Determining Whether Debt Relief Service Complies with FTC Rule (Telemarketing Sales Rule 16 C.F.R. Part 310) INTERNAL BBB IMPLEMENTATION GUIDE The FTC amended its Telemarketing Sales Rule (16 C.F.R. Part 310) ( FTC Rule ) in July 2010 to add specific requirements for debt relief services. This document is intended to provide internal guidance to BBB staff in determining whether a debt relief service complies with those requirements. The FTC Rule and detailed comments can be found at http://www.ftc.gov/os/2010/07/r411001finalrule.pdf. One purpose of this guide is to help BBBs determine the correct TOB for debt settlement businesses. I. Possible TOBs for Debt Settlement Businesses There are three possible TOBs for debt settlement businesses: A. 25079-000 Debt Relief Services (non-compliant with FTC Rule)[illegal/scam] this is for debt settlement businesses that the BBB has determined do not comply with the FTC Rule. B. 25077-000 Debt Relief Services [monitored] this is for debt settlement businesses that (1) have been found by the BBB to be in compliance with the FTC Rule, (2) have not been evaluated by the BBB to determine compliance with the FTC 1
Rule, or (3) are currently being reviewed by the BBB to determine compliance. C. 25078-000 -- Debt Relief Services (requested information not provided to BBB) [inherent problem] this is for debt settlement businesses from whom the BBB has requested information to determine compliance with the FTC Rule but the business has not provided what the BBB is requesting and BBB investigation has been unable to determine compliance. II. What is a debt relief service? The FTC Rule defines a debt relief service as: Any [for-profit] program or 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 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. This is a very broad definition that covers both those offering debt relief services as well as lead generators 1 for debt relief services. The FTC Rule covers the following types of businesses if they are for-profit: Credit counseling businesses that work as a liaison between consumers and creditors to negotiate debt management plans. Credit counseling businesses that can verify their non-profit status would not be subjected to the FTC Rule. 2 Debt settlement businesses that offer consumers the opportunity to obtain lump sum settlements with their creditors for less than the full outstanding balance of their unsecured debts. 1 Lead generators are intermediaries that produce and disseminate advertisements for debt relief services to generate leads that are sold to actual providers of debt relief services. 2 Most credit counseling businesses are non-profit and would thus not be covered by the FTC Rule. 2
Debt negotiation businesses that offer to obtain interest rate reductions or other concessions to lower the amount of consumers monthly payment owed to unsecured creditors. The FTC Rule does not cover the following types of businesses: Any non-profit business 3 Any business that only offers to assist with secured debts (e.g., businesses exclusively offering to assist with mortgage debt) Any business that only offers debt relief services to businesses. Any business that does not conduct a plan, program or campaign through interstate telephone communications (either calls made to the consumer or calls received from the consumer in response to advertisements) to induce the purchase of debt relief services. 4 The FTC Rule specifically exempts compliance with most 5 provisions where payment is not required until after a face-toface meeting. 6 3 The FTC Act exempts non-profit entities, and that jurisdictional limit applies to the FTC Rule. Non-profit entities are subject to state law and stringent IRS regulations. 4 The FTC Rule is aimed at businesses whose advertisements solicit consumers to call so that the consumers may be subject to a sales pitch with the end result being that consumers consent to purchase debt relief services. Because the FTC Rule only covers businesses that use interstate calls, it does not cover businesses that operate solely in a single state or those businesses that rely exclusively on face-to-face sales presentations. The FTC comments note that attorneys are generally not covered by the FTC Rule if they engage in debt settlement: In general, attorneys who provide bona fide legal services do not utilize a plan, program or campaign of interstate telephonic communications in order to solicit potential clients to purchase debt relief services. Thus, an attorney who makes telephone calls to clients on an individual basis to provide assistance and legal advice generally would not be engaged in telemarketing. (emphasis added) 5 Sellers engaged in telemarketing that qualify for the face-to-face exemption must still comply with National Do Not Call Registry provisions and must also refrain from a number of abusive sales practices that are prohibited by the FTC Rule. 6 This is another reason why attorneys who provide debt relief services are generally not covered by most requirements in the FTC Rule, since most attorneys do not ask for payments prior to a face-to-face meeting. However, the FTC Rule would apply to an attorney who provided debt relief services over the telephone and required payment without a meeting. 3
