The Federal Trade Commission (FTC) announced the Final Rule to amend the Telemarketing Sales Rule (TSR), 16 C.F.R. Part 310, to enhance consumer protections related to the sale of debt relief services, including debt management and debt settlement services, on July 29, 2010. The landmark regulatory action established a regime for how for-profit-operated debt relief services may be structured and advertised, protecting consumers in financial distress and more. While the TSR Debt Relief Rule had a significant impact throughout the consumer credit market, the impact on debt relief service providers was profound and is still being felt today.
In the midst of the COVID-19 pandemic and escalating uses of consumer credit, it may be easy to believe that the potential for consumer harm related to debt relief services and consumer need have changed little since the Great Recession, and that the basis used by the FTC to justify the rule is still valid. However, the permanent and profound ways in which technology and consumer need have evolved as a result of changes in the consumer credit marketplace and the needs of the account receivables sector should not be ignored.
The FTC's stated goals for the Rule were to curb deceptive and abusive practices in the telemarketing of debt relief services. The rule defines the term "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."
The TSR Debt Relief Rule made changes for debt relief services providers in several major areas:
- Prohibits for-profit companies that sell debt relief services over the telephone from charging a fee before they settle or reduce a customer's credit card or other unsecured debt;
- Requires debt relief companies to make specific disclosures to consumers when telemarketing;
- Prohibits debt relief companies from making misrepresentations; and
- Extends the TSR to cover calls consumers make to these firms in response to debt relief advertising.
The Rule covers telemarketers of for-profit debt relief services, including credit counseling, debt settlement, and debt negotiation services. The Rule does not cover nonprofit firms, although the government has asserted that the Rule covers companies that falsely claim nonprofit status. Under the TSR, it is also illegal for a person to provide "substantial assistance" to another if it knows the other person is violating the TSR or if the person remains deliberately ignorant of the other's actions.
In the decade preceding the Rule, the FTC and state enforcers had reportedly brought a combined 259 cases to stop deceptive and abusive practices by debt relief providers that have targeted consumers in financial distress. These cases include alleged violations of law brought under the Federal Trade Commission Act, the TSR (in a small number of instances), state UDAP laws / "mini" FTC Acts, and various other consumer protection laws.
Since the enactment of the Rule, effective on September 27, 2010 (the advance fee ban took effect on October 27, 2010), the FTC, state enforcers, and, since 2011, the CFPB, have brought numerous cases alleging violation of the TSR. In fact, the CFPB was created just eight days prior to the Rule announcement with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Rule announcement was also made five years to the day after the issuance of the model state Uniform Debt Management Services Act by the National Conference of Commissioners on Uniform State Laws.
At various times over the past decade, the FTC and CFPB have used the TSR—and preexisting UDAP authority—to bring enforcement actions against debt relief services providers that advertise credit card and student loan debt relief, and service providers such as payment processors and lead generators.
The Rule contains a number of restrictions that can make doing business challenging; yet the Rule also created a baseline for consumer protection that applies when debt relief services are advertised and marketed through telemarketing, which continues to be the case for many providers in the sector, although there are some that have been Web-based or may otherwise fall outside of the scope of the Rule.
Advance Fee Ban
The Rule contains specific requirements for debt relief providers related to charging a fee before providing services. It specifies that fees for debt relief services may not be collected until:
- the debt relief 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 debt relief provider.
The Rule also specifies how debt relief providers can collect their fee for each settled debt.
Not surprisingly, the advance fee restriction in the Rule received the most comments during the notice and comment rulemaking process. The FTC concluded that the taking of fees in advance, for services that in its view were often characterized by deception, is deceptive, based on the public record in the rulemaking, including public comments, a workshop on the topic, testimony to Congress, consumer complaints, and federal and state law enforcement experience. The FTC also believed that taking an advance fee for debt settlement services impedes accomplishing the goal of helping consumers resolve their debt. Notably, the Rule places no restriction on the amount of fees that may be charged but does establish rules for when such fees may be collected. As a result, providers have had to sync TSR compliance requirements with applicable state law requirements that often do regulate the amount and timing of fees that providers may charge.
Dedicated Account for Fees and Savings
The Rule allows debt relief companies to require that consumers set aside their fees and savings for payment to creditors in a "dedicated bank account." The FTC believed this feature substantially mitigates a provider's risk of nonpayment. For debt settlement providers, as each debt is settled, the Rule provides that the consumer could then pay the provider's fees from the dedicated account. But under the Rule providers may require a dedicated bank account only if 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.
The FTC believed the five conditions above were safeguards for consumers, against providers using the consumer's funds for their own purposes.
Disclosures and Prohibited Misrepresentations
Under the Rule, providers must make several disclosures when telemarketing their services to consumers. Before the consumer signs up for any debt relief service, providers must disclose fundamental aspects of their services, including how long it will take for consumers to see results, how much the services will cost, the negative consequences that could result from using debt relief services, and key information about dedicated accounts if they choose to require them.
The Rule also prohibits misrepresentations about any debt relief service, including success rates and whether the provider is a nonprofit entity. The Rule was also accompanied by guidance about the evidence providers must have in order to make advertising claims commonly used in selling debt relief services.
