For-profit companies that sell debt relief services by telephone, as of Oct. 27, will not be able to charge a fee before they settle or reduce a customer’s credit card or other unsecured debt, according to a new rule approved and announced July 29 by the Federal Trade Commission.
"This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, upfront fees," FTC Chairman Jon Leibowitz said today. “Too many of these companies pick the last dollar out of consumers’ pockets – and far from leaving them better off, push them deeper into debt, even bankruptcy."
Three other Telemarketing Sales Rule provisions will take effect on Sept. 27. They will: require debt relief companies to make specific disclosures to consumers; prohibit them from making misrepresentations; an extend the Telemarketing Sales Rule to cover calls consumers make to these firms in response to debt relief advertising.
The rule concerning upfront fees covers telemarketers of for-profit debt relief services, including credit counseling, debt settlement and debt negotiation services. It does not cover nonprofit firms, but does cover companies that falsely claim nonprofit status.
The FTC and state enforcers have brought a combined 259 cases in the past decade to stop deceptive and abusive practices by debt relief providers that have targeted consumers in financial distress.
Advance Fee Ban
The rule specifies that fees for debt relief services may not be collected until: the debt relief service successfully renegotiates, settles, reduces or otherwise changes the terms of at least one of the consumer’s debts; there is a written settlement agreement, debt management plan or other agreement between the consumer and the creditor, and the consumer has agreed to it; and the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.
To ensure debt relief providers do not front-load their fees if a consumer has enrolled multiple debts in one debt relief program, the rule specifies how debt relief providers can collect their fee for each settled debt.
First, the provider’s fee for a single debt must be in proportion to the total fee that would be charged if all of the debts had been settled. Alternatively, if the provider bases its fee on the percentage of what the consumer saves as result of using its services, the percentage charged must be the same for each of the consumer’s debts.
Dedicated Account for Fees and Savings
Another provision of the rule will allow debt relief companies to require that consumers set aside their fees and savings for payment to creditors in a “dedicated account.” However, providers may only require a dedicated account as long as five conditions are met: the dedicated account is maintained at an insured financial institution; the consumer owns the funds (including any interest accrued); the consumer can withdraw the funds at any time without penalty; the provider does not own or control or have any affiliation with the company administering the account; and the provider does not exchange any referral fees with the company administering the account.