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Tuesday,
August 10, 2010
Part III
Federal Trade
Commission
16 CFR Part 310
Telemarketing Sales Rule; Final Rule
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FEDERAL TRADE COMMISSION careful review and consideration of the promulgate regulations addressing some
entire record on the issues presented in specific practices, which the Act
16 CFR Part 310 this rulemaking proceeding, including designated as ‘‘abusive.’’6 The Act also
public comments submitted by 321 authorized state attorneys general or
Telemarketing Sales Rule interested parties,2 the Commission has other appropriate state officials, as well
AGENCY: Federal Trade Commission decided to adopt, with several as private persons who meet stringent
(‘‘Commission’’ or ‘‘FTC’’). modifications, the proposed jurisdictional requirements, to bring
amendments to the TSR intended to civil actions in federal district court.7
ACTION: Final rule amendments.
curb deceptive and abusive practices in Pursuant to the Act’s directive, the
SUMMARY: In this document, the the telemarketing of debt relief services. Commission promulgated the original
Commission adopts amendments to the The Rule provisions will: (1) prohibit TSR in 1995 and subsequently amended
Telemarketing Sales Rule (‘‘TSR’’ or debt relief service providers3 from it in 2003 and again in 2008 to add,
‘‘Rule’’) that address the telemarketing of collecting a fee for services until a debt among other things, provisions
debt relief services. These amendments has been settled, altered, or reduced; establishing the National Do Not Call
define debt relief services, prohibit debt (2) require certain disclosures in calls Registry and addressing the use of pre-
relief providers from collecting fees marketing debt relief services; recorded messages.8 The TSR applies to
until after services have been provided, (3) prohibit specific misrepresentations virtually all ‘‘telemarketing,’’ defined to
require specific disclosures of material about material aspects of the services; mean ‘‘a plan, program, or campaign
information about offered debt relief and (4) extend the TSR’s coverage to which is conducted to induce the
services, prohibit specific include inbound calls made to debt purchase of goods or services or a
misrepresentations about material relief companies in response to general charitable contribution, by use of one or
aspects of debt relief services, and media advertisements. more telephones and which involves
extend the TSR’s coverage to include Beginning on September 27, 2010, more than one interstate telephone
inbound calls made to debt relief sellers and telemarketers of debt relief call.’’9 The Telemarketing Act, however,
services will be required to comply with explicitly states that the jurisdiction of
companies in response to general media
the amended TSR requirements, except the Commission in enforcing the Rule is
advertisements. The amendments are
for § 310.4(a)(5), the advance fee ban coextensive with its jurisdiction under
necessary to protect consumers from
provision, which will be effective on Section 5 of the Federal Trade
deceptive or abusive practices in the
October 27, 2010. Commission Act (‘‘FTC Act’’).10 As a
telemarketing of debt relief services.
B. The Commission’s Authority Under result, some entities and products fall
DATES: These final amendments are
the TSR outside the scope of the TSR.11
effective on September 27, 2010, except In addition, the Rule wholly or
for § 310.4(a)(5), which is effective on Enacted in 1994, the Telemarketing partially exempts several types of calls
October 27, 2010. and Consumer Fraud and Abuse from its coverage. For example, the Rule
ADDRESSES: Requests for copies of these Prevention Act (‘‘Telemarketing Act’’ or generally exempts inbound calls placed
amendments to the TSR and this ‘‘Act’’) targets deceptive and abusive by consumers in response to direct mail
Statement of Basis and Purpose (‘‘SBP’’) telemarketing practices, and directed or general media advertising.12
should be sent to: Public Reference the Commission to adopt a rule with
Branch, Federal Trade Commission, 600 anti-fraud and privacy protections for 6 15 U.S.C. 6102(a)(3).
Pennsylvania Avenue NW, Room 130, consumers receiving telephone 7 15 U.S.C. 6103, 6104.
Washington, D.C. 20580. The complete solicitations to purchase goods or 8 TSR and Statement of Basis and Purpose and
record of this proceeding is also services.4 Specifically, the Act directed Final Rule (‘‘TSR Final Rule’’), 60 FR 43842 (Aug.
the Commission to issue a rule defining 23, 1995); Amended TSR and Statement of Basis
available at that address. Relevant and Purpose (‘‘TSR Amended Rule’’), 68 FR 4580
portions of the proceeding, including and prohibiting deceptive and abusive (Jan. 29, 2003); Amended TSR and Statement of
the final amendments to the TSR and telemarketing acts or practices.5 In Basis and Purpose (‘‘TSR Amended Rule 2008’’), 73
SBP, are available at (http:// addition, the Act mandated that the FTC FR 51164 (Aug. 29, 2008).
9 16 CFR 310.2(cc) (using the same definition as
www.ftc.gov). the Telemarketing Act, 15 U.S.C. 6106(4)). The TSR
2 The comments and other material placed on the
FOR FURTHER INFORMATION CONTACT: excludes from the definition of telemarketing:
rulemaking record are available at (http://
Alice Hrdy, Allison Brown, Evan www.ftc.gov/os/comments/tsrdebtrelief/ the solicitation of sales through the mailing of a
index.shtm). In addition, a list of commenters cited catalog which: contains a written description or
Zullow, or Stephanie Rosenthal, illustration of the goods or services offered for sale;
in this SBP, along with their short citation names
Attorneys, Division of Financial or acronyms used throughout the SBP, follows includes the business address of the seller; includes
Practices, Bureau of Consumer Section V of this SBP. When a commenter multiple pages of written material or illustrations;
Protection, Federal Trade Commission, submitted more than one comment, the comment is and has been issued not less frequently than once
also identified by date. a year, when the person making the solicitation
600 Pennsylvania Avenue NW, Room 3 Throughout the SBP, the Commission uses the does not solicit customers by telephone but only
NJ-3158, Washington, D.C. 20580, (202) term ‘‘providers’’ to refer to ‘‘sellers and receives calls initiated by customers in response to
326-3224. telemarketers’’ as defined in the TSR. ‘‘Seller’’ is the catalog and during those calls takes orders only
defined as ‘‘any person who, in connection with a without further solicitation.
SUPPLEMENTARY INFORMATION:
telemarketing transaction, provides, offers to Id.
provide, or arranges for others to provide goods or 10 15 U.S.C. 6105(b).
