[Federal Register Volume 74, Number 159 (Wednesday, August 19, 2009)]
[Proposed Rules]
[Pages 41988-42024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-19749]



[[Page 41987]]

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Part II





Federal Trade Commission





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16 CFR Part 310



Telemarketing Sales Rule; Proposed Rule

Federal Register / Vol. 74, No. 159 / Wednesday, August 19, 2009 / 
Proposed Rules

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FEDERAL TRADE COMMISSION

16 CFR Part 310


Telemarketing Sales Rule

AGENCY: Federal Trade Commission (``Commission'' or ``FTC'').

ACTION: Notice of Proposed Rulemaking; Announcement of Public Forum.

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SUMMARY: In this document, the FTC issues a Notice of Proposed 
Rulemaking (``NPRM'' or ``Notice'') to amend the FTC's Telemarketing 
Sales Rule (``TSR'' or ``Rule'') to address the sale of debt relief 
services. The Commission seeks public comment on the proposed 
amendments, which would: define the term ``debt relief service''; 
ensure that, regardless of the medium through which such services are 
initially advertised, telemarketing transactions involving debt relief 
services would be subject to the TSR; mandate certain disclosures and 
prohibit misrepresentations in the telemarketing of debt relief 
services; and prohibit any entity from requesting or receiving payment 
for debt relief services until such services have been fully performed 
and documented to the consumer.
    This NPRM invites written comments on all issues raised by the 
proposed amendments and seeks answers to the specific questions set 
forth in Section VIII of this Notice. This document also contains an 
invitation to participate in a public forum, to be held following the 
close of the comment period, which will afford Commission staff and 
interested parties an opportunity to discuss the proposed amendments as 
well as any issues raised in comments in response thereto.

DATES: Written comments must be received by October 9, 2009. For 
information on the public forum, please see the SUPPLEMENTARY 
INFORMATION section below.

ADDRESSES: Interested parties are invited to submit written comments 
electronically or in paper form. For important information concerning 
the comments you file, please review the SUPPLEMENTARY INFORMATION 
section below. Comments in electronic form should be filed at the 
following electronic address: (https://secure.commentworks.com/ftc-TSRDebtRelief) (following the instructions on the web-based form). 
Comments in paper form should be mailed or delivered to the following 
address: Federal Trade Commission, Office of the Secretary, Room H-135 
(Annex T), 600 Pennsylvania Avenue, NW, Washington, DC 20580, in the 
manner detailed in the SUPPLEMENTARY INFORMATION section below.

FOR FURTHER INFORMATION CONTACT: Evan Zullow, Division of Financial 
Practices, Bureau of Consumer Protection, Federal Trade Commission, 600 
Pennsylvania Avenue, NW, Washington, DC 20580, (202) 326-3224.

SUPPLEMENTARY INFORMATION: The public forum will be held at the Federal 
Trade Commission. The Commission will post the date, time, and location 
of the public forum on its website no later than 30 days after the 
publication of this NPRM. The Commission will publish an agenda for the 
public forum on its website prior to the forum. Requests to participate 
as a panelist at the public forum must comply with all applicable 
requirements set forth in this document and must be received by October 
9, 2009. To be considered as a panelist at the public forum, interested 
parties must submit both a request to participate and a comment in 
response to this NPRM. Further details regarding the public forum are 
included in Section IV of this Notice.
    Requests to participate in the public forum, which must be filed 
separately from a party's public comment, may be filed in paper form or 
sent via e-mail to: (<a href="/cdn-cgi/l/email-protection#86f2f5f4e2e3e4f2f4e3eaefe3e0c6e0f2e5a8e1e9f0"><span class="__cf_email__" data-cfemail="e39790918786819791868f8a8685a3859780cd848c95">[email protected]</span></a>) and should refer to 
``Telemarketing Sales Rule - Debt Relief Rulemaking Forum - Request to 
Participate, R411001'' to facilitate organization of such requests.\1\ 
Requests must comply with all other applicable requirements set forth 
in this section and elsewhere in this document. A request to 
participate filed in paper form should include this reference, both in 
the text and on the envelope, and should be mailed or delivered to: 
Federal Trade Commission/Office of the Secretary, Room H-135 (Annex T), 
600 Pennsylvania Avenue, NW, Washington, DC 20580. Because paper mail 
in the Washington area, and specifically to the FTC, is subject to 
delay due to heightened security screening, please consider submitting 
your request to participate via e-mail to: (<a href="/cdn-cgi/l/email-protection#384c4b4a5c5d5a4c4a5d54515d5e785e4c5b165f574e"><span class="__cf_email__" data-cfemail="0a7e79786e6f687e786f66636f6c4a6c7e69246d657c">[email protected]</span></a>.)
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    \1\Please note that your request constitutes a public filing 
before the Commission and will be placed on the public record of the 
proceeding, including on the publicly accessible FTC website, at 
(www.ftc.gov/os/publiccomments.shtm). Therefore, your request should 
not include any sensitive or confidential information. In 
particular, it should not include any sensitive personal information 
- such as any individual's Social Security Number; date of birth; 
driver's license number, other state identification number, or 
foreign country equivalent; passport number; financial account 
number; or credit or debit card number. Comments also should not 
include any sensitive health information, such as medical records or 
other individually identifiable health information. In addition, 
comments should not include any ``[t]rade secret or any commercial 
or financial information which is obtained from any person and which 
is privileged or confidential,'' as provided in Section 6(f) of the 
Federal Trade Commission Act (``FTC Act''), 15 U.S.C. 46(f), and FTC 
Rule 4.10(a)(2), 16 CFR 4.10(a)(2).
    The Federal Trade Commission Act and other laws the Commission 
administers permit the collection of requests to participate in the 
above forum to consider and use in this proceeding as appropriate. 
As a matter of discretion, the Commission makes every effort to 
remove home contact information for individuals before placing 
requests to participate on the FTC website. More information, 
including routine uses permitted by the Privacy Act, may be found in 
the FTC's privacy policy, at (www.ftc.gov/ftc/privacy.shtm).
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    Interested parties are invited to submit written comments 
electronically or in paper form. Comments should refer to 
``Telemarketing Sales Rule - Debt Relief Amendments, R411001'' to 
facilitate the organization of comments. Please note that your comment 
- including your name and your state - will be placed on the public 
record of this proceeding, including on the publicly accessible FTC 
Website at (www.ftc.gov/os/publiccomments.shtm).
    Because comments will be made public, they should not include any 
sensitive personal information, such as any individual's: Social 
Security Number; date of birth; driver's license number, other state 
identification number, or foreign country equivalent; passport number; 
financial account number; or credit or debit card number. Comments also 
should not include any sensitive health information, such as medical 
records or other individually identifiable health information. In 
addition, comments should not include any ``[t]rade secret or any 
commercial or financial information which is obtained from any person 
and which is privileged orconfidential,'' as provided in Section 6(f) 
of the Federal Trade Commission Act (``FTC Act''), 15 U.S.C. 46(f), and 
FTC Rule 4.10(a)(2), 16 CFR 4.10(a)(2). Comments containing material 
for which confidential treatment is requested must be filed in paper 
form, must be clearly labeled ``Confidential,'' and must comply with 
FTC Rule 4.9(c), 16 CFR 4.9(c).\2\
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    \2\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See FTC Rule 4.9(c), 16 CFR 
4.9(c).
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    Because paper mail addressed to the FTC is subject to delay due to 
heightened security screening, please consider submitting your comments 
in electronic form. Comments filed in electronic form should be 
submitted by using the following weblink: (https://

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secure.commentworks.com/ftc-TSRDebtRelief) (and following the 
instructions on the web-based form). To ensure that the Commission 
considers an electronic comment, you must file it on the web-based form 
at the weblink (https://secure.commentworks.com/ftc-TSRDebtRelief). If 
this Notice appears at (www.regulations.gov/search/index.jsp), you may 
also file an electronic comment through that website. The Commission 
will consider all comments that regulations.gov forwards to it. You may 
also visit the FTC Website at (www.ftc.gov) to read the Notice and the 
news release describing it.
    A comment filed in paper form should include the ``Telemarketing 
Sales Rule - Debt Relief Amendments - R411001'' reference both in the 
text and on the envelope, and should be mailed or delivered to the 
following address: Federal Trade Commission, Office of the Secretary, 
Room H-135 (Annex T), 600 Pennsylvania Avenue, NW, Washington, DC 
20580. The FTC requests that any comment filed in paper form be sent by 
courier or overnight service, if possible, to avoid security related 
delays.
    Comments on any proposed filing, recordkeeping, or disclosure 
requirements that are subject to paperwork burden review under the 
Paperwork Reduction Act should additionally be submitted to: Office of 
Information and Regulatory Affairs, Office of Management and Budget 
(``OMB''), Attention: Desk Officer for Federal Trade Commission. 
Comments should be submitted via facsimile to (202) 395-5167 because 
U.S. postal mail at the OMB is subject to delays due to heightened 
security precautions.
    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. The Commission will consider all timely and responsive 
public comments that it receives, whether filed in paper or electronic 
form. Comments received will be available to the public on the FTC 
website, to the extent practicable, at (www.ftc.gov/os/publiccomments.shtm). As a matter of discretion, the Commission makes 
every effort to remove home contact information for individuals from 
the public comments it receives before placing those comments on the 
FTC website. More information, including routine uses permitted by the 
Privacy Act, may be found in the FTC's privacy policy, at (www.ftc.gov/ftc/privacy.shtm).

