement broadcast advertising typically omits any representation

regarding fees or charges for the service, other than statements such as “free online evaluation” or “free consultation.”
95
The issue of fees or charges is not broached until contact is made through a telemarketing sales call or even later - in the written contract the consumer receives after the telemarketing call.
96

95

See, e.g,. FTC v. Debt-Set, Inc.,
No. 1:07-cv-00558-RPM (D. Colo. 2007)(alleging defendants’ website represented “It’s Free” and “No Fee Application”);
FTC v. Connelly,
No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006) (alleging defendants offered consumers free analysis of their financial situation);
FTC v. Nat’l Credit Council,
Case. No. SACV04-0474 CJC (JWJx) (C.D. Cal. 2004) (alleging defendant purported to offer “free counseling and assistance in debt management”); TASC (Young) Tr. at 138-139.

96

See, e.g.,
CFA (Plunkett) Tr. at 110 (“[Y]ou go on almost any website for a settlement firm and you can’t find a simple explanation of what will be charged in general based on whatever, say a fee schedule.”); TASC (Young) Tr. at 155-56.

2) Consumer Protection Abuses in the Debt Settlement Industry

Debt settlement plans, as they are commonly marketed and implemented, raise several consumer protection concerns. These concerns begin with the marketing and advertising of the services,
97
but also extend to whether such plans are fundamentally sound for consumers.

97

See
AADMO (Guimond) Tr. at 45-46 (“What are the real problems with debt settlement? I would mirror the earlier comments. I believe it’s the advertising practices. It’s an enticing offer to eliminate 75% of your debt in 12 months, but if that’s not what’s occurring it’s an absolutely worthless claim.”).

The initial contact between a debt settlement company and a prospective customer is typically through Internet, television, or radio advertising.
98
The ads commonly urge consumers to call a toll-free number for more information.
99
Common claims in the ads and ensuing telemarketing pitches include representations that debt settlement companies will obtain for consumers who enroll in a debt settlement plan any of the following results: a reduction of their debts by 50%; elimination of debt in 12 to 36 months; cessation of harassing calls from debt collectors and collection lawsuits; and expert assistance from debt settlement providers who have special relationships with creditors and knowledge about available techniques to induce settlement.
100
Debt settlement companies also frequently represent that there is a high likelihood (sometimes even a “guarantee”) of success.
101
Law enforcement actions, consumer complaints, and the Workshop record, however, cast serious doubt on the validity of such claims.
102
Indeed, even the industry’s own figures, to the limited extent it has provided them,
103
indicate that a large proportion of consumers who enter a debt settlement plan do not attain the commonly touted results.
104

98

See
USOBA at 7 (“Most consumers normally begin the debt settlement process by searching online through various search engines, such as, Yahoo, Google, MSN, ASK, etc. Consumers will type in a keyword or key phrase, such as ‘debt help’ or ‘debt assistance’ and the search engine will provide both natural and advertised results. . . . Other means of advertising include national radio, television, newspapers, and magazines. Most advertisements specifically target consumers who are in financial trouble.”).

99

See, e.g., FTC v. Debt-Set, Inc.,
No. 1:07-cv-00558-RPM (D. Colo. 2007);
FTC v. Edge Solutions
,
Inc.,
No. CV-07-4087 (E.D.N.Y. 2007);
FTC v. Connelly,
No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006);
FTC v. Jubilee Fin. Servs., Inc.
, No. 02-6468 ABC (Ex) (C.D. Cal 2002).

100

See, e.g., FTC v. Debt-Set, Inc.,
No. 1:07-cv-00558-RPM (D. Colo. 2007);
FTC v. Better Budget Fin. Servs., Inc.,
No. 04-12326 (WG4) (D. Mass. 2004);
California v. Am. Debt Arb.,
No. 06CS01309 (Sup Ct. Sacramento Cty. 2006);
Florida v. Emergency Debt Relief
, AG Case No. L05-3-1033 (2006);
Florida v. Boyd,
2008 CA 002909 (4 th Jud. Cir., Duval Cty Mar 2008);
see also
NFCC (Binzel) Tr. at 30.

101

See, e.g., FTC v. Innovative Sys. Tech., Inc.,
No. CV04-0728 GAF JTLx (C.D. Cal. 2004) (alleging that defendant represented that service was “no risk” because it guaranteed that its services would produce the advertised result).

102

See, e.g.
,
FTC v. Nat’l Consumer Council, Inc
., No. SACV04-0474 CJC(JWJX) (C.D. Cal. 2004) (showing that only 1.4% of the consumers that entered defendant’s debt settlement program obtained the promised results);
FTC v. Connelly
, No. SA CV 06-701 DOC (RNBx), Order Denying Def’s Mot. Summ. J. (Dec. 20, 2006), at 18 (finding that only 12% to 14% of defendant’s consumers had debts settled with the represented reduction in overall debt);
FTC v. Debt Solutions, Inc.,
No. 06-0298 JLR, App. for T.R.O. (W.D. Wash. Mar. 6, 2006) at 15 (alleging that Defendants failed to achieve promised interest rate reductions for 99.5% of sample of accounts and failed to achieve any interest rate reductions in 80.4 percent of the accounts); New York Attorney General, Press Release,
Attorney General Cuomo Sues Debt Settlement Companies for Deceiving and Harming Consumers
(May 20, 2009) (alleging that two debt settlement companies only provided the promised results to 1% and 1/3% of their consumers, respectively),
available at
(
www.oag.state.ny.us/media_center/2009/may/may19b_09.html
).

103
Generally, when asked for data to support its pervasive performance claims, the industry has not provided reliable statistical or empirical data. The lack of industry-wide statistics is not a new phenomenon. In its 2005 report on the debt settlement industry, the NCLC described its difficulty getting debt settlement companies or a trade association to provide data to support the advertising claims of debt settlement entities.
See
NCLC,
An Investigation of Debt Settlement Companies: An Unsettling Business for Consumers
(2005), at 1 (“[M]any debt settlement companies we called would not share information about their business.”);
id.
at 9 (“It is possible that the fee arrangements described above would be justifiable if the companies actually earned those fees. Unfortunately, it is not easy to determine what the companies actually do to earn these fees. As noted above, the debt settlement trade association (USOBA) and companies we called have either refused to speak with us or provided vague responses.”). Then, and now, the industry has not provided sufficient performance data to demonstrate that the typical consumer who enrolls in their debt relief services obtains the represented relief. For example, at the Workshop, USOBA’s representative stated that it has undertaken a new study, but could not state whether the study would be made public.
See
USOBA (Keehnen) Tr. at 260-61;
see also
CFA (Plunkett) Tr. at 105 (“This is a very murky industry. It’s not just consumers who have a hard time getting real information on what’s really occurring. We need empirical information that’s independently verified. Based on what we have seen in the industry, it has to be independently verified.”).

