Legal Review: Debt Relief Programs Wander Into the FTC’s Crosshairs23 Nov, 2009 By: Jeffrey D. Knowles, Venable LLP’s Advertising, Gary D. Hailey Response
You can’t turn on the TV these days without seeing ads promising help if you’ve maxed out your credit cards, or can’t afford to pay your taxes.
The explosion in debt relief-related advertising has been matched by a dramatic upswing in regulatory and law-enforcement activity. The Federal Trade Commission (FTC) has filed more complaints against marketers of such services than you can shake a stick at, usually alleging that claims that the companies can obtain lump-sum settlements at a discount, reduce the interest rate charged on an outstanding debt, and put an end to collection calls are deceptive. Other FTC investigations are ongoing, and state attorneys general have also been actively pursuing debt relief service marketers.
But the FTC turned up the heat on this industry considerably when it recently proposed to add special debt relief provisions to its Telemarketing Sales Rule (TSR).
Outbound telemarketing — including outbound telemarketing by debt relief service providers — generally is subject to the TSR’s prohibitions against deceptive or abusive practices. But the TSR exempts most inbound calls made in response to television or radio advertising.
The FTC wants to cancel that exemption for inbound calls made in response to debt relief advertising, subjecting such calls to the TSR’s provisions. The FTC also has proposed some new TSR provisions that really draw a bull’s eye on the debt relief industry.
The proposed amendments would define debt relief services (such as credit counseling, debt management, debt settlement and debt negotiation) as including any service represented to renegotiate, settle or otherwise alter the terms of payment of a debt, “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.” Bona fide nonprofit credit counselors would not be covered by the amendments. The current proposal would not cover offers involving secured debts, such as mortgage loans, but the FTC is dealing with advertising for mortgage modification services in a separate rulemaking.
Marketers of debt relief services, including lead generators and affiliate marketers, would be prohibited from overstating the amount of money that the consumer would save or the number of consumers who achieve a significant reduction in debt, or claiming that the debt relief service provider is a non-profit entity when it is not. They would also be required to make several specific affirmative disclosures before taking a caller’s credit card information. For example, the marketer would be required to disclose the following:
How long it will take for the debt relief services provider to present a settlement offer to the consumer’s creditors
That not all creditors or debt collectors will agree to a reduction in the outstanding balance, interest rate or fees a customer owes
That the consumer’s creditors or debt collectors may continue to pursue collection efforts, including initiation of lawsuits
That certain debt settlement techniques may hurt the consumer’s credit rating and increase the amount he or she owes
That any savings realized from the use of a debt relief service may be taxable income
But that’s not the worst of it. The FTC says that many consumers have paid hundreds or thousands of dollars up front for debt relief services that were never provided. So it has decided to prohibit debt relief service providers from requesting or receiving payment before the provider has actually settled or renegotiated the debt and provided the customer with documentation that the work has been completed.
That’s only fair, right? When you take your car in for a brake job, you usually don’t pay the mechanic until the work has been completed.
Of course, the mechanic can always hold on to your car until you pay for the work. Telephone or online sellers have to protect themselves by asking for a credit card before filling orders. But the agency is convinced that so many debt relief marketers stiff their customers that they propose to rain down this regulation.
The FTC will hold a public forum to discuss the proposed amendments in November. Don’t be surprised if the final amendments look a lot like what has been proposed. And don’t be surprised if final action on the amendments takes place sooner rather than later.