In the days and weeks since the Federal Trade Commission amended the Telemarketing Sales Rule, 16 C.F.R. Parts 310.1-.9, adding specific provisions to govern for-profit debt relief providers (the “TSR Amendments”), there have been many discussions among industry professionals about possible exceptions, or “loopholes,” to the TSR Amendments.
While we have counseled industry clients to utilize conservative, well-substantiated marketing strategies and meaningful due diligence, and have championed the use of a success fee model with nominal monthly administrative fees, we have also voiced our criticism of the FTC’s method of regulating the debt relief industry. See “Hid[ing] Elephants in Mouseholes: the FTC’s Unwarranted Attempt to Regulate the Debt Relief-Services Industry Using Rulemaking Authority Purportedly Granted by the Telemarketing And Consumer Fraud and Abuse Prevention Act,” Texas Review of Law & Politics, Vol. 14, No. 2, 301-342.
The agency circumvented the rulemaking procedures that were provided by Congress in the Magnuson-Moss Act and shoehorned advance fee restrictions into the TSR using the more flexible procedures offered by the Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. §§6101-6108 (the “Telemarketing Act”). We expect that industry advocates will challenge the amendments in court on the ironic grounds that the FTC failed to comply with the law in its zealous efforts to enforce its vision of what the law should be.
Unless a court grants an injunction staying the enforcement of the new provisions before September 27 (October 27 for the advance fee ban), the TSR Amendments will go into effect and will apply to all for-profit debt relief providers nationwide.
While we understand the desire of industry members to find enticing “loopholes” that may exist in the TSR, these should be viewed as potential traps for the companies that attempt to exploit them. There is no doubt that these loopholes will soon be the “test cases” for the FTC’s TSR regulatory enforcement efforts, and debt relief companies should be very wary about pursuing marketing programs or business models based on such “loopholes.” For these reasons, we are cautioning industry professionals to avoid jumping at the promise offered by a loophole – that loop may turn out to be a noose.
The following are the more obvious exceptions to the TSR, all of which are expressly set forth in the TSR itself:
1. Changing to a Non-Profit Business Model
The FTC readily admits that it is not authorized to regulate non-profit entities. See TSR Final Rule, 75 FR 48458, fn. 11. Thus, there may be a temptation to circumvent the advance fee restrictions by simply changing a business model from for-profit to non-profit.
While the FTC lacks authority over legitimate non-profit entities, the agency has aggressively pursued companies that it determined were “operating for their own profit or that of their members,” and thus fell outside the non-profit exemption in the FTC Act. Id. at fn. 38.
In other words, simply changing a company’s corporate structure from for-profit to non-profit, without a corresponding change in the company’s overall objectives, revenue structure and governance (that is, truly becoming a public benefit entity), will not eliminate the company as a potential target of regulatory enforcement. Rather, it is likely that the FTC will bring regulatory challenges against some companies that transition from for-profit to non-profit in the aftermath of the TSR Amendments.
In July 2010, the First Circuit Court of Appeal held that a credit counseling agency failed to meet the non-profit exemption of the Credit Repair Organizations Act (“CROA”), 15 U.S.C. §§ 1679-1679j, and was therefore liable to class action plaintiffs for more than $256 million. Zimmerman v. Puccio, No. 09-1416, __ F3d __ (1st Cir., July 27, 2010). In order to meet CROA’s non-profit exemption, the defendants had to show not only that they were recognized by the Internal Revenue Service as exempt from taxation under Section 503(c)(3), but also that they actually operated as a qualified non-profit.
The court’s opinion reflects some of the “red flags” indicating that a “non-profit” may be acting as a “for-profit”:
A. The for-profit entity provides “services” to the non-profit and receives most of the fees that are charged by the non-profit to consumers. B. Aggressive marketing campaign conducted by the non-profit. C. Common governance between the non-profit and the for-profit entities. D. The for-profit and non-profit entities share offices, employees and database accounts, etc. E. Lack of board of directors overseeing the non-profit. F. Minimal “non-profit” services offered by the non-profit.
Examples of some of the regulatory actions against non-profit entities include U.S. v. Credit Found. of Am., No. CV 06- 3654 ABC(VBKx) (C.D. Cal. filed June 13, 2006); FTC v. Integrated Credit Solutions, Inc., No. 06-806- SCB-TGW (M.D. Fla. filed May 2, 2006); FTC v. Express Consolidation, No. 06-cv-61851-WJZ (S.D. Fla. Am. Compl. filed Mar. 21, 2007); FTC v. Debt Mgmt. Found. Servs., Inc., No. 04-1674-T-17-MSS (M.D. Fla. filed July 20, 2004); FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md. filed Nov. 19, 2003).
2. Intrastate Telephone Calls
The TSR specifically applies to “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,” 16 C.F.R. 310.2(dd) (emphasis added). Based on this language, some may be tempted to limit telemarketing to “intrastate calls,” which would not cross state borders.
Such programs raise at least the following questions:
a. Would the TSR apply to “a plan, program, or campaign” where a national debt settlement company fulfills consumer transactions that are generated by multiple related or unrelated marketing entities that perform solely “intrastate” marketing? Such companies can certainly anticipate that the FTC will argue that the TSR would apply to such transactions based on a joint enterprise theory.
b. In an era where cellular telephones often serve as the primary telephone numbers for consumers, and move freely throughout the country and around the world, companies can no longer rely on area code prefixes to determine the location of an inbound or outbound call. Additional compliance procedures must be implemented to confirm a consumer’s location before an “intrastate” telemarketing transaction can be completed.
