By: Kristen Marshall
With its recent revisions to the Telemarketing Sales Rule (TSR), the Federal Trade Commission has added yet another group to the list of those affected by its rules.
With its recent revisions to the Telemarketing Sales Rule (TSR), the Federal Trade Commission has added yet another group to the list of those affected by its rules. Debt relief service providers are now subject to certain requirements recently added to the TSR and published in the Federal Register on August 10, 2010.
The amended TSR, effective September 27 1 , includes several key changes applicable to debt relief providers: (1) it prohibits debt relief providers from collecting an advance fee until after services are provided; (2) it requires specific disclosures; (3) it prohibits specific misrepresentations about material aspects of debt relief service; (4) it sets forth certain conditions for dedicated accounts; and (5) it includes within the TSR’s scope inbound calls to debt relief companies in response to advertising.
The amendments apply to “any program or service represented, directly or by implication, to renegotiate or settle, or in any way alter, the terms of payment or other terms of the debt between a person and one or more unsecured creditors or debt collectors …” which includes telemarketers providing credit counseling, debt settlement, and debt negotiation services. Legitimate non-profit firms are not covered because the FTC does not have jurisdiction over non-profit organizations under the FTC Act. However, the FTC has pointed out that non-profit firms must still comply with state and IRS regulations, which include strict limitations on fee income.
• Under the amendments to the TSR, debt settlement providers may not charge a fee (i.e. advance fee) until all of the following occur: (1) the debt relief services successfully renegotiates, settles, reduces, or changes the terms of at least one of the consumer’s debts; (2) there is a settlement agreement or some kind of agreement between the creditor and the consumer, and the consumer has agreed to it; and (3) the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.
The TSR establishes that the fee charged for settling a single debt must be proportionate to the total fee which would be charged if the entire debt amount had been settled. If a service provider charges a fee based on a percentage, the percentage must remain the same for each debt settled.
Under the amendments, a debt relief servicer may require that consumers set aside their fees and savings for payment to creditors in a “dedicated account.” However, the dedicated account must meet certain conditions (i.e. what kind of institution maintains the funds, who owns the funds, what kind of access the consumer has to the funds, the relationship between the provider and the institution maintaining the funds).
As mentioned above, debt relief service providers must disclose certain aspects of their services, including the estimated time it will take to achieve the represented results, how much it will cost, the negative consequences on a consumer’s creditworthiness that could result from using debt relief services, and key conditions imposed on dedicated accounts if they choose to require them.
The amended TSR prohibits misrepresentations about any debt relief service, including statements about how much money a consumer may save by using a debt relief service, the effect of the service on collection efforts of the consumer’s creditors or debt collectors, and whether the provider is a nonprofit entity.
Finally, the new amendments apply to inbound calls including calls by consumers in response to direct mail and advertisements through other mediums such as television, radio, newspaper, Internet, or billboards.
Given the recent scrutiny debt service providers have recently been under, if you are a provider of these services, it is imperative that your business practices comply with the new amendments. The FTC has issued a guide for businesses to aid in compliance with the amendments, which may be found at http://www.ftc.gov/bcp/edu/pubs/business/marketing/bus72.pdf
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1 Compliance with the advance fee provision, 16 C.F.R. § 310.4(a)(5), is not required until October 27, 2010.