I. Overview and Background
services to the customer in exchange for 11 See 15 U.S.C. 44, 45(a)(2), which exclude or
A. Overview consideration.’’ 16 CFR 310.2(aa). ‘‘Telemarketer’’ is limit from the Commission’s jurisdiction several
defined as ‘‘any person who, in connection with types of entities, including bona fide nonprofits,
This document states the basis and telemarketing, initiates or receives telephone calls bank entities (including, among others, banks,
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purpose for the Commission’s decision to or from a customer or donor.’’ 16 CFR 310.2(cc). thrifts, and federally chartered credit unions), and
4 15 U.S.C. 6101-6108. Subsequently, the USA common carriers, as well as the business of
to adopt amendments to the TSR that
PATRIOT Act, Pub. L. No. 107–56, 115 Stat. 272 insurance.
were proposed and published for public (Oct. 26, 2001), expanded the Telemarketing Act’s 12 16 CFR 310.6(b)(5)-(6). Moreover, the Rule
comment on August 19, 2009.1 After definition of ‘‘telemarketing’’ to encompass calls exempts from the National Do Not Call Registry
soliciting charitable contributions, donations, or provisions calls placed by for-profit telemarketers to
1 TSR Proposed Rule, 74 FR 41988 (Aug. 19, gifts of money or any other thing of value. solicit charitable contributions; such calls are not
2009). The TSR is set forth at 16 CFR 310. 5 15 U.S.C. 6102(a). exempt, however, from the ‘‘entity-specific’’ do not
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However, there are certain ‘‘carve-outs’’ of assisting and facilitating sellers or Over the last several years, the
from some of the TSR’s exemptions that telemarketers engaged in violations of Commission has addressed consumer
limit their reach, such as the carve-out the TSR.20 Fifth, the TSR, with narrow protection concerns about debt relief
for calls initiated by a customer in exceptions, prohibits telemarketers from services through law enforcement
response to a general advertisement calling consumers whose numbers are actions,27 consumer education,28 and
relating to investment opportunities.13 on the National Do Not Call Registry or outreach to industry and other relevant
The TSR is designed to protect who have specifically requested not to parties.29 The brief description of the
consumers in a number of different receive calls from a particular entity.21 debt relief services industry in the next
ways. First, the Rule includes Finally, the TSR requires that section is based upon information in the
provisions governing communications telemarketers transmit to consumers’ record, the enforcement activities of the
between telemarketers and consumers, telephones accurate Caller ID FTC and the states, and independent
requiring certain disclosures and information22 and places restrictions on research by Commission staff.30
prohibiting material calls made by predictive dialers23 and
misrepresentations.14 Second, the TSR 1. Credit Counseling Agencies
those delivering pre-recorded
requires telemarketers to obtain messages.24 Credit counseling agencies (‘‘CCAs’’)
consumers’ ‘‘express informed consent’’ historically were nonprofit
to be charged on a particular account C. Overview of Debt Relief Services organizations that worked as liaisons
before billing or collecting payment and, Debt relief services have proliferated between consumers and creditors to
through a specified process, to obtain in recent years as the economy has negotiate ‘‘debt management plans’’
consumers’ ‘‘express verifiable declined and greater numbers of (‘‘DMPs’’). DMPs are monthly payment
authorization’’ to be billed through any consumers hold debts they cannot plans for the repayment of credit card
payment system other than a credit or pay.25 A range of nonprofit and for- and other unsecured debt, enabling
debit card.15 Third, the Rule prohibits as profit entities – including credit consumers to repay the full amount
an abusive practice requesting or counselors, debt settlement companies, owed to their creditors under
receiving any fee or consideration in and debt negotiation companies – offer renegotiated terms that make repayment
advance of obtaining any credit repair debt relief services, frequently through less onerous.31 To be eligible for a DMP,
services;16 recovery services;17 or offers telemarketing. Thus, consumers with
of a loan or other extension of credit, the debt problems have several options for Communications (June 16, 2010) at 1 (according to
granting of which is represented as industry groups, consumers who can afford to pay
which they may qualify. Those who 1.5-2% of their debt amount each month should
‘‘guaranteed’’ or having a high likelihood have sufficient assets and income to enter debt settlement). Moreover, even for those
of success.18 Fourth, the Rule prohibits repay their full debts over time, if their consumers for whom debt settlement might be
credit card laundering19 and other forms creditors make certain concessions (e.g., appropriate, the practice of charging large advance
fees makes it much less likely that those consumers
a reduction in interest rate), can enroll can succeed in such a program. CFA at 9; CareOne
call provisions or the TSR’s other requirements. 16 in a debt management plan with a credit at 4; see SBLS at 2-3.
CFR 310.6(a).
13 See, e.g., 16 CFR 310.6(b)(5)-(6) (provisions
counseling agency. On the other end of 27 See List of FTC Law Enforcement Actions
related to general advertisements and direct mail the spectrum, for consumers who are so Against Debt Relief Companies, following Section V
far in debt that they can never catch up, of the SBP, for a list of cases that the FTC has
solicitations).
prosecuted since 2003 (‘‘FTC Case List’’). In
14 The TSR requires that telemarketers soliciting declaring Chapter 13 or Chapter 7 addition, as detailed in the subsequent List of State
sales of goods or services promptly disclose several bankruptcy might be the most Law Enforcement Actions Against Debt Relief
key pieces of information in an outbound telephone
call or an internal or external upsell: (1) the identity
appropriate course. Debt settlement is Companies (‘‘State Case List’’), state law
ostensibly designed for consumers who enforcement agencies have brought at least 236
of the seller; (2) the fact that the purpose of the call enforcement actions against debt relief companies
is to sell goods or services; (3) the nature of the fall between these two options, i.e., in the last decade.
goods or services being offered; and (4) in the case consumers who cannot repay their full 28 See, e.g., FTC, Settling Your Credit Card Debts
of prize promotions, that no purchase or payment
is necessary to win. 16 CFR 310.4(d); see also 16
debt amount, but could pay some (2010); FTC, Fiscal Fitness: Choosing a Credit
percentage of it.26 Counselor (2005); FTC, For People on Debt
CFR 310.2(ee) (defining ‘‘upselling’’). Telemarketers
Management Plans: A Must-Do List (2005); FTC,
also must disclose in any telephone sales call the
Knee Deep in Debt (2005).
cost of the goods or services and certain other 20 16 CFR 310.3(b). 29 In September 2008, the Commission held a
material information. 16 CFR 310.3(a)(1). 21 16 CFR 310.4(b)(iii). public workshop entitled ‘‘Consumer Protection and
In addition, the TSR prohibits misrepresentations 22 16 CFR 310.4(a)(7).
the Debt Settlement Industry’’ (‘‘Workshop’’), which
about, among other things, the cost and quantity of 23 16 CFR 310.4(b)(1)(iv) (a call abandonment safe
brought together stakeholders to discuss consumer
the offered goods or services. 16 CFR 310.3(a)(2). It harbor is found at 16 CFR 310.4(b)(4)). protection concerns associated with debt settlement
also prohibits making false or misleading 24 16 CFR 310.4(b)(1)(v). services, one facet of the debt relief services
statements to induce any person to pay for goods 25 See, e.g., TASC (Oct. 26, 2009) at 7; NFCC at industry. Workshop participants also debated the
or services or to induce charitable contributions. 16
2; Federal Reserve Board, Charge-off and merits of possible solutions to those concerns,
CFR 310.3(a)(4).