104
TASC, a debt settlement industry trade association, submitted a study to the FTC purporting to show “completion rates” for consumers in debt settlement programs offered by TASC members. The study, which was voluntary for industry members, reported that “completion rates” ranged from 35% to 60%.
See
TASC
, Study on the Debt Settlement Industry
, at 1 (2007). However, this study’s probative value is limited substantially by, among other things, the fact that it does not provide any information on the TASC members who participated in the survey -
i.e.
, how many TASC members participated, how long those who did participate had been in business, and how many consumers those members serviced. Additionally, the measurement of “completion rates” -a term undefined and subject to various interpretations - is not the correct means of judging success rates for the debt relief industry. For example, industry members may define “completion” to mean that consumers obtained even a single settlement, regardless of how many accounts a consumer may have outstanding.
See id.
at 1 (in explaining its methodology, TASC notes that some of those surveyed “defined a completion as having all debts settled, [but that] there were two that considered a client completed if they had settled at least 80% of the debt and one if they had settled at least 50% of the debt”). Similarly, a settlement may be counted as “completed” regardless of whether it was obtained on the terms represented to the consumer, or on less favorable terms. Industry members might even include consumers who ceased paying for services prior to receiving the represented results in the count of “completed” accounts. The Commission believes, instead, that success rates should reflect the number or percentage of consumers who pay for the offered goods or services that then fully achieve the represented results.

In some instances debt settlement companies omit material information about the debt settlement process from their marketing presentations to consumers. Specifically, they often counsel consumers to stop paying their creditors
105
without informing them that failing to make payments to creditors may actually increase the amount they owe because of penalties and interest and likely will adversely affect their credit score. Consumers often are misled that their initial payments are taken by the debt settlement company as fees and not saved for settlement of their debt.
106
Further, debt settlement companies, in many instances, misrepresent to consumers how long it will take them to

save sufficient funds in order to offer settlements to each creditor.
107

105

See, e.g.
,
FTC v. Connelly
, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006);
FTC v. Jubilee Fin. Servs., Inc
., No. 02-6468 ABC (Ex) (C.D. Cal. 2002).

106

See, e.g., FTC v. Debt-Set, Inc.,
No. 1:07-cv-00558-RPM (D. Colo. 2007)
.

107

See, e.g.,
Debt Settlement USA,
Growth of the Debt Settlement Industry
, at 10 (“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.”).

Consumers often suffer irreparable injury as a result of paying a fee in advance of receiving services offered by a debt settlement company. These consumers, relying on the representations of results, pay fees to debt settlement companies believing that most or all of the payments are being saved for the promised debt settlement.
108
Telemarketers’ practice of taking fees before a settlement is obtained results in a number of adverse consequences: late fees or other penalty charges, interest charges, delinquencies reported to credit bureaus that decrease the consumer’s credit score, and sometimes legal action to collect the debt.
109
Given what appear to be the relatively low success rates for debt settlement plans, consumers who pay substantial fees up-front are likely to be harmed.

108

See, e.g., FTC v. Debt-Set, Inc.,
No. 1:07-cv-00558-RPM (D. Colo. 2007);
FTC v. Innovative Sys. Tech., Inc.,
No. CV04-0728 GAF JTLx (C.D. Cal. 2004);
see also
USOBA at 12 (“Some business models call for the fee to be paid up front in its entirety, over the first several months of the program prior to any negotiating with creditors takes place.”).

109
One of the Commission’s enforcement actions,
FTC v. Connelly,
No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006), is particularly illustrative on this harm: In that matter, between 2004 and 2005, 5,679 lawsuits were filed against defendants’ estimated 18,116 consumers (the total number of consumers as of October 2005).
See id.,
Trial Exs. 382, 561, 562, 623 & Schumann Test., Day 4, Vol. III, 37:21-40:12; 34:17-37:4;
see also infra
note 221.

3) Law Enforcement Actions and Other Responses

The Commission and state enforcers have brought law enforcement actions and launched consumer education efforts to combat deceptive and unfair practices in the debt settlement industry. Since 2001, the Commission has brought seven actions against debt settlement entities for a variety of the abuses detailed above.
110
As in the FTC’s actions against deceptive credit counselors, these suits commonly allege the misrepresentation of fees, or the failure to fully disclose them - including the significant up-front fees that are often charged.
111
Additionally, the Commission alleged that these defendants falsely promised high success rates,
112
promisedunattained results (
e.g.
, settlements for a certain percentage of the total original debt),
113
and misrepresented their refund policies.
114
Further, the Commission complaints charged that the defendants in these matters failed to warn consumers of the negative consequences of debt settlement, including the accumulation of late fees and other charges,
115
the effect on consumers’ credit ratings,
116
and the fact that debt collectors would continue to contact consumers.
117

110

FTC v. Debt-Set, Inc.
, No. 1:07-cv-00558-RPM (D. Colo. 2007);
FTC v. Edge Solutions
, No. CV-07-4087 (E.D.N.Y. 2007);
FTC v. Connelly
, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006);
FTC v. Better Budget Fin. Servs., Inc
., No. 04-12326 (WG4) (D. Mass. 2004);
FTC v. Innovative Sys. Tech., Inc.
, No. CV04-0728 GAF JTLx (C.D. Cal. 2004);
FTC v. Nat’l Consumer Council
, No. SACV04-0474 CJC(JWJX)(C.D. Cal. 2004);
FTC v. Jubilee Fin. Servs., Inc
., No. 02-6468 ABC (Ex) (C.D. Cal. 2002).

111

See, e.g., FTC v. Debt-Set, Inc.
, No. 1:07-cv-00558-RPM (D. Colo. 2007) (alleging that defendants misrepresented that they would not charge consumers any up-front fees before obtaining the promised debt relief, but required a substantial up-front fee).

112

See, e.g., id.

113

See, e.g., id.
;
FTC v. Connelly
, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006).

114

See, e.g., FTC v. Innovative Sys. Tech., Inc.,
No. CV04-0728 GAF (JTLx) (C.D. Cal. 2004) (defendants misrepresented that they would refund consumers’ money if unsuccessful).

115

See, e.g., id.

116

See, e.g.
,
FTC v. Connelly
, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006).

