On July 30, 2009, the Federal Trade Commission ("FTC" or "Commission") announced that it would seek comment on a proposed rulemaking to amend the Telemarketing Sales Rule ("TSR") to cover "debt relief services" including credit counseling, debt settlement, and debt negotiation. This is a critical departure from the current reach of the Telemarketing Sales Rule to debt relief services. The proposed rules are based on comments from the Commission's September 2008 Workshop on "Consumer Protection and the Debt Settlement Industry" and enforcement actions taken against advertisers and marketers of debt relief services.
The Commission's Notice of Proposed Rulemaking ("NPRM") requests comment on rules that would impose fee restrictions, disclosure requirements, and prohibit a host of activities, which if enacted, would significantly impact the manner in which debt relief services may be advertised and marketed, as well as how and when providers may charge for these services. The NPRM also summarizes the Commission's September 2008 public workshop and provides an overview of its enforcement actions in this area. Lastly, the NPRM announced the Commission's intention to hold a public forum to allow the Commission staff and interested parties to discuss the issues raised in the proposed rules.
Traditionally, the TSR governs the practices of companies conducting telemarketing sales calls. It prohibits abusive practices including making misrepresentations to customers and requires specific disclosures. The TSR was amended in 2003 to create the National Do Not Call Registry and most recently in 2008 regarding the use of delivering prerecorded messages.
For some time, the FTC has made the advertising and marketing of debt relief services a priority. Over the course of the last several years, the FTC has brought numerous enforcement actions against advertisers and marketers of debt relief services based on allegations that the companies and individuals offering services engaged in unfair or deceptive practices, in violation of the FTC Act. Many of these cases initially involved telemarketing offers either as a result of inbound or outbound calls.
With the issuance of the Commission's NPRM, the FTC continues its push to ensure that financially distressed customers are protected from abusive advertising and marketing practices. The FTC is both strengthening and broadening the TSR with the proposed amendments. Specifically, "the proposed amendments would bring all inbound debt relief calls in response to direct mail or general media advertisements under the Rule."
The Commission seeks public comment on amendments to the TSR that address the definition of "debt relief service" as well as a range of deceptive and abusive telemarketing acts or practices, including disclosures, misrepresentations, and the collection of fees. Key areas where comment is sought include amendments that:
- Define, and expand, 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". Though this revised definition broadens the reach of the term, offers for secured debts such as mortgage loans remain unaffected (as the FTC is in the process of adopting specific rules for mortgage foreclosure consultants and mortgage loans generally). In addition, the FTC in the NPRM recognizes both distinctions and similarities between the services offered by nonprofit credit counseling agencies, for-profit debt management plan providers, debt settlement companies and debt negotiation companies.
- Broaden the reach of the TSR to cover all inbound debt relief calls regardless of the way in which the services are advertised. Outbound telemarketing calls are already regulated by the TSR. As the NPRM states, "As a result, virtually all debt relief telemarketing transactions would be subject to the TSR if the proposed modifications to the Rule are adopted."
- Require six specific disclosures about the debt relief services offered:
- Disclose "the amount of time necessary to achieve the represented results, and to the extent that the offered service may include the making of a settlement offer to one or more of the customer's creditors or debt collectors, the specific time by which the debt relief service provider will make such a bona fide settlement offer to each of the customer's creditors or debt collectors.
- Disclose "to the extent that the offered service may include the making of a settlement offer to one or more of the customer's creditors or debt collectors, the amount of money or the percentage of each outstanding debt that the customer must accumulate before a debt relief service provider will make a bona fide settlement offer to each of the customer's creditors or debt collectors."
- Disclose that "not all creditors or debt collectors will accept a reduction in the balance, interest rate, or fees a customer owes such creditor or debt collector."
- Disclose that "pending completion of the represented debt relief services, the customer's creditors or debt collectors may pursue collection efforts, including initiation of lawsuits."