15 16 CFR 310.4(a)(7); 16 CFR 310.3(a)(3). Delinquency Rates (May 24, 2010), available at including the various remedies that were
(http://www.federalreserve.gov/releases/chargeoff/ subsequently included in the proposed rule. An
16 16 CFR 310.4(a)(2).
delallsa.htm) (charting recent increase in credit agenda and transcript of the Workshop are available
17 16 CFR 310.4(a)(3). As the Commission has
card delinquency rate); Debt Settlement: at (http://www.ftc.gov/bcp/workshops/
previously explained, [in] recovery room scams . . . a Fraudulent, Abusive, and Deceptive Practices Pose debtsettlement/index.shtm). Public comments
deceptive telemarketer calls a consumer who has Risk to Consumers: Hearing on The Debt Settlement associated with the Workshop are available at
lost money, or who has failed to win a promised Industry: The Consumer’s Experience Before the S. (http://www.ftc.gov/os/comments/
prize, in a previous scam. The recovery room Comm. on Commerce, Science, & Transportation, debtsettlementworkshop/index.shtm). As discussed
telemarketer falsely promises to recover the lost 111th Cong. at 1 (2010) (statement of Philip A. below, in November 2009, the Commission held a
money, or obtain the promised prize, in exchange Lehman, Assistant Attorney General, North public forum on issues specific to the rulemaking
for a fee paid in advance. After the fee is paid, the Carolina Department of Justice) (‘‘NC AG proceeding.
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promised services are never provided. In fact, the Testimony’’). 30 A more detailed description of the history and
consumer may never hear from the telemarketer 26 See Weinstein (Oct. 26, 2009) at 8 (see attached evolution of these different forms of debt relief can
again. Bernard L. Weinstein & Terry L. Clower, Debt be found in Section II of the Notice of Proposed
TSR Final Rule, 60 FR at 43854. Settlement: Fulfilling the Need for An Economic Rulemaking in this proceeding.
18 16 CFR 310.4(a)(4); see TSR Amended Rule, 68
Middle Ground at 7 (Sept. 2009) (‘‘Weinstein 31 GP (Oct. 22, 2009) at 2; Cambridge (Oct. 26,
FR at 4614 (finding that these three services were paper’’)). It is not clear, however, how wide a ‘‘slice’’ 2009) at 1. Each creditor determines what, if any,
‘‘fundamentally bogus’’). of the debt-impaired population is suitable for debt repayment options to offer the consumer based on
19 16 CFR 310.3(c). settlement programs. See Summary of Continued
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a consumer generally must have typically receive less than 10% of their allegedly made frequent
sufficient income to repay the full revenue from such contributions.34 misrepresentations about the benefits
amount of the debts, provided that the Over the past decade, a number of and likelihood of success consumers
terms are adjusted to make such larger CCAs entered the market. Many of could expect from their services. These
repayment possible. Credit counselors these CCAs obtained nonprofit status included false promises to provide
typically also provide educational from the Internal Revenue Service. counseling and educational services39
counseling to assist consumers in Other CCAs openly operated as for- and overstatements of the amount or
developing manageable budgets and profit companies. In response to illegal percentage of interest charges a
avoiding debt problems in the future.32 practices by some of these new entrants, consumer might save.40 Third, the
the FTC and state attorneys general Commission alleged that these entities
Nonprofit CCAs generally receive brought a number of enforcement misrepresented material information
funding from two sources. First, actions challenging these practices.35 regarding their fees, including making
consumers typically pay for their Specifically, since 2003, the false claims that they did not charge
services: usually $25 to $45 to enroll in Commission has brought six cases upfront fees41 or that fees were tax
a DMP, followed by a monthly charge of against credit counseling entities for deductible.42 In addition to allegedly
roughly $25.33 The second source of deceptive and abusive practices. In one violating the FTC Act, some of these
funding is creditors themselves. After a of these cases, the FTC sued AmeriDebt, entities were engaging in outbound
consumer enrolls in a DMP, the Inc., at the time one of the largest CCAs telemarketing and allegedly violating
consumer’s creditors often pay the CCA in the United States.36 The defendants the TSR, particularly the Rule’s
a percentage of the monthly payments in these cases allegedly engaged in disclosure requirements and
the CCA receives. In the past, this several common patterns of deceptive prohibitions of misrepresentations, as
funding mechanism, known as a ‘‘fair conduct in violation of Section 5 of the well as its provisions on certain abusive
share’’ contribution, has provided the FTC Act.37 First, most made allegedly practices, including violations of the
bulk of a nonprofit CCA’s operating deceptive statements regarding their National Do Not Call Registry
revenue, but these agencies now nonprofit nature.38 Second, they provision.43
Over the last several years, in
the consumer’s income and total debt load.
34 GP (McNamara), Transcript of Public Forum on response to abuses such as these, the
Repayment options, known as ‘‘concessions,’’ Debt Relief Amendments to the TSR (‘‘Tr.’’), at 77-
include reduced interest rates, elimination of late or 78; RDRI at 2 (creditor fair share has fallen to 4% the Senate Committee on Governmental Affairs,
over limit fees, and extensions of the term for to 5% of consumer debt amounts and in some cases significant harm to consumers may accrue from
repayment. has been eliminated); NWS (Oct. 22, 2009) at 5 (see misrepresentations regarding an entity’s nonprofit
32 GP (Oct. 22, 2009) at 2; Davis at 2; CCCS NY attached Walji paper at 5) (fair share is 4% to 10%); status. See Consumer Protection Issues in the Credit
at 2; FECA (Oct. 26, 2009) at 2-3; DebtHelper at 1; see also National Consumer Law Center, Inc. & Counseling Industry: Hearing Before the Permanent
Cambridge (Oct. 26, 2009) at 1 (‘‘Roughly 85% of Consumer Federation of America, Credit Counseling Subcomm. on Investigations, S. Comm. on
the individuals who contact Cambridge [a credit in Crisis: The Impact on Consumers of Funding Governmental Affairs, 108th Cong. 2d Sess. (2004)
counseling agency] simply have questions about a Cuts, Higher Fees and Aggressive New Market (testimony of the FTC) (‘‘[S]ome CCAs appear to use
particular aspect of their finances or wouldn’t Entrants at 10-12 (April 2003); NFCC (Binzel), their 501(c)(3) status to convince consumers to
qualify for creditor concessions due to too much or Transcript of ‘‘Consumer Protection and the Debt enroll in their DMPs and pay fees or make
too little income. Nevertheless, they receive the Settlement Industry’’ Workshop, September 2008 donations. These CCAs may, for example, claim
same financial analysis and Action Plan offered to (‘‘Workshop Tr.’’) at 37; but see JH (Oct. 24, 2009) that consumers’ ‘donations’ will be used simply to
Cambridge’s DMP clients, and are also offered at 8 (without citation, the commenter states that defray the CCA’s expenses. Instead, the bulk of the
ongoing counseling, educational guides and web CCAs receive 22.5% of the total amount collected money may be passed through to individuals or for-
resources, free of charge.’’). In fact, Section 501(c)(3) from each consumer). profit entities with which the CCAs are closely
of the Internal Revenue Code (‘‘IRC’’), 26 U.S.C.
