The 2010 Amendments to the Telemarketing Sales Rule: Expanding FTC Regulatory Oversight to Debt Relief Services

Transcription

1 QUARTERLY REPORT 383 The 2010 Amendments to the Telemarketing Sales Rule: Expanding FTC Regulatory Oversight to Debt Relief Services By John L. Ropiequet and Jason B. Hirsh John L. Ropiequet is a partner in the Litigation Group of Arnstein & Lehr LLP, Chicago, where he has practiced since 1973, and Co-Chair of its Consumer ˇinance Group. His litigation experience includes consumer finance class action, anti-trust, environmental, and commercial cases in numerous state and federal courts. Mr. Ropiequet is a graduate of The Johns Hopkins University and Northwestern University School of Law. He writes and speaks frequently on issues involving consumer credit class actions, evidentiary privilege, legal ethics and other matters. He is a contributing editor to ROHNER & MILLER, TRUTH IN LENDING (2009 Suppl.), on private remedies for TILA violations and the author of numerous articles on a variety of consumer finance topics in The Business Lawyer, the Consumer Finance Law Quarterly Report and other publications. He is a member of the Governing Committee of the Conference on Consumer ˇinance Law. Jason B. Hirsh was a senior litigation associate in the Litigation Group at Arnstein & Lehr LLP, Chicago, at the time this article was written. He is now a senior litigation associate at Levenfeld Pearlstein, LLC in Chicago. Although his practice spans all areas of litigation, he focuses on complex commercial litigation and electronic discovery issues. Mr. Hirsh was recently selected to Illinois Rising Stars 2010 by Super Lawyers. Congress sought to prohibit deceptive and fraudulent activities perpetrated by telemarketers. Rather than spelling out in detail what activities would violate the Telemarketing Act, as is the case with most other federal consumer protection statutes, in the Telemarketing Act Congress simply authorized the ˇederal Trade Commission (ˇTC) to prescribe rules to regulate deceptive and abusive practices involving interstate telemarketing activities, 2 with very limited direction as to which particular abusive practices should be included in its rulemaking. 3 Pursuant to this authority, in 1995 the ˇTC promulgated the Telemarketing Sales Rule (TSR), which was subsequently amended in 2003 and After considerable enforcement activity at both the federal and the state level against the debt relief services industry, 5 the ˇTC proposed further amendments to the TSR in and adopted final amendments in 2010 (the 2010 Amendments) 7 which specifically target certain telemarketing practices. Under the 2010 Amendments, for-profit debt relief service providers are: required to provide consumers with new mandatory disclosures; prohibited from collecting fees I. Introduction By enactment of the Telemarketing and Consumer ˇraud and Abuse Prevention Act (Telemarketing Act), 1 1. Pub. L. No , 108 Stat (1994) (codified as amended at 15 U.S.C (2006)). 2. Id. (codified at 15 U.S.C. 6102(1)). 3. Id. (codified at 15 U.S.C. 6102(3)). 4. See 16 CˇR pt. 310 (2009). See generally Stephen ˇ.J. Orenstein, Matthew S. Yoon & John P. Holahan, Telemarketing Sales Rule, 62 Consumer ˇin. L.Q. Rep. 94 (2008). 5. See infra note 7; see infra this text at note 28 for the ˇTC definition of debt relief service ˇed. Reg (Aug. 19, 2009). 7. ˇederal Trade Commission, Telemarketing Sales Rule, 75 ˇed. Reg (Aug. 10, 2010). The 2010 Amendments became effective September 27, 2010, except for one amendment effective 30 days later. Id. The ˇTC listed 84 federal enforcement actions against debt relief services providers and many more state investigations and enforcement actions. Id. at

2 384 QUARTERLY REPORT until the debt relief services have been provided in concrete, ascertainable form; and otherwise prohibited from engaging in deceptive acts. This article describes the 2010 Amendments to the TSR. II. Historical Background A. Telemarketing Act Provisions Congress enacted the Telemarketing Act in 1994 to address deceptive practices by telemarketers that it found to be injurious to consumers. It expressly found the legislation to be needed because: (1) Telemarketing differs from other sales activities in that it can be carried out by sellers across State lines without direct contact with the consumer. Telemarketers also can be very mobile, easily moving from State to State. (2) Interstate telemarketing fraud has become a problem of such magnitude that the resources of the ˇederal Trade Commission are not sufficient to ensure adequate consumer protection from such fraud. (3) Consumers and others are estimated to lose $40 billion a year in telemarketing fraud. (4) Consumers are victimized by other forms of telemarketing deception and abuse See 15 U.S.C. 6101(1)-(4). The Telemarketing Act defines telemarketing as a plan, program, or campaign which is conducted to induce purchases of goods or services, or a charitable contribution, donation, or gift of money or any other thing of value, by use of one or more telephones and which involves more than one interstate telephone call. 9 This is commonly referred to as making outbound calls. Telemarketing does not include the solicitation of sales through the mail where the person making the solicitation does not solicit customers by telephone but only receives calls initiated by customers in response to the catalog and during those calls takes orders only without further solicitation. 