117

See, e.g., FTC v. Debt-Set, Inc.
, No. 1:07-cv-00558-RPM (D. Colo. 2007).

To complement its law enforcement efforts, the Commission has worked to advance public awareness of the debt settlement industry through its September 25, 2008 Workshop to discuss the origins and current practices of the debt settlement industry and consumer protection issues, including the possible need for additional regulation by the Commission and the future of the industry. The Workshop record has aided Commission efforts to understand better, and now propose additional restrictions to curb, deceptive and unfair practices involving debt settlement and other forms of debt relief services.
118

118
In addition to the Workshop, the FTC has also published a number of relevant consumer education publications.
See e.g., Knee Deep in Debt, available at
(
www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm;
)
Fiscal Fitness: Choosing a Credit Counselor
,
available at
(
www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm.
)

The states have also been active in attempting to regulate abuses in the debt settlement industry.
119
Many states have enacted statutes specifically designed to restrict deceptive practices in this area; in fact, some have banned for-profit debt settlement entirely
120
or the charging of up-front fees.
121
However, most of these statutes allow debt settlement but impose certain requirements, for example that companies be licensed in the state,
122
that they provide consumers with certain key disclosures (
e.g.
, schedule of payments and fees),
123
and/or that they provide consumers with some right to cancel enrollment.
124
Additionally, some states restrict the amount and timing of fees, including up-front fees and subsequent monthly charges.
125
In 2005, the National Conference of Commissioners on Uniform Laws (“NCCUSL”) drafted the Uniform Debt-Management Services Act (“Uniform Act”) in an attempt to provide consistent regulation of both for-profit and nonprofit debt relief services across the United States.
126
Among the key consumer protection provisions in the Uniform Act are: a fee cap
127
; mandatory education requirements
128
; certified counselors
129
; and accreditation requirements for

sellers of debt management services.
130
At this point, only a handful of states have adopted the Uniform Act, but NCCUSL believes that with recent modifications to the Act in 2008 more states will adopt it in 2009.
131

119

See
AADMO (Guimond) Tr. at 44 (“If you also look at some states [which regulate debt settlement] . . . [t]here are no or very few licensed debt settlement companies.”).

120

See, e.g.,
Conn. Gen. Stat. § 36A-655,
et seq.
; La. Rev. Stat. § RS 14:331,
et seq.
, 37:2581,
et seq.
; N.D. Gen. Stat. § 13-06-01-03 & 13-07-01-07; Wyo. Stat. Ann. § 33-14-101,
et seq.

121

See, e.g.,
N.C. Gen. Stat § 14-423
et seq.

122

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.

123

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.

124

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.

125

See, e.g.,
Fla. Stat. § 817.801,
et seq.
(limiting initial fee to $50 and monthly fee to $35 or 7.5% of total payment); Me. Rev. Stat. Ann. Tit. 17 § 701,
et seq.
, tit. 32 § 6171,
et seq.
(limiting set-up fee to $75, monthly charge to $40, and 15% of reduction for any settlement of debt).

126

See
AADMO (Guimond) Tr. at 42.

127

Unif. Debt-Mgmt. Servs. Act
§ 23(d)(2) (2008) (allowing debt settlement entities to charge “a fee for consultation, obtaining a credit report, setting up an account, and the like, in an amount not exceeding the lesser of $400 and four percent of the debt in the plan at the inception of the plan; and . . . a monthly service fee, not to exceed $10 times the number of creditors remaining in a plan at the time the fee is assessed, but not more than $50 in any month.”);
id.
§ 23(d)(1) (2008) (allowing entities that offer to “reduce finance charges or fees for late payment, default, or delinquency” to charge “a fee not exceeding $50 for consultation, obtaining a credit report, setting up an account, and the like; and . . . a monthly service fee, not to exceed $10 times the number of creditors remaining in a plan at the time the fee is assessed, but not more than $50 in any month.”).

128

Unif. Debt-Mgmt. Servs. Act
§ 17(b) (requiring that debt management entities provide consumers “with reasonable education about the management of personal finance”).

129

Unif. Debt-Mgmt. Servs. Act
§ 2(6) (setting forth requirements for certification);
id.
§ 16 (requiring that registered entities “maintain a toll-free communication system, staffed at a level that reasonably permits an individual to speak to a certified counselor, certified debt specialist, or customer-service representative, as appropriate, during ordinary business hours.”).

130

Unif. Debt-Mgmt. Servs. Act
§ 6(8);
see also
AADMO (Guimond) Tr. at 42-43; NCCUSL (Kerr) Tr. at 207.

131
According to NCCUSL, the recent amendments to the Uniform Act did not impact the consumer protection provisions referenced above, rather the amendments focused on addressing problems identified with the Uniform Act that made it difficult for states to implement.
See
NCCUSL (Kerr) Tr. at 211-12.

Further, state regulators and Attorneys General have filed numerous law enforcement actions against debt settlement companies.
132
Some states have sued these entities for alleged violations of state consumer protection laws banning unfair or deceptive acts and practices. For example, in one recent action, Texas sued a debt settlement entity under state consumer protection law for making deceptive claims that it could eliminate consumers’ debts in 36 months or less and reduce their overall amount by as much as 60%.
133
Other states have brought lawsuits against companies for allegedly violating their debt management or settlement statutes.
134
In an illustrative case, Colorado recently settled suits against several debt settlement entities under its debt management statute for, among other things, failing to register with the state, charging illegal fees, and/or failing to allow consumers to cancel contracts.
135

132

See, e.g., California v. American Debt Arb.,
Case No. 06CS01309 (Sup. Ct. Sacramento Cty. 2006);
Florida v. Emergency Debt Relief
, AG Case No. L05-3-1033 (2006);
Florida v. Boyd,
2008 CA 002909 (4 th Jud. Cir., Duval Cty Mar. 2008);
see also,
Florida Attorney General, Press Release,
Attorney General Announces Settlement in Debt Relief Scheme that Victimized Thousands
(Nov. 25, 2008),
available at
(
www.myfloridalegal.com/newsrel.nsf/pv/352C2D099A1FA7EE8525750C006DF6B4
); North Carolina Attorney General, Press Release,
Debt relief firms ordered to stop taking money in NC, says AG
,
available at
(
www.ncdoj.gov/DocumentStreamerClient?directory=PressReleases/&file=Consumer%20Law%20Center.pdf
) (Feb. 15, 2008); Maryland Attorney General, Press Release,
Attorney General Settles with Companies Selling Debt Repayment Services
,
available at
(
www.oag.state.md.us/Press/2007/101907.htm
) (Oct. 19, 2007); West Virginia Attorney General, Press Release,
Attorney General McGraw Reaches Settlement with Four Debt Relief Companies for 366 Consumers
(May 16, 2007),
available at
(
www.wvago.gov/press.cfm?ID=343&fx=more
).