3. The “Face-to-Face” Exemption
Face-to-face presentations are expressly exempted from the TSR. Section 310.6(b)(3) exempts “[t]elephone calls in which the sale of goods or services … is not completed, and payment or authorization of payment is not required, until after a face-to-face sales … presentation by the seller …”
The face-to-face exemption clearly provides that the following requirements must be met:
a. The sale of the goods or services cannot be completed until after the face-to-face presentation has occurred.
b. There can be no required payment or authorization of payment until after the face-to-face presentation has occurred.
However, several issues arise in connection with this exemption.
First, the TSR’s wording fails to address the question of what kind of presentation is sufficient to satisfy the face-to-face exemption. The FTC website states that: “The key to the face-to-face exemption is the direct and personal contact between the buyer and seller. The goal of the Rule is to protect consumers against deceptive or abusive practices that can arise when a consumer has no direct contact with an invisible and anonymous seller other than the telephone sales call. A face-to-face meeting provides the consumer with more information about — and direct contact with — the seller, and helps limit potential problems the Rule is designed to remedy.” See FTC, Complying with the Telemarketing Sales Rule. It is likely that the meaning of “direct and personal contact” will be decided by the courts after extensive and protracted litigation with the FTC.
It should be noted that the face-to-face exemption also covers sales that begin with a face-to-face presentation and are later completed in a telephone call. The distinction is between a “face-to-face contact between the buyer and seller” and “those of telemarketing that are completed without face-to-face contact between buyer and seller,” TSR Final Rule, 60 FR at 43860.
Second, making a face-to-face presentation at a consumer’s home or away from the seller’s place of business may trigger the obligation to comply with state and/or federal home solicitation rules and “cooling off” rules. See, i.e., FTC’s Cooling Off Rule (16 C.F.R. Part 429). These rules need to be understood and complied with in connection with any face-to-face presentation.
4. “Internet Only” Transactions
In the Final Rule, the FTC acknowledged the possibility that the TSR Amendments would not reach transactions conducted solely over the Internet without the benefit of any interstate telephone communications. However, the agency apparently recognized that its rulemaking authority under the Telemarketing Act does not extend to the Internet.
Companies that consider an “Internet only” strategy must recognize that the FTC continues to wield a broad range of enforcement powers under Section 5 of the FTC Act, which directs the agency to prevent “unfair or deceptive acts or practices,” including those that occur on the Internet.
Where the FTC has aggressively pursued enforcement actions against Internet marketers in the past, it can be expected that it will continue to do so in the future. To the extent the TSR Amendments demonstrate and support the FTC’s view that charging debt settlement fees before delivering services is an “abusive” practice, there is every reason to believe that the agency will pursue Section 5 violations against “Internet” only debt relief marketers that attempt to charge fees in advance of settling consumers’ debts.
5. “Attorney Model” Transactions
In discussions in the Final Rule and a guide for debt relief businesses, the FTC has addressed the applicability of the new rules to attorneys. The agency selected examples when the TSR Amendments would not apply to lawyers, such as where the attorney’s telemarketing was limited solely to intrastate calls and/or where the attorney conducted a face-to-face presentation before entering into a transaction with the prospective client (exceptions that apply to all debt relief providers).
Notwithstanding the language used by the Commission, implicit in the FTC’s “guidance” is a clear indication of the agency’s view that the TSR Amendments apply to attorneys and law firms that provide debt relief representation to clients. As such, companies that work with attorneys must understand clearly that, apart from other potential issues that may arise in relationships between debt settlement companies and attorneys, the FTC’s position will likely be that such relationships will not exempt or otherwise protect such companies from compliance with the requirements of the TSR.
Before pursuing any potential exceptions, exemptions or other “loopholes” to the TSR Amendments, it is important to recognize that the FTC will scrutinize such efforts very closely and will likely focus its early regulatory enforcement efforts on these issues.
Consider the Benefits of a Settlement-Based Fee Model
While the way the FTC has gone about amending the TSR to reach debt relief companies is subject to serious question, the change the FTC is trying to make to industry-wide practices, though draconian, may ultimately benefit rather than burden the industry. Industry participants should carefully consider a business model that complies with the advance fee ban. Economic modeling and firsthand reports by some companies that have tried settlement-based fee models indicate that benefits include higher conversions, lower marketing costs, higher retention, earlier settlements and improved consumer satisfaction (translating into lower regulatory and legal complaint rates). In addition, rather than creating a portfolio of accounts that must be serviced over time, even after upfront fees have stopped coming in, the settlement-based fee model may help companies build a portfolio of future revenue events, increasing the company’s value and eliminating the need to continue to generate new clients to remain profitable.
Rather than changing business models, which will be perceived as chasing after “loopholes,” we encourage companies to explore compliance with the TSR Amendments to see if the burdens truly outweigh the potential benefits. Given the infancy of the TSR Amendments, there are no clear answers dictating how companies should respond to the changes forced by the TSR. But that does not mean that strict compliance is not necessarily the wrong answer or that it is bad for business. If companies could comply with the TSR Amendments and provide empirical data that such compliance leads to greater consumer satisfaction and success, the industry could use the TSR Amendments and its compliance therewith to challenge state provisions that bar debt relief programs outright or curtail industry viability by mandating unreasonably low fee caps.