10 Customer-initiated calls to telemarketers are commonly called inbound calls. B. Key TSR Provisions Prior to the 2010 Amendments, the TSR regulated only outbound telemarketer communications and did not specifically address the conduct of debt relief services providers. The key provisions of the pre-2010amendments version of the TSR were: (1) a Do-Not- Call Registry; 11 (2) a prohibition on telemarketers from abandoning calls, i.e., failing to connect the consumer to a salesperson within two seconds of the completed greeting; and (3) a prohibition on engaging in deceptive telemarketing acts and practices, including failing to disclose, among other things, the full cost of goods or services and all material restrictions and conditions of the purchase of any goods or services. 12 C. Debt Relief Services Abuses The genesis of the 2010 Amendments is set forth in the ˇTC s findings regarding alleged abuses in the debt relief services industry. 13 In articulating its findings, the ˇTC focused on three components of this industry: credit counseling agencies, also known as debt management companies; debt settlement companies; and debt negotiation companies Id. 6106(4). 10. Id CˇR Id Amendments, supra note 7, 75 ˇed. Reg. at Id. Credit counseling agencies have historically been non-profit entities which function as intermediaries between consumers and creditors for the purpose of negotiating debt management plans. 15 The plans are designed to modify and extend payment terms. Typically, the plans are intended to result in consumers paying the full amount of the delinquent unsecured debt, although creditors may pay the agency a portion of the amounts paid by the consumer for its fee. 16 In the 2010 Amendments the ˇTC identified various abuses by credit counseling agencies, including: false statements regarding their non-profit status; misrepresentations about unrealistic outcomes from their services; material misrepresentations about their fees; and engaging in outbound telemarketing in violation of the TSR. 17 Debt settlement companies seek to negotiate agreements between consumers and creditors that allow satisfaction of outstanding unsecured debt by making a single lump sum payment in an amount considerably less than the full amount due. 18 They generally engage in direct marketing campaigns that solicit consumers to contact the company through a toll free telephone number. 19 Consumers who call such numbers frequently communicate with a telemarketer employed by the debt settlement company. 20 Upon accepting the company s services, the consumer is ordinarily required to deposit funds in a dedicated bank account to provide funds for the purpose of debt settlements. 21 An advance fee is often paid for the company s services Id. at See generally, e.g., David A. Lander, Snapshot of an Industry in Turmoil: The Plight of Consumer Debt Counseling, 54 Consumer ˇin. L.Q. Rep. 330 (2000); David A. Lander, One Lawyer s Look at the Debt Counseling Industry, 53 Consumer ˇin. L.Q. Rep. 191 (1999) Amendments, supra note 7, 75 ˇed. Reg. at Id. at Id. at Id. 20. Id. 21. Id. 22. Id. at

3 QUARTERLY REPORT 385 The ˇTC found that debt settlement companies also present serious consumer protection concerns, due to frequent misrepresentations about: the likelihood of large debt reductions; the time needed to eliminate debt; the ability to end harassing calls from creditors and debt collectors; having a special relationship with creditors ; having expert knowledge about debt reduction; or having involvement in alleged government programs; as well as instructing consumers to stop paying creditors while failing to indicate that doing so may increase the amounts owed. 23 Debt negotiation companies offer to negotiate interest rate reductions or other debt concessions on unsecured debt, that result in lower monthly installment payments. 24 The ˇTC also identified various abuses by debt negotiation companies, because many of them: solicit consumers by robocalls ; require payment of advance fees; promise specific results; deceive consumers by describing the company as a customer service department ; and promise debt reduction when the only service to be provided is an accelerated payment schedule that recommends increased monthly payments. 