I. Background

A. Telemarketing and Consumer Fraud and Abuse Prevention Act

    On August 16, 1994, the Telemarketing and Consumer Fraud and Abuse 
Prevention Act (``Telemarketing Act'' or ``Act'') was signed into 
law.\3\ The purpose of the Act was to curb telemarketing deception and 
abuse and provide key anti-fraud and privacy protections for consumers 
receiving telephone solicitations to purchase goods or services. The 
Telemarketing Act directed the Commission to issue a rule defining and 
prohibiting deceptive and abusive telemarketing acts or practices, and 
specified that the FTC's rule must address certain acts or practices. 
The Act directed the Commission to include provisions relating to three 
specific ``abusive telemarketing acts or practices'': (1) a requirement 
that telemarketers may not undertake a pattern of unsolicited telephone 
calls which the reasonable consumer would consider coercive or abusive 
of his or her right to privacy; (2) restrictions on the time of day 
telemarketers may make unsolicited calls to consumers; and (3) a 
requirement that telemarketers promptly and clearly disclose in all 
sales calls to consumers ``that the purpose of the call is to sell 
goods or services and make such other disclosures as the Commission 
deems appropriate, including the nature and price of the goods and 
services.''\4\ The Act also directed the Commission to consider 
including recordkeeping requirements in the Rule.\5\ Finally, the Act 
authorized state Attorneys General, other appropriate state officials, 
and private persons to bring civil actions in federal district court to 
enforce compliance with the FTC's Rule.\6\
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    \3\ 15 U.S.C. 6101-6108.
    \4\ 15 U.S.C. 6102(a)(3).
    \5\ 15 U.S.C. 6102(a).
    \6\ 15 U.S.C. 6103, 6104.
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B. Telemarketing Sales Rule

    Pursuant to its authority under the Telemarketing Act, the FTC 
promulgated the TSR on August 16, 1995.\7\ The Rule was subsequently 
amended on two occasions, first in 2003\8\ and again in 2008.\9\ As to 
the Rule's scope, the TSR applies to virtually all ``telemarketing'' - 
defined to mean ``a plan, program, or campaign which is conducted to 
induce the purchase of goods or services or a charitable contribution, 
by use of one or more telephones and which involves more than one 
interstate telephone call . . . .''\10\ However, the Telemarketing Act 
makes clear that the jurisdiction of the Commission in enforcing the 
Rule is coextensive with its jurisdiction under Section 5 of the FTC 
Act.\11\ As a result, some entities and products fall outside the 
jurisdiction of the TSR.\12\ Further, the Rule wholly or partially 
exempts from its coverage several types of calls.\13\
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    \7\ The effective date of the original Rule was December 31, 
1995.
    \8\ See TSR; Final Amended Rule, 68 FR 4580 (Jan. 29, 2003).
    \9\ See TSR; Final Rule Amendments, 73 FR 51164 (Aug. 29, 2008).
    \10\ 16 CFR 310.2(cc) (using the same definition as the 
Telemarketing Act, 15 U.S.C. 6106).
    \11\ 15 U.S.C. 6105(b).
    \12\ 15 U.S.C. 45(a)(2) (setting forth certain limitations to 
the Commission's jurisdiction with regard to its authority to 
prohibit unfair or deceptive acts or practices). These entities 
include banks, savings and loan institutions, and certain federal 
credit unions. It should be noted, however, that although the 
Commission's jurisdiction is limited with respect to the entities 
exempted by the FTC Act, the Commission has made clear that the Rule 
does apply to any third-party telemarketers those entities might use 
to conduct telemarketing activities on their behalf. See TSR; 
Proposed Rule, 67 FR 4492, 4497 (Jan. 30, 2002) (citing TSR; 
Statement of Basis and Purpose and Final Rule, 60 FR, 43842, 43843 
(Aug. 23, 1995)) (``As the Commission stated when it promulgated the 
Rule, `[t]he Final Rule does not include special provisions 
regarding exemptions of parties acting on behalf of exempt 
organizations; where such a company would be subject to the FTC Act, 
it would be subject to the Final Rule as well.' '')
    \13\ For example, Section 310.6(a) exempts telemarketing calls 
to induce charitable contributions from the Do Not Call Registry 
provisions of the Rule, but not from the Rule's other requirements. 
In addition, there are exceptions to some exemptions that limit 
their reach. See, e.g., 16 CFR 310.6(b)(5)-(6).
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    The TSR sets forth rules governing communications between 
telemarketers and consumers, requiring certain disclosures\14\ and 
prohibiting certain material misrepresentations.\15\ Further, the TSR 
requires telemarketers to obtain consumers' ``express informed 
consent'' to be charged on a particular account

[[Page 41990]]

before billing or collecting payment\16\ and, through a specified 
process, to obtain consumers' ``express verifiable authorization'' to 
be billed through any payment system other than a credit or debit 
card.\17\ In addition, the Rule prohibits requesting or receiving 
payment of any fee or consideration in advance of obtaining any of 
three purported services that the Commission determined to be 
``fundamentally bogus''\18\: credit repair services,\19\ recovery 
services,\20\ and offers of a loan or other extension of credit, the 
granting of which is represented as ``guaranteed'' or having a high 
likelihood of success.\21\ The Rule also prohibits credit card 
laundering\22\ and other forms of assisting and facilitating fraudulent 
telemarketers.\23\
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    \14\ The TSR requires that telemarketers soliciting sales of 
goods or services promptly disclose several key pieces of 
information: (1) the identity of the seller; (2) the fact that the 
purpose of the call is to sell goods or services; (3) the nature of 
the goods or services being offered; and (4) in the case of prize 
promotions, that no purchase or payment is necessary to win. 16 CFR 
310.4(d). Telemarketers must also, in any telephone sales call, 
disclose cost and certain other material information before 
consumers pay. 16 CFR 310.3(a)(1). In telemarketing calls soliciting 
charitable contributions, the Rule requires prompt disclosure of the 
identity of the charitable organization on behalf of which the 
request is being made and that the purpose of the call is to solicit 
a charitable contribution. 16 CFR 310.4(e).
    \15\ The TSR prohibits misrepresentations about, among other 
things, the cost and quantity of the offered goods or services. 16 
CFR 310.3(a)(2). It also prohibits making a false or misleading 
statement to induce any person to pay for goods or services or to 
induce a charitable contribution. 16 CFR 310.3(a)(4).
    \16\ 16 CFR 310.4(a)(6).
    \17\ 16 CFR 310.3(a)(3).
    \18\ See TSR; Final Amended Rule, 68 FR at 4614.
    \19\ 16 CFR 310.4(a)(2).
    \20\ 16 CFR 310.4(a)(3). As the Commission has previously 
explained, in ``recovery room scams . . . a deceptive telemarketer 
calls a consumer who has lost money, or who has failed to win a 
promised prize, in a previous scam. The recovery room telemarketer 
falsely promises to recover the lost money, or obtain the promised 
prize, in exchange for a fee paid in advance. After the fee is paid, 
the promised services are never provided. In fact, the consumer may 
never hear from the telemarketer again.'' TSR; Statement of Basis 
and Purpose and Final Rule, 60 FR 43842, 43854 (Aug. 23, 1995).
    \21\ 16 CFR 310.4(a)(4).
    \22\ 16 CFR 310.3(c).
    \23\ 16 CFR 310.3(b).
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    The Rule restricts telemarketers from calling before 8:00 a.m. or 
after 9:00 p.m. (in the time zone where the consumer is located),\24\ 
and from calling consumers whose numbers are on the National Do Not 
Call Registry (except when the seller has an established business 
relationship with the person called or has obtained the person's 
express agreement, in writing, to receive telemarketing calls).\25\ It 
also prohibits calling consumers who have specifically requested not to 
receive calls from a particular entity.\26\ The TSR also requires that 
telemarketers transmit accurate Caller ID information\27\ and places 
restrictions on calls made by predictive dialers\28\ and calls 
delivering pre-recorded messages.\29\
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    \24\ 16 CFR 310.4(c).
    \25\ 16 CFR 310.4(b)(1)(iii)(B) (a safe harbor regarding Do Not 
Call violations can be found at 16 CFR 310.4(b)(3)).
    \26\ 16 CFR 310.4(b)(1)(iii)(A) (a safe harbor regarding Do Not 
Call violations can be found at 16 CFR 310.4(b)(3)).
    \27\ 16 CFR 310.4(a)(7).
    \28\ 16 CFR 310.4(b)(1)(iv) (a call abandonment safe harbor is 
found at 16 CFR 310.4(b)(4)).
    \29\ 16 CFR 310.4(b)(1)(v).
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II. Overview of Debt Relief Services

    Debt relief services - including credit counseling, debt management 
plans, debt settlement, and debt negotiation - are offered by a range 
of nonprofit and for-profit entities, often through telemarketing. As 
consumer debt has grown in recent years, so have the number and type of 
entities that provide, or purport to provide, services to consumers 
struggling with debt. Over the past several years, consumer protection 
concerns have arisen regarding the sale of debt relief services. The 
Commission has addressed these concerns in a variety of ways, including 
through law enforcement actions, consumer education, and outreach to 
industry. In September 2008, the Commission held a public workshop 
entitled ``Consumer Protection and the Debt Settlement Industry'' 
(``Workshop''),\30\ which brought together stakeholders to discuss the 
current state of debt settlement services, one facet of the debt relief 
services industry. Based upon information provided in conjunction with 
the Workshop, as well as through its independent research and law 
enforcement efforts, the Commission provides the following description 
of the evolution and marketing practices of the debt relief services 
industry, with a particular focus on two primary types of service 
providers: credit counseling agencies and for-profit debt settlement 
service providers.
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    \30\ Materials from the Workshop, including an agenda and 
transcript, and link to public comments, are available at 
(www.ftc.gov/bcp/workshops/debtsettlement/index.shtm). Public 
comments associated with the Workshop are available at (www.ftc.gov/os/comments/debtsettlementworkshop/index.shtm). Attachment A to this 
Notice contains a list of commenters who submitted comments for the 
Workshop, together with the abbreviations used to identify each 
commenter referenced in this NPRM. Where a commenter has submitted 
multiple comments, the abbreviation used indicates - by reference to 
either its date or subject matter - which specific comment is being 
referenced in this NPRM. Attachment B to this Notice contains a list 
of Workshop participants, together with the abbreviations used to 
identify each participant referenced in this NPRM.
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A. Credit Counseling Agencies

1) Background
    For decades, debt relief services were almost exclusively the 
province of nonprofit credit counseling agencies (``CCAs'').\31\ 
Beginning in the mid-1960s, creditor banks initiated this model, 
providing funding for CCAs with the intent of reducing personal 
bankruptcy filings.\32\ CCA credit counselors work as a liaison between 
consumers and creditors to negotiate a ``debt management plan'' 
(``DMP'') - usually for the repayment of credit card and other 
unsecured debt. Typically, credit counselors also have provided 
educational counseling on financial literacy to assist consumers in 
developing a manageable budget and avoiding debt problems in the 
future.\33\
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    \31\ But see Credit Advisors at 1 (stating that the credit 
counseling industry ``was founded as a for-profit industry, and was 
much more consumer oriented than under the subsequent nonprofit 
model'').
    \32\ See National Consumer Law Center, Inc. (``NCLC'') and 
Consumer Federation of America (``CFA''), Credit Counseling in 
Crisis: The Impact on Consumers of Funding Cuts, Higher Fees and 
Aggressive New Market Entrants, April 2003, at 6.
    \33\ See IRS (Grodnitzky) Tr. at 19 (noting that the IRS 
``issued two rulings, one in 1965 and one in 1969, and really kind 
of set up a framework for what a compliant credit counseling 
organization needs to look like. I think the overarching theme of 
these rulings were the organization, at least with respect to 
501(c)(3), needs to educate, educate consumers, educate the 
public.'').
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    The hallmark of a traditional DMP is that it enables a consumer to 
repay the full amount owed to creditors, albeit under renegotiated 
terms that make repayment less onerous.\34\ Thus, DMPs can be 
beneficial both to consumers, who receive more manageable terms, and to 
creditors, who are paid the outstanding balance. A credit counselor 
makes an initial determination about whether a DMP is a viable option 
for a consumer after obtaining the consumer's full financial profile. 
Traditionally, to be eligible for a DMP, a consumer must have 
sufficient income to repay the full amount of his or her debts, 
provided that the terms are adjusted to make such repayment 
possible.\35\
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    \34\ See Credit Counseling in Crisis at 6. The study goes on to 
note that ``a DMP is very similar to a chapter 13 bankruptcy 
`reorganization,' through which a consumer submits a plan to repay 
creditors over time. The critical difference is that Chapter 13 
plans allow consumers with sufficient income to pay back secured as 
well as unsecured creditors. For consumers trying to hold onto their 
homes or cars, this is a critical distinction.'' Id. at 25-26.
    \35\ See Press Release, National Foundation for Credit 
Counseling, Top Credit Card Issuers Support the NFCC's ``Call to 
Action'' For Consumer Repayment Relief, (Apr. 15, 2009) (also noting 
that ``in these tough economic times, fewer consumers have 
sufficient income to be eligible for, or the ability to maintain, a 
traditional DMP, often leaving bankruptcy as the only option''), 
available at (www.nfcc.org/NewsRoom/newsreleases/files09/NFCC_Call_Action.pdf); CCFS (Manning) Tr. at 6.
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    Crafting a DMP begins when a credit counselor contacts each of a 
consumer's unsecured creditors. Each creditor determines what, if any, 
repayment options to offer the consumer based on the consumer's income 
and total debt load. Repayment options, known as ``concessions,'' 
include reduced interest rates, elimination of late or over limit fees, 
and extensions of the term for repayment. After negotiations with all 
of a consumer's creditors are complete, the credit counselor finalizes 
the DMP and calculates the new repayment schedule. The traditional DMP 
typically calls for a consumer to repay the full balance of