35 See FTC and State Case Lists, supra note 27. affiliated. Tax-exempt status also may tend to give
501(c)(3), dictates that nonprofits must provide a 36 FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. these fraudulent CCAs a veneer of respectability by
substantial amount of free education and Md., final order May 17, 2006). On the eve of trial, implying that the CCA is serving a charitable or
counseling to the public and prohibits them from the FTC obtained a $35 million settlement and thus public purpose. Finally, some consumers may
refusing credit counseling services to a consumer if far has distributed $12.7 million in redress to believe that a ‘non-profit’ CCA will charge lower
the consumer cannot pay. FECA (Oct. 26, 2009) at 287,000 consumers. See Press Release, FTC, FTC’s fees than a similar for-profit.’’), available at (http://
4. AmeriDebt Lawsuit Resolved: Almost $13 Million www.ftc.gov/os/2004/03/040324testimony.shtm).
39 See, e.g., FTC v. Integrated Credit Solutions,No.
33 Cambridge (Oct. 26, 2009) at 1; NWS (Oct. 22, Returned to 287,000 Consumers Harmed by Debt
2009) at 6 (see attached Hasnain Walji, Delivering Management Scam (Sept. 10, 2008), (http:// 06-806-SCB-TGW(M.D. Fla. filed May 2, 2006); U.S.
Value to Consumers in a Debt Settlement Program www.ftc.gov/opa/2008/09/ameridebt.shtm). v. Credit Found. of Am., No. CV 06-3654
at 6 (Oct. 16, 2009) (‘‘Walji paper’’)) (the average 37 See, e.g., FTC v. Debt Solutions, Inc., No. 06- ABC(VBKx) (C.D. Cal. filed June 13, 2006); FTC v.
account set up fee is $25 and monthly maintenance 0298 JLR (W.D. Wash. filed Mar. 6, 2006); U.S. v. Nat’l Consumer Council, No. SACV04-0474
fee is $15); see also Cards & Payments, Vol. 22, Credit Found. of Am., No. CV 06-3654 ABC(VBKx) CJC(JWJX) (C.D. Cal. filed Apr. 23, 2004).
40 See U.S. v. Credit Found. of Am., No. CV 06-
Issue 2, Credit Concessions: Assistance for (C.D. Cal. filed June 13, 2006); FTC v. AmeriDebt,
Borrowers on the Brink (Feb. 1, 2009) (nonprofit Inc., No. PJM 03-3317 (D. Md. filed Nov. 19, 2003). 3654 ABC(VBKx) (C.D. Cal. filed June 13, 2006);
agencies’ counseling fees average about $25 per 38 See U.S. v. Credit Found. of Am., No. CV 06- FTC v. Integrated Credit Solutions, Inc., No. 06-806-
month); Miami Herald, Credit Counselors See 3654 ABC(VBKx) (C.D. Cal. filed June 13, 2006); SCB-TGW (M.D. Fla. filed May 2, 2006); FTC v.
Foreclosures on the Rise, July 13, 2008, (CCAs FTC v. Integrated Credit Solutions, Inc., No. 06-806- Debt Mgmt. Found. Servs., Inc., No. 04-1674-T-17-
charge an initial fee of $25 and a $25 monthly fee). SCB-TGW (M.D. Fla. filed May 2, 2006) ; FTC v. MSS (M.D. Fla. filed July 20, 2004).
41 See FTC v. Express Consolidation, No. 06-cv-
These fees are often limited by state law. See, e.g., Express Consolidation, No. 06-cv-61851-WJZ (S.D.
Me. Rev. Stat. Ann. Tit. 17, § 701, et seq., tit. 32 Fla. Am. Compl. filed Mar. 21, 2007); FTC v. Debt 61851-WJZ (S.D. Fla. Am. Compl. filed Mar. 21,
§ 6171, et seq. (limiting fees to $75 for set-up and Mgmt. Found. Servs., Inc., No. 04-1674-T-17-MSS 2007); FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D.
$40 monthly charge); Md. Code Ann. § 12-901 et (M.D. Fla. filed July 20, 2004); FTC v. AmeriDebt, Md. filed Nov. 19, 2003).
seq. (limiting fees to $50 consultation fee and the Inc., No. PJM 03-3317 (D. Md. filed Nov. 19, 2003). 42 See FTC v. Integrated Credit Solutions, No. 06-
lesser of $40 per month or $8 per creditor per Although the defendants in these cases had 806-SCB-TGW (M.D. Fla. filed May 2, 2006); U.S.
month); Ill. Com. Stat. Ann., § 205 ILCS 665/1 et obtained IRS designation as nonprofits under IRC v. Credit Found. of Am., No. CV 06-3654
seq. (limiting fees to an initial counseling fee of $50, § 501(c)(3), they allegedly funneled revenues out of ABC(VBKx) (C.D. Cal. filed June 13, 2006). Other
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provided the average initial counseling fee does not the CCAs and into the hands of affiliated for-profit defendants allegedly claimed to have ‘‘special
exceed $30 per debtor for all debtors counseled, and companies and/or the principals of the operation. relationships’’ with the consumers’ creditors. See
$50 per month for each debtor, provided the Thus, the FTC alleged defendants were ‘‘operating FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D.
average monthly fee does not exceed $30 per debtor for their own profit or that of their members’’ and Wash. filed Mar. 6, 2006) .
for all debtors counseled); N.C. Gen. Stat. § 14-423 fell outside the nonprofit exemption in the FTC Act. 43 See FTC v. Express Consolidation, No. 06-cv-
et seq. (limiting fees to $40 for set-up and 10% of See 15 U.S.C. 44, 45(a)(2). 61851-WJZ (S.D. Fla. Am. Compl. filed Mar. 21,
the monthly payment disbursed under the DMP, not As the Commission has stated in testimony before 2007); U.S. v. Credit Found. of Am., No. CV 06-3654
to exceed $40 per month). the Permanent Subcommittee on Investigations of ABC(VBKx) (C.D. Cal. filed June 13, 2006).
