Acknowledges “Debt Settlement Can Provide Some Real Benefits for Consumers”

Addressing a credit and collection industry conference in Carlsbad, California, on April 2, 2009, FTC Commissioner J. Thomas Rosch shared his views about debt settlement and discussed his thoughts on options available to the FTC and to the debt settlement industry to improve practices.

On the heels of FTC congressional testimony on consumer protection issues and the debt relief industry, Commissioner Rosch acknowledged that, in his view, debt settlement can provide some real benefits for consumers, but added that certain practices should be prohibited in the debt settlement industry.

In an address that was striking for its specificity, Commissioner Rosch directly addressed one of the most significant topics confronting debt relief providers and often asked by consumer advocacy groups – whether debt settlement was of any benefit to consumers. Commissioner Rosch noted that in his view “debt settlement can provide some real benefits for consumers.”

“For example, a debt settlement firm can advocate on the consumer’s behalf, especially in cases where consumers are reluctant, embarrassed, or even afraid to contact their creditors directly,” Commissioner Rosch said to the conference attendees. “A debt settlement firm also may be able to provide individualized attention to consumers, taking a holistic approach to all of the consumer’s unsecured debt owed to several creditors, rather than just the amount owed to a particular creditor.”

Commissioner Rosch, one of four sitting commissioners on the FTC, laid out his views in vivid terms that echo, in many ways, but also expand upon, recent FTC testimony to congressional committees responsible for overseeing the consumer protection agency. Commissioner Rosch said that he was “concerned about certain practices we’ve witnessed among some industry players.” To illustrate his concerns, Rosch described a number of the law enforcement actions brought by the FTC in recent years.

Though his specific themes have been sounded by consumer advocates and the FTC elsewhere, Commissioner Rosch offered views on “several industry practices that can be improved – as well as some that I believe should be prohibited.”

Recommendations for the Debt Settlement Industry

Among his recommendations, pulling suggestions from prior enforcement actions, Commissioner Rosch called on debt settlement firms to

  1. “limit their performance claims to those they can adequately substantiate”;
  2. not “misrepresent the benefits of debt settlement”;
  3. ”disclose, clearly and conspicuously, the negative impact that participation in a program may have on a consumer’s credit score, and how long that impact may linger. This disclosure should not be made only in the written contract, but in the ad itself”; and
  4. “if a debt settlement firm promises to refund debt settlement service fees to consumers if their debt settlement negotiations are unsuccessful, the firm must honor that promise.”

Options for Improving the Debt Settlement Industry

Commissioner Rosch told the audience there were debt settlement industry practices he believed should be prohibited. “Debt settlement firms shouldn't be allowed to charge any payment in advance of performing services for the consumer” he said in his speech. “This type of advance payment is already prohibited for credit repair services, and I think they should similarly be prohibited here.”

Commissioner Rosch also said that when “the debt settlement program involves trust accounts for consumers, the firms should not be allowed to withdraw any funds from those accounts without the consumer's express, prior written consent.”

But Commissioner Rosch also acknowledged that “ultimately, the goal should be that consumers have complete and accurate information about debt settlement, as well as other options such as credit counseling and bankruptcy, before they choose a course of action.”

Commissioner Rosch included in his speech his view on ways to improve the practices in the debt settlement industry. The first is Magnuson-Moss Act rulemaking, which the FTC can start on its own initiative. The second is rulemaking under the Administrative Procedure Act. Third is law enforcement actions that he noted are an ongoing FTC priority.

Last, but certainly not least, Commissioner Rosch commented on self-regulatory efforts by the debt settlement industry. The FTC commissioner has been a strong proponent of industry self-regulation and commented that self-regulation “can provide a critical complement to the FTC’s law enforcement actions.”

“The best self-regulatory programs carry several hallmarks. First, they clearly address the problems they seek to remedy. Second, they are flexible and able to adapt to new developments within the industry. Third, they are widely followed by affected industry members. Fourth, they are visible and accessible to the public. Fifth, they are administered in a fashion that avoids conflicts of interest between the regulated firms, on the one hand, and the body doing the regulating, on the other hand. Finally, they objectively measure member performance and impose sanctions for noncompliance.”

Commissioner Rosch singled out the efforts of three trade associations, the American Association of Debt Management Organizations (“AADMO”), the United States Organization for Bankruptcy Alternatives (“USOBA”), and The Association of Settlement Companies (“TASC”). Commissioner Rosch acknowledged that “each of the organizations already meets some of the hallmarks [of the best self-regulatory programs].”

But Commissioner Rosch had his own observations about areas for improvement for the associations, citing self-monitoring, independence, objectivity, visibility, and accessibility. “While I commend AADMO, USOBA and TASC for their self-regulatory efforts thus far, I'm bound to say that their efforts are far from perfect. Indeed, I wonder whether a trade association can sufficiently provide the self-regulatory regime that is required in today's environment.”

In the current economy, with consumer debt-to-income ratios at an all-time high, with tightened availability for full-balance debt repayment plans and bankruptcy, the ability for consumers to find debt relief services that offer workable options is more important than ever to cash-strapped, debt-ridden consumers.

Over the last several months, the FTC has emphasized increased enforcement against debt relief companies, mortgage loan modification and foreclosure rescue consultants, payday lenders, credit repair companies, and debt collectors. Just today, the FTC announced five new law enforcement actions targeting the perpetrators of alleged mortgage modification-related scams (see www.ftc.gov/opa/2009/04/hud.shtm for details). In addition, the FTC has upped its efforts at consumer education outreach on these topics, including launching new consumer-focused websites.

Section 5 of the Federal Trade Commission Act prohibits unfair or deceptive acts or practices. The FTC also has the authority to promulgate rules to prohibit deceptive or unfair practices and enforces a number of other consumer protection statutes.

On September 25, 2008 in Washington, D.C., the Federal Trade Commission held an all-day workshop, entitled “Consumer Protection and the Debt Settlement Industry” to explore growth in the for-profit debt settlement industry and to examine its impact on consumers and businesses. It is expected that the FTC will use the information gathered from the workshop and other sources to write a report that could further serve as the basis for additional regulation (possibly along the lines suggested by Commissioner Rosch) of the settlement industry.

The complete text of FTC Commissioner J. Thomas Rosch’s remarks are available at www.ftc.gov/speeches/rosch/090402debtsettlement.pdf.