[[Page 41991]]

unsecured debt to creditors by making reduced, consolidated monthly 
payments over a period of three to five years. The CCA receives these 
monthly payments over the term of the DMP and distributes the 
appropriate share to each of the consumer's creditors.
    In response to the recent economic downturn and increase in 
consumer debt, the National Foundation for Credit Counseling (``NFCC'') 
- the umbrella organization for more than one hundred nonprofit credit 
counseling organizations - announced on April 15, 2009, that the top 
ten credit card issuers in the U.S. had agreed to provide additional 
concessions to ensure that even consumers in significant financial 
straits may be able to use a DMP as a means to extricate themselves 
from indebtedness.\36\ According to the NFCC, this initiative came in 
response to its October 2008 ``Call to Action,'' which urged creditors 
to ``make DMPs more affordable for people in troubled financial 
circumstances.''\37\
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    \36\ Id. The participating creditors include: American Express, 
Bank of America, Capital One, Chase Card Services, Citi, Discover 
Financial Services, GE Money, HSBC Card Services, U.S. Bank, and 
Wells Fargo Card Services.
    \37\ Id. These credit card issuers endorsed two new plans: a 
``more affordable `Standard' DMP'' and a ```Hardship' DMP,'' 
specifically designed to enable consumers who have lost their jobs 
or experienced other serious financial problems to qualify. Like 
traditional DMPs, these so-called ``Call to Action DMPs'' provide 
for a five-year repayment term, but they allow a consumer to make 
more affordable, fixed monthly payments and establish an emergency 
savings fund rather than using all disposable income to repay 
existing debt. Id.
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    For their efforts, CCAs, which operate as nonprofit entities, 
receive funding from two sources.\38\ First, consumers now typically 
pay for services,\39\ although this was not always the case.\40\ 
According to the NFCC, as of 2001, consumers paid on average about $20 
to enroll in a DMP, and then paid a monthly service fee of about 
$12.\41\ These fees have increased over the last decade, and now 
average approximately $25 to enroll, plus $25 per month.\42\ The second 
source of funding is creditors themselves. Traditionally, after a 
consumer enrolls in a DMP, the consumer's creditors pay the CCA a 
percentage of the monthly payments the CCA receives.\43\ This funding 
mechanism, known as a ``fair share'' contribution, historically has 
provided the bulk of a CCA's operating revenue.\44\ For many years, 
creditors' fair share payments ranged from 12 to 15% of the amount 
received as a result of the DMP, but that amount has decreased over 
time to between 0% and 10%.\45\
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    \38\ See Consumer Protection Issues in the Credit Counseling 
Industry: Hearing Before the Permanent Subcommittee on 
Investigations Senate Committee on Governmental Affairs, 108 th 
Cong. 2d Sess. (2004) (Testimony of the FTC), available at 
(www.ftc.gov/os/2004/03/040324testimony.shtm). Binzell Tr. at 37 
(``If we had to do it all over again, we could go back 50 years, 
that fair share would have never existed. We think it's important. 
We think creditors have a very important role and should be 
responsible for helping to fund credit counseling and financial 
literacy. I mean, they have a vested interest and they should be 
supporting it. The fact that it's tied to DMPs, again, it started 
long before I got involved and it probably ought to be something 
different.'').
    \39\ These fees are often limited by state law. See, e.g., Me. 
Rev. Stat. Ann. Tit. 17 Sec.  701, et seq., tit. 32 Sec.  6171, et 
seq. (limiting fees to $75 for set-up, $40 monthly charge, and 15% 
of reduction for any settlement of debt); Md. Code Ann. Sec.  12-901 
et seq. (limiting to $50 consultation fee and the lesser of $40 per 
month or $8 per creditor per month); Ill. Com. Stat. Ann., Sec.  205 
ILCS 665/1 et seq. (capping initial and monthly credit counseling 
fees).
    \40\ See Credit Counseling in Crisis at 13-14 (``charging 
consumers was virtually unheard of even a decade ago'' but, in 2001, 
``about 88% of [NFCC] agencies were charging monthly fees, a little 
more than half charged enrollment fees, and almost 25% were charging 
for counseling.'').
    \41\ See id.
    \42\ See Cards & Payments, Vol. 22, Issue 2, Credit Concessions: 
Assistance for Borrowers on the Brink (Feb. 1, 2009) (noting that 
``nonprofit agencies' counseling fees average about $25 per 
month''); Miami Herald, Credit Counselors See Foreclosures on the 
Rise (July 13, 2008) (noting that CCAs charge an initial fee of $25, 
and a $25 monthly fee).
    \43\ See Letter from NFCC to Lucy Morris, Attorney, Federal 
Trade Commission (Feb. 27, 1997) (proposing CCA disclosure that 
creditor contributions are usually calculated as a percentage of 
``each payment received''), available at (www.ftc.gov/os/1997/03/nfcc2.pdf).
    \44\ See NFCC, FAQs (``The majority of agency funding comes from 
voluntary contributions from creditors who participate in Debt 
Management Plans.''), available at (www.nfcc.org/aboutus/aboutus_04.html#7); NFCC (Binzel) Tr. at 37. Some have since questioned the 
appropriateness of the ``fair share'' model. See, e.g., NFCC 
(Binzel) Tr. at 37 (``If we had to do it all over again . . . fair 
share would have never existed . . . . We think creditors have a 
very important role and should be responsible for helping to fund 
credit counseling and financial literacy. I mean, they have a vested 
interest and they should be supporting it. The fact that it's tied 
to DMPs, again, it started long before I got involved and it 
probably ought to be something different.'').
    \45\ See Credit Counseling in Crisis at 10-12.
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2) Abuse and Crackdown in the Credit Counseling Industry
    Responding to the rise in consumer debt and the concomitant 
increase in defaults, many new entities entered the credit counseling 
field during the last decade.\46\ The advent of these new credit 
counseling entities - many of which, unlike traditional CCAs, operated 
on a for-profit basis - appeared to increase the options for indebted 
consumers.\47\ At the same time consumer protection concerns emerged 
with regard to these new credit counselors. Research by consumer 
advocates and congressional scrutiny highlighted troubling trends in 
the credit counseling industry, including: deceptive and unfair 
practices; excessive fees; and the abuse of nonprofit status.\48\ These 
abuses prompted an array of responses over the past decade, including 
law enforcement, regulatory, legislative, educational,\49\ and self-
regulatory\50\ actions.
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    \46\ See IRS (Grodnitzky) Tr. at 19-21 (noting that in the past 
10 years, the IRS observed that new entities, which looked more like 
commercial entities than nonprofits, entered the CCA marketplace); 
AADMO (Guimond) Tr. at 40 (``Everybody saw the AmeriDebt nightmare, 
all the horror stories that were on the news.''); see also Credit 
Counseling in Crisis at 7 (``Ten years ago, there were about 200 
credit counseling organizations in the country, with 90% affiliated 
with NFCC. By 2002, there were more than 1,000 credit and debt 
management organizations in the country.'').
    \47\ See Credit Counseling in Crisis at 8 (``These [new] 
agencies have pioneered more business-like methods of making debt 
management plans convenient for consumers, including flexible hours, 
phone and Internet counseling, and electronic payments. These 
improvements, in turn, have forced the `old guard' to be more 
responsive to their clients. Some of these newer agencies are 
responsible, effective and sensitive to their client's needs. 
However, as the newer agencies have gained market share, a number of 
serious problems have surfaced as well.'').
    \48\ See generally id; see also IRS (Grodnitzsky) Tr. at 20; 
NFCC (Binzel) Tr. at 28-29 (noting that ``when profit motive is 
injected into a non-profit industry, it should come as no surprise 
that harm to consumers will follow.''). In March of 2004, the Senate 
Permanent Subcommittee on Investigations of the Committee on 
Homeland Security and Governmental Affairs conducted an 
investigation and held hearings on the industry. The Subcommittee's 
report, issued in April 2005, concluded that ``[c]learly, something 
is wrong with the credit counseling industry.'' S. Rep. No. 109-55, 
at 1 (2005).
    \49\ The FTC and IRS, as well as other entities, have created 
and disseminated education materials to help consumers understand 
the fundamentals of credit counseling and learn how to select a 
reputable CCA. See, e.g., FTC, Fiscal Fitness: Choosing a Credit 
Counselor, available at (www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm); FTC, Knee Deep in Debt, available at (www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm); IRS, Credit Counseling 
Organizations - Questions and Answers about New Requirements, 
available at (www.irs.gov/charities/article/0,,id=163180,00.html).
    \50\ Some industry associations have created or enhanced self-
regulatory codes. See, e.g., NFCC, Member Application (Attachments 
A-C), available at (www.nfcc.org/NFCC_MemberApplicationFINAL_REV071006.pdf); AICCA Certification of Compliance, available at 
(www.aiccca.org/images/CertificateofCompliance.pdf); AADMO (Guimond) 
Tr. at 43 (AADMO ``created the first nationwide accreditation 
program for for-profit credit counselors'').
---------------------------------------------------------------------------

    The FTC and state Attorneys General have targeted unscrupulous 
practices by some CCAs in a number of law enforcement actions.\51\ 
Since 2003, the

[[Page 41992]]