- Disclose that "to the extent that any aspect of the debt relief service relies upon or results in the customer failing to make timely payments to creditors or debt collectors, that use of the debt relief service will likely adversely affect the customer's creditworthiness, may result in the customer being sued by one or more creditors or debt collectors, and may increase the amount of money the customer owes to one or more creditors or debt collectors due to the accrual of fees and interest."
- Disclose that "savings a customer realizes from use of a debt relief service may be taxable income."
- Prohibit debt relief service companies from making specific misrepresentations regarding any material aspect of the offered debt relief service including but not limited to: (a) the amount of money or the percentage of the debt amount that a customer may save by using such service; (b) the amount of time necessary to achieve the represented results; (c) the amount of money or the percentage of each outstanding debt that the customer must accumulate before the provider of the debt relief service will initiate attempts with the customer's creditors debt collectors to negotiate, settle, or modify the terms of customer's debt; (d) the effect of the service on a customer's creditworthiness; (e) the effect of the service on collection efforts of the consumer's creditors or debt collectors; (f) the percentage or number of customers who attain the represented results; and (g) whether a service is offered or provided by a nonprofit entity. This proposed rule would also prohibit telemarketers of debt relief services from making similar misrepresentations.
- Prohibit any entity from "[r]equesting or receiving payment of any fee or consideration from a person for any debt relief service until the seller has provided the customer with documentation in the form of a settlement agreement, debt management plan, or other such valid contractual agreement, that the particular debt has, in fact, been renegotiated, settled, reduced, or otherwise altered."
- Prohibit a debt relief services company from receiving an advance fee for providing the debt relief services offered. In practice, this means that a debt settlement company could not charge an upfront fee for a settlement before that settlement has been achieved. The FTC takes the position that "the practice appears to meet the statutory test for unfairness because it appears to cause significant harm to consumers that is not outweighed by countervailing benefits to consumers or competition, and the harm is not reasonably avoidable."
In addition to the proposed amendments outlined above, the Commission intends to modify the general media exemption and direct mail exemptions such that they are unavailable to telemarketers of debt relief services. Generally, these exemptions use a four-prong approach to ensure that legitimate business are not unduly burdened by the TSR.
Bona fide nonprofit organizations providing debt relief services, such as nonprofit credit counseling agencies, remain exempt from the reach of the TSR, and therefore, the proposed amended rules. Note, though, that the nonprofit exemption to the TSR is narrower and more nuanced than the nonprofit exemption to the FTC Act, by comparison. In addition, the TSR and the proposed rules remain applicable to third-party telemarketers that conduct telemarketing activities on the behalf of bona fide nonprofit entities, as well as other for-profit companies hired by nonprofit entities (e.g., marketing companies, back-end processing companies). Further, the FTC will continue to have jurisdiction over "sham" nonprofits that act like for-profit entities in practice; the FTC reiterated this point in the NPRM.
The FTC has made clear that it will continue its rigorous enforcement efforts in this area through investigations, enforcement actions against violators, and responding to consumer complaints. Violations of the TSR are subject to significant monetary penalties per violation. In addition to the FTC, enforcement actions under the TSR also can be brought by state attorneys general.
Comment Deadline and Additional Information
The Commission will be receiving written comments during the 60-day NPRM public comment period until October 9, 2009.
The FTC press release can be found here: http://www.ftc.gov/opa/2009/07/tsr.shtm
The Notice of Proposed Rulemaking can be found here: http://www.ftc.gov/os/2009/07/R411001tsrnprm.pdf
* * * * * *
The foregoing regulatory developments, as well as continuing legislative developments (including the request by the FTC for greater rulemaking authority over debt relief services), present significant challenges for debt relief service providers and related industry service providers, including lead generators and marketing companies that promote debt relief services. Advertisers and marketers of debt relief services should exercise caution and consult legal counsel whenever advertising debt relief services in this evolving regulatory and legal landscape.