III. What debt relief services must show to demonstrate they comply with the FTC Rule. In order to be placed in the TOB for debt relief services that comply with the FTC Rule, a debt relief service must establish to BBB s satisfaction that it complies with the FTC Rule. The business should provide BBB with all information that BBB needs to determine compliance. In order to demonstrate compliance with the FTC Rule, a debt relief services must show: It is making required disclosures as of September 27, 2010 (Section A below) It is not making prohibited misrepresentations as of September 27, 2010 7 (Section B below) It is not charging an advance fee for consumers who contracted for debt relief services on or after October 27, 2010 (Section C below) It complies as of September 27, 2010 with requirements for accounts in which customers place funds (Section D below) 7 While the Telemarketing Sales Rule generally prohibited misrepresentations prior to September 27, 2010, the more specific prohibitions applicable to debt relief service businesses became effective September 27, 2010. 4
A. REQUIRED DISCLOSURES (Effective September 27, 2010) 1. Required disclosures unique to debt relief services The FTC Rule requires four disclosures that are unique to debt relief services. The following must be clearly and conspicuously disclosed at the time the debt relief service is marketing the service and before the consumer consents to pay 8 for debt relief services: Amount of time necessary to achieve the represented debt relief 9 ; Amount of money or percentage of debt that the consumer must accumulate before settlement offer will be made; IF the debt relief service relies on or results in the consumer s failure to make timely payments to creditors, it must be disclosed that the use of the debt relief service (a) will likely adversely affect the consumer s creditworthiness, (b) may result in the consumer being subject to collections or sued, and (c) may increase the amount of money the consumer owes due to the accrual of fees and interests; and IF the debt relief provider requests or requires the consumer to place funds in a dedicated bank account at an insured financial institution, it must be disclosed that (a) the consumer owns the funds held in the account, (b) the consumer may withdraw from the debt relief service at any time without penalty and (c) the consumer must receive all funds in the account if the consumer withdraws, except for funds earned by the debt relief service in compliance with the FTC Rule. 2. Required disclosures that generally apply to all entities covered by Telemarketing Sales Rule Debt relief services are also required to make any disclosures that are generally required of all entities covered by the Telemarketing Sales Rule. The generally required disclosures include: 8 Acts or communications that signify the consumer s consent to pay include (a) sending full or partial payment; (b) providing credit card, bank account or other billing information; (c) stating agreement to a transaction; or (d) invoking an electronic process used to electronically sign an agreement. 9 Providers may make a good faith estimate of the necessary time and money commitments entailed in the service but must have a reasonable basis to support their estimates. 5
The total cost to purchase, receive or use the services; Any material restriction, limitation, or condition to purchase, receive or use the services 10 ; and Any material aspect of the nature or terms of the seller s refund or cancellation policy. B. PROHIBITED MISREPRESENTATIONS (Effective September 27, 2010) The FTC Rule prohibits misrepresentations as to: Amount of money or the percentage of debt amount that a consumer may save by using such service 11 ; Amount of time necessary to achieve the represented results; Amount of money or the percentage of each outstanding debt that the consumer must accumulate before the provider will initiate attempts with the consumer s creditors or debt collectors or make a bona fide offer to negotiate, settle, or modify the terms of the consumer s debt; Effect of the service on a consumer s creditworthiness; Effect of the service on the collection efforts of the consumer s creditors or debt collectors; Percentage or number of consumers who attain the represented results; and Whether a service is offered or provided by a nonprofit entity. BBBs need to review all claims that relate to the above areas and make sure that the business provides appropriate substantiation. That is particularly true with respect to any savings claims, and FTC 10 The FTC specifically notes that these disclosures should include (1) any minimum amount of debt needed to be eligible for the debt relief services and (2) that the debt relief services will extend only to unsecured debt if that is the case. 11 The FTC has identified four fundamental deficiencies in the data that debt relief providers often use to support overstated savings claims: (1) calculating savings without accounting for the additional debt and costs consumers incur as a result of interest, late fees, and other charges imposed by the creditor(s) or debt collector(s) during the course of the program (2) omitting fees consumers pay to the provider from their calculations of the savings (3) excluding from their calculation of savings those consumers who dropped out or were otherwise unable to complete the program, (4) excluding from their calculation of savings those individual accounts that were not settled successfully. 6