Commission has brought six cases against credit counseling entities for 
deceptive and abusive practices, including a seminal action against 
AmeriDebt, Inc., which was, at the time, one of the largest CCAs.\52\ 
The defendants in these cases allegedly engaged in several common 
patterns of deceptive conduct in violation of Section 5 of the FTC 
Act.\53\ First, most made deceptive statements regarding their 
nonprofit status.\54\ Second, they allegedly frequently misrepresented 
the scope, benefits, and likelihood of success consumers could expect 
from their services. Misrepresentations included false promises to 
provide counseling and education services\55\ and overstatements of the 
amount or percentage of interest charges a consumer might save using 
the services.\56\ Third, these entities allegedly commonly 
misrepresented material information regarding their fees, including 
making false claims that they did not charge up-front fees\57\ or that 
fees were tax deductible.\58\ In addition to allegedly violating the 
FTC Act, some of these entities also allegedly engaged in violations of 
the TSR, particularly the Rule's disclosure and misrepresentation 
provisions and the abusive practices section, including the National Do 
Not Call Registry provision.\59\
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    \51\ State enforcers have sued CCAs for violations of state 
consumer protection laws. See, e.g., Colorado Office of the Attorney 
General Press Release, Eleven Companies Settle With The State Under 
New Debt-Management And Credit Counseling Regulations (Mar. 12, 
2009), available at (www.ago.state.co.us/press_detail.cfmpressID=957.html); Press Release of the N.J. Department of 
Public Affairs, State Files Suit Against United Credit Adjusters and 
Related Companies (Oct. 15, 2008), available at (www.nj.gov/lps/ca/press/creditadjusters.htm); North Carolina Office of Attorney 
General Press Release, AG Cooper Seeks to Stop Sham Credit Counselor 
(Oct. 10, 2006), available at (www.ncdoj.gov/DocumentStreamerClient?directory=PressReleases/&file=Commercial 
Credit Counseling final.pdf); State Accuses Columbus Man of Credit-
Counseling Scam, Columbus Dispatch (July 12, 2006), available at 
(www.columbusdispatch.com/live/contentbe/dispatch/2006/07/12/20060712-D1-01.html); New York Office the Attorney General, State 
Wins Order to Shut Down Bogus Debt Counseling Agencies in Queens 
(Oct. 17, 2000), available at (www.oag.state.ny.us/media_center/2000/oct/oct17a_00.html).
    \52\ See FTC v. Express Consolidation, No. 06-cv-61851-WJZ (S.D. 
Fla. 2006); United States v. Credit Found. of Am., No. CV 06-3654 
ABC(VBKx) (C.D. Cal. 2006); FTC v. Integrated Credit Solutions, No. 
06-806-SCB-TGW (M.D. Fla. 2006); FTC v. Nat'l Consumer Council, No. 
SACV04-0474 CJC(JWJX) (C.D. Ca. 2004); FTC v. Debt Mgmt. Found. 
Svcs., No. 04-1674-T-17-MSS (M.D. Fla. 2004); FTC v. AmeriDebt, 
Inc., No. PJM 03-3317 (D. Md. 2003). AmeriDebt was also the subject 
of law enforcement actions by several states. See, e.g., State of 
Missouri ex rel. Nixon v. AmeriDebt, Inc., No. 03-402378 (St. Louis 
City Circuit Court, Sept. 11, 2003); State of Texas v. AmeriDebt, 
Inc., No. GV-304638 (Dist. Ct. Travis County, Texas, Nov. 19, 2003); 
State of Minnesota v. AmeriDebt, Inc., Case No. MC 03-018388 
(Hennepin County Dist. Ct., Nov. 19, 2003).
    \53\ See, e.g., FTC v. Debt Solutions, Inc., No. 06-0298 JLR 
(W.D. Wash. 2006); United States v. Credit Found. of Am., No. CV 06-
3654 ABC(VBKx) (C.D. Cal. 2006); FTC v. Nat'l Consumer Council, No. 
SACV04-0474 CJC(JWJX) (C.D. Cal. 2004).
    \54\ See FTC v. Integrated Credit Solutions, Inc., No. 06-806-
SCB-TGW (M.D. Fla. 2006); FTC v. Express Consolidation, No. 06-cv-
61851-WJZ (S.D. Fla. 2006); FTC v. Debt Mgmt. Found. Svcs., Inc., 
No. 04-1674-T-17-MSS (M.D. Fla. 2004); FTC v. AmeriDebt, Inc., No. 
PJM 03-3317 (D. Md. 2003). Other defendants allegedly claimed to 
have ``special relationships'' with the consumers' creditors. See 
FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. Wash. 2006).
    \55\ See, e.g., FTC v. Integrated Credit Solutions, No. 06-806-
SCB-TGW (M.D. Fla. 2006); United States v. Credit Found. of Am., No. 
CV 06-3654 ABC(VBKx) (C.D. Cal. 2006); FTC v. Nat'l Consumer 
Council, No. SACV04-0474 CJC(JWJX) (C.D. Cal. 2004).
    \56\ See United States v. Credit Found. of Am., No. CV 06-3654 
ABC(VBKx) (C.D. Cal. 2006); FTC v. Integrated Credit Solutions, 
Inc., No. 06-806-SCB-TGW (M.D. Fla. 2006); FTC v. Debt Mgmt. Found. 
Svcs., Inc., No. 04-1674-T-17-MSS (M.D. Fla. 2004).
    \57\ See FTC v. Express Consolidation, No. 06-cv-61851-WJZ (S.D. 
Fla. 2006); FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md. 2003).
    \58\ See FTC v. Integrated Credit Solutions, No. 06-806-SCB-TGW 
(M.D. Fla. 2006); United States v. Credit Found. of Am., No. CV 06-
3654 ABC(VBKx) (C.D. Cal. 2006).
    \59\ See FTC v. Express Consolidation, No. 06-cv-61851-WJZ (S.D. 
Fla. 2006); United States v. Credit Found. of Am., No. CV 06-3654 
ABC(VBKx) (C.D. Cal. 2006).
---------------------------------------------------------------------------

    The IRS has played a key role in regulating CCAs based on its 
authority to regulate nonprofit entities under Section 501(c)(3) of the 
Internal Revenue Code (``IRC''). In 2003, in response to the abuses 
arising from for-profit entities masquerading as nonprofits, the IRS 
announced its intention to re-examine CCAs with 501(c)(3) status to 
determine whether they were complying with the laws and regulations 
governing tax-exempt status.\60\ Ultimately, this initiative expanded 
into a full-scale program to examine all tax-exempt CCAs, resulting in 
``widespread revocation, proposed revocation or other termination of 
tax-exempt status,'' of many organizations,\61\ as well as increased 
scrutiny of new applications for tax-exempt status by credit counseling 
agencies.\62\
---------------------------------------------------------------------------

    \60\ See IRS (Grodnitzky) Tr. at 19-23; see also IRS, Press 
Release, IRS Takes Steps to Ensure Credit Counseling Organizations 
Comply with Requirements for Tax-Exempt Status (Oct. 17, 2003), 
available at (www.irs.gov/newsroom/article/0,,id=114575,00.html).
    \61\ A list of entities whose tax exempt status has been revoked 
can be found at (www.irs.gov/charities/charitable/article/0,,id=164392,00.html).See also IRS (Grodnitzky) Tr. at 20-23 (noting 
that of the initial 63 CCAs reviewed, the vast majority of them had 
their 501(c)(3) status revoked, or were issued notices of 
revocation).
    \62\ IRS, Press Release, IRS Takes New Steps on Credit 
Counseling Groups Following Widespread Abuse (May 15, 2006), 
available at (www.irs.ustreas.gov/newsroom/article/0,,id=156996,00.html).
---------------------------------------------------------------------------

    To enhance the IRS's ability to oversee CCAs, in 2006 Congress 
amended the IRC, adding Section 501(q) to provide specific eligibility 
criteria for CCAs seeking tax-exempt status as well as criteria for 
retaining that status.\63\ Among other things, Section 501(q) of the 
IRC prohibits tax-exempt CCAs from: making or negotiating loans to or 
on behalf of a client; engaging in credit repair activities, if those 
activities are not incidental to the provision of credit counseling, or 
charging a separate fee for credit repair activities; or refusing to 
provide credit counseling services due to a consumer's inability to pay 
or a consumer's ineligibility or unwillingness to agree to enroll in a 
DMP.\64\ In addition, Section 501(q) provides that tax-exempt credit 
counselors may only charge reasonable fees for services; must allow fee 
waivers if a consumer is unable to pay; and may not, unless allowed by 
state law, base fees on a percentage of a client's debt, DMP payments, 
or savings from enrolling in a DMP.\65\ Section 501(q) also limits the 
aggregate revenues that a tax-exempt CCA may receive from creditors for 
DMPs.\66\ Under Section 501(q), tax-exempt CCAs also are prohibited 
from making or receiving referral fees and from soliciting voluntary 
contributions from a client.\67\
---------------------------------------------------------------------------

    \63\ Pension Protection Act of 2006, P.L. 109-280, Section 1220 
(Aug. 2006), codified as 26 U.S.C. 501(q).
    \64\ See 26 U.S.C. 501(q).
    \65\ See id.
    \66\ 26 U.S.C. 501(q)(2) (requiring that ``[t]he aggregate 
revenues of the organization which are from payments of creditors of 
consumers of the organization and which are attributable to debt 
management plan services do not exceed the applicable percentage 
[that is being phased in and that will go down to 50%] of the total 
revenues of the organization.'').
    \67\ See 26 U.S.C. 501(q)(1)(C). In addition to government 
efforts to regulate CCAs, some industry trade associations have 
imposed registration and/or certification requirements on their 
members requiring, among other things, that members maintain 
nonprofit status, provide counseling and education services, and 
provide counseling services to consumers regardless of ability to 
pay. See NFCC Member Application (Attachments A-C), available at 
(www.nfcc.org/NFCC_MemberApplicationFINAL_REV071006.pdf); AICCA 
Certification of Compliance, available at (www.aiccca.org/images/CertificateofCompliance.pdf.)
---------------------------------------------------------------------------

    In addition to receiving regulatory scrutiny from the IRS, as a 
result of changes in the federal bankruptcy code, certain nonprofit 
CCAs have been subjected to rigorous screening by the Department of 
Justice's Executive Office of the U.S. Trustee (``EOUST''). Pursuant to 
the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 
consumers must obtain credit counseling before filing for bankruptcy 
and must take a financial literacy class before obtaining a

[[Page 41993]]

discharge from bankruptcy.\68\ Under the established processes, CCAs 
seeking certification as approved providers of the required credit 
counseling must submit to an in-depth initial examination and to 
subsequent re-examination by the EOUST.\69\
---------------------------------------------------------------------------

    \68\ See Pub L. No. 109-8, 119 Stat. 23 (codified as amended at 
11 U.S.C. 101 et seq.).
    \69\ See Application Procedures and Criteria for Approval of 
Nonprofit Budget and Credit Counseling Agencies by United States 
Trustees; Notice of Proposed Rulemaking, 73 FR 6062 (Feb. 1, 2008) 
(seeking comment on proposed rule setting forth additional 
procedures and criteria for approval of entities seeking to become, 
or to remain, approved nonprofit budget and credit counseling 
agencies). The proposed rule and public comments are available at 
(www.regulations.gov). A list of EOUST-approved credit counselors is 
available to consumers at (www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm).
---------------------------------------------------------------------------