133

See Texas v. CSA-Credit Solutions of Am.
, Inc., No. 09-000417 (Dist. Travis Cty, filed Mar. 26, 2009),
available at
(
www.oag.state.tx.us/newspubs/releases/2009/032509csa_op.pdf
). In a similar case, Florida challenged the practices of another debt settlement provider.
See Florida v. Boyd
, 2008-CA-002909 (Cir. Ct. 4th Cir. Duval Cty, Mar. 5, 2008) (alleging deceptive and unfair practices for promises to settle debts for “as little as 25-50%” of the balance owed in 12 to 36 months),
available at
(
www.myfloridalegal.com/webfiles.nsf/WF/JFAO-7CFMMD/$file/FutureFinancialComplaint.PDF.
)

134

See, e.g., New Hampshire Banking Dept. v. Debt Relief USA
, No. 08-361 (Order of License Denial, Jan. 2, 2009) (denying company licencing for failing to abide by state requirements, including fee caps),
available at
(
www.nh.gov/banking/Order08_361DebtReliefUSA_DO.pdf
);
Florida v. Boyd
, 2008-CA-002909 (Cir. Ct. 4 th Cir. Duval Cty, Mar. 5, 2008) (alleging violations of Florida credit counseling statute for, inter alia, charging fees above statutory cap),
available at
(
www.myfloridalegal.com/webfiles.nsf/WF/JFAO-7CFMMD/$file/FutureFinancialComplaint.PDF
). West Virginia Attorney General, Press Release,
Attorney General McGraw Sues Texas Debt Settlement Company
(Apr. 14, 2009) (alleging that defendant charged more the 2% fee cap set by state law),
available at
(
www.wvago.gov/press.cfm?fx=more&ID=472
); Vermont Attorney General,
Debt Adjuster Sanctioned For Violating Licensing And Consumer Laws
(Mar. 9, 2009) (alleging,
inter alia
, that company violated state debt adjustment law by doing business in state without a license),
available at
(
www.atg.state.vt.us/display.php?smod=63&pubsec=4&curdoc=1659
). Maryland Attorney General,
Attorney General Settles with Companies Selling Debt Repayment Services
(Oct. 19, 2007),
available at
(
www.oag.state.md.us/Press/2007/101907.htm
).

135

See
Colorado Attorney General Press Release,
Eleven Companies Settle With The State Under New Debt-Management And Credit Counseling Regulations
(Mar. 12, 2009),
available at
(
www.ago.state.co.us/press_detail.cfmpressID=957.html
).

C. Debt Negotiation

In addition to credit counseling and debt settlement, the Commission has observed a third category of debt relief service which this Notice refers to as “debt negotiation.” Debt negotiation companies offer to obtain interest rate reductions or other concessions to lower consumers’ monthly payment to creditors.
136
Unlike DMPs or debt settlement, debt negotiation does not purport to obtain full balance payment plans or lump sum settlements of less than the full balance. Rather debt negotiators offer to obtain interest rate reductions or other concessions from creditors to make monthly payments more affordable. However, similarly to debt settlement companies, some debt negotiation entities charge significant up-front fees.
137
Additionally, like some debt settlement companies, debt negotiators may represent or promise specific results, like a particular interest rate reduction or amount saved.
138

136

See e.g., FTC v. MCS Programs, LLC,
No. C09-5380RJB (W.D. Wash. 2009);
FTC v. Group One Networks, Inc.
, No. 8:09-cv-352-T-26-MAP (M.D. Fla. 2009) (amended complaint);
FTC v. Select Pers. Mgmt.,
No. 07- 0529 (N.D. Ill. 2007);
FTC v. Debt Solutions, Inc.,
No. 06-0298 JLR (W.D. Wash. 2006).

137

See FTC v. MCS Programs, LLC,
No. C09-5380RJB (W.D. Wash. 2009)(alleging defendants charged an up-front fee of $690 to $899);
FTC v. Group One Networks, Inc.
, No. 8:09-cv-352-T-26-MAP (M.D. Fla. 2009) (amended complaint) (alleging defendants charged an up-front fee of $595 to $895);
FTC v. Select Pers. Mgmt.,
No. 07- 0529 (N.D. Ill. 2007) (alleging defendants charged an up-front fee of $695);
FTC v. Debt Solutions, Inc.,
No. 06-0298 JLR (W.D. Wash. 2006) (alleging that defendants charged an up-front fee of $399 to $629).

138

See FTC v. MCS Programs, LLC,
No. C09-5380RJB (W.D. Wash 2009) (alleging defendants represented that their program would save consumers $2,500 or more);
FTC v. Group One Networks, Inc.
, No. 8:09-cv-352-T-26-MAP (M.D. Fla. 2009) (amended complaint) (alleging defendants represented they would provide consumers with savings of $1,500 to $20,000 in interest);
FTC v. Select Pers. Mgmt.,
No. 07- 0529 (N.D. Ill. 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. 2006) (alleging defendants promised to save consumers $2500).

The FTC has brought four actions against defendants for alleged deceptive debt negotiation practices.
139
In each case, defendants relied on telemarketing to deliver alleged deceptive representations to consumers -
i.e.
, that they could reduce consumers’ interest payments by specific percentages or minimum amounts, in exchange for a fee of hundreds of dollars. The Commission also alleged that some of these entities falsely purported to be affiliated, or have close relationships, with consumers’ creditors.
140
Finally, in each case, the Commission charged defendants with violations of the TSR.

139

See FTC v. MCS Programs, LLC,
No. C09-5380RJB (W.D. Wash. 2009);
FTC v. Group One Networks, Inc.
, No. 8:09-cv-352-T-26-MAP (M.D. Fla. 2009) (amended complaint);
FTC v. Select Pers. Mgmt.,
No. 07- 0529 (N.D. Ill. 2007);
FTC v. Debt Solutions, Inc.,
No. 06-0298 JLR (W.D. Wash. 2006).

