In the FTC’s most recent settlement with two debt reduction companies and their principals, FTC v. Debt-Set et al., the FTC's press release and stipulated orders contain a worthwhile illustration of some of the disclosures to be used by debt negotiation companies and those that market and advertise debt reduction services.1
Background
The Federal Trade Commission (the "FTC" or "Commission") has aggressively prosecuted about a dozen cases against companies that allegedly falsely promised to assist consumers in financial distress or falsely promised to clear consumers’ credit reports of negative but accurate and timely information.2 State Attorneys General have been just as aggressive in bringing actions against such companies, many of which are resolved in non-public settlements.3 Each of the public (and non-public) settlements offers valuable lessons and examples to those marketing and advertising to consumers in financial distress.
FTC Suit Against Debt-Set et al.
The FTC filed suit against Debt-Set, Resolve Credit Counseling, Inc., and their principals, for allegedly violating federal law by falsely claiming that they could reduce consumers' credit card interest rates or the amount of their credit card debt. These defendants entered into stipulated orders (collectively "Orders") with the FTC on January 31, 2008. The Orders admit no violation of law.
According to the complaint filed by the FTC in March 2007, the defendants sold debt reduction services through web sites and television and radio advertisements. The FTC cited claims made by the defendants of "Reduce Debt Now" and "Eliminate Harassing Calls." The complaint alleged that when consumers called a toll-free number they were encouraged to enroll in a "debt consolidation program" if their unsecured consumer debt was up to one month overdue, or a "debt settlement program" if overdue longer.
The FTC alleged that the defendants violated the Federal Trade Commission Act (the "FTC Act") by: (1) falsely promising to obtain lump-sum settlements, such as "fifty cents on the dollar" or "50 to 60 percent" of consumers' total unsecured debt, or to negotiate with creditors for lower interest rates; (2) misrepresenting that they would not charge consumers any up-front fees before obtaining the promised debt relief; and (3) stating that participation in their program would stop creditors from calling or suing them to collect debt.
After being put under receivership and an asset freeze and engaging in lengthy negotiations with the FTC, the parties agreed to make a suspended monetary payment to the FTC, avoid engaging in the violations alleged in the complaint and comply with typical FTC reporting conditions.
In addition, and most importantly to anyone engaging in marketing or advertising of services to consumers in financial distress, the two debt reduction companies and principals agreed to make certain representations about specific debt reductions they can achieve and to truthfully disclose key terms of the program: all fees and costs they charge, including when and how such fees and costs will be paid by consumers; the approximate time period before settlements will be achieved; and the fact that consumers' balances typically will increase before settlements for all accounts are achieved. In addition, the Orders prohibit misrepresentations that enrolling in a debt reduction program will before creditors receive payment prevent or assist with preventing creditors from calling, harassing or commencing collection litigation.
The FTC Settlement Orders
While it is clear that the FTC, when enforcing the FTC Act, consistently has taken the position that a company marketing and advertising debt management plans and debt negotiation needs to make certain disclosures to consumers, avoid being misleading and have substantiation for their claims, until now, it has not been clear exactly when, in what form and how detailed the FTC would require certain disclosures by such companies.4 This recent settlement sheds some critical light on these questions.5
More specifically, the Orders in the Debt-Set case state that whenever representations to a consumer are made that a company "can settle the consumer's debt for fifty cents on the dollar," or that the service "can lower a consumer's interest rates to between zero and nine percent," or other similar statements of specific debt or interest rate reduction that specific disclosures be made and that the disclosures be made in a clear and prominent manner.6
Under the Order, the FTC requires that if any of the above claims are made there must be a disclosure of the following clearly and prominently at the same time:
- all fees and costs that will be charged for these services, including when and how such fees and costs will be paid by consumers;
- the approximate time period before settlements will be achieved on behalf of consumers, based on the prior historical experience of the average consumer who enrolls in a program or service; and
- that consumers' balances will typically increase during this time period until settlements for all accounts are actually achieved.
Claims Must Be Accompanied By a Clear and Prominent Disclosure Message
Under the FTC Act and relevant case law, disclosure messages must be delivered clearly and prominently. The Orders, however, further specify how different types of messages must be delivered to match the particular way the claims are made:
- Print messages must be in a type size and location sufficiently noticeable for an ordinary consumer to comprehend it and shall contrast with the background.
- Oral communications shall be delivered in a volume and cadence sufficient for an ordinary consumer to hear it and comprehend it.
- Electronic communications (such as television, radio and interactive media such as the Internet, online services and software), the message shall be presented simultaneously in both the audio and video portions of the communication, provided however, that for television, video, and radio communications of sixty seconds or less, the message presented simultaneously shall be: "Fees and conditions apply. Ask for details."