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IRS has challenged the tax-exempt state laws in 49 states, most of which set typically then urge consumers to call a
status of a number of purportedly fee limits.48 toll-free number for more information.52
nonprofit CCAs – both through Consumers who call the specified
2. For-Profit Debt Settlement Services
enforcement of existing statutes and phone number reach a telemarketer
new tax code provisions.44 To enhance Debt settlement companies purport to working for or on behalf of the debt
the IRS’s ability to oversee CCAs, in offer consumers the opportunity to settlement provider. The telemarketer
obtain lump sum settlements with their obtains information about the
2006 Congress amended the IRC, adding
creditors for significantly less than the consumer’s debts and financial
§ 501(q) to provide specific eligibility
full outstanding balance of their condition and makes the sales pitch,
criteria for CCAs seeking tax-exempt unsecured debts. Unlike a traditional
status as well as criteria for retaining often repeating the claims made in the
DMP, the goal of a debt settlement plan advertisements as well as making
that status.45 Among other things, is for the consumer to repay only a additional ones. If the consumer agrees
§ 501(q) of the Code prohibits tax- portion of the total owed. to enroll in the program, the provider
exempt CCAs from refusing to provide mails a contract for signature. Providers
credit counseling services due to a The Promotion of Debt Settlement
Services sometimes pressure consumers to return
consumer’s inability to pay or a payment authorization forms and signed
consumer’s ineligibility or Debt settlement companies typically contracts as quickly as possible
unwillingness to enroll in a DMP; advertise through the Internet, following the call.53
charging more than ‘‘reasonable fees’’ for television, radio, or direct mail.49 The
services; or, unless allowed by state law, advertisements generally follow the The Debt Settlement Program
basing fees on a percentage of a client’s ‘‘problem-solution’’ approach – In the typical scenario, consumers
debt, DMP payments, or savings from consumers who are over their heads in enroll one or more of their unsecured
enrolling in a DMP.46 In addition to debt can be helped by enrolling in the debts into the program and begin
advertiser’s program. Many making payments into a dedicated bank
receiving regulatory scrutiny from the
advertisements make specific claims account established by the provider.54
IRS, as a result of changes in the federal
that appeal to the target consumers – for These payments are apportioned in
bankruptcy code, 158 nonprofit CCAs, example, claims that consumers will
including the largest such entities, have some fashion between the provider’s
save 40 to 50 cents on each dollar of fees and money set aside for settlements
been subjected to rigorous screening by their credit card debts50 or will become
the Department of Justice’s Executive of the debts. According to industry
debt-free.51 The advertisements representatives, debt settlement
Office of the U.S. Trustee (‘‘EOUST’’).47
Finally, nonprofits must comply with 48 Supra note 33; see also CareOne at 4. Some of
providers assess each consumer’s
the state laws apply to for-profit credit counseling
financial condition and, based on that
44 In 2006, the IRS examined all tax-exempt companies as well; others do not. individualized assessment and the
CCAs, resulting in revocation or proposed
49 Able (Oct. 21, 2009) at 17; CFA at 2-3; provider’s historical experience,
Weinstein (Oct. 26, 2009) at 7 (see attached calculate a single monthly payment that
revocation of the existing tax-exempt status of 41
Weinstein paper at 6); see also USOBA Workshop
of them, as well as increased scrutiny of new
Comment at 9.
applications for tax-exempt status. TSR Proposed 50 In April 2010, FTC staff conducted a surf of JTLx (C.D. Cal. filed Feb. 3, 2004) (Complaint, ¶ 26)
Rule, 74 FR at 41992; Hunter at 1; AICCCA at 5; debt settlement websites, based on a sample of the (the company’s website ‘‘represent[ed] that, by using
FECA (Oct. 26, 2009) at 4; CareOne at 4; Eileen websites that a consumer searching for debt DRS’s debt negotiation services, consumers can pay
Ambrose, Credit firms’ status revoked; IRS says 41 settlement services on a major search engine would off their credit card debt for fifty percent or less of
debt counselors will lose tax-exempt standing, encounter. In conducting the surf, staff searched on the amount currently owed and be debt free within
Baltimore Sun, May 16, 2006. Google for the term ‘‘debt settlement services,’’ three to 36 months.’’); GAO Testimony, supra note
45 Pension Protection Act of 2006, Pub. L. No. obtaining more than 24,000 results. To best 50, at 18.
52 In its review of debt settlement websites, see
109-280, Section 1220 (Aug. 2006) (codified as 26 duplicate what a typical consumer searching for
these services would find, staff narrowed the results supra note 50, FTC staff found that 91% of websites
U.S.C. 501(q)).
46 See 26 U.S.C. 501(q). Section 501(q) also limits to the websites that appeared on the first six pages reviewed directed the consumer to call a telephone
of the search results and eliminated duplicates. The number to learn more about the service. The
the total revenues that a tax-exempt CCA may Commission also has observed this practice in its
staff found that 86% of the 100 debt settlement
receive from creditors for DMPs and prohibits tax- websites reviewed represented that the provider law enforcement experience. See, e.g., FTC v. Debt-
exempt CCAs from making or receiving referral fees could achieve a specific level of reduction in the Set, Inc., No. 1:07-CV-00558-RPM (D. Colo. filed
and from soliciting voluntary contributions from a amount of debt owed. Mar. 19, 2007); FTC v. Edge Solutions, Inc., No. CV-
client. 26 U.S.C. 501(q)(1)-(2); see also FECA (Oct. See also, e.g., FTC v. Better Budget Fin. Servs., 07-4087 (E.D.N.Y. filed Sept. 28, 2007); FTC v.
26, 2009) at 4-5. Inc., No. 04-12326 (WG4) (D. Mass. filed Nov. 2, Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal.
47 Pursuant to the Bankruptcy Abuse Prevention 2004) (Complaint, ¶ 12) (defendants’ websites Am. Compl. filed Nov. 27, 2006); FTC v. Jubilee Fin.
and Consumer Protection Act of 2005, consumers represented that they could ‘‘reduce the amount of Servs., Inc., No. 02-6468 ABC (Ex) (C.D. Cal. filed
must obtain credit counseling before filing for the consumer’s debt by as much as 50% - 70%.’’); Aug. 19, 2002).
53 See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-
bankruptcy and must take a financial literacy class infra note 566; Debt Settlement: Fraudulent,
before obtaining a discharge from bankruptcy. See Abusive, and Deceptive Practices Pose Risk to 00558-RPM (D. Colo. filed Mar. 19, 2007)
Pub L. No. 109-8, 119 Stat. 23 (codified as amended Consumers: Hearing on The Debt Settlement (Complaint ¶ 20) (alleging ‘‘[c]onsumers who agree
at 11 U.S.C. 101 et seq.). CCAs seeking certification Industry: The Consumer’s Experience Before the to enroll . . . are sent an initial set of enrollment
as approved providers of the required credit Sen. Comm. On Commerce, Science, & documents from Debt Set Colorado. During their
Transportation, 111th Cong. (2010) (testimony of the telephone pitches, the defendants’ telemarketers
counseling must submit to an in-depth initial
U.S. Government Accountability Office) (‘‘GAO also exhort consumers to fill out the enrollment
examination and to subsequent re-examination by
Testimony’’) at 13. documents and return the papers as quickly as
the EOUST. See Application Procedures and 51 Of the 100 websites FTC staff reviewed, see possible . . . . Included in these documents are forms
Criteria for Approval of Nonprofit Budget and for the consumer to authorize direct withdrawals
supra note 50, 57% represented that they could
Credit Counseling Agencies by United States from the consumer’s checking account, to identify
settle or reduce all unsecured debts (websites made
Trustees; Notice of Proposed Rulemaking, 73 FR claims such as ‘‘Become Debt Free,’’ ‘‘Debt free in the amounts owed to various creditors, and a Client
sroberts on DSKB9S0YB1PROD with RULES
6062 (Feb. 1, 2008) (seeking comment on proposed as little as 24-48 months,’’ and ‘‘Achieve $0.00 Debt Agreement.’’).
