Banks may benefit from Federal Trade Commission rules on debt-relief firms scheduled to take effect this month, but small companies may have trouble adapting.
The final rules that take effect this month let debt-collection firms require customers to set aside their fees and savings in a dedicated account at an insured financial institution not connected to the debt-collection firm.
This provision in the new rules could create an opportunity for banks serving the debt-collection industry, said Michael Brauneis, the director of regulatory risk in the Chicago office of Menlo Park, Calif.'s Protiviti Inc., a consulting firm.
"Banks … may be able to expand their offerings in the area of dedicated accounts for debt-relief customers," Brauneis said, "and I expect a few leaders may emerge in this area."
The FTC in July announced the rules prohibiting for-profit companies that sell debt-relief services by telephone from collecting fees before they actually settle or reduce credit card and other unsecured debt. The final rules are to take effect Oct. 27, a month after three other rules took effect related to debt-collection firms' disclosures and promises.
"A lot of individual players in the debt-collections industry will be threatened by these new rules," Brauneis said. They "will drive out fringe operators who promise to settle people's debts, charge thousands of dollars up-front and fail to come through, and many other operators will be forced to change their strategies."
Small companies are likely to struggle to comply, Brauneis said.
"There are some debt-collection firms that collect up-front fees that make a good effort to deliver on the services they promise; for those firms, it may become more difficult to capture profits under the new rules," he said.
Smaller firms may also find it difficult and costly to revamp their business models, marketing materials and disclosures to comply with the rules, Brauneis said.
"For larger debt-collection firms with legal, compliance and [information-technology] staff, complying with the new FTC rules may not be as hard," he said. "But it will be tougher for many of the mom-and-pop shops."
The FTC's final rules cover telemarketers representing for-profit debt-relief services, including credit-counseling, debt-settlement and debt-negotiation services.
Though the FTC's new rules apply only to for-profit collection firms, regulators eventually may extend them, especially those pertaining to disclosures, to nonprofit debt-relief firms, Brauneis said. Further, regulators soon may begin to try harder to ensure that certain debt-relief firms are indeed nonprofit, he said.
"Anyone in the nonprofit debt-relief sector who thinks they have dodged a bullet should be aware that we expect to see the for-profit rules extended across the industry," Brauneis said.
This is because the business practices of for-profit and nonprofit debt-relief firms have a lot in common, he said.
With nonprofits, "in many cases there is no difference in their operations compared with for-profit firms, except for their business classification" with the Internal Revenue Service, Brauneis said.
The new rules affecting debt-relief disclosures and promises, which took effect Sept. 27, require for-profit debt-relief firms to disclose how long it would take for customers to see results, how much it would cost, the potentially negative consequences that could result from using debt-relief services and key information about dedicated bank accounts should they choose to require them.