140

See FTC v. MCS Programs, LLC,
No. C09-5380RJB, App. for T.R.O. at 7 (W.D. Wash. 2009) (alleging that defendants “create the impression of affiliation with consumers’ banks or credit card companies”);
FTC v. Group One Networks, Inc.
, No. 8:09-cv-352-T-26-MAP (M.D. Fla. 2009) (amended complaint) (alleging defendants claimed to have “close working relationship with over 50,000” creditors);
FTC v. Select Pers. Mgmt.,
No. 07- 0529 (N.D. Ill. 2007) (alleging defendants claimed to be affiliated with consumers’ credit card companies);
FTC v. Debt Solutions, Inc.,
No. 06-0298 JLR (W.D. Wash. 2006) (alleging that defendants claimed to have “special relationships” with creditors).

III. Discussion of the Proposed Rule

Based on its enforcement and outreach experience, including information from the Workshop, the Commission tentatively has concluded that additional legal restrictions are needed to address pervasive illegal conduct occurring in the sale of debt relief services.
141
Thus, the Commission

is proposing amendments to the TSR specifically to address debt relief services, the sale of which commonly involves telemarketing. The existing provisions of the TSR already apply to outbound calls made to induce the purchase of debt relief services and to any non-exempt inbound calls.
142
The proposed amendments would bring all
inbound
debt relief calls in response to direct mail or general media advertisements under the Rule and would add tailored provisions to address specific concerns about deceptive and abusive practices prevalent in the marketing of such offers.

141
Workshop participants expressed support for a federal legislative or regulatory solution to concerns about debt settlement.
See, e.g.,
American Credit Alliance (Franklin) Tr. at 212 (agreeing that federal regulation is necessary); NCCUSL (Kerr) Tr. at 212 (agreeing that federal regulation of debt settlement advertising is needed); USPIRG (Mierzwinski) Tr. at 212-213 (agreeing that federal regulation is necessary, but arguing that it should serve as a floor, not a ceiling, of protection); USOBA (Keehnen) Tr. at 213 (agreeing that federal regulation is necessary, but arguing that it should serve as a floor, not a ceiling, of protection); Gordon Feinblatt (Witzel) Tr. at 213 (agreeing that federal

legislation is necessary); NFCC (Binzel) Tr. at 33 (“[I]f debt settlement companies are going to be allowed to do business, they should be subjected to strong Federal legislation. At a minimum, the legislation should define the scope of the services that may be provided;. . . set caps on the range of fees that may be charged and ensure that the fees are commensurate with the services being provided; prohibit the collection of fees until actual services are provided; require full disclosure to consumers to inform them of the fees that are being charged, the potential consequence of utilizing debt settlement, the potential impact of debt settlement services on their credit history and the tax consequences of debt settlement”); AADMO (Guimond) Tr. at 46 (“AADMO does support federal legislation and state regulation that regulates both credit counseling and debt settlement, just not necessarily together”).

142
Outbound telemarketing of debt relief services is already subject to the TSR.
See, e.g., FTC v. Express Consolidation
, No. 06-cv-61851-WJZ (S.D. Fla. 2006) (alleging violation of TSR by defendant offering consumers assistance in obtaining lower credit card interest rates);
FTC v. Debt Solutions, Inc.,
No. 06-0298 JLR (W.D. Wash. 2006) (alleging violations of the TSR by debt settlement company). Inbound telemarketing of debt relief services in response to general media advertisements currently is exempt from the Rule, 16 CFR 310.6(b)(5), as is inbound calling in response to direct mail advertisements that make the requisite disclosures required in Section 310.3(a)(1) of the Rule. 16 CFR 310.6(b)(6). Inbound calls in response to direct mail advertisements that do not make these disclosures, however, are presently subject to the Rule. 16 CFR 310.6(b)(6).

While the Commission believes that the proposed amendments are an important step in the effort to prevent harm to consumers considering debt relief options, it believes that a comprehensive approach is needed to address the important consumer protection concerns at issue. Therefore, in addition to this rulemaking initiative, the Commission intends to continue law enforcement, as well as its consumer education efforts, to ensure that consumers considering debt relief make informed choices. Further, the Commission believes that creditors and debt collectors can do more to address the concerns at issue in this proceeding, such as developing innovative loss mitigation techniques.
143
Creditors are uniquely positioned to play a role in resolving issues related to debt relief because they have direct relationships with consumers in financial distress. With traditional DMPs out of reach for many consumers and significant concerns about the efficacy of the debt settlement model, at least as it currently exists, the Commission encourages creditors to step up efforts to reach consumers directly and determine what, if any, debt relief options may be available. One positive development in this regard came with the recent announcement that the ten top credit card issuers are amenable to more flexible DMPs.
144

143

See
CFA (Plunkett) Tr. at 101-02 (“It’s not like there isn’t some responsibility here on the part of the credit card industry for the fact that the debt settlement industry is surfacing and appears to be growing. Creditors do share some responsibility for this growth. As I mentioned, there’s demand and CFA has documented over the last decade that credit card issuers have reduced the concessions, the benefits that they offer to consumers in credit counseling. So, therefore, the demand for an alternative has been even stronger. And we’d like to
see
creditors work harder in their work-out programs, their individual one-on-one programs, to meet the needs of the consumers who clearly have a hardship and clearly need some form of a settlement.”).

144

See supra
notes 35-38 and accompanying text;
see also
CFA (Plunkett) Tr. at 104 (“One of the market-based solutions that’s very promising are the ongoing efforts by creditors and credit counseling agencies to develop what I think is a much more viable and a consumer-friendly alternative to bankruptcy and to, on the other extreme, a traditional debt management plan.”).

The Commission invites written comments on the proposed Rule, and, in particular, answers to the specific questions set forth in Section VIII, to assist it in determining whether the proposed Rule provisions strike an appropriate balance between maximizing protections for consumers from deceptive and abusive conduct in the telemarketing of debt relief services, while avoiding the imposition of unnecessary compliance burdens on legitimate industry actors.

A. Section 310.1: Scope

Although no amendment is proposed with regard to the scope of the Rule, it is worth noting, for the benefit of those who may be unfamiliar with the TSR, that the Telemarketing Act dictates that the jurisdictional limits of the FTC Act apply to the TSR. Specifically, the Act states that “no activity which is outside of the jurisdiction of [the FTC Act] shall be affected by this chapter.”
145
One example of such an activity, which merits mention here, is the exemption of nonprofit entities from the jurisdiction of the FTC Act and, by extension, the TSR. This jurisdictional limitation is rooted in Sections 4 and 5 of the FTC Act which, by their terms, provide the Commission with jurisdiction only over persons, partnerships, or corporations organized to carry on business for their profit or that of their members.
146

145
15 U.S.C. 6105(a).