comments provide helpful guidance for evaluating savings claims made by debt relief services. FTC comments provide the following principles that should be used in deciding whether a debt relief service has substantiated its savings claims: Savings claims must be calculated based on the amount of debt owed at the time of enrollment, rather than the amount of debt owed at time of settlement. Savings claims must take into account the experiences of all past customers, including those who dropped out or otherwise failed to complete the program. 12 Savings claims must take into account all of the debts enrolled by each consumer. The provider may not exclude debts it has failed to settle, including those associated with consumers who dropped out of the program, from its calculation of average savings. 13 FTC comments also provide the following guidance for general savings claims and up to savings claims: When a debt relief service makes a general savings claim (e.g., We will help you reduce your debts ), without specifying a percentage or amount of debt reduction, these claims are likely to convey the message that consumers can expect to achieve a result that will be a substantial benefit to the consumer. The business would need to substantiate that message. When a debt relief service makes savings claims of up to or as much as (e.g., Up to a 60% savings ), these claims are likely 12 FTC comments provide the following example: A debt settlement business has ten customers, each of whom has $10,000 in debt at time of enrollment for a total of $100,000 in unpaid debt. Five of those customers complete the program and each of those customers save $2,000, for a total savings of $10,000. The remaining five customers drop out before making any settlements and thus save nothing. In total, the customers have saved $10,000 out of the aggregate $100,000 in debt and thus the business can claim a savings rate of 10%. 13 FTC comments provide the following example: A debt settlement business has ten customers, each of whom has two $1,000 debts enrolled in the program, for a total of 20 debts and $20,000 in enrolled debts. The business settles a single debt for each of the ten customers for $800 per debt. The business fails to settle the remaining debt for each of the ten customers. In total, the customers have saved $2,000 out of the aggregate $20,000 enrolled in the program. The business can thus claim a savings rate of 10%. 7
to convey the message that the service will consistently produce results in the range of the stated percentage or amount. 8
C. ADVANCE FEE BAN (Effective October 27, 2010) The FTC Rule prohibits debt relief services from charging a fee until they settle or reduce a consumer s debt. This ban on advance fees only applies to consumers who sign up for debt relief services on or after October 27, 2010. 1. When may a fee be charged? The debt relief service must show that it meets the following three conditions before it may legally charge a fee: At least one debt has been renegotiated, settled, reduced or otherwise altered pursuant to a contractual agreement executed by the consumer; The consumer made at least one payment to his/her creditor under the executed agreement; and The fee is proportional either to the fee charged for the entire debt relief service (if the business uses a flat fee structure) 14 or a percentage of the amount saved (if the business uses a contingency fee structure). 15 2. What documentation must the debt relief service have in order to charge a fee? In order to collect its fee, the debt relief service must have documentation evidencing the debt resolution. Different types of debt relief services need different types of documentation: A debt settlement provider must have documentation showing that the debt in question has been successfully settled and at least one payment has been made to the creditor under the settlement agreement. Examples of such documentation include a letter or receipt from the creditor or debt collector stating that 14 The FTC Rule requires that the fee must bear 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. 15 The FTC Rule provides that the percentage charged cannot change from one individual debt to another. The FTC Rule defines amount saved as 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. 9
the debt has been satisfied or a payment (amount must be identified) has been made toward satisfaction. A debt negotiation company must have documentation showing an executed contract showing that a creditor has agreed to the concession (e.g., a lower interest rate for a particular credit card), along with evidence that the consumer has made at least one payment under the new terms. A credit counseling business must have documentation showing a debt management plan containing the altered terms that is executed by the consumer and is binding on all applicable creditors. The credit counseling business must also have documentation showing that the consumer made the first payment pursuant to the debt management plan. D. REQUIREMENTS FOR ACCOUNTS IN WHICH CONSUMERS PLACE FUNDS 16 If the debt relief service requests or requires that consumers place money in an account to be used to pay debts and also pay fees to the debt relief service, the following rules apply: The account must be maintained at an insured financial institution; The consumer must own the funds (including any interest accrued); The consumer must be able to withdraw the funds at any time without penalty; The debt relief service cannot own, control or have any affiliation with the company administering the account; and The debt relief service may not give or accept any money or other compensation from the company administering the account in exchange for referrals of business involving the debt relief service. 16 While BBBs have often referred to these accounts as escrow accounts, that term is not used in the FTC Rule and is not a technically accurate term to describe the accounts covered by the FTC Rule. 10