B. For-profit Debt Settlement Services

1) Background
    As detailed above, the last decade has seen tremendous change in 
the debt relief industry. Historic levels of consumer debt\70\ have 
dramatically increased the demand for debt relief services, but 
traditional DMPs have become less available to consumers who 
increasingly have insufficient income to repay their debts under such 
plans.\71\ At the same time, CCAs have been under significant pressure 
due to decreases in fair share funding and new regulatory 
constraints.\72\ These developments have created an opportunity for a 
new debt relief business model offered by for-profit debt settlement 
companies.\73\ These companies commonly use radio, television, and 
Internet advertising to entice consumers with the prospect of lump sum 
settlements for less than the full outstanding balance of their 
unsecured debts.\74\ In many cases, they purport to offer consumers a 
way to pay off their unsecured debt obligations for pennies on the 
dollar. Unlike a DMP, the goal of a debt settlement plan is for the 
consumer to repay only a portion of the total owed. Thus, debt 
settlement may appeal to a wide range of indebted consumers, including: 
those who are ineligible for a DMP because their income is insufficient 
to enable them to repay their total debt in three to five years; those 
who would be able to repay their debts in full, but are unaware of the 
existence of or uninterested in the DMP option; and even those who 
might be better off declaring bankruptcy due to the extent of their 
indebtedness or other specifics of their particular situation.\75\
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    \70\ See CCFS (Manning) Tr. at 54-57 (noting ``unprecedented 
levels of debt'' and explaining that at least $350 billion in credit 
card debt was refinanced into home equity loans and mortgages 
between 2001 and 2007).
    \71\ See CCFS (Manning) Tr. at 65; FTC (Parnes) Tr. at 6-7; Care 
One at 2, 5 (estimating that six million consumers a year are unable 
to qualify for a traditional DMP because ``[t]he traditional [DMP] 
supported by creditors is not sufficient to help consumers impacted 
by the downturn in the economy and the increased availability and 
use of unsecured debt.''); see also supra notes 35-38 and 
accompanying text.
    \72\ This pressure may be responsible for a reduction in 
entities seeking to engage in credit counseling on a nonprofit 
basis. See, e.g., IRS (Grodnitzky) Tr. at 25 (noting that ``since 
2006, [the IRS has] received very few new applications from 
organizations wishing to engage in credit counseling'').
    \73\ See NFCC (Binzel) Tr. at 29 (``what we've seen as a result 
of companies being pushed out of 501(c), many have reemerged or are 
morphing into for profit entities and, in some cases, debt 
settlement companies.''); IRS (Grodnitzky) Tr. at 66; EFA Data 
Processing (Ansbach) Tr. at 81 (``There are more and more debt 
settlement companies that join us every day. Some are certainly well 
organized. Others are not. Some certainly join us with a tremendous 
amount of expertise. Others do not.''); Debt Settlement USA (Craven) 
Tr. at 88 (``In the past year alone, we have experienced a more than 
50% increase in the number of consumers who have turned to us and 
turned to debt settlement as an alternative to bankruptcy.'').
    \74\ See NFCC (Binzel) Tr. at 31.
    \75\ See CCFS (Manning) Tr. at 61-62 (``If people are in 
financial distress, we should be able to essentially underwrite them 
through a means test provision and say which program they should go 
into, and most importantly, what the debt concessions should look 
like. . . . We need to have a means test that says people are going 
to pay what they can afford to pay.'').
---------------------------------------------------------------------------

    Many consumers seeking information about debt settlement are 
already behind on their debt payments and subject to the attendant 
stresses of their financial situations, including fielding multiple 
debt collection calls, struggling to make even minimum payments on 
their credit cards, and, in many instances, struggling to pay their 
mortgages. Thus, the prospect of alleviating these stresses has 
undeniable appeal. Advertisements for debt settlement services 
typically direct consumers to call for more information, and the 
resulting telemarketing transactions often occur when consumers are 
extremely vulnerable.\76\
---------------------------------------------------------------------------

    \76\ See CFA (Plunkett) Tr. at 103; EFA Data Processing 
(Ansbach) Tr. at 83 (``These are consumers that are distraught, 
these are consumers that are crying, and I am sad to report to you 
that more often than not my representatives shared with me that 
these are people that are actually suicidal.'').
---------------------------------------------------------------------------

    The debt settlement business model appears to depend on the ability 
of the debt settlement provider to time a consumer's delinquency and 
rate of savings to coincide with a creditor's or debt collector's 
incentive to settle.\77\ According to debt settlement industry 
representatives, settling a debt for less than the full principal value 
becomes more attractive to creditors as their internal charge-off 
deadlines approach.\78\ The delinquency, charge-off, and collection 
process varies from creditor to creditor, but some commonalities exist. 
Generally, after a credit card account is delinquent for some period of 
time (most often between six months and a year) the issuer will 
``charge off the account.''\79\ Once the creditor charges off the 
account, it is no longer listed as an account receivable, and its value 
is charged against the creditor's reserves for losses.\80\ At the time 
of charge-off, the issuer may assign or sell the debt to a debt 
collector - whether a contingency collection agency, collection law 
firm, or debt buyer -who will then attempt to collect the debt directly 
from the consumer.\81\ Debt settlement companies often negotiate with 
debt collectors regarding accounts that are, due to their delinquency 
status, no longer in the creditor's portfolio.\82\
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    \77\ See USOBA at 7; see also generally US Debt Resolve 
(Johnson) Tr. at 71-75 (discussing the debt settlement business 
model).
    \78\ See USOBA at 7 (asserting that debt settlement offers are 
more likely to be accepted on accounts that are at least 120 days 
delinquent).
    \79\ See FTC, Collecting Consumer Debts, The Challenges of 
Change: A Workshop Report (Feb. 2009), at 2-3; Kaulkin Ginsberg, The 
Kaulkin Report: The Future of Receivables Management 37 (7th ed. 
2007).
    \80\ See NCLC, Fair Debt Collection 14-15 (6th ed. 2008).
    \81\ See id. Of course, many creditors use contingency 
collection agencies to collect debts that are delinquent but not 
charged-off. Once the debt is charged-off, ``[c]ollection efforts 
continue on many charged-off debts for a substantial period of time 
. . . . Any payment on the charged-off debt is then treated as 
income - a recovery on a bad debt - on the debt collector's books.'' 
Id. (citing Uniform Retail Credit Classification and Account 
Management Policy, 65 FR 36,903 (June 12, 2000)). The use of the 
term ``debt collector'' to include contingency collection agencies, 
collection law firms, and debt buyers is consistent with the 
Commission's interpretations of the Fair Debt Collection Practices 
Act (``FDCPA''). See FTC, Collecting Consumer Debts, The Challenges 
of Change: A Workshop Report (Feb. 2009), at 2-3.
    \82\ See ACA (Feb. 20, 2009) at 2 (reporting the results of a 
survey ACA conducted to determine its members' experiences with debt 
settlement companies).
---------------------------------------------------------------------------

    Debt settlement industry representatives assert that they assess 
the information about a particular consumer's financial condition and, 
based on that individualized assessment, calculate a monthly 
payment.\83\ Depending on the debt

[[Page 41994]]