146
Section 5(a)(2) of the FTC Act states: “The Commission is hereby empowered and directed to prevent persons, partnerships, or corporations . . . from using unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. 45(a)(2). Section 4 of the Act defines “corporation” to include: “any company, trust, so-called Massachusetts trust, or association, incorporated or unincorporated,
which is organized to carry on business for its own profit or that of its members
. . . .” 15 U.S.C. 44 (emphasis added).

Thus, legitimate nonprofit credit counseling agencies that conduct telemarketing campaigns on their own behalf will not be subject to the amended Rule. As the Commission previously has stated, however, the TSR “does apply to any third-party telemarketers [that exempt] entities might use to conduct telemarketing activities on their behalf.”
147
Thus, if a for-profit telemarketer is engaged on behalf of a nonprofit entity in a telemarketing campaign to offer a “debt relief service,” as defined in proposed Section 310.2(m), that telemarketer would be subject to the Rule.
148
Additionally, the Commission has jurisdiction over sham nonprofits that operate as for-profit entities in practice.
149

147

See TSR; Proposed Rule
, 67 FR 4492, 4497 (Jan. 30, 2002) (
citing TSR; Statement of Basis and Purpose and Final Rule
, 60 FR, 43842, 43843 (Aug. 23, 1995)) ( “As the Commission stated when it promulgated the Rule, ‘[t]he Final Rule does not include special provisions regarding exemptions of parties acting on behalf of exempt organizations; where such a company would be subject to the FTC Act, it would be subject to the Final Rule as well.’”);
see also Nat’l Fed’n of the Blind v. FTC
, 420 F.3d 331, 334-35 (4th Cir. 2005).

148
Pursuant to the USA PATRIOT Act amendments to the TSR in 2001, the Rule now reaches “not only the sale of goods or services, but also charitable solicitations by for-profit entities on behalf of nonprofit organizations.”
TSR; Final Amended Rule
, 68 FR 4580, 4585 (Jan. 29, 2003).

149

Supra note
147.

Indeed, the Commission’s law enforcement record shows that sham nonprofit CCAs have been a source of significant consumer injury. Although these entities purport to operate as nonprofits, their activities in fact earn profits for affiliated entities or individuals. The Commission has obtained robust injunctive and monetary relief in actions against these bogus nonprofit credit counselors for deceptive practices in violation of the FTC Act.
150

150
Specifically, in these actions, the Commission has secured injunctive relief and significant monetary judgments.
See, e.g., FTC v. AmeriDebt, Inc.
, No. PJM 03-3317 (D. Md. 2005) (stipulated final judgment for $172 million suspended judgment, and barring defendants from making nonprofit claims, with $12.7 million returned to consumers as a result of the FTC action and $7-million as a result of class action settlements);

see

also, e.g., FTC v. Express Consolidation

, No. 06-cv-61851-WJZ (S.D. Fla. 2008) (stipulated final judgment for over $40 million);
United States v. Credit Found. of Am.
, No. CV 06-3654 ABC(VBKx) (C.D. Cal. 2006) (stipulated final judgment of $926,754 in consumer redress and civil penalties, a $102,540 suspended judgment, and injunctive relief);
FTC v. Integrated Credit Solutions
, No. 06-806-SCB-TGW (M.D. Fla. 2006) (stipulated final judgment of $2,371,380 in consumer redress and ordering defendants to set aside $415,000 to refund enrollment fees);
FTC v. Debt Mgmt. Found. Svcs.
, No. 04-1674-T-17-MSS (M.D. Fla. 2005)(stipulated suspended judgment for over $11 million and injunctive relief);
FTC v. Nat’l Consumer Council
, No. SACV04-0474CJC(JWJX) (C.D. Cal. 2005) (stipulated suspended judgment of $84.3 million and injunctive relief).

B. Section 310.2: Definitions

The only proposed change to the definitions section of the Rule is the addition of newly renumbered Section 310.2(m), which defines the term “debt relief service” to mean:

any service represented, directly or by implication, to renegotiate, settle, or in any way alter the terms of payment or other terms of the debt between a consumer and one or more unsecured creditors or debt collectors, including, but not limited to, a reduction in the balance, interest rate, or fees owed by a consumer to an unsecured creditor or debt collector.
151

151
Former Section 310.2(m) (definition of “donor”) and all subsequent definitions have been renumbered accordingly in the proposed amended Rule.

The Commission intends that the definition of “debt relief service” encompass a broad swath of debt relief activities, including offers of debt settlement or negotiation services and debt management plans.
152
The definition of “debt relief service” is, however, limited with regard to the underlying nature of the debt involved and would not reach offers regarding consumers’ secured debt, such as mortgage loans. Deceptive foreclosure rescue and mortgage loan modification schemes, which have proliferated as a result of the mortgage crisis, cause significant harm to homeowners already in financial distress.
153
The Commission tentatively has determined not to address these types of transactions under the proposed amendments because it anticipates comprehensively regulating such conduct under its new mortgage loan rulemaking authority pursuant to the Omnibus Appropriations Act.
154
On June 1, 2009, the Commission commenced a rulemaking proceeding to address deceptive or unfair practices in connection with mortgage assistance relief services (including loan modification and foreclosure rescue).
155
That Notice sets forth the law enforcement and education efforts undertaken by the Commission and state enforcers and seeks comment about the appropriate contours of a mortgage relief rule.

152
The definition is focused on the provision of debt relief services, but Section VIII of this Notice includes questions to aid the Commission in determining whether this definition, and by extension, the coverage of the proposed amendments, should include “debt relief products” as well.

153
The Commission has brought actions against entities and individuals alleging mortgage-related debt relief fraud using its authority under Section 5 of the FTC Act. These cases allege false guarantees of success; false representations about refund policies; undisclosed up-front fees; misrepresentations regarding affiliations with nonprofit or government entities; and failure to deliver the promised services.
See FTC v. Dinamica Financiera LLC,
No. 09-CV-03554 CAS PJWx (C.D. Cal., filed May 19, 2009);
FTC v. Cantkier
, No. 1:09-cv-00894 (D.D.C. filed May 14, 2009);
FTC v. Federal Loan Modification Law Center, LLP
, Case No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009);
FTC v. (http://bailout.hud-gov.us) and Ryan
, Civil No. 1:09-00535 (HHK) (D.D.C. filed Mar. 25, 2009);
FTC v. Home Assure, LLC,
Case No. 8:09-CV-00547-T-23T-SM (M.D. Fla. filed Mar. 24, 2009);
FTC v. New Hope Property LLC
, Case No. 1:09-cv-01203-JBS-JS (D.N.J. filed Mar. 17, 2009);
FTC v. Hope Now Modifications, LLC
, Case No. 1:09-cv-01204-JBS-JS (D.N.J. filed Mar. 17, 2009);
FTC v. National Foreclosure Relief, Inc.
, Case No. SACV09-117 DOC (MLGx) (C.D. Cal. filed Feb. 2, 2009);
FTC v. United Home Savers, LLP
, Case No. 8:08-cv-01735-VMC-TBM (M.D. Fla. filed Sept. 3, 2008);
FTC v. Foreclosure Solutions
, LLC, No. 1:08-cv-01075 (N.D. Ohio filed Apr. 28, 2008);
FTC v. Mortgage Foreclosure Solutions, Inc.
, Case No. 8:08-cv-388-T-23EAJ (M.D. Fla. filed Feb. 26, 2008);
FTC v. Nat’l Hometeam Solutions, Inc
., Case No. 4:08-cv-067 (E.D. Tex. filed Feb. 26, 2008);
see also
FTC Press Release,
Federal and State Agencies Crack Down on Mortgage Modification and Foreclosure Rescue Scams
(Apr. 6, 2009),
available at
(
www.ftc.gov/opa/2009/04/hud.shtm
).

