In the wake of massive unsecured consumer debt and the country’s most recent economic woes, debt relief services are under scrutiny from federal regulators, state legislatures and attorneys general. On July 30, 2009, the Federal Trade Commission (“FTC” or “Commission”) issued a notice of proposed rulemaking to amend the Telemarketing Sales Rule (“TSR”) to cover “debt relief services” including credit counseling, debt settlement, and debt negotiation. This proposal seeks to impose fee restrictions, disclosure and consent requirements which, if enacted, would severely impact the manner in which debt relief services are advertised, marketed and provided today. Additionally, state legislation specifically targeting the debt relief industry and lead generators is on the rise.
Federal Trade Commission Proposal
For some time, the FTC has made protection of financially distressed consumers a priority. Over the course of the last several years, the FTC has brought numerous enforcement actions against advertisers and marketers of debt relief services based on allegations that the companies and individuals offering these services engaged in unfair or deceptive practices, in violation of the FTC Act. Many of these cases initially involved telemarketing offers either as a result of inbound or outbound calls.
Traditionally, the TSR governs the practices of companies conducting telemarketing sales calls. It prohibits abusive practices, including making misrepresentations to customers, and requires specific disclosures. The TSR was adopted in 1995, amended in 2003 to create the National Do Not Call Registry, and again in 2008 to impose restrictions on the use of delivering prerecorded messages. The FTC’s “proposed amendments would bring all inbound debt relief calls in response to direct mail or general media advertisements under the Rule.” 1 This is a critical departure from the current reach of the TSR to debt relief services.
In particular, the Commission seeks comment on amendments to the TSR that would:
- Prohibit companies from charging fees until they have provided the debt relief services;
- Require disclosures about the debt relief services being offered, including how long it will take to obtain promised debt relief and how much it will cost;
- Prohibit specific misrepresentations about material aspects of debt relief services, including success rates and whether a debt relief company is nonprofit;
- Extend the TSR to cover calls consumers make to debt relief services in response to their advertisements; and
- Define the term “debt relief service” to cover any service to renegotiate, settle, or in any way alter the payment terms or other terms of the debt between a consumer and one or more unsecured creditors or debt collectors, including a reduction in the balance, interest rate, or fees owed.
Violations of the TSR are subject to significant monetary penalties per violation. Enforcement actions under the TSR may be brought by the FTC and state attorneys general. The proposed rules are based on comments from the Commission’s September 2008 Workshop on “Consumer Protection and the Debt Settlement Industry” and its prior enforcement actions. Comments on the proposed rules are due on October 9, 2009 and the FTC will hold a public forum before the close of the comment period.
The FTC press release can be found here: http://www.ftc.gov/opa/2009/07/tsr.shtm. The Notice of Proposed Rulemaking can be found here: http://www.ftc.gov/os/2009/07/R411001tsrnprm.pdf.
State Legislatures Target Lead Generators for Debt Relief Services
Lead generators have begun to attract the attention of state legislatures as well. On August 1, 2009, a Minnesota law took effect that imposes new disclosure requirements and restrictions on lead generators for one subset of debt relief services – debt settlement service – which is a narrower scope than the one taken by the FTC in its rulemaking.
Among other things, the new Minnesota law defines the term “lead generator” as “a person that, without providing debt settlement services: (1) solicits debtors to engage in debt settlement through mail, in person, or electronic Web site-based solicitation or any other means, (2) acts as an intermediary or referral agent between a debtor and an entity actually providing debt settlement services, or (3) obtains a debtor's personally identifiable information and transmits that information to a debt settlement services provider.”2
Like the FTC’s proposed rule, Minnesota’s requirements for lead generators prohibit:
- false, deceptive, or misleading statements or omissions about the rates, terms, or conditions of an actual or proposed debt settlement services plan, or create the likelihood of consumer confusion or misunderstanding regarding its services;
- representations that the debt settlement services provider is a nonprofit, not-for-profit, or has similar status or characteristics, if some or all of the debt settlement services will be provided by a for-profit company that is a controlling or affiliated party to the debt settlement services provider;
- making any communication that gives the impression that the debt settlement services provider is acting on behalf of a government agency; or
- representing, claiming, implying, or inferring that secured debts may be settled.3
In addition, Minnesota has a requirement that solicitations for debt settlement must include specific verbatim disclosures. The law also broadens the scope of regulation over debt settlement service providers and allows the state attorney general to recover statutory damages. It also provides for a private right of action (e.g., class actions).
While Minnesota has targeted lead generators specifically, a growing number of states also have laws that regulate offering to engage in or providing services related to debt relief. These laws often impose vigorous requirements and sometimes significant restrictions on the covered activities.
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The above regulatory developments, as well as continuing legislative developments, present challenges for lead generators that promote debt relief services. Advertisers and marketers of debt relief services should exercise caution and consult legal counsel in this evolving regulatory and legal landscape.
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Jonathan L. Pompan is an attorney in the Washington, D.C. office of the law firm Venable LLP. Mr. Pompan’s practice focuses on advertising and marketing regulation and enforcement, as well as working with debt relief service providers. For more information, please contact Jonathan L. Pompan at 202/344-4383 or jlpompan@venable.com. This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to a specific fact situation.
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