settlement company, the consumer may make the payment to the debt 
settlement company or to a third-party escrow company.\84\ Consumers 
are typically told that the monthly payments - often in the range of 
hundreds of dollars - will accumulate until there are sufficient funds 
to make the creditor or debt collector an offer equivalent to an 
appreciable percentage of the amount originally owed to the creditor. 
During this time, the debt settlement provider often instructs the 
consumer not to talk to his or her creditors or debt collectors.\85\ To 
effectuate what appears to be a ``communication blackout,'' debt 
settlement companies often instruct consumers to assign them power of 
attorney\86\ and to send creditors (directly or through the debt 
settlement provider) a cease communication notice.\87\ In some cases, 
the debt settlement provider may even execute a change of address form 
substituting its address for the consumer's, redirecting billing 
statements and collections notices so that the consumer does not 
receive them.\88\ A company may assure the consumer that it is in 
contact with the creditors or debt collectors directly and represent 
that collection calls and lawsuits will cease upon enrollment in the 
debt settlement program.
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    \83\ See, e.g., USOBA at 7 (``Once a consumer has preliminarily 
qualified for and decided upon a debt settlement company, the 
consumer receives an agreement for services, a creditor information 
form, a budget form, limited power of attorney, a permission to 
communicate form, and instructions on how to complete the package. 
Once the consumer has completed the package . . . [the company] is 
responsible for reviewing the package to ensure that the consumer 
meets the criteria to qualify for the program. The qualification 
process is a timely process, which includes a complete review of the 
client's monthly budget form, the list of creditors on the creditor 
worksheet, the client's history with those creditors (current, 
delinquent, how long the account has been open, cash advances, 
balance transfers), and the client's ability to make the recommended 
monthly payment.'').
    \84\ In many instances, consumers are requested or required to 
send funds to the debt settlement company to be escrowed. One debt 
settlement provider at the Workshop noted, however, that no 
``legitimate debt settlement company [should] pay creditors on 
behalf of the consumer.'' Debt Settlement USA (Craven) Tr. at 91. 
The Commission's law enforcement shows the dangers of the escrow 
model. See, e.g., FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC 
(Ex) (C.D. Cal. 2002) (alleging that defendants regularly withdrew 
money from consumers' trust accounts to pay their operating 
expenses); FTC v. Edge Solutions, No. CV-07-4087 (E.D.N.Y.), First 
Interim Report of Temporary Receiver (Oct. 23, 2007), at 3 (noting 
that ``customer funds in the amount of $601,520 were missing from 
the receivership defendants' accounts and unaccounted for by the 
receivership defendants'').
    \85\ See, e.g., FTC v. Connelly, No. SA CV 06-701 DOC(RNBx) 
(C.D. Cal. 2006); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 
ABC(Ex) (C.D. Cal. 2002).
    \86\ See ACA (Dec. 1, 2008) at 5 (``ACA members routinely 
receive letters from debt settlement companies or law firms claiming 
to represent consumers. Commonly the letters include [power of 
attorney documents] that purport to be signed by the consumer 
authorizing the attorney to act on behalf of the consumer. The 
attorney then directs the credit-grantor or collection agency to 
work with a debt settlement company to resolve the debt.''); see 
also, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. Colo. 
2007)(alleging defendants send power of attorney documents to 
consumers); FTC v. Better Budget Fin. Servs., Inc., No. 04-
12326(WG4) (D. Mass. 2004) (alleging that consumers were instructed 
to sign power of attorney forms); FTC v. National Credit Council, 
Case. No. SACV04-0474 CJC(JWJx) (C.D. Cal. 2004) (alleging that 
defendants used power of attorney documents).
    In a comment submitted to the Commission in connection with the 
Workshop, ACA International (a trade organization representing 
third-party debt collectors) claimed that the power of attorney 
documents prepared by debt settlement companies are frequently 
legally deficient under state law. See ACA (Dec. 1, 2008) at 5-8. 
Moreover, unless presented by an attorney, a power of attorney may 
permit, but does not require, a creditor to contact the debt 
settlement company. Accordingly, it appears that this strategy often 
does not stop contacts between creditors and consumers, collection 
calls, or lawsuits/garnishment proceedings, but instead has the 
propensity to escalate the collection process.
    \87\ See ACA (Dec. 1, 2008) at 7 (``The increase in for-profit 
debt settlement companies has resulted in more of these companies 
seeking to interpose themselves between consumers and credit-
grantors or collectors.''). Workshop comments from the Community 
Bankers Association (CBA), the American Financial Services 
Association (AFSA) and ACA International, as well as statements by 
banking representatives at the workshop, indicate debt settlement 
companies often use power of attorney and cease and desist letters 
to stop contacts between creditor and consumer. See ACA (Dec. 1, 
2008) at 4-7; CBA at 2-3; AFSA at 3. Creditors express displeasure, 
however, that once debt settlement companies intercede on behalf of 
consumers, the debt settlement companies are non-responsive to 
creditor contacts. See, e.g., AFSA at 3. One workshop panelist 
representing the American Bankers Association (``ABA'') noted that, 
even when successful, attempts to inhibit direct communication with 
consumers prevent creditors from informing consumers about available 
options for dealing with the debt and the ramifications of failure 
to make payments. See ABA (O'Neill) Tr. at 96.
    \88\ See, e.g., FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 
ABC (Ex) (C.D. Cal 2002) (alleging defendants instructed consumers, 
among other things, to submit change of address information to 
creditors so that mail would go directly to defendants); FTC v. 
Debt-Set, Inc., No. 1:07-cv-00558-RPM, Exs. Supp. Mot. T.R.O., at 
Ex. 7 (D. Colo. 2007) (same).
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    The Workshop record indicates that there are three common fee 
models in the debt settlement industry. The first is the ``front-end 
fee model.'' Although this model has some variations, debt settlement 
companies that charge front-end fees generally require consumers to pay 
as much as 40% or more of the fee within the first three or four months 
of enrollment, and collect the remaining fee over an ensuing period of 
12 months or less,\89\ whether or not any settlements have been 
attempted or achieved.\90\ This model is apparently becoming the most 
prevalent.\91\ Additionally, depending on the debt settlement company, 
consumers may be required to pay a substantial percentage or even the 
full fee before any portion of their funds are paid to creditors - and 
perhaps before the debt settlement company makes any contact with 
creditors.\92\ As a result, consumers may pay hundreds of dollars in 
up-front fees before any of their funds are escrowed for the settlement 
fund.
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    \89\ See US Debt Resolve (Johnson) Tr. at 72-74 (``It is my 
opinion that a front end-loaded model looks at that [sic] 40 percent 
or more of the service fee is collected within the first three or 
four months and, then typically, the remainder of the service fee 
paid by the consumer to the company is paid over a 12-month period 
of time, sometimes even less.''); TASC, General Response (Dec. 1, 
2008), at 2 (``The settlement savings fee model bases the majority 
of the fee on a percentage of the savings realized by the consumer. 
In most instances the fees for this model equate to around 20%. 
Companies using the settlement savings model generally charge an 
initial fee collected over the first one to three months followed by 
a lower monthly fee over the life of the program.''); USOBA at 12 
(``Some business models call for the fee to be paid up front in its 
entirety, over the first several months of the program prior to any 
negotiating with creditors takes [sic] place. Other business models 
include this percentage fee into a consumer's monthly payment, 
deducting a portion of the monthly payment and applying that portion 
towards the overall fee amount.''); see also, e.g., FTC v. Connelly, 
No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006) (alleging that 
defendants required consumers to make a ``down payment'' of 30% to 
40% of total fee in first two or three months with the remainder 
paid over the following 6 to 12 months).
    \90\ See US Debt Resolve (Johnson) Tr. at 73 (noting that the 
cost of a program may be tied to a percentage of the debt owed when 
the consumer enrolls in the program or based on an estimate of the 
amount of money the consumer may save); see also CFA (Plunkett) Tr. 
at 103, 110 (``Fifteen to 20 percent of the total debt enrolled in 
the program is collected in the first year of the program. So, if 
you have $50,000 in debt, we're talking about $7,500 or more in the 
first year . . . [T]hat makes it very difficult for most people to 
afford a program for which they have received nothing at that 
point.'').
    \91\ See CFA (Plunkett) Tr. at 103.
    \92\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. 
Colo. 2007)(alleging defendant required full payment of fee - 8% of 
consumer's total unsecured debt - before contacting any creditors); 
FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 GAF JTLx (C.D. 
Cal. 2004) (alleging defendants required payment of ``all or some of 
the fee'' before they would perform services); US Debt Resolve 
(Johnson) Tr. at 108 (``I think there is concern on protection for 
the consumer because at different points in time[] the settlement 
firm will collect 65% of the fees in six months and the client won't 
have any results at that point in time.''); id. Tr. at 74 
(``Typically on a front-end loaded program - I'm not saying that 
it's incorrect - but the opportunity for the average consumer will 
not have the ability to settle.''); see also USOBA Comment at 12 
(``Some business models call for the fee to be paid up front in its 
entirety, over the first several months of the program prior to any 
negotiating with creditors takes place.''); FTC v. National Credit 
Council, Case. No. SACV04-0474 CJC (JWJx) (C.D. Cal. 2004) (alleging 
``[o]nly after these [up-front] fees are paid in full do defendants 
begin to apply a consumer's monthly payments to his NCC-administered 
trust account for use in settling his debts'').
---------------------------------------------------------------------------

    The second common fee structure is the ``flat fee model,'' in which 
the entire fee is collected over approximately the first half of the 
total enrollment period.\93\ Finally, the ``back-end model'' 
contemplates the consumer paying a small monthly fee for the duration 
of the plan, and then, upon program completion, paying a fee equal to a 
percentage of total savings.\94\
---------------------------------------------------------------------------

    \93\ See US Debt Resolve (Johnson) Tr. at 73.
    \94\ See id. at 73-74.
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    Debt settlement broadcast advertising typically omits any 
representation

[[Page 41995]]

regarding fees or charges for the service, other than statements such 
as ``free online evaluation'' or ``free consultation.''\95\ The issue 
of fees or charges is not broached until contact is made through a 
telemarketing sales call or even later - in the written contract the 
consumer receives after the telemarketing call.\96\
---------------------------------------------------------------------------

    \95\ See, e.g,. FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. 
Colo. 2007)(alleging defendants' website represented ``It's Free'' 
and ``No Fee Application''); FTC v. Connelly, No. SA CV 06-701 DOC 
(RNBx) (C.D. Cal. 2006) (alleging defendants offered consumers free 
analysis of their financial situation); FTC v. Nat'l Credit Council, 
Case. No. SACV04-0474 CJC (JWJx) (C.D. Cal. 2004) (alleging 
defendant purported to offer ``free counseling and assistance in 
debt management''); TASC (Young) Tr. at 138-139.
    \96\ See, e.g., CFA (Plunkett) Tr. at 110 (``[Y]ou go on almost 
any website for a settlement firm and you can't find a simple 
explanation of what will be charged in general based on whatever, 
say a fee schedule.''); TASC (Young) Tr. at 155-56.
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2) Consumer Protection Abuses in the Debt Settlement Industry
    Debt settlement plans, as they are commonly marketed and 
implemented, raise several consumer protection concerns. These concerns 
begin with the marketing and advertising of the services,\97\ but also 
extend to whether such plans are fundamentally sound for consumers.
---------------------------------------------------------------------------

    \97\ See AADMO (Guimond) Tr. at 45-46 (``What are the real 
problems with debt settlement? I would mirror the earlier comments. 
I believe it's the advertising practices. It's an enticing offer to 
eliminate 75% of your debt in 12 months, but if that's not what's 
occurring it's an absolutely worthless claim.'').
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    The initial contact between a debt settlement company and a 
prospective customer is typically through Internet, television, or 
radio advertising.\98\ The ads commonly urge consumers to call a toll-
free number for more information.\99\ Common claims in the ads and 
ensuing telemarketing pitches include representations that debt 
settlement companies will obtain for consumers who enroll in a debt 
settlement plan any of the following results: a reduction of their 
debts by 50%; elimination of debt in 12 to 36 months; cessation of 
harassing calls from debt collectors and collection lawsuits; and 
expert assistance from debt settlement providers who have special 
relationships with creditors and knowledge about available techniques 
to induce settlement.\100\ Debt settlement companies also frequently 
represent that there is a high likelihood (sometimes even a 
``guarantee'') of success.\101\ Law enforcement actions, consumer 
complaints, and the Workshop record, however, cast serious doubt on the 
validity of such claims.\102\ Indeed, even the industry's own figures, 
to the limited extent it has provided them,\103\ indicate that a large 
proportion of consumers who enter a debt settlement plan do not attain 
the commonly touted results.\104\
---------------------------------------------------------------------------