25 III Amendments to the TSR A. Regulation of Telemarketing for Debt Relief Services In its effort to address these problems on a systemic basis, the ˇTC is now using its regulatory authority under the Telemarketing Act to regulate debt relief services providers through the 2010 Amendments. 26 Notably, it found no need to seek additional congressional authorization through new legislation. In doing so, the ˇTC broadly defined the 23. Id. 24. Id. at Id. 26. The 2010 Amendments bear some resemblance to the Uniform Debt Management Services Act (UDMSA) and may be based, at least in part, on the provisions of that Act. ˇor a description of the UDMSA, see, e.g., Carla Stone Witzel, The New Uniform Debt Management Services Act, 60 Consumer ˇin. L.Q. Rep. 650 (2006). scope of the debt relief services covered, to bring within the scope of the TSR all current and reasonably foreseeable forms of debt relief services, including debt settlement, debt negotiation, and debt management, as well as lead generators for these services. 27 The 2010 Amendments broadly define debt relief service as: any service or program 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 person 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 person to an unsecured creditor or debt collector. 28 There are, however, two obvious limitations in this otherwise all-encompassing definition. ˇirst, this definition excludes from its coverage debt relief products, such as books, CDs and DVDs which provide consumers do-it-yourself advice relating to debt relief. 29 Second, this definition excludes debt relief services relating to secured debt. 30 With regard to both of these limitations, the ˇTC stated that it could not identify deceptive or abusive practices justifying regulation. 31 Significantly, as under the Credit Repair Organizations Act (CROA), which regulates the provision of credit repair services, 32 attorneys are not excluded Amendments, supra note 7, 75 ˇed. Reg. at CˇR 310.2(m) Amendments, supra note 7, 75 ˇed. Reg. at Id. 31. Id. The ˇTC noted that it is addressing debt relief services for mortgage secured debt in a separate rule. Id. See Mortgage Assistance Relief Services Notice of Proposed Rulemaking, 75 ˇed. Reg (Mar. 9, 2010). The rules have subsequently become final. See ˇederal Trade Commission, ˇinal Rule on Mortgage Assistance Relief Services, 75 ˇed. Reg (Dec. 1, 2010), to be codified at 12 CˇR pt. 322; Ashley Harrell, Mortgage Rescue Fraud and the Subsequent Purchaser, in this issue. See also Press Release, ˇTC Issues ˇinal Rule to Protect Struggling Homeowners from Mortgage Relief Scams, available at U.S.C et seq. (2006). See John L. Ropiequet & Jason B. Hirsh, The Credit Repair Organizations Act: Recent (Continued in next column) from regulation in the TSR. Thus, the 2010 Amendments apply to any person providing debt relief services as defined above, including attorneys, who runs afoul of its prohibitions. 33 However, attorneys apparently need not worry that individualized interstate client communications may make the 2010 Amendments applicable to them. 34 According to the ˇTC s findings, since telemarketing is defined as a plan, program or campaign which is conducted to induce the purchase of goods and services, 35 individual interstate telephone calls to a client would not ordinarily fall within the scope of the 2010 Amendments. 36 B. Regulation of Both Inbound and Outbound Calls As noted above, at Part II.B., the TSR previously only regulated outbound calls by telemarketers. This is now changed for debt relief services providers, in the 2010 Amendments. Regulation of telemarketing activities involving debt relief services is no longer limited just to outbound calls. Under the 2010 Amendments, both inbound and outbound telemarketing calls by debt relief services providers are regulated. 37 The ˇTC justified this expansion of the scope of the TSR by noting its concern that deceptive marketing campaigns are often used to encourage consumers to call debt relief services providers. 38 Thus, the ˇTC concluded, excluding inbound calls from the 2010 Amendments might have resulted in a large regulatory gap. 32. (Continued from previous column) Developments, 64 Consumer ˇin. L.Q. Rep. 13, 16 (2010) [hereinafter CROA 2010] CˇR 310.2(cc); 2010 Amendments, supra note 7, 75 ˇed. Reg. at Id. at CˇR 310.2(dd); 2010 Amendments, supra note 7, 75 ˇed. Reg. at Id CˇR 310.2(cc); id (b)(6). See supra this text at note 28 for the ˇTC definition of a debt relief service Amendments, supra note 7, 75 ˇed. Reg. at