rule setting forth additional procedures and criteria In 12-60 Months.’’); see also, e.g., FTC v. Edge 54 See SBLS at 1; USDR (Oct. 20, 2009) at 14;
for approval of entities seeking to become, or Solutions, Inc., No. CV-07-4087 (E.D.N.Y. filed Sept. Orion (Jan. 12, 2009) at 5; NWS (Oct. 29, 2009) at
remain, approved nonprofit budget and credit 28, 2007) (Complaint, ¶ 16) (defendants’ websites 10 (see attached Walji paper at 10). In fact, most
counseling agencies). A list of EOUST-approved represented that ‘‘we can reduce your unsecured state debt management laws, including the Uniform
credit counselors is available to consumers at debt by up to 60% and sometimes more and have Debt-Management Services Act (‘‘UDMSA’’), require
(http://www.usdoj.gov/ust/eo/bapcpa/ccde/ you debt free in 18 to 30 months.’’); FTC v. providers to keep client funds in separate,
cc_approved.htm). Innovative Sys. Tech., Inc., No. CV04-0728 GAF dedicated bank accounts. ULC at 2; CareOne at 6.
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the consumer must make to both save creditors a letter, directly or through the attempted or achieved any settlements.
for settlements and pay the provider’s provider, instructing the creditor to An increasing number of providers
fee.55 The providers typically tell cease communication with the utilize a so-called ‘‘pay as you go’’
consumers that the monthly payments – consumer.60 In some cases, providers model, spreading the fees over the first
often in the hundreds of dollars – will have even executed a change of address fifteen months or more of the program,
accumulate until there are sufficient form substituting their address for the yet still requiring consumers to pay
funds to make the creditor or debt consumer’s, thereby redirecting billing hundreds of dollars in fees before they
collector an offer equivalent to an statements and collection notices so that receive a single settlement.64 Even when
appreciable percentage of the amount the consumer does not receive them.61 providers spread the fee over the
originally owed to the creditor. The Some providers represent that they anticipated duration of the program
provider generally will not begin maintain direct contact with the (usually three years), consumers
negotiations with creditors until the consumer’s creditors or debt collectors typically are required to pay a
consumer has saved money sufficient to and that collection calls and lawsuits substantial percentage of the fee before
fund a possible settlement of the debt.56 will cease upon the consumer’s any portion of their funds is paid to
The provider pursues settlements on an enrollment in the debt settlement creditors.65
individual, debt-by-debt basis as the program.62 Many debt settlement companies
consumer accumulates sufficient funds break their fee into separate
Debt Settlement Fee Models components, such as an initial fee,
for each debt. According to industry
representatives, the process of settling Many debt settlement providers monthly fees, and/or contingency fees
all of a consumer’s debts can take three charge significant advance fees. Some based on the amount of savings the
years or more to complete.57 require consumers to pay 40% or more company obtains for the consumer.66
While the consumer is accumulating of the total fee within the first three or While fee models vary greatly, they
funds, the debt settlement provider four months of enrollment and the generally require a substantial portion of
often advises the consumer not to talk remainder over the ensuing 12 months the fee in advance of any settlements.67
to the associated creditors or debt or fewer.63 These fees must be paid As described more fully below, the large
collectors.58 In addition, some providers whether or not the provider has initial commitment required of
instruct the consumer to assign them consumers has contributed to the high
power of attorney59 and to send 60 AFSA at 6; RDRI at 5 (‘‘The issuance of ‘cease
and desist’ letters from debt settlement companies 64 DRS (Jan. 12, 2010) at 1 (fee of 15% of enrolled
to creditors provides a false sense of security to
55 See, e.g., FDR (Jan. 14, 2010) at 2; TASC (Oct. debt balance is collected over 15 months); FDR
consumers that their accounts are being
26, 2009) at 7. (Oct. 26, 2009) at 14 (fees are collected over the first
successfully negotiated and that there is not any
56 USOBA (Oct. 26, 2009) at 32. A trade 18 months or longer of the program); JH (Jan. 12,
threat of impending legal action.’’); see also ACA
association reported that creditors may not consider 2010) at 4 (The first payment goes toward fees; the
Workshop Comment (Dec. 1, 2008) at 4-7;
settlements until an account is at least 60 days remainder of the fee is collected in installments
Consumer Bankers Association Workshop Comment
delinquent. USOBA (Oct. 26, 2009) at 32. If over one-half of the program. The company’s total
(Dec. 1, 2008) at 2-3. Creditors have expressed
consumers are current on their debts, debt displeasure, however, that once debt settlement fee is 15% of enrolled debt, plus a $49 per month
settlement providers sometimes advise them to stop providers intercede on behalf of consumers, the maintenance fee. Formerly, the company collected
making payments to their creditors so that they can providers are not responsive to creditor contacts. the 15% fee over the first 12 months.); Hunter at
achieve the duration of delinquency necessary for See, e.g., AFSA at 2. One workshop panelist 3 (‘‘[I]t is becoming more common for companies to
the provider to initiate negotiations. Infra note 73. representing the American Bankers Association charge a one-time, flat enrollment fee and prorate
57 DSA/ADE at 8; see also CO AG at 5 (based on
(‘‘ABA’’) noted that, even when successful, attempts the remaining percentage of the fee over at least half
data submitted by industry members, the average to inhibit direct communication with consumers the life of the program.’’); NC AG Testimony, supra
program length was 32.3 months). prevent creditors from informing consumers about note 25, at 4 (‘‘a significant portion of the
58 See CFA at 9; SOLS at 2; AFSA at 2; JH (Oct.
available options for dealing with the debt and the consumer’s initial payments is diverted to the
24, 2009) at 14; NC AG Testimony, supra note 25, ramifications of the failure to make payments. See settlement company’s fees.’’).
at 3-4 (‘‘The whole premise of debt settlement is ABA (O’Neill), Workshop Tr. at 96. 65 See USOBA (Jan. 29, 2010) at 3; CSA (Witte),
based on consumers not paying their debts and not 61 See, e.g., FTC v. Jubilee Fin. Servs., Inc., No. Tr. at 64 (company collects its entire fee monthly,
communicating with creditors.’’); see also, e.g., FTC 02-6468 ABC (Ex) (C.D. Cal. filed Aug. 19, 2002) in even amounts, throughout the program); USDR
v. Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. (alleging defendants instructed consumers, among (Johnson), Tr. at 187 (same); SDS (Jan. 22, 2010) at
Cal. Am. Compl. filed Nov. 27, 2006); FTC v. Jubilee other things, to submit change of address 1-2 (no fee is taken from the first payment; the fee
Fin. Servs., Inc., No. 02-6468 ABC (Ex) (C.D. Cal. information to creditors so that mail would go is then taken in equal amounts from the next 20
filed Aug. 19, 2002). directly to defendants); FTC v. Debt-Set, Inc., No. payments for 36-month programs).
