Debt Relief Agency Legislation from the FTC
As of October 27, 2010, for-profit companies that sell debt relief services over the telephone may no longer charge an upfront fee before they settle or reduce a customer’s unsecured debt.
Three other Telemarketing Sales Rule provisions that took effect on October 27, 2010:
- require debt relief companies to make specific disclosures to consumers;
- prohibit them from making misrepresentations;
- extend the Telemarketing Sales Rule to cover calls consumers make to these firms in response to advertising.
The Final Rule covers telemarketers of for-profit debt relief services, including credit counseling, debt settlement, and debt negotiation services. The Final Rule does not cover nonprofit firms but does cover companies that falsely claim nonprofit status.
Advance Fee Ban
The Final Rule contains specific requirements for debt relief providers related to charging an advance fee before providing any services. It specifies that fees for services may not be collected until:
- the service 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 provider.
To ensure that providers do not front-load their fees if a consumer has enrolled multiple debts in one debt relief program, the Final Rule specifies how providers can collect their fee for each settled account. First, the provider’s fee for a single debt must be in proportion to the total fee that would be charged if all of the debts had been settled. Alternatively, if the provider bases its fee on the percentage of what the consumer saves as result of using its services, the percentage charged must be the same for each of the consumer’s debts.
Dedicated Account for Fees and Savings
Another new provision of the Final Rule will allow debt relief companies to require that consumers set aside their fees and savings for payment to creditors in a “dedicated account.” However, providers may only require a dedicated account as long as five conditions are met:
- the dedicated account is maintained at an insured financial institution;
- the consumer owns the funds (including any interest accrued);
- the consumer can withdraw the funds at any time without penalty;
- the provider does not own or control or have any affiliation with the company administering the account; and
- the provider does not exchange any referral fees with the company administering the account.
Disclosures and Prohibited Misrepresentations
Under the Final Rule, providers will have to make several disclosures when telemarketing their services to consumers. Before the consumer signs up for any service, providers must disclose fundamental aspects of their services, including how long it will take for consumers to see results, how much it will cost, the negative consequences that could result from using services, and key information about dedicated accounts if they choose to require them.
The Final Rule also prohibits misrepresentations about any debt relief service, including success rates and whether the provider is a nonprofit entity. The FTC’s Statement of Basis and Purpose, which accompanies the Final Rule, provides extensive guidance about the evidence providers must have to make advertising claims commonly used in selling services.