154

See
Omnibus Appropriations Act of 2009, Pub. L. No. 111-8, § 626, 123 Stat. 524 (Mar. 11, 2009) (2009 Omnibus Appropriations Act). Further, to the extent that outbound telemarketing is used to further mortgage-related debt relief schemes, the Commission may use the existing provisions of the TSR, in addition to Section 5, to challenge the conduct if appropriate.

155

See Advance Notice of Proposed Rulemaking: Mortgage Assistance Relief Services,
74 FR 26130 (June 1, 2009).

C. Section 310.3: Deceptive Telemarketing Acts or Practices

Section 310.3 of the Rule addresses deceptive acts or practices in telemarketing. Specifically, this provision sets forth required disclosures that must be made in every telemarketing call; prohibits misrepresentations of material information; requires that a telemarketer obtain a customer’s express verifiable authorization by following specified procedures whenever a payment method other than a credit or debit card is used; prohibits false or misleading statements to induce a person to pay for goods or services or to induce a charitable contribution; holds liable anyone who provides substantial assistance to another in violating the Rule; and prohibits credit card laundering in telemarketing transactions.
156

156

See generally
16 CFR 310.3.

Outbound calls to solicit the purchase of debt relief services are already subject to the TSR, including the provisions of Section 310.3. The proposed amendments to Section 310.6, discussed in detail below, would also bring
inbound
debt relief calls within the ambit of the Rule.
157
As a result, virtually all debt relief telemarketing transactions would be subject to the TSR if the proposed modifications to the Rule are adopted.
158

157
Most inbound calls placed by consumers in response to direct mail or general media advertising are exempt from the Rule.
See
16 CFR 310.6(b)(5) & (6). Certain exceptions to the exemption have been created to require TSR compliance for the sale of products or services that have been the subject of significant fraudulent or deceptive telemarketing activity. The proposed amendments would create an exception to the direct mail and general media exemptions for the sale of debt relief services, requiring sellers and telemarketers of these services to comply with the Rule in both inbound and outbound calls.

158
Another exemption provides that “[t]elephone calls initiated by a customer or donor that are not the result of any solicitation by a seller, charitable organization, or telemarketer” are exempt. 16 CFR 310.6(a)(4). Thus, if a customer were to call a seller or telemarketer regarding debt relief services independent of any solicitation, such a call would not be subject to the proposed revised TSR.

As context for examining how the Rule, including the proposed modifications, applies to debt relief marketing practices, it is important to understand the fundamental nature of debt relief services and the ways in which they are commonly marketed. As discussed above in Section II, various types of debt relief services have different goals, and each employs different means of reaching those goals. A debt management plan, for example, is intended to enable a consumer to repay his or her full debt by making regular payments over a period of 3 to 5 years. Debt settlement, on the other hand, envisions a consumer repaying only a fraction of each debt owed by making one lump sum payment to each creditor. Distinct from DMPs or debt settlement services, debt negotiators offer to obtain interest rate reductions or other concessions to lower consumers’ monthly payment to creditors. Nevertheless, there are some common techniques used to market these debt relief services. The following section explains how the existing provisions of the TSR and proposed amendments set forth in this NPRM would apply to debt relief services.

1) Application of Section 310.3(a)(1) to Debt Relief Services: Disclosure Obligations

The existing requirements of Section 310.3(a)(1)(i)-(vii), while not subject to amendment in this proceeding, provide the framework for understanding the general disclosure obligations of sellers and telemarketers of debt relief services who are now (in the case of outbound telemarketing) or may be as a result of this rulemaking (in the case of most inbound telemarketing) subject to the TSR. The subparts that are most likely applicable to debt relief services - Sections 310.3(a)(1)(i), (ii), and (iii) - relate to disclosure of the total costs of services; all material restrictions, limitations or conditions to purchase, receive, or use the services; and the seller’s refund policy.
159
Accordingly, it is important to examine how these provisions establish the general obligations of debt relief providers.

159

See
16 CFR 310.3(a)(1)(i)-(iii). In addition to these provisions, Section 310.3(a)(1) of the TSR also requires disclosures specific to offers involving prize promotions, credit card loss protection plans, and negative option plans.
See
16 CFR 310.3(a)(1)(iv)-(vii).

Section 310.3(a)(1)(i) of the TSR prohibits a telemarketer from failing to disclose truthfully, in a clear and conspicuous manner, certain material information including “the total costs to purchase, receive, or use, and the quantity of, any goods or services that are the subject of the sales offer” before a customer pays for goods or services offered. Debt relief companies and industry association representatives contend that industry members disclose costs to consumers during telemarketing sales calls or after the call, in written disclosures.
160
Yet, law enforcement actions allege, and consumers consistently complain, that the debt relief telemarketers say little, if anything, about fees or misrepresent the amount and timing of fee payments.
161
As a result of these practices, consumers who enter into debt relief agreements often do so unaware of the total costs they will incur, which commonly amount to thousands of dollars.

160

See
Debt Settlement USA (Craven) Tr. at 109 (stating that all fees are disclosed to consumers in the telemarketing call); TASC (Young) Tr. at 155-156 (noting that fees should be disclosed on the phone and again in writing following the call). The Commission’s law enforcement experience suggests that in many cases, post hoc written disclosures contradict what telemarketers have told consumers.
See, e.g., FTC v. Connelly
, No. SA CV 06-701 DOC (RNBx), Opp. to FTC Mot. Summ. J., at 12 (Aug. 3, 2006) (arguing that subsequent telephone calls would have “corrected any misconceptions the consumer had about the program based on [previous] correspondence”). However, such contradictory post hoc disclosures do not adequately modify or qualify the claims made in the telemarketing sales pitch.
See, e.g., Resort Car Rental System, Inc. v. FTC
, 518 F.2d 962, 964 (9th Cir. 1975).

