Today the Federal Trade Commission announced a new rule directed specifically at regulating the debt relief industry. Initially proposed eleven months ago, the new rule implements a vast set of requirements and prohibitions, including an absolute ban on charging any fees to consumers before settlements are reached with creditors.
Industry representatives, including members of the industry’s largest trade associations, the United States Organizations For Bankruptcy Alternatives (USOBA) and The Association of Settlement Companies (TASC), testified at an FTC forum in November 2009 that such a ban will force many debt relief companies out of business and reduce the options available to financially-distressed Americans for resolving their consumer debt problems.
Among other provisions, the new rule:
- requires debt relief companies to make specific disclosures to consumers;
- prohibits them from making misrepresentations; and
- extends the Telemarketing Sales Rule (“TSR”) to cover calls consumers make to these firms in response to debt relief advertising.
Advance Fee Provisions
The rule prohibits debt relief providers from collecting any fees for debt relief services until:
- the debt relief company successfully renegotiates, settles, reduces or otherwise changes the terms of at least one of the consumer’s debts;
- there is a written settlement agreement, debt management plan or other agreement between the consumer and the creditor, and the consumer has agreed to it; and
- the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.
To prevent debt relief providers from front-loading fees charged to consumers that enroll multiple debts in one debt relief program, the rule requires that the fee charged for the settlement of a single debt be in proportion to the total fee that would be charged if all of the debts were settled. If the provider’s fee is based on the percentage of the consumer’s savings on the settlements negotiated, the percentage charged must be the same for each of the consumer’s debts.
The release of this new rule appears to be inconsistent with Congress’ recent enactment of the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” which created a new Bureau of Consumer Financial Protection that will soon take over the FTC’s rulemaking authority and assume primary responsibility for enforcing consumer financial laws with respect to a wide variety of industries, including the debt relief industry.
The FTC characterized its new rule as an amendment to the Telemarketing Sales Rule (“TSR”), 16 C.F.R. §§ 310.1-.9. Its rulemaking authority is purportedly granted by the Telemarketing and Consumer Fraud Protection Act (“TCPA”), 15 U.S.C. §§ 6101-6108.
The FTC’s decision to regulate debt settlement by modifying the TSR has been the subject of significant debate and is the subject of an article in the Spring edition of the Texas Review of Law & Politics entitled “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,” authored by Loeb partners Michael Mallow and Michael Thurman.
One concern raised by many industry participants is the impact the new rule will have on existing contracts. Section III.C.(5)(d) of the Final Rule Amendments states (on page 124) that the rule "does not apply retroactively; thus, the advance fee ban does not apply to contracts with consumers executed prior to the effective date.
If the rule is enforceable, a number of issues remain open. Among these, it is not entirely clear how the new rule will interplay with state debt settlement laws that directly contradict the fee ban provision. It is likely that this issue, along with the enforceability of the modifications themselves, will be subject of future litigation.
The new rule is scheduled to take effect on September 27, 2010, with the exception of the advance fee provisions, which are set to be implemented on October 27, 2010.