Whenever one of the above claims is made in print or is an oral communication, the Orders require that during the same communication the same media is used to deliver the full disclosure set forth above. While the full disclosure is considerable, the Orders requires it to be used in nearly every instance that one of the above claims is made, except in communication made through television, video and radio of one minute or less, which should be accompanied by the shorter disclosure message. In situations where the shorter disclosure message may be used, the Orders require a disclosure of: "Fees and conditions apply. Ask for details," with the longer disclosure message used the next time there is communication with the consumer. The Orders also prohibit using in any communication anything that is contrary to, inconsistent with, or in mitigation of the message.
Again, while these and other disclosures have long been advocated by the FTC, until now they have never stated how and when they should be used in the debt reduction marketing and advertising context with such specificity.
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An FTC Stipulated Order, by its very terms, states that it is directed only to the parties signing the document; and Stipulated Orders are negotiated and not precedent. Thus, the FTC’s requirements here should not be interpreted to mean that the FTC, a state Attorney General, regulatory body or private plaintiff will never treat claims with the type of disclosures Debt-Set and Resolve Credit Counseling agreed to make as unfair or deceptive. In addition, the claims made and media used by other companies may vary; there have been numerous other disclosures that the FTC and state attorneys general may view as necessary in marketing and advertising of particular debt reduction products and services, and particular statutes may require specific disclosures, if triggered. These FTC Orders, however, are helpful in providing practical application of the FTC's position on a key issue affecting companies advertising and marketing to consumers in financial distress. These FTC Orders indicate that many debt negotiation companies and advertisers may need to reconsider the claims they make, the content of and manner of the disclosures that accompany the claims.
Advertising and marketing claims made by debt management plan providers and debt negotiation companies should be made only after careful consideration of FTC and state advertising law, as well as other applicable laws (e.g., state debt adjusting laws), and a company's own particular situation. Often companies will seek pre-publication legal review of their advertising and marketing to ensure they get it right. The failure to learn from the lessons of others and adhere to the law could leave you facing significant consequences.
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For more information, contact Jonathan L. Pompan at 202/344-4383 or jlpompan@venable.com.
To view Venable's index of articles and PowerPoint presentations on credit counseling and debt settlement industry related legal topics, see www.venable.com/ccds/publications.
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.
1Available at http://www.ftc.gov/os/caselist/0623140/index.shtm.
2FTC v. Debt-Set, No. 07-558 (D. Colo. 2007); FTC v. Select Personnel Mgmt., Inc., No. 07- 0529 (N.D. Ill. 2007); FTC v. Dennis Connelly, No. 06-701 (C.D. Cal. 2006); FTC v. Express Consolidation, No. 06-61851 (S.D. Fla. 2006); US v. Credit Found. of Am., No. 06-3654 (C.D. Cal. 2006); FTC v. Debt Solutions, Inc., No. 06-0298 (W.D. Wash. 2006); FTC v. Debt Mgmt. Found. Servs., Inc., No. 04-1674 (M.D. Fla. 2004); FTC v. Integrated Credit Solutions, Inc., No. 06-00806 (M.D. Fla. 2006); FTC v. National Consumer Council, Inc., No. 04-0474 (C.D. Cal. 2004); FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (D. Mass. 2004); FTC v. Innovative Sys. Tech., Inc., d/b/a Briggs & Baker, No. 04-0728 (C.D. Cal. 2004); FTC v. AmeriDebt, Inc., No. 03-3317 (D. Md. 2003); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 (C.D. Cal 2002). In addition, the FTC has brought more than 50 cases since 1998 against defendants that the Commission alleged misrepresented the credit-related services they said they would provide. See, e.g., FTC v. Sunshine Credit Repair, Inc., No. 05-20228 (S.D. Fla. 2005); FTC v. Service Brokers Assoc., Inc., No. 05-60129 (S.D. Fla. 2005); and Press Release, FTC, "Project Credit Despair" Snares 20 "Credit Repair" Scammers (Feb. 2, 2006), available at www.ftc.gov/opa/2006/02/badcreditbgone.shtm.
3Most states have enacted "mini-FTC acts," consumer protection statutes that are enforced by state Attorneys General and resemble the FTC Act in whole or in part; these laws may also explicitly incorporate the FTC’s regulations by reference.
4See supra note 2 and, e.g., FTC Facts for Consumers "Knee Deep in Debt," available at http://www.ftc.gov/bcp/conline/pubs/credit/kneedeep.shtm.
5In addition to the FTC Act, other federal and state statutes may require specific disclosures. For example, the federal Credit Repair Organizations Act requires two specific disclosures be made to consumers by credit repair organizations.
6In addition, under Section 5 of the FTC Act advertisers must have a "reasonable basis" for claims made in advertising, including both express and implied claims. The FTC requires advertisers to have their substantiation in place before disseminating an advertising claim.