October 2009

Six Pitfalls that Can Spell the Demise of Your Debt Relief Business

7 min

No one would fault the debt settlement industry for being too overly focused on the Federal Trade Commission’s (“FTC”) proposed amendments to Telemarketing Sales Rule (the “TSR”) to address the sale of debt relief services.  The TSR rulemaking will have a profound and long-term impact on the industry and your business.

Outbound telemarketing generally – including outbound telemarketing by debt relief service providers – is subject to the TSR's prohibitions against deceptive or abusive practices.  But the TSR currently exempts most inbound calls received in response to advertising for debt relief services.  The FTC wants to rescind that exemption and subject such calls to the TSR's general provisions as well as to other new requirements specific to debt relief services.

Of course, the proposed TSR amendments are not regulations yet; they represent the agency's proposed view of the TSR as applied to the context of debt relief services.  However, if the TSR is revised as proposed, you can expect enforcement actions to be filed sooner or later against companies whose advertising or services do not conform to the approach set forth in the TSR.

In the meantime, considering that the aggressive stance law enforcement officials and regulators are taking against members of the debt settlement industry, it is vitally important to the health of your business to critically evaluate your legal and regulatory compliance on an ongoing basis.

In doing so, consider some of the most common pitfalls:

1. Pitfall One:  Falling into the “But Everyone Else is Doing It” Trap.

Just because your competitors are doing it will not be an acceptable excuse for noncompliance to a regulator or judge.  On the topic of compliance, the number one comment we hear almost daily from new and existing industry participants is that someone else is doing “it” – whatever “it” may be.  One popular excuse – that usually is a mistake – is using someone else’s compliance materials instead of independently determining what obligations stem from, and which laws are triggered by, your own business plan and model.  Other folks’ compliance plans are geared (hopefully) for their – not your – business.  Additionally, in this ever-changing environment, compliance plans quickly become outdated.  As the legal landscape evolves, don’t get caught without your own compliance plan.  Relying on someone else (even a trusted source) can lead to severely adverse consequences.

2. Pitfall Two:  Insufficient Claim Substantiation.

In our experience, the substantiation our clients provide to us (or have on file), along with a website, script or a rough cut, is almost never sufficient to meet the government's expectations.  On occasion, the FTC or a state Attorney General who investigates a marketer's claims will conclude that they are substantiated and a give the “thumbs up.”  But it is much more common for an investigation to result in the government giving a “thumbs down” on the substantiation offered by the advertiser.  The underlying legal requirement for advertising claims is that that advertisers and ad agencies must have a reasonable basis for advertising claims before they are disseminated.  According to the FTC, advertisers must be able substantiate express and implied claims, however conveyed, that make objective assertions about the item or service advertised.  A person’s failure to possess and rely upon a reasonable basis for objective claims constitutes an unfair and deceptive act or practice in violation of Section 5 of the Federal Trade Commission Act (the “FTC Act”).  Moreover, the government requires that advertisers have the requisite substantiation at the time the claim is made, not after the fact. 

3. Pitfall Three:  Not Recognizing that You Can Be Held Responsible for the Acts (or Non-Acts/Omissions) of Others.

Based on its enforcement actions against advertisers of debt relief services, it is clear that the FTC takes the view that it can go after all parties,  up and down the food chain, that benefit from the alleged misleading advertising and marketing.  As a result, the actions of those businesses and individuals who make a living assisting debt relief providers – such as lead generators and aggregators – cannot be ignored.  One misconception we often see in affiliate marketing scenarios is parties attempting to split up so-called “back end” and “front end” functions.  Splitting up roles may be convenient for business modeling and an efficient use of limited financial resources, however, it does not allow individuals within the group to ignore the law.  Moreover, a party’s particular role may come with the responsibility for compliance with specific regulatory and legal requirements, such as licensure/registration under various state laws that regulate those engaged in marketing or soliciting debt relief services.

4. Pitfall Four:  Over-Reliance on Testimonials and Endorsements.

The FTC makes available a “Guide Concerning the Use of Endorsements and Testimonials in Advertising” (the “Testimonial Guide”), found at 16 C.F.R. § 255, which describes the Commission’s requirements when using the statements of consumers, experts or organizations.  The FTC recently published revisions to its Testimonial Guide that take effect on December 1, 2009.  The new Testimonial Guide includes a number of changes to the current Guide.  The most significant is the deletion of the “safe harbor” provision that allowed advertisers to use unusually successful testimonials as long as those testimonials were accompanied by a typicality disclaimer, such as “results not typical” or something similar.  While the Testimonial Guide is not law, it does represent the FTC’s view on what is acceptable conduct.  As a result, it should be considered a guide to “best practices” and those not complying with the Guide will likely face an uphill battle before regulators or a court of law.

5. Pitfall Five:  Free Consultations that Require One Low Fee.

If you want to call something “free,” all hidden strings attached to that offer must be disclosed.  That disclosure should be in close proximity to the “free” claim and unavoidable – not buried way down in a lengthy document with small type that has a misleading title and requires consumers to click on a link to get to it.  Remember, if “free” doesn’t always mean “free,” you probably want to consider using a different marketing claim. 

6. Pitfall Six:  Charging Whatever You Want to Charge.

There may be nothing unfair or deceptive about providing a lawful service and charging an honest fee for that service.  But even if there is no state law with a fee restriction that is applicable to your business plan, don’t ignore common sense when pricing your services.  The FTC, consumer advocates, and others have been sounding the alarm about high fees for debt relief services for a long time now.  They usually couple their warnings about fees with concerns about a general lack of service being provided.  Critics will pick the worst-sounding example and often use statistics from companies that were around just long enough to have a decent number of clients, but not long enough to begin having substantial numbers of “graduated” clients.  In addition, even if the FTC’s proposed advance fee prohibition does not become the law through the TSR amendments, regulators may still maintain that charging high fees and not settling all or most of the debts of all clients are unfair and deceptive practices in violation of Section 5 of the FTC Act. 

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The above list is based on our experience in reviewing the advertising and marketing of debt relief services and related areas.  Remember, the key to steering clear of these risks is to identify them early, take steps to avoid them, and re-evaluate the risks on an ongoing basis. 

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Jonathan Pompan, an attorney in the Washington, DC office of Venable LLP, represents debt relief service providers and others in a wide variety of areas including regulatory compliance, as well as in connection with federal and state investigations and law enforcement actions.  For more information, please contact Mr. Pompan at 202.344.4383 or jlpompan@venable.com

For more information about this and related industry 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 a specific fact situation.