4 386 QUARTERLY REPORT C. Prohibition of Advance Fees While the 2010 Amendments do not cap the total fee that may be charged by a debt relief services provider, they plainly prohibit such a provider from requiring or requesting any form of advance fee from consumers before a specified amount of work has been performed for the consumer s benefit. 39 Thus, debt relief service providers are specifically prohibited from: (i) CˇR 310.4(a)(5)(i). Requesting or receiving payment of any fee or consideration for any debt relief service until and unless: (A) the seller or telemarketer has renegotiated, settled, reduced, or otherwise altered the terms of at least one debt pursuant to a settlement agreement, debt management plan, or other such valid contractual agreement executed by the customer; (B) the customer has made at least one payment pursuant to that settlement agreement, debt management plan, or other valid contractual agreement between the customer and the creditor or debt collector; and (C) to the extent that debts enrolled in a service are renegotiated, settled, reduced, or otherwise altered individually, the fee or consideration either: (1) bears the same proportional relationship to the total fee for renegotiating, settling, reducing, or altering the terms of the entire debt balance as the individual debt amount bears to the entire debt amount. The individual debt amount and the entire debt amount are those owed at the time the debt was enrolled in the service; or (2) is a percentage of the amount saved as a result of the renegotiation, settlement, reduction, or alteration. The percentage charged cannot change from one individual debt to another. The amount saved is the difference between the amount owed at the time the debt was enrolled in the service and the amount actually paid to satisfy the debt. 40 Significantly, unlike the requirement in the CROA that no fee can be collected until all contracted-for work has been performed, 41 under the TSR debt relief services providers are not required to abstain from collecting any part of their fees until all of the consumer s debts have been settled or resolved. 42 Rather, once the advance fee criteria have been satisfied by providing a written debt relief agreement with a creditor that is executed by the consumer and the consumer follows through by making the first payment due under the agreement, the debt service provider can be paid part of its fee relating to that agreement. The ˇTC noted in its supplementary discussion accompanying the 2010 Amendments that, to guard against evasion of this requirement, the execution of a power of attorney that would authorize the provider to execute agreements with creditors on behalf of the consumer does not meet the requirement for a written contract, because [t]he requirement that consumers execute the agreements is necessary to ensure that the offers are legitimate, final, and acceptable to the consumers Id U.S.C. 1679b(a). See, e.g., Eugene J. Kelley, Jr., John L. Ropiequet & Andrea J. Durkin, The Credit Repair Organizations Act: The Next Big Thing?, 57 Consumer ˇin. L.Q. Rep. 49, 51 (2003) [hereinafter CROA 2003] CˇR 310.4(a)(5)(i); 2010 Amendments, supra note 7, 75 ˇed. Reg. at Amendments, supra note 7, 75 ˇed. Reg. at D. Deposit Account Safeguards Although advance fees are regulated as noted above, debt relief services providers are authorized to require a consumer to deposit funds into a dedicated bank account in order to ensure payment to creditors or debt collectors, but only if the debt relief services provider cannot use this deposit account to pay its fees or otherwise obtain benefits. 44 Thus, such deposit accounts are permitted only if the following conditions are met: ˇirst, the account must be located at an insured financial institution. Second, all funds in the account must remain the property of the consumer, and, if the money is held in an interest-bearing account, all interest that accrues must be paid to the consumer. Third, the agent holding the funds must be independent that is, not under the control of or affiliated with the debt relief provider. ˇourth, to further ensure that the account provider is truly independent, the debt relief provider may not give or accept any money or other compensation in exchange for referrals of business involving the debt relief service. ˇifth and finally, the provider must allow the consumer to withdraw from the debt relief service at any time without penalty; thus, the provider may not charge a termination fee or similar fee. 45 In the event that the consumer makes a request for return of the funds deposited in the dedicated deposit account, the debt relief services provider must ensure that the consumer receives, within seven business days of the consumer s request, all funds in the account, less any money that the provider has earned in fees in compliance with the Rule s provisions, as a result of having settled a debt prior to the consumer s withdrawal from the program Id. at CˇR (a)(5)(ii). 46. Id (a)(5)(ii)(E).