59 AFSA at 5 (‘‘Debt settlement providers 66 CRN (Jan. 21, 2010) at 4; FCS (Oct. 27, 2009)
1:07-cv-00558-RPM, Exs. Supp. Mot. T.R.O., at Exh.
frequently use such means to block communication 7 (D. Colo. Mar. 20, 2007) (same). at 2; ACCORD (Oct. 9, 2009) at 2-3; SBLS at 4
between the creditor and the consumer. This 62 NACCA at 5; AFSA at 8; FTC v. Connelly, No. (Financial Consulting Services, National Asset
prevents the creditor from being able to put together Services, and American Debt Arbitration, three
SA CV 06-701 DOC (RNBx) (C.D. Cal. Am. Compl.
a workout plan that would be free for the different companies that share identical websites,
filed Nov. 27, 2006); Better Business Bureau, BBB
consumer.’’). However, ACA International (‘‘ACA’’), have charged a ‘‘set-up fee’’ of $399, an ‘‘enrollment
on Differences Between Debt Consolidation, Debt
a trade organization representing third-party debt fee’’ equal to half of each of the first six monthly
Negotiation and Debt Elimination Plans (Mar. 2,
collectors, stated that the power of attorney payments, a $49 monthly maintenance fee, a $7.20
2009) , available at (http://www.bbb.org/us/article/
documents prepared by debt settlement providers monthly bank fee, and a settlement fee of 29% of
frequently are legally deficient under state law. See bbb-on-differences-between-debt-consolidation-
debt-negotiation-debt-elimination-plans-9350). the savings on each settlement. Two other
ACA Workshop Comment (Dec. 1, 2008) at 5-8.
63 USDR (Oct. 20, 2009) at 2; NAAG (Oct. 23, providers, Debt Choice and the Palmer Firm, have
Further, unless presented by an attorney, a power
2009) at 3; CFA at 4, 8-10; SBLS at 4; QLS at 2; charged an 8% set-up fee, a $65 monthly fee, and
of attorney may permit, but does not require, a
SOLS at 2; see also, e.g., FTC v. Connelly, No. SA a 33% settlement fee on realized savings at the time
creditor to contact the debt settlement provider.
Accordingly, it appears that this strategy often does CV 06-701 DOC (RNBx) (C.D. Cal. Am. Compl. filed of settlement. A debt settlement company called
not stop collection calls, lawsuits, or garnishment Nov. 27, 2006) (alleging that defendants required Allegro Law has charged a 16% fee collected over
proceedings, but instead may actually escalate the consumers to make a ‘‘down payment’’ of 30% to 18 months and a $59.99 monthly fee; the 16% fee
collection process. See, e.g., FTC v. Debt-Set, Inc., 40% of the total fee in the first two or three months is due immediately if the customer drops out of the
No. 1:07-cv-00558-RPM (D. Colo. filed Mar. 19, with the remainder paid over the following six to program within the first 18 months. Morgan Drexen
sroberts on DSKB9S0YB1PROD with RULES
2007)(alleging defendants sent power of attorney 12 months). A debt settlement trade association and the Eric A. Rosen law firm have charged a set-
documents to consumers); FTC v. Better Budget Fin. (USOBA) obtained information about providers’ fee up fee of 5%, monthly fees of $48, and a 25%
Servs., Inc., No. 04-12326 (WG4) (D. Mass. filed structures from 58 providers and reported that six settlement fee based on realized savings at time of
Nov. 2, 2004) (alleging that consumers were of the 58 primarily use this ‘‘front end fee model.’’ settlement).
USOBA (Jan. 29, 2010) at 3 (providing no 67 GAO Testimony, supra note 50, at 9. The wide
instructed to sign power of attorney forms); FTC v.
Nat’l Credit Council, Case No. SACV04-0474 CJC information as to whether the 58 respondents are variety of fee models makes it difficult for
(JWJx) (C.D. Cal. 2004) (alleging that defendants representative of the trade association or the consumers to shop for the lowest cost service. See
used power of attorney documents). industry as a whole). Loeb (Mallow), Tr. at 206.
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rate at which consumers drop out of record, discussed in detail below, enforcement actions targeting deceptive
these programs before their debts are establishes that a large proportion of and unfair practices in the debt
settled. consumers who enter a debt settlement settlement industry.77 Since 2001, the
plan do not attain results close to those Commission has brought nine actions
Consumer Protection Concerns
commonly represented. against debt settlement entities under
Debt settlement plans, as they are In the context of the widespread the FTC Act for many of the abuses
often marketed and implemented, raise deception in this industry, the advance detailed above.78 As in the FTC’s
several consumer protection concerns. fee model used by many debt settlement actions against deceptive credit
First, many providers’ advertisements providers causes substantial consumer counselors, these suits commonly
and ensuing telemarketing pitches injury. Consumers often are not aware alleged that the provider
include false, misleading, or that their initial payments are taken by misrepresented, or failed to disclose
unsubstantiated representations, the provider as its fees and are not saved adequately, the amount and/or timing of
including claims that for settlement of their debt; in many its substantial advance fees.79
∑ the provider will or is highly likely instances, providers deceptively Additionally, the Commission alleged
to obtain large debt reductions for underestimate the time necessary to that the defendants in these cases falsely
enrollees, e.g., a 50% reduction of what complete the program.74 As a result, promised high success rates and results
the consumer owes;68 many consumers fall further behind on that were, in fact, unattainable;80
∑ the provider will or is highly likely misrepresented their refund policies;81
their debts, incur additional charges,
to eliminate the consumer’s debt and failed to disclose the accumulation
harm their creditworthiness, including
entirely in a specific time frame, e.g., 12 of creditor late fees and other negative
credit scores, and, in some cases, suffer
to 36 months;69 consequences of their programs.82
∑ harassing calls from debt collectors legal action against them to collect the
debt.75 Moreover, in a large percentage The states also have been active in
and collection lawsuits will cease;70 attacking abuses in this industry. State
∑ the provider has special of cases, consumers are unable to
continue making payments while their regulators and attorneys general have
relationships with creditors and expert
debts remain undiminished and drop filed numerous law enforcement actions
knowledge about available techniques to
out of the program, usually forfeiting all against debt settlement providers83
induce settlement;71 and
∑ the provider’s service is part of a the payments they made towards the under their state unfair and deceptive
government program, through the use of provider’s fees.76 acts and practices statutes84 or other
such terms as ‘‘credit relief act,’’ Both the Commission and state state laws or regulations.85 In addition,
‘‘government bailout,’’ or ‘‘stimulus enforcers have brought numerous law many states have enacted statutes
money.’’72 specifically designed to combat
Many providers also tell consumers that 2006); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 deceptive debt settlement practices;86 in
ABC (Ex) (C.D. Cal. filed Aug. 19, 2002); see also
they can, and should, stop paying their Texas Attorney General, Press Release, Attorney 77 See FTC and State Case Lists, supra note 27.
