The Shriver Center has previously reported on federal and state efforts to crack down on the rapidly growing debt settlement industry, particularly the industry’s pervasive practice of taking advantage of desperate consumers’ fears and financial troubles.
Last year, the Federal Trade Commission (FTC) established the Telemarketing Sales Rule which bans advance fees, requires disclosures, and prohibits misrepresentations by debt settlement companies. Since October 2010, for-profit companies that sell debt relief services over the telephone may not charge a fee before they settle or reduce a customer’s credit card or other unsecured debt. Companies must disclose fundamental aspects of their services, such as how long it will take for consumers to see results, how much it will cost and the potential negative consequences from using debt relief services, before the consumer signs up for any service. The rule also covers calls consumers make to these firms in response to debt relief advertising.
Most recently, the FTC settled two actions charging debt settlement companies with fraudulent practices including deceptive telemarketing calls, calling consumers on the Do Not Call Registry and using illegal robocalls.
In the first case, the FTC charged Advanced Management Services NW LLC for calling consumers and claiming that they could negotiate with credit card issuers to substantially lower the consumers’ credit card interest rates. The defendants allegedly used prerecorded “robocalls” with messages urging consumers to “press one” to speak with someone, falsely leading many consumers to believe that the calls came from the credit card company. They also charged consumers up to $1,590 and promised a refund if they failed to save at least $2,500 in interest savings. Instead of arranging for interest rate reductions, the companies merely advised consumers to pay down their credit card debts early to save money on interest. When refunds were requested, the companies either denied the requests or deducted a $199 “nonrefundable fee” from the refund.
The US District Court for the Eastern District of Washington’s settlement order against Advanced Management Services imposes an 8.1 million dollar judgment and prohibits them from engaging in marketing, advertising, promoting, offering for sale, or selling debt relief services. They are also banned from misrepresenting facts about any good or service, selling or using customers’ personal information. These monetary judgments, which represent the total amount consumers lost, will be suspended when the defendants surrender virtually all of their assets.
In another case, the FTC charged Dynamic Financial Group and other defendants with making false claims by offering debt relief services with an up-front fee of up to $1,995. The defendants claimed to help consumers pay off their debts faster and promised a full refund if a consumer did not save a “guaranteed” amount.
The settlement order from the US District Court for the Northern District of Illinois Easter Division prohibits the defendants from misrepresenting material facts about any good or service, violating the Telemarketing Sales Rule, collecting payments from their debt relief consumers and using or selling customers’ information. In terms of monetary damages, the defendants must pay over 30 million dollars.
While the FTC Telemarketing Sales Rule increased regulation over debt settlement services marketing, it only covers calls consumers make to debt relief firms in response to their advertising. It does not, unfortunately, cover in-person or internet-only sales of debt settlement services. More federal measures are therefore necessary. For example, the Federal government could follow states’, such as Illinois’, examples and require written contracts prior to a debt settlement company receiving a fee. Illinois’ debt settlement law requires a written contract that clearly indicates the terms of the debt settlement agreement and that must be signed by both the service provider and the customer. Most importantly, it caps the initial fee to $50 and forbids debt settlement companies from unfairly charging customers without having done any work. The settlement fee is capped at 15% of the savings and cannot be charged until the creditor has entered into a legally enforceable agreement with the consumer. Also, debt settlement service providers must warn consumers that debt settlement service is not suited for everyone and that it may have detrimental effects on the consumer’s credit history and credit score. Companies must provide detailed accounting reports, and consumers are entitled to cancel the contract and receive a refund.
This blog post was coauthored by Ji Won Kim.