November 12, 2009

Will the Debt Relief Vertical Survive?

11 min

On November 4, 2009, the Federal Trade Commission (the “FTC” or “Commission”) held a public forum to discuss proposed amendments to the Commission's Telemarketing Sales Rule (“TSR”) to address the sale of debt relief services.  The proposed rules would reshape the availability of alternatives to bankruptcy and services to counter the efforts of debt collectors.

The proposed changes to the TSR are the FTC’s latest step to combat what it views as deceptive and abusive marketing of debt relief services. Covered services and entities include for-profit debt management plan providers, debt consolidators, and debt settlement service providers. The use of the TSR also represents a dramatic and unprecedented use of the TSR to enact rules for a specific industry. This type of rulemaking would not be possible under the FTC’s limited authority granted under Section 5 of the Federal Trade Commission Act.

The proposal would require specific disclosures and prohibit certain misrepresentations in the sale of debt relief services.  Industry representatives, consumer advocates, and state regulators generally all viewed these changes as acceptable.  With a history of enduring enforcement actions and little guidance from the government in what constitutes acceptable advertising and marketing of debt settlement services, the debt settlement industry groups that participated in the panels signaled that they welcomed guidance from the Commission.  Although some industry groups noted that they already go to great lengths to ensure that disclosures are provided to consumers by their members.

The amended rules, however, also would prohibit charging or collecting fees from customers in advance of services being provided (e.g., settlement letters, accepted debt management plan proposals, etc.). The biggest losers under such a rule would be a number of for-profit debt settlement companies and their marketing and advertising vendors that charge the providers fees when advertising is run. As a result, the business plans of providers and their advertising models – including lead generation, affiliate marketeering, television and radio advertising – would be impacted significantly.

The camps in the debt relief debate see fee restriction through the prism of their advocacy and experience.  Debt settlement industry groups cast the advance fee ban as drastic and crippling, while consumer groups and state regulators see the advance fee ban as a consumer-friendly step that will help prevent consumers from paying for services that, in their view, they may never receive.

At issue in the rulemaking, as it has been in several state Attorneys General enforcement actions, is whether the FTC should prohibit advance fees from being collected from consumers that contract for debt settlement services. The for-profit debt settlement industry that opposes the ban asserts that the regulation of the timing of fees is not necessary, should not be as drastic, and if anything, should be modeled after some newly-enacted state law fee restrictions that allow setup fees and other fees for settlement services throughout the duration of the program.  The industry representatives passionately made the case that their business practices are honorable, that they are providing a valuable alternative for consumers in financial distress, and that they are providing broader services to customers than merely the settlement of unsecured debts, as put forth by the FTC in the rulemaking.

Consumer group representatives and others suggested that settlement companies’ timing and amount of fees, and advertising and marketing practices – including widespread advertising by third-party lead generators – were responsible for misleading consumers and needed to be reigned in. The consumer advocates present attacked industry studies and cited anecdotal examples of consumers signing up for programs that they did not and, maybe could not, complete despite being charged fees by the provider. Industry groups defended these studies and requested additional time in order to provide more information to the Commission.

Underlying the discussion during the entire day was the fact that the FTC under both Section 5 of the FTC Act and the TSR does not have jurisdiction over bona fide nonprofit organizations. As a result, several panelists representing for-profit interests at various times called on the Commission to seek Congressional authorization to expand the FTC’s jurisdictional authority to cover the debt relief services offered by nonprofit credit counseling agencies. Nonprofit, tax-exempt credit counseling agency representatives generally supported the FTC’s efforts in connection with the proposed rulemaking, but requested clarification on the FTC’s jurisdictional limits. They also noted that there were specific, expansive requirements for tax-exempt credit counseling (e.g., fee waiver requirements, prohibitions on compensated referrals, requirements  to provide individualized counseling and education, etc.) under the Internal Revenue Code and other federal and state laws that strictly regulate their activities and often require services to be provided without regard to the ability of the consumer to pay.

The remainder of this alert provides background on the rulemaking and summarizes the key points made at the public forum.

Notice of Proposed Rulemaking

In a Notice of Proposed Rulemaking (“NPRM”) announced on July 30, 2009, the Commission proposed 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 organization;


  • Extend the TSR to cover calls consumers make to debt relief service providers 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.

The FTC’s NPRM can be found here:  The NPRM requested comments by October 9, 2009.  The Commission later extended the comment period to October 26, 2009.   The rulemaking has drawn intense interest and 284 comments and other filings by interested parties, including industry trade associations, state regulators and state Attorneys General, consumer groups, nonprofit credit counseling agencies, and members of Congress.  

Public Forum

The public forum was comprised of four panels moderated by an FTC staff person and an open microphone session that allowed members of the general public to participate.  The four panels were:  (1) the proposed advance fee ban; (2) implementation issues raised by the proposed advance fee ban; (3) the proposed disclosure and misrepresentation provisions; and (4) definitions and scope.  Invited panelists participated in spirited discussions in response to questions posed by FTC moderators and in response to their fellow panelists’ comments.  No formal opening or closing statements were permitted. 

