- Photo of Federal Trade Commission building - Photo: Public Domain
The Federal Trade Commission's (FTC) Telemarketing Sales Rule, 16 CFR Part 310, has been amended to prohibit for-profit debt settlement companies from charging advance consumer fees before eliminating or reducing debts. The amendments apply to debt relief services sold over the telephone, whether solicited by debt relief company telemarketers or from calls made to firms by consumers responding to advertisements.
Debt settlement companies are also called debt relief, credit counseling, and debt negotiation service providers. The amendments' disclosure rules, which include a ban on misrepresentations, go into effect September 27, 2010. The ban on collecting advanced fees goes into effect October 27, 2010.
Debt Relief Company Advance Fee Ban
Some debt settlement companies have become accustomed to collecting upfront fees without ever renegotiating a single consumer debt. One of the most significant changes in the Telemarketing Sales Rule is that debt settlement companies will not be allowed to collect advance service fees.
"These amendments will effectively stop telemarketers from taking money from consumers and delivering little or in some cases, no debt relief," said Paulette Scarpetti, President of the Connecticut Better Business Bureau. These new federal amendments were created in response to numerous consumer protection complaints to the FTC and state consumer protection agencies regarding advance fee payments being paid to debt relief companies without receiving any debt relief benefits.
Under the federal regulations, fees can only be charged after the firm has successfully reduced, settled , or otherwise renegotiated the terms of at least one of its client's debts. Also, the consumer must make at least one creditor payment after the successful settlement negotiations. Also, the debt settlement fees must be clearly spelled out in a formal written contract between the firm and the consumer, and the fees must be proportionate to the amount of debt at issue.
Debt Settlement Firms Dedicated Accounts
The new federal rules allow debt settlement companies to require consumers to set aside service fees and savings for creditor payments into a dedicated account if five conditions are met, namely:
- The account must be established at an insured financial institution.
- Accounts must be set-up in the consumer's name and fully controlled by the consumer.
- The consumer must have the right to withdraw the funds at any time without penalty, including any accrued interest.
- The debt settlement firm cannot own or control the dedicated account, or have affiliations with the financial institution administering the account.
- The debt settlement firm cannot exchange any referral fees with the financial institution.
Debt Settlement Company Increased Disclosure Requirements
David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, stated in a Los Angeles Times report that debt settlement can harm your credit as dramatically as bankruptcy.
The amendments now require debt settlement companies to disclose potential negative consequences of a settlement and how long it will take for a client to see results. Also, misrepresenting success rates and falsely claiming to be a non-profit company are expressly prohibited under the Final Rule. The new Final Rule does not apply to firms with legitimate non-profit status.
The FTC has issued a free compliance guide to help firms adjust their business practices to the Final Rule.
Reference:
- “New FTC Debt Settlement Rules Aim to Protect Consumers from Debt Relief Companies,” Federal Trade Commission press release, July 29, 2010
- "New debt-settlement rules," Kathy M. Kristof, Los Angeles Times, B3, August 15, 2010
General disclaimer: this article is for information purposes only and should not be substituted for legal or other professional advice.
Vanessa Cross - Vanessa Cross is a freelance writer who specializes in small business, international trade and legal issues.
