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 rule announced last week 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, up-front fees," FTC Chairman Jon Leibowitz said in a press release Thursday. "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."
Three other Telemarketing Sales Rule provisions will take effect Sept. 27. They will require certain disclosures; prohibit debt relief agencies from making misrepresentations; and extend the Telemarketing Sales Rule to cover calls consumers make to these firms in response to advertising.
The rule concerning up-front fees covers telemarketers of for-profit debt relief services, including credit counseling, debt settlement and debt negotiation services.
The FTC and state enforcers have brought 259 cases in the past decade to stop abusive practices by debt relief providers.
The rule specifies that fees for debt relief services may not be collected until the service successfully renegotiates, settles or reduces the terms of at least one of a consumer's debts; there is a written agreement between the consumer and the creditor; and the consumer has made at least one payment to the creditor as a result of the agreement.
To ensure debt relief providers do not front-load their fees if people have enrolled multiple debts into a single debt relief program, the rule specifies how companies can collect their fees.
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. If the provider bases its fee on the percentage of what the consumer saves from its services, the percentage charged must be the same for each of the consumer's debts.
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; the consumer can withdraw the funds at any time; the provider does not have any affiliation with the company administering the account; and the provider does not exchange any referral fees with the company administering the account.