161

See, e.g., FTC v. Better Budget Fin. Servs., Inc.,
No. 04-12326 (WG4) (D. Mass. 2004) (alleging that defendant obfuscated the total costs for the products and services by separately reeling off various fees, such as retainer fees, monthly fees, and fees correlated to the percentage of money that a customer saves using the services, without ever disclosing the total cost, which sometimes was as high as thousands of dollars);
FTC v. Debt-Set, Inc.
, No. 1:07-cv-00558-RPM (D. Colo. 2007) (alleging that, in numerous instances, defendants represented that there would be no up-front fees or costs for their debt settlement program, when in fact the defendants required consumers to pay, through monthly payments, an up-front fee of approximately 8% of the consumers’ total unsecured debt);
FTC v. Connelly
, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006) (alleging that defendant failed to disclose to consumers that they would have to pay 45% of their total program fees up-front, before any payments would be made to the customers’ creditors).

The Commission believes that disclosure of total costs is particularly crucial in the sale of debt relief services.
162
This is especially true for debt settlement plans, for which the costs are often significant. According to TASC, the median fee under the predominant debt settlement model calls for a consumer to pay the equivalent of 14% to 18% of the debt enrolled in the program.
163
Using this formula, a consumer with $20,000 in debt would pay between $2,800 and $3,600 for debt settlement services. Such large amounts of money are especially significant given that the typical consumer seeking debt relief is almost certainly experiencing serious financial distress and thus, is unable to afford existing financial obligations. Similarly, in the sale of debt management plans, disclosure of total costs is crucial to ensure that consumers understand what they will need to pay for the touted services. Indeed, in the cases brought against sham nonprofit credit counselors, consumers allegedly have been misled not only as to the total costs, but also as to the nature of monies paid because they are told that the only fees are “voluntary contributions” used to offset the operating expenses of the allegedly nonprofit service provider.
164
Adherence to the requirements of Section 310.3(a)(1)(i) by all sellers and telemarketers of debt relief services will provide consumers with material information necessary to evaluate their offers.
165

162
According to one industry participant, “disclosure is often very inadequate, especially with regards to program fees.” Debt Settlement USA - Revised White Paper at 10.

163
TASC,
General Response
(Dec. 1, 2008), at 2 (stating that in the predominant flat fee model, the cost for debt settlement services “is calculated based on a percentage of debt enrolled into the program. The approximate median flat fee is 14% to 18% of the debt brought into the program depending on the amount of debt enrolled.”).

164

See, e.g., FTC v. AmeriDebt, Inc.
, No. PJM 03-3317 (D. Md. 2003) (alleging that, “[i]n response to the question, ‘How much will it cost me to be on the Debt Management Program,’ AmeriDebt’s website . . . stated, ‘Due to the fact that AmeriDebt is a nonprofit organization, we do not charge any advance fees for our service. We do request that clients make a monthly contribution to our organization to cover the costs involved in handling the accounts on a monthly basis.’” In fact, the Commission alleged that defendants retained all of consumers’ first monthly payment as a fee without notice to the consumer.).

165
The Commission previously has explained the compliance obligations when marketing installment contracts, some of which are particularly applicable to debt relief services. Specifically, the Commission noted that “it is possible to state the cost of an installment contract in such a way that, although literally true, obfuscates the actual amount that the consumer is being asked to pay.”
TSR; Proposed Rule,
67 FR 4492, 4502 (Jan. 30, 2002). It goes on to state that “[t]he Commission believes that the best practice to ensure the clear and conspicuous standard is met is to
do the math for the consumer
wherever possible. For example, where the contract entails 24 monthly installments of $8.99 each, the best practice would be to disclose that the consumer will be paying $215.76. In open-ended installment contracts, it may not be possible to do the math for the consumer. In such a case, particular care must be taken to ensure that the cost disclosure is easy for the consumer to understand.”
Id
. at n.92. (emphasis supplied, internal quotations omitted).

Section 310.3(a)(1)(ii) requires disclosure of “[a]ll material restrictions, limitations, or conditions to purchase, receive, or use the goods or services that are the subject of the sales offer.” A seller or telemarketer of debt relief services would be required, pursuant to this provision, to disclose that the debt relief services will only extend to unsecured debt, if that is the case. Similarly, if a debt relief provider places other limits on the services they provide - such as requiring that a consumer have a minimum amount of debt to be eligible or providing that only individual debts of a certain amount will be enrolled - this would need to be disclosed pursuant to Section 310.3(a)(1)(ii). Such information would be material to consumers in determining whether the offered services would provide all, or merely some, of the debt relief they seek.

Section 310.3(a)(1)(iii) of the TSR requires that “[i]f the seller has a policy of not making refunds, cancellations, exchanges, or repurchases,” disclosure of this policy must be made to consumers. Further, the provision requires that, “if the seller or telemarketer makes a representation about a refund, cancellation, exchange, or repurchase policy, a statement of all material terms and conditions of such policy” be made. This TSR provision signifies the Commission’s view that a seller’s unwillingness to provide refunds is a material term that a consumer must know about before

paying for goods or services. Similarly, if a seller or telemarketer chooses to tout the availability of a refund policy, that entity is affirmatively obliged to disclose the material terms and conditions of the policy. Application of this provision to sellers and telemarketers of debt relief services is particularly important given that data from law enforcement actions and consumer complaints indicate that, commonly, consumers either are not apprised that refunds are unavailable or are misled by material omissions regarding the full terms and conditions of these policies.
166

166

See, e.g., FTC v. Select Personnel Mgmt., Inc
., No. 07-0529 (N.D. Ill. 2007);
FTC v. Connelly,
No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006);
FTC v. Debt Solutions, Inc.,
No. 06-0298 JLR (W.D. Wash. 2006);
FTC v. Innovative Sys. Tech., Inc.
, No. CV04-0728 GAF JTLx (C.D. Cal. 2004);
FTC v. Debt Mgmt. Found. Svcs.
, No. 04-1674-T-17-MSS (M.D. Fla. 2004). Commission staff has reviewed a sample of debt relief complaints received between April 1, 2008, and March 31, 2009, included in th

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3AE9-19749. Public record. Not legal advice.