    \98\ See USOBA at 7 (``Most consumers normally begin the debt 
settlement process by searching online through various search 
engines, such as, Yahoo, Google, MSN, ASK, etc. Consumers will type 
in a keyword or key phrase, such as `debt help' or `debt assistance' 
and the search engine will provide both natural and advertised 
results. . . . Other means of advertising include national radio, 
television, newspapers, and magazines. Most advertisements 
specifically target consumers who are in financial trouble.'').
    \99\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. 
Colo. 2007); FTC v. Edge Solutions, Inc., No. CV-07-4087 (E.D.N.Y. 
2007); FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 
2006); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC (Ex) (C.D. 
Cal 2002).
    \100\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM 
(D. Colo. 2007); FTC v. Better Budget Fin. Servs., Inc., No. 04-
12326 (WG4) (D. Mass. 2004); California v. Am. Debt Arb., No. 
06CS01309 (Sup Ct. Sacramento Cty. 2006); Florida v. Emergency Debt 
Relief, AG Case No. L05-3-1033 (2006); Florida v. Boyd, 2008 CA 
002909 (4 th Jud. Cir., Duval Cty Mar 2008); see also NFCC (Binzel) 
Tr. at 30.
    \101\ See, e.g., FTC v. Innovative Sys. Tech., Inc., No. CV04-
0728 GAF JTLx (C.D. Cal. 2004) (alleging that defendant represented 
that service was ``no risk'' because it guaranteed that its services 
would produce the advertised result).
    \102\ See, e.g., FTC v. Nat'l Consumer Council, Inc., No. 
SACV04-0474 CJC(JWJX) (C.D. Cal. 2004) (showing that only 1.4% of 
the consumers that entered defendant's debt settlement program 
obtained the promised results); FTC v. Connelly, No. SA CV 06-701 
DOC (RNBx), Order Denying Def's Mot. Summ. J. (Dec. 20, 2006), at 18 
(finding that only 12% to 14% of defendant's consumers had debts 
settled with the represented reduction in overall debt); FTC v. Debt 
Solutions, Inc., No. 06-0298 JLR, App. for T.R.O. (W.D. Wash. Mar. 
6, 2006) at 15 (alleging that Defendants failed to achieve promised 
interest rate reductions for 99.5% of sample of accounts and failed 
to achieve any interest rate reductions in 80.4 percent of the 
accounts); New York Attorney General, Press Release, Attorney 
General Cuomo Sues Debt Settlement Companies for Deceiving and 
Harming Consumers (May 20, 2009) (alleging that two debt settlement 
companies only provided the promised results to 1% and 1/3% of their 
consumers, respectively), available at (www.oag.state.ny.us/media_center/2009/may/may19b_09.html).
    \103\ Generally, when asked for data to support its pervasive 
performance claims, the industry has not provided reliable 
statistical or empirical data. The lack of industry-wide statistics 
is not a new phenomenon. In its 2005 report on the debt settlement 
industry, the NCLC described its difficulty getting debt settlement 
companies or a trade association to provide data to support the 
advertising claims of debt settlement entities. See NCLC, An 
Investigation of Debt Settlement Companies: An Unsettling Business 
for Consumers (2005), at 1 (``[M]any debt settlement companies we 
called would not share information about their business.''); id. at 
9 (``It is possible that the fee arrangements described above would 
be justifiable if the companies actually earned those fees. 
Unfortunately, it is not easy to determine what the companies 
actually do to earn these fees. As noted above, the debt settlement 
trade association (USOBA) and companies we called have either 
refused to speak with us or provided vague responses.''). Then, and 
now, the industry has not provided sufficient performance data to 
demonstrate that the typical consumer who enrolls in their debt 
relief services obtains the represented relief. For example, at the 
Workshop, USOBA's representative stated that it has undertaken a new 
study, but could not state whether the study would be made public. 
See USOBA (Keehnen) Tr. at 260-61; see also CFA (Plunkett) Tr. at 
105 (``This is a very murky industry. It's not just consumers who 
have a hard time getting real information on what's really 
occurring. We need empirical information that's independently 
verified. Based on what we have seen in the industry, it has to be 
independently verified.'').
    \104\ TASC, a debt settlement industry trade association, 
submitted a study to the FTC purporting to show ``completion rates'' 
for consumers in debt settlement programs offered by TASC members. 
The study, which was voluntary for industry members, reported that 
``completion rates'' ranged from 35% to 60%. See TASC , Study on the 
Debt Settlement Industry, at 1 (2007). However, this study's 
probative value is limited substantially by, among other things, the 
fact that it does not provide any information on the TASC members 
who participated in the survey - i.e., how many TASC members 
participated, how long those who did participate had been in 
business, and how many consumers those members serviced. 
Additionally, the measurement of ``completion rates'' -a term 
undefined and subject to various interpretations - is not the 
correct means of judging success rates for the debt relief industry. 
For example, industry members may define ``completion'' to mean that 
consumers obtained even a single settlement, regardless of how many 
accounts a consumer may have outstanding. See id. at 1 (in 
explaining its methodology, TASC notes that some of those surveyed 
``defined a completion as having all debts settled, [but that] there 
were two that considered a client completed if they had settled at 
least 80% of the debt and one if they had settled at least 50% of 
the debt''). Similarly, a settlement may be counted as ``completed'' 
regardless of whether it was obtained on the terms represented to 
the consumer, or on less favorable terms. Industry members might 
even include consumers who ceased paying for services prior to 
receiving the represented results in the count of ``completed'' 
accounts. The Commission believes, instead, that success rates 
should reflect the number or percentage of consumers who pay for the 
offered goods or services that then fully achieve the represented 
results.
---------------------------------------------------------------------------

    In some instances debt settlement companies omit material 
information about the debt settlement process from their marketing 
presentations to consumers. Specifically, they often counsel consumers 
to stop paying their creditors\105\ without informing them that failing 
to make payments to creditors may actually increase the amount they owe 
because of penalties and interest and likely will adversely affect 
their credit score. Consumers often are misled that their initial 
payments are taken by the debt settlement company as fees and not saved 
for settlement of their debt.\106\ Further, debt settlement companies, 
in many instances, misrepresent to consumers how long it will take them 
to

[[Page 41996]]

save sufficient funds in order to offer settlements to each 
creditor.\107\
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    \105\ See, e.g., FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) 
(C.D. Cal. 2006); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC 
(Ex) (C.D. Cal. 2002).
    \106\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM 
(D. Colo. 2007).
    \107\ See, e.g., Debt Settlement USA, Growth of the Debt 
Settlement Industry, at 10 (``Fraudulent firms also regularly fail 
to provide the services promised to consumers by claiming that they 
can help them become debt free in an unrealistically short amount of 
time and/or promise too low of a settlement.'').
---------------------------------------------------------------------------

    Consumers often suffer irreparable injury as a result of paying a 
fee in advance of receiving services offered by a debt settlement 
company. These consumers, relying on the representations of results, 
pay fees to debt settlement companies believing that most or all of the 
payments are being saved for the promised debt settlement.\108\ 
Telemarketers' practice of taking fees before a settlement is obtained 
results in a number of adverse consequences: late fees or other penalty 
charges, interest charges, delinquencies reported to credit bureaus 
that decrease the consumer's credit score, and sometimes legal action 
to collect the debt.\109\ Given what appear to be the relatively low 
success rates for debt settlement plans, consumers who pay substantial 
fees up-front are likely to be harmed.
---------------------------------------------------------------------------

    \108\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM 
(D. Colo. 2007); FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 
GAF JTLx (C.D. Cal. 2004); see also USOBA at 12 (``Some business 
models call for the fee to be paid up front in its entirety, over 
the first several months of the program prior to any negotiating 
with creditors takes place.'').
    \109\ One of the Commission's enforcement actions, FTC v. 
Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006), is 
particularly illustrative on this harm: In that matter, between 2004 
and 2005, 5,679 lawsuits were filed against defendants' estimated 
18,116 consumers (the total number of consumers as of October 2005). 
See id., Trial Exs. 382, 561, 562, 623 & Schumann Test., Day 4, Vol. 
III, 37:21-40:12; 34:17-37:4; see also infra note 221.
---------------------------------------------------------------------------

3) Law Enforcement Actions and Other Responses
    The Commission and state enforcers have brought law enforcement 
actions and launched consumer education efforts to combat deceptive and 
unfair practices in the debt settlement industry. Since 2001, the 
Commission has brought seven actions against debt settlement entities 
for a variety of the abuses detailed above.\110\ As in the FTC's 
actions against deceptive credit counselors, these suits commonly 
allege the misrepresentation of fees, or the failure to fully disclose 
them - including the significant up-front fees that are often 
charged.\111\ Additionally, the Commission alleged that these 
defendants falsely promised high success rates,\112\ promisedunattained 
results (e.g., settlements for a certain percentage of the total 
original debt),\113\ and misrepresented their refund policies.\114\ 
Further, the Commission complaints charged that the defendants in these 
matters failed to warn consumers of the negative consequences of debt 
settlement, including the accumulation of late fees and other 
charges,\115\ the effect on consumers' credit ratings,\116\ and the 
fact that debt collectors would continue to contact consumers.\117\
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    \110\ FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. Colo. 
2007); FTC v. Edge Solutions, No. CV-07-4087 (E.D.N.Y. 2007); FTC v. 
Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006); FTC v. 
Better Budget Fin. Servs., Inc., No. 04-12326 (WG4) (D. Mass. 2004); 
FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 GAF JTLx (C.D. 
Cal. 2004); FTC v. Nat'l Consumer Council, No. SACV04-0474 
CJC(JWJX)(C.D. Cal. 2004); FTC v. Jubilee Fin. Servs., Inc., No. 02-
6468 ABC (Ex) (C.D. Cal. 2002).
    \111\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM 
(D. Colo. 2007) (alleging that defendants misrepresented that they 
would not charge consumers any up-front fees before obtaining the 
promised debt relief, but required a substantial up-front fee).
    \112\ See, e.g., id.
    \113\ See, e.g., id.; FTC v. Connelly, No. SA CV 06-701 DOC 
(RNBx) (C.D. Cal. 2006).
    \114\ See, e.g., FTC v. Innovative Sys. Tech., Inc., No. CV04-
0728 GAF (JTLx) (C.D. Cal. 2004) (defendants misrepresented that 
they would refund consumers' money if unsuccessful).
    \115\ See, e.g., id.
    \116\ See, e.g., FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) 
(C.D. Cal. 2006).
    \117\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM 
(D. Colo. 2007).
---------------------------------------------------------------------------

    To complement its law enforcement efforts, the Commission has 
worked to advance public awareness of the debt settlement industry 
through its September 25, 2008 Workshop to discuss the origins and 
current practices of the debt settlement industry and consumer 
protection issues, including the possible need for additional 
regulation by the Commission and the future of the industry. The 
Workshop record has aided Commission efforts to understand better, and 
now propose additional restrictions to curb, deceptive and unfair 
practices involving debt settlement and other forms of debt relief 
services.\118\
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    \118\ In addition to the Workshop, the FTC has also published a 
number of relevant consumer education publications. See e.g., Knee 
Deep in Debt, available at (www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm;) Fiscal Fitness: Choosing a Credit Counselor, 
available at (www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm.)
---------------------------------------------------------------------------

    The states have also been active in attempting to regulate abuses 
in the debt settlement industry.\119\ Many states have enacted statutes 
specifically designed to restrict deceptive practices in this area; in 
fact, some have banned for-profit debt settlement entirely\120\ or the 
charging of up-front fees.\121\ However, most of these statutes allow 
debt settlement but impose certain requirements, for example that 
companies be licensed in the state,\122\ that they provide consumers 
with certain key disclosures (e.g., schedule of payments and 
fees),\123\ and/or that they provide consumers with some right to 
cancel enrollment.\124\ Additionally, some states restrict the amount 
and timing of fees, including up-front fees and subsequent monthly 
charges.\125\ In 2005, the National Conference of Commissioners on 
Uniform Laws (``NCCUSL'') drafted the Uniform Debt-Management Services 
Act (``Uniform Act'') in an attempt to provide consistent regulation of 
both for-profit and nonprofit debt relief services across the United 
States.\126\ Among the key consumer protection provisions in the 
Uniform Act are: a fee cap\127\; mandatory education requirements\128\; 
certified counselors\129\; and accreditation requirements for