A complete transcript of the public forum and archive of the webcast is available at

Panel One:  The Proposed Advance Fee Ban

The first panel, which addressed the proposed advance fee ban, saw two very different positions presented.  Most debt settlement industry advocates spoke out against the ban.  One panelist from the settlement industry predicted that many debt relief companies could be run out of business if the ban is adopted.  Industry advocates spoke of the high cost of working with consumers and creditors and the inability to sustain these services without income.  Others advocated for a more nuanced fee ban that recognized that services were provided throughout the consumer experience.  Industry advocates said this would allow their companies continue to use a variety of fee models such as pay-as-you-go or a nominal monthly fee, while still achieving the consumer protection goals of the FTC.  While some thought a ban on fees before settlements were achieved would help to align the interests of the consumer and the debt relief service provider, others felt it would simply force companies to accelerate their efforts, resulting in less desirable settlements for consumers that had funds available to settle the debts.

Panel Two:  Implementation Issues Raised by the Proposed Advance Fee Ban

The second panel covered implementation issues raised by the proposed advance fee ban.  The points made during this panel mirrored many of those from the first panel.  Settlement industry representatives argued that that their industry associations, USOBA and TASC, are already policing themselves through disclosure requirements, audits and implementation of membership regulations, and that a growing number of states already have effectively regulated the fees that companies may charge.  There also was discussion of who would fill the void should debt settlement providers be unable to sustain their operations under the fee ban.  While some questioned the ability of nonprofit credit counseling agencies to fill the void, other panelists put attention on less-than-full balance plans offered by credit counseling agencies in cooperation with certain creditors.  Also discussed during this panel were issues related to the risk of payment and who should bear it in a debt settlement model.  Lastly, industry and consumer advocates generally supported the idea of consumer-controlled escrow accounts for use during the settlement process.

Panel Three:  The Proposed Disclosure and Misrepresentation Provisions

The third panel addressed the proposed disclosure and misrepresentation provisions of the proposed amendments to the TSR.  There seemed to be a panel-wide agreement that disclosures and informed consumers are a good thing.  But, one issue that came up several times was the lack of uniform definitions and prior guidance on the topic.  Consumer groups said that the debt settlement industry lacked sufficient results to make the types of performance claims that are commonly made.  Indeed, consumer advocates attacked the types of advertising claims often attributed to debt settlement companies because they believe consumers mistakenly assume that these are the results they themselves will achieve under the program.  Eligibility criteria for debt settlement programs also got some play during this session when it was suggested by one panelist that providers should screen consumers more carefully to ensure that they were appropriate customers for a debt settlement program based on their individual profile, the structure of the program (including fees), and historical data on consumer credit profiles.

Panel Four:  Definitions and Scope 

The fourth and final panel covered general issues of definition and scope for the TSR amendments. The discussion included:

  • At present, the proposed amendments do not include any exemptions for attorneys, which some panelists felt should be included within the scope of the rulemaking, especially when the debt relief services are incidental to the attorney’s practice of law. Others cited examples of attorneys providing debt relief services as their principal activity, in which case they should be regulated as such.

  • Whether or not products, such as books or CDs, should be included.  Many panelists seemed to believe that, unless the products were sold with the intention of affecting the debt settlement services, they should not be included.

  • The limitations of the FTC’s jurisdiction came under attack when some panelists questioned how the rules could be effective for for-profit companies and not at all address nonprofit providers of similar services.  Others pointed out that nonprofit providers of debt relief services are limited in any number of ways from charging more than nominal fees for services, and, in some cases, no fee is allowed to be charged at all (such as when the consumer is unable to afford the fee).

  • Whether the TSR should include secured debt along with unsecured debt; some pointed out that secured mortgage debt is the subject of a Congressionally-authorized and -directed rulemaking.

  • Finally, debt settlement industry representatives voiced concern that the TSR was the wrong way to provide guidance and regulation for the industry.

Public Comment

The final segment of the forum was devoted to open mic time.  The comments presented varied, ranging from personal testimonials in support of debt settlement to questions about the FTC’s jurisdiction in this area.  More than one commenter expressed concern that, because the Commission lacks authority to create a new rule under Section 5 of the FTC Act, it is merely working around an existing rule, with poor results. 

Background on the Telemarketing Sales Rule

The FTC adopted the TSR on August 16, 1995.  It requires certain disclosures and prohibits misrepresentations during telemarketing calls.  It also bars abusive practices, including charging up-front fees for certain services such as credit repair, recovery services, and offers of a loan or other extension of credit when granting it is “guaranteed” or is represented as having a high likelihood of success.  The TSR was amended in 2003 to create the National Do Not Call Registry and again in 2008 to curtail telemarketing calls that deliver prerecorded messages.

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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 such services engaged in unfair or deceptive practices, in violation of the FTC Act.  This rulemaking is unprecedented for its use of the TSR to address non-telemarketing concerns.

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This article also appeared on, a web-based news service that focuses on the online marketing industry.

The significant contributions of Venable’s Meghan Chapman to the preparation of this Alert are gratefully acknowledged. 

Jonathan L. Pompan, an attorney in the Washington, DC office of Venable LLP, represents advertisers and marketers, 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

For more information about this and related industry topics, see

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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