CONSUMER RIGHTS INFORMATION

FTC Issues Final Rule to Protect Consumers in Credit Card Debt

• Amendments to Telemarketing Sales Rule Prohibiting Debt Relief Companies From Collecting Advance Fees

  Starting on October 27, 2010, for-profit companies that sell debt relief services over the telephone may no longer charge a fee before they settle or reduce a customer’s credit card or other unsecured debt.

  “At the FTC we strive every day to make sure America’s middle class families get straight deals for their dollars,” Chairman Jon Leibowitz said. “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. 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.”

  3 other Telemarketing Sales Rule provisions to take effect on September 27, 2010, will: 

  • Require debt relief companies to make specific disclosures to consumers;
  • Prohibit them from making misrepresentations; and
  • Extend the Telemarketing Sales Rule to cover calls that consumers make to these firms in response to debt relief advertising.

   

  The Final Rule covers telemarketers of for-profit debt relief services. This includes credit counseling, debt settlement, and debt negotiation services. The Final Rule does not cover nonprofit firms, but does cover companies that falsely claim nonprofit status. Over the past decade, the FTC and state enforcers have brought a combined 259 cases to stop deceptive and abusive practices by debt relief providers that have targeted consumers in financial distress.

• Advanced Fee Ban

  The Final Rule contains specific requirements for debt relief providers related to charging an advance fee before providing any services.

  The Final 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 that debt relief providers do not front-load their fees if a consumer has enrolled multiple debts in one debt relief program, the Final 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.