[[Page 41997]]

sellers of debt management services.\130\ At this point, only a handful 
of states have adopted the Uniform Act, but NCCUSL believes that with 
recent modifications to the Act in 2008 more states will adopt it in 
2009.\131\
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    \119\ See AADMO (Guimond) Tr. at 44 (``If you also look at some 
states [which regulate debt settlement] . . . [t]here are no or very 
few licensed debt settlement companies.'').
    \120\ See, e.g., Conn. Gen. Stat. Sec.  36A-655, et seq.; La. 
Rev. Stat. Sec.  RS 14:331, et seq., 37:2581, et seq.; N.D. Gen. 
Stat. Sec.  13-06-01-03 & 13-07-01-07; Wyo. Stat. Ann. Sec.  33-14-
101, et seq.
    \121\ See, e.g., N.C. Gen. Stat Sec.  14-423 et seq.
    \122\ See, e.g., Kan. Stat. Ann. Sec.  50-1116, et seq.; Me. 
Rev. Stat. Ann. Tit. 17 Sec.  701, et seq. &tit. 32 Sec.  6171, et 
seq., 1101-03; N.H. Rev. Stat. Ann. Sec.  339-D:1, et seq.; Va. Code 
Ann. Sec.  6.1-363.2, et seq.
    \123\ See, e.g,. Kan. Stat. Ann. Sec.  50-1116, et seq.; N.H. 
Rev. Stat. Ann. Sec.  339-D:1, et seq; S.C. Code Ann. Sec.  37-7-
101, et seq.; Wash. Rev. Code Sec.  18.28.010, et seq.
    \124\ See, e.g., S.C. Code Ann. Sec.  37-7-101, et seq.; Va. 
Code Ann. Sec.  6.1-363.2, et seq.; Wash. Rev. Code Sec.  18.28.010, 
et seq.
    \125\ See, e.g., Fla. Stat. Sec.  817.801, et seq. (limiting 
initial fee to $50 and monthly fee to $35 or 7.5% of total payment); 
Me. Rev. Stat. Ann. Tit. 17 Sec.  701, et seq., tit. 32 Sec.  6171, 
et seq. (limiting set-up fee to $75, monthly charge to $40, and 15% 
of reduction for any settlement of debt).
    \126\ See AADMO (Guimond) Tr. at 42.
    \127\ Unif. Debt-Mgmt. Servs. Act Sec.  23(d)(2) (2008) 
(allowing debt settlement entities to charge ``a fee for 
consultation, obtaining a credit report, setting up an account, and 
the like, in an amount not exceeding the lesser of $400 and four 
percent of the debt in the plan at the inception of the plan; and . 
. . a monthly service fee, not to exceed $10 times the number of 
creditors remaining in a plan at the time the fee is assessed, but 
not more than $50 in any month.''); id. Sec.  23(d)(1) (2008) 
(allowing entities that offer to ``reduce finance charges or fees 
for late payment, default, or delinquency'' to charge ``a fee not 
exceeding $50 for consultation, obtaining a credit report, setting 
up an account, and the like; and . . . a monthly service fee, not to 
exceed $10 times the number of creditors remaining in a plan at the 
time the fee is assessed, but not more than $50 in any month.'').
    \128\ Unif. Debt-Mgmt. Servs. Act Sec.  17(b) (requiring that 
debt management entities provide consumers ``with reasonable 
education about the management of personal finance'').
    \129\ Unif. Debt-Mgmt. Servs. Act Sec.  2(6) (setting forth 
requirements for certification); id. Sec.  16 (requiring that 
registered entities ``maintain a toll-free communication system, 
staffed at a level that reasonably permits an individual to speak to 
a certified counselor, certified debt specialist, or customer-
service representative, as appropriate, during ordinary business 
hours.'').
    \130\ Unif. Debt-Mgmt. Servs. Act Sec.  6(8); see also AADMO 
(Guimond) Tr. at 42-43; NCCUSL (Kerr) Tr. at 207.
    \131\ According to NCCUSL, the recent amendments to the Uniform 
Act did not impact the consumer protection provisions referenced 
above, rather the amendments focused on addressing problems 
identified with the Uniform Act that made it difficult for states to 
implement. See NCCUSL (Kerr) Tr. at 211-12.
---------------------------------------------------------------------------

    Further, state regulators and Attorneys General have filed numerous 
law enforcement actions against debt settlement companies.\132\ Some 
states have sued these entities for alleged violations of state 
consumer protection laws banning unfair or deceptive acts and 
practices. For example, in one recent action, Texas sued a debt 
settlement entity under state consumer protection law for making 
deceptive claims that it could eliminate consumers' debts in 36 months 
or less and reduce their overall amount by as much as 60%.\133\ Other 
states have brought lawsuits against companies for allegedly violating 
their debt management or settlement statutes.\134\ In an illustrative 
case, Colorado recently settled suits against several debt settlement 
entities under its debt management statute for, among other things, 
failing to register with the state, charging illegal fees, and/or 
failing to allow consumers to cancel contracts.\135\
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    \132\ See, e.g., California v. American Debt Arb., Case No. 
06CS01309 (Sup. Ct. Sacramento Cty. 2006); Florida v. Emergency Debt 
Relief, AG Case No. L05-3-1033 (2006); Florida v. Boyd, 2008 CA 
002909 (4 th Jud. Cir., Duval Cty Mar. 2008); see also, Florida 
Attorney General, Press Release, Attorney General Announces 
Settlement in Debt Relief Scheme that Victimized Thousands (Nov. 25, 
2008), available at (www.myfloridalegal.com/newsrel.nsf/pv/352C2D099A1FA7EE8525750C006DF6B4); North Carolina Attorney General, 
Press Release, Debt relief firms ordered to stop taking money in NC, 
says AG, available at (www.ncdoj.gov/DocumentStreamerClient?directory=PressReleases/&file=Consumer%20Law%20Center.pdf) (Feb. 15, 2008); Maryland 
Attorney General, Press Release, Attorney General Settles with 
Companies Selling Debt Repayment Services, available at 
(www.oag.state.md.us/Press/2007/101907.htm) (Oct. 19, 2007); West 
Virginia Attorney General, Press Release, Attorney General McGraw 
Reaches Settlement with Four Debt Relief Companies for 366 Consumers 
(May 16, 2007), available at (www.wvago.gov/press.cfm?ID=343&fx=more).
    \133\ See Texas v. CSA-Credit Solutions of Am., Inc., No. 09-
000417 (Dist. Travis Cty, filed Mar. 26, 2009), available at 
(www.oag.state.tx.us/newspubs/releases/2009/032509csa_op.pdf). In a 
similar case, Florida challenged the practices of another debt 
settlement provider. See Florida v. Boyd, 2008-CA-002909 (Cir. Ct. 
4th Cir. Duval Cty, Mar. 5, 2008) (alleging deceptive and unfair 
practices for promises to settle debts for ``as little as 25-50%'' 
of the balance owed in 12 to 36 months), available at 
(www.myfloridalegal.com/webfiles.nsf/WF/JFAO-7CFMMD/$file/
FutureFinancialComplaint.PDF.)
    \134\ See, e.g., New Hampshire Banking Dept. v. Debt Relief USA, 
No. 08-361 (Order of License Denial, Jan. 2, 2009) (denying company 
licencing for failing to abide by state requirements, including fee 
caps), available at (www.nh.gov/banking/Order08_361DebtReliefUSA_DO.pdf); Florida v. Boyd, 2008-CA-002909 (Cir. Ct. 4 th Cir. Duval 
Cty, Mar. 5, 2008) (alleging violations of Florida credit counseling 
statute for, inter alia, charging fees above statutory cap), 
available at (www.myfloridalegal.com/webfiles.nsf/WF/JFAO-7CFMMD/
$file/FutureFinancialComplaint.PDF). West Virginia Attorney General, 
Press Release, Attorney General McGraw Sues Texas Debt Settlement 
Company (Apr. 14, 2009) (alleging that defendant charged more the 2% 
fee cap set by state law), available at (www.wvago.gov/press.cfm?fx=more&ID=472); Vermont Attorney General, Debt Adjuster 
Sanctioned For Violating Licensing And Consumer Laws (Mar. 9, 2009) 
(alleging, inter alia, that company violated state debt adjustment 
law by doing business in state without a license), available at 
(www.atg.state.vt.us/display.php?smod=63&pubsec=4&curdoc=1659). 
Maryland Attorney General, Attorney General Settles with Companies 
Selling Debt Repayment Services (Oct. 19, 2007), available at 
(www.oag.state.md.us/Press/2007/101907.htm).
    \135\ See Colorado Attorney General Press Release, Eleven 
Companies Settle With The State Under New Debt-Management And Credit 
Counseling Regulations (Mar. 12, 2009), available at 
(www.ago.state.co.us/press_detail.cfmpressID=957.html).
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C. Debt Negotiation

    In addition to credit counseling and debt settlement, the 
Commission has observed a third category of debt relief service which 
this Notice refers to as ``debt negotiation.'' Debt negotiation 
companies offer to obtain interest rate reductions or other concessions 
to lower consumers' monthly payment to creditors.\136\ Unlike DMPs or 
debt settlement, debt negotiation does not purport to obtain full 
balance payment plans or lump sum settlements of less than the full 
balance. Rather debt negotiators offer to obtain interest rate 
reductions or other concessions from creditors to make monthly payments 
more affordable. However, similarly to debt settlement companies, some 
debt negotiation entities charge significant up-front fees.\137\ 
Additionally, like some debt settlement companies, debt negotiators may 
represent or promise specific results, like a particular interest rate 
reduction or amount saved.\138\
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    \136\ See e.g., FTC v. MCS Programs, LLC, No. C09-5380RJB (W.D. 
Wash. 2009); FTC v. Group One Networks, Inc., No. 8:09-cv-352-T-26-
MAP (M.D. Fla. 2009) (amended complaint); FTC v. Select Pers. Mgmt., 
No. 07- 0529 (N.D. Ill. 2007); FTC v. Debt Solutions, Inc., No. 06-
0298 JLR (W.D. Wash. 2006).
    \137\ See FTC v. MCS Programs, LLC, No. C09-5380RJB (W.D. Wash. 
2009)(alleging defendants charged an up-front fee of $690 to $899); 
FTC v. Group One Networks, Inc., No. 8:09-cv-352-T-26-MAP (M.D. Fla. 
2009) (amended complaint) (alleging defendants charged an up-front 
fee of $595 to $895); FTC v. Select Pers. Mgmt., No. 07- 0529 (N.D. 
Ill. 2007) (alleging defendants charged an up-front fee of $695); 
FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. Wash. 2006) 
(alleging that defendants charged an up-front fee of $399 to $629).
    \138\ See FTC v. MCS Programs, LLC, No. C09-5380RJB (W.D. Wash 
2009) (alleging defendants represented that their program would save 
consumers $2,500 or more); FTC v. Group One Networks, Inc., No. 
8:09-cv-352-T-26-MAP (M.D. Fla. 2009) (amended complaint) (alleging 
defendants represented they would provide consumers with savings of 
$1,500 to $20,000 