Impact of the TSR Debt Relief Rule
The TSR amendments were part of profound changes in the way debt relief services were regulated and led to similar restrictions under some state laws. While the changes have now been in effect for nearly 10 years, the consequences of these provisions are ongoing.
Once the Rule took effect, a baseline was established. The Rule instantly made it challenging for many debt relief businesses to meet consumer needs, due to operational complexities and the general uncertainty in cash flow. And the impact on startups is likely more brutal without significant capitalization and with a limited ability to monetize each consumer relationship.
In addition to the enforcement risk, aspects of the Rule, including the advance fee prohibition, have been adopted in several states, although many had already required licensure and regulated the fees that may be charged to consumers by providers. Yet there has also been an influx of investor interest in debt relief companies, because of the more established regulatory environment (which had been missing baseline rules on the federal level). And, in more recent years, there has been an increase in bank partnership interest in lending to consumers on debt settlement programs.
Background on the TSR
Enacted in 1994, the Telemarketing and Consumer Fraud and Abuse Prevention Act (Telemarketing Act), 15 U.S.C. 6101-6108, targets deceptive and abusive telemarketing practices. The Act specifically directed the FTC to issue a rule defining and prohibiting deceptive and abusive telemarketing acts or practices. In addition, the Act mandated that the rule address some specified practices, which the Act designated as "abusive." The Act also authorized state attorneys general or other appropriate state officials, as well as private persons who meet its jurisdictional requirements, to bring civil actions in federal district court. While the FTC has rulemaking authority to issue industry-wide regulations under the FTC Act, the Telemarketing Act gave the FTC more expansive and efficient regulatory power, although limited to instances of telemarketing.
In August 2009, the FTC issued a Notice of Proposed Rulemaking to amend the TSR to enhance consumer protections related to the sale of debt relief services, including debt settlement services. More than 300 commenters submitted in response. The FTC also held a public forum on the proposed amendments in November 2009, and had previously held a public workshop on debt settlement in September 2008. The FTC began a review of the TSR in 2014, where the FTC received comments). The results of the review have not yet been made public.
What's Next for the TSR Debt Relief Rule?
There seems to have been little public appetite by the FTC or CFPB for revising the Rule's restrictions, although the status quo can be stifling if considered from the perspective of a fintech innovator or established provider seeking to offer other products and services or work in all 50 states with a uniform service offering. The regulated nature of debt relief services can also raise diligence concerns for collectors and others interested in engaging with the consumer (or their representative) to achieve repayment of amounts owed. Moreover, legacy views of what constitutes telemarketing under the TSR, especially as it pertains to debt relief services, could present challenges to innovation in how companies market their services, how consumers may identify service providers, and how such providers can deliver their services through Web and other digital applications that may not have been contemplated when the Rule was written.
Whether the Rule's restrictions are serving the consumer interest could presumably be a topic addressed in a future review of the TSR by the FTC. The FTC periodically reviews all of its rules and guides, and during the next go-round stakeholders could submit information on the Rule's efficacy, costs, and benefits, and advocate whether to retain, modify, or rescind it. However, that may be a long way away, as the earlier rule review is still pending, and another is not on the calendar. Any changes presumably would also need to be considered by the CFPB, which often uses the TSR in public enforcement actions. The CFPB has also issued an unknown number of nonpublic, confidential investigations of companies seeking information about compliance with the TSR. However, the CFPB has indicated a desire to embrace innovation and, in some circumstances, respond to no-action requests.
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Ten years seems like ages ago, and predates the CFPB, which has avoided extending its supervisory reach to debt relief companies from its initial rulemaking on the scope of its supervisory and exam prioritization to now. So, for now, the primary form of potential federal scrutiny for debt relief services providers remains enforcement investigations, and some oversight occurs by virtue of the whims of creditors (and debt collectors) that may or may not choose to engage with a debt relief company representing a consumer. It will be interesting to see how the Rule evolves, if at all, and how it will be viewed in the future.
Related Articles and Presentations
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Navigating CFPB, FTC, and State Attorneys General Consumer Protection Investigations
Debt Services Advertising: Major Search Engine to Require BK Counseling Approval and Certification
EOUST Releases Final Rules for Bankruptcy Counseling and Debtor Education
Frequently Asked Questions in Internal Revenue Service Audits of Credit Counseling Agencies
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Summary of Provisions in the Uniform Debt-Management Services Act
What the New Consumer Financial Protection Act Means for Debt Relief Service Providers
CFPB Issues Proposed Debt Collection Rules
CFPB Debt Collection Regulatory Update
New CFPB Management Unveils a Reduced Regulatory Agenda
Navigating Debt Buying in a "Regulatory by Enforcement" Environment During a Rulemaking
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For more information, contact Jonathan L. Pompan at 202.344.4383, or at jlpompan@Venable.com.
Jonathan L. Pompan, a partner in the Washington, DC office of Venable LLP, co-chairs the firm's Consumer Financial Services Practice Group. His practice focuses on providing comprehensive legal advice and regulatory advocacy to a broad spectrum of clients, such as nonbank financial products and services providers, nonprofit organizations, and trade and professional associations, before the CFPB, the FTC, state attorneys general, and regulatory agencies.
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 specific fact situations.