5 QUARTERLY REPORT 387 E. Required Disclosures for Debt Relief Services The ˇTC found that consumers often fail to appreciate that doing business with a debt relief services provider may open the door for possible deceptive practices and acts. 47 To avoid this risk, the 2010 Amendments require such providers to make four specific consumer disclosures prior to obtaining the consumer s consent to pay their fees: (1) the amount of time necessary to achieve the represented results; (2) if a settlement offer will be made, the amount of debt the customer must accumulate before the offer is to be made; (3) if the debt relief program includes advice or instruction to consumers not to make timely payments to creditors, that the program may affect the consumer s creditworthiness, result in collection efforts, and increase the amount the consumer owes due to late fees and interest; and (4) if the debt relief provider requests or requires the customer to place funds in a dedicated deposit account at an insured financial institution, that the customer owns the funds held in the account and may withdraw from the debt relief service at any time without penalty, and receive all funds in the deposit account. 48 F. Prohibited Deceptive Acts The 2010 Amendments specifically prohibit debt relief services providers from misrepresenting any material aspect of the debt relief service. 49 The ˇTC s discussion accompanying the 2010 Amendments applies a materiality test to determine whether an act or practice is likely to result in an injury and to assess whether it is deceptive. 50 Thus, [i]njury is likely if inaccurate or omitted information is material [and] [a] claim is deceptive if it either misrepresents or omits a material fact such that reasonable consumers are likely to be misled. 51 The ˇTC gave several examples of material misrepresentations, including false representations regarding: the amount of money or the percentage of the debt amount that a customer may save by using such service; the amount of time necessary to achieve the represented results; the amount of money or percentage of the debt that the customer must accumulate before the provider attempts to negotiate or settle a customer s debts; the effect of the service on the collection efforts of the customer s creditors or debt collectors; the percentage or number of customers who attain the represented results; and whether the service is offered or provided by a nonprofit entity. 52 To avoid liability, the debt relief services provider s statements regarding such matters must be truthful and justified by a reasonable basis to substantiate the claims. 53 IV. Conclusion By promulgating the 2010 Amendments to the TSR, the ˇTC has broadly expanded the scope of the TSR to deal with a set of abuses which it has found to be prevalent in a specific industry, the debt relief services business. Perhaps inspired by the apparent success of the advance fee ban in the CROA in preventing abuse in the credit repair services industry, 54 the 2010 Amendments exercise the ˇTC s authority to prevent consumer fraud and abuse by essentially banning advance fees. Likewise, because of perceived abuses, the ˇTC is exerting its authority as a means to regulate an industry s inbound as well as outbound calls for the first time. Significantly, these requirements apply to attorneys. The ˇTC has subsequently taken further action to protect consumers from mortgage assistance relief service providers by issuing a set of final rules which has features very similar to those in the 2010 Amendments. These include a ban on advance payment of fees, required disclosures and a prohibition of false and misleading claims. 55 Whether these measures, along with the special disclosure requirements and other safeguards, will accomplish their intended purpose of preventing deceptive and abusive acts by the targeted providers, or will interfere with services needed by consumers, will only become more clear over time. The same is true with respect to the question of whether successful application of the new aspects of the TSR added by the 2010 Amendments will influence the ˇTC to further amend the TSR in the future, perhaps to expand its power over other industries that employ telemarketing techniques. Clearly, the ˇTC will remain vigilant and additional rulemaking, either as amendments to the TSR or otherwise, can be expected to combat perceived abuses Amendments, supra note 7, 75 ˇed. Reg. at CˇR 310.3(a)(1)(viii)(A)-(D). 49. Id (a)(2)(x) Amendments, supra note 7, 75 ˇed. Reg. at Id. at Id. at Id. at While there were some ˇTC enforcement actions in the early years after enactment of the CROA in 1997, see CROA 2003, supra note 41, at 53-54, subsequent activity under the CROA has largely been limited to private litigation. See CROA 2010, supra note 32, at See supra note 31.