creditors, while not disclosing that General Abbott Pursues Restitution for Texans from 78 See FTC Case List, supra note 27.
failing to make payments to creditors ‘‘Debt Settlement Company’’ in Bankruptcy Court 79 See, e.g., FTC v. Debt-Set, No. 1:07-cv-00558-
may actually increase the amounts (Aug. 20, 2009), available at (http://
RPM (D. Colo. filed Mar. 19, 2007) (alleging that
consumers owe (because of www.oag.state.tx.us/oagNews/
defendants misrepresented that they would not
release.php?id=3088); Florida v. Hacker (Fl. Cir. Ct.
accumulating fees and interest) and will - 4th filed Feb 21, 2008); GAO Testimony, supra
charge consumers any upfront fees before obtaining
adversely affect their the promised debt relief, but in fact required a
note 50, at 9; NC AG Testimony, supra note 25, at
substantial upfront fee).
creditworthiness.73 The rulemaking 4 (‘‘The theory is that the older and more delinquent 80 See, e.g., id; FTC v. Connelly, No. SA CV 06-
the debt, the easier it will be to negotiate.’’); Debt
Settlement: Fraudulent, Abusive, and Deceptive 701 DOC (RNBx) (C.D. Cal. Am. Compl. filed Nov.
68 Supra note 50; infra note 566. Practices Pose Risk to Consumers: Hearing on The 27, 2006).
69 Supra note 51. Debt Settlement Industry: The Consumer’s
81 See, e.g., FTC v. Innovative Sys. Tech., Inc., No.
70 See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-
Experience Before the Sen. Comm. On Commerce, CV04-0728 GAF JTLx (C.D. Cal. filed Feb. 3, 2004)
00558-RPM (D. Colo. filed Mar. 19, 2007); FTC v. Science, & Transportation, 111th Cong. (2010) (defendants misrepresented that they would refund
Better Budget Fin. Servs., Inc., No. 04-12326 (WG4) (Statement of Holly Haas) (‘‘Haas Testimony’’), at 2 consumers’ money if unsuccessful).
(D. Mass. filed Nov. 2, 2004); FTC v. Jubilee Fin. (‘‘We were instructed by [the debt settlement 82 See, e.g., id.; FTC v. Connelly,No. SA CV 06-
Servs., Inc., No. 02-6468 ABC (Ex) (C.D. Cal. filed company] not to pay our credit card bills because 701 DOC (RNBx) (C.D. Cal. Am. Compl. filed Nov.
Aug. 19, 2002); GAO Testimony, supra note 50, at the credit card companies would not negotiate 27, 2006); FTC v. Debt-Set, No. 1:07-cv-00558-RPM
13; see also, e.g., In re Positive Return, Inc. (Cal. settlements with current accounts.’’); RDRI at 5. (D. Colo. filed Mar. 19, 2007).
Dep’t of Corps., desist and refrain order May 28, 74 See, e.g., Debt Settlement USA, Growth of the 83 See State Case List, supra note 27.
2004).
71 See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-
Debt Settlement Industry,at 10 (Oct. 17, 2008) 84 See, e.g. State of Illinois v. Clear Your Debt,
(‘‘Fraudulent firms also regularly fail to provide the LLC, No. 2010-CH-00167 (Cir. Ct. 7th Judicial Cir.
00558-RPM (D. Colo. filed Mar. 19, 2007); FTC v.
services promised to consumers by claiming that filed Feb. 10, 2010); State of Texas v. CSA-Credit
Better Budget Fin. Servs., Inc., No. 04-12326 (WG4)
they can help them become debt free in an Solutions of Am., Inc., No. 09-000417 (Dist. Travis
(D. Mass. filed Nov. 2, 2004); Press Release, Florida
unrealistically short amount of time and/or promise Cty. filed Mar. 26, 2009); State of Florida v. Boyd,
Attorney General, Two Duval County Debt
Negotiation Companies Sued for Alleged too low of a settlement.’’); see also, e.g., FTC v. Debt- No. 2008-CA-002909 (Cir. Ct. 4th Cir. Duval Cty
Deceptions (Mar. 5, 2008), available at Set, Inc., No. 1:07-cv-00558-RPM (D. Colo. filed filed Mar. 5, 2008).
(myfloridalegal.com/__852562220065EE67.nsf/0/ Mar. 19, 2007). 85 See, e.g., Press Release, Colorado Attorney
75 One of the Commission’s enforcement actions, General, Eleven Companies Settle With The State
1E9B7637235FE1
6C85257403005C595F? FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) Under New Debt-Management And Credit
Open&Highlight=0,ryan,boyd); In re Am. Debt Arb., (C.D. Cal. Am. Compl. filed Nov. 27, 2006), is Counseling Regulations (Mar. 12, 2009), available at
No. 06CS01309 (Cal. Dep’t of Corps., desist and particularly illustrative of the risk of litigation. In (http://www.ago.state.co.us/
refrain order June 30, 2008). that case, between 2004 and 2005, nearly a third of press_detail.cfmpressID=957.html).
72 See, e.g., NAAG (July 6, 2010) at 2; FTC v. defendants’ 18,116 customers were sued by 86 Some states restrict the amount and timing of
Dominant Leads, LLC, No. 1:10-cv-00997 (D.D.C. creditors or debt collectors. See id.,Trial Exs. 382, fees, including initial fees and subsequent monthly
sroberts on DSKB9S0YB1PROD with RULES
filed June 15, 2010); GAO Testimony, supra note 561, 562, 623 & Schumann Test., Day 4, Vol. III, charges. In 2005, the Uniform Law Commission
50, at 13-14; Steve Bucci, Bankrate.com, Settle 37:21 - 40:12; 34:17 - 37:4. (‘‘ULC’’) drafted the UDMSA in an attempt to foster
Credit Card Debt For Pennies? (Feb. 2, 2010), 76 NC AG Testimony, supra note 25, at 4 (‘‘If the consistent regulation of both for-profit and
available at (http://www.bankrate.com/finance/ consumer drops out before the settlement process nonprofit debt relief services across the United
credit-cards/settle-credit-card-debt-for-pennies- is concluded, as is usually the case, he or she will States. ULC at 2. Among the key consumer
1.aspx). lose the fee payments, while facing increased debt protection provisions in the UDMSA are: a fee cap,
73 See, e.g., FTC v. Connelly,No. SA CV 06-701 account balances.’’); see infra Section III.C.2.a.(1); mandatory education requirements, a requirement
DOC (RNBx) (C.D. Cal. Am. Compl. filed Nov. 27, FTC Case List, supra note 27. Continued
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