Debt Relief Services FTC Rule Compliance Checklist Business Name Date Requirements for debt relief services under FTC Rule 1. It has made all required disclosures, in a clear and conspicuous manner, BEFORE the consumer consents to pay: Amount of time necessary to achieve the represented debt relief; Amount of money or percentage of debt that the consumer will need to accumulate before settlement offer will be made; IF the debt relief service relies on or results in the consumer s failure to make timely payments to creditors, it must be disclosed that the use of the debt relief service (a) will likely adversely affect the consumer s creditworthiness, (b) may result in the consumer being subject to collections or sued, and (c) may increase the amount of money the consumer owes due to the accrual of fees and interests; IF the debt relief provider requests or requires the consumer to place funds in a dedicated bank account at an insured financial institution, it must be disclosed that (a) the consumer owns the funds held in the account, (b) the consumer may withdraw from the debt relief service at any time without penalty and (c) the consumer must receive all funds in the account if the consumer withdraws, except for funds earned by the debt relief service in compliance with the FTC Rule. The total cost to purchase, receive or use the services; Any material restriction, limitation, or condition to purchase, receive or use the services; and Any material aspect of the nature or terms of the seller s refund or cancellation policy. 11
2. It has not made misrepresentations regarding any material aspect of the debt relief service provided including: Amount of money or the percentage of debt amount that a consumer may save by using such service; Amount of time necessary to achieve the represented results; Amount of money or the percentage of each outstanding debt that the consumer must accumulate before the provider will initiate attempts with the consumer s creditors or debt collectors or make a bona fide offer to negotiate, settle, or modify the terms of the consumer s debt; Effect of the service on a consumer s creditworthiness; Effect of the service on the collection efforts of the consumer s creditors or debt collectors; Percentage or number of consumers who attain the represented results; and Whether a service is offered or provided by a nonprofit entity. 3. It has complied with the advance fee ban for consumer who signed up on or after October 27, 2010. Consumer executed a debt relief agreement Consumer made at least one payment to creditor under the agreement Fees collected are proportional either to the fee charged or a percentage of savings achieved Required documentation to show compliance based on type of debt relief provider. 12
4. It has complied with the requirements for accounts in which consumers place funds. Dedicated account is maintained at an insured financial institution Consumer is informed that he owns the funds (including any interest accrued) Consumer can withdraw the funds at any time without penalty Provider does not own, control or have any affiliation with the company administering the account Provider does not exchange any referral fees with the company administering the account 13
Information Required by BBB to Determine Compliance by Debt Relief Services with FTC Rule 1. List of principals and their past associations in any debt relief service or other financial service business. 2. Screenshots of all Web site pages, including all pages seeking information from consumers. 3. All advertising and/or promotional material used in any media (including print, TV, radio and Internet). 4. Substantiation of all savings claims made in advertising and/or promotional material. 5. Sample copies of all written agreements with consumers. 6. All consumer disclosures that explain fees. 7. Procedures for ensuring that fees are not paid by consumers before debts have been successfully settled, including identification of documentation that confirms this. 8. Scripts for telephone operators and other employees or independent contractors. [Subject to BBB confidentiality agreement] 9. A description of (a) all training given to telephone operators and other employees/independent contractors, (b) all monitoring of sales personnel that is conducted, and (c) all monitoring of debt negotiators. [Subject to BBB confidentiality agreement] 10. Names and addresses of any sub-contractors (including attorneys) used in marketing and/or providing services to consumers, including a statement of each sub-contractor s role. [Subject to BBB confidentiality agreement] 11. For the past 3 years, copies of all complaints received from or on behalf of consumers as well as the business response to those complaints. Personally identifiable information may be redacted. [Subject to BBB confidentiality agreement] 12. A minimum of 10 consumer references. More may be requested based on business volume. [To be contacted by BBB but otherwise subject to BBB confidentiality agreement] 13. A list of states where business is registered and/or licensed to perform debt settlement services, including a copy of any licenses. 14. Any other information requested by BBB. Business must agree that BBB may perform a confidential review of any documents in business possession to confirm representations made by business in submission to BBB, subject to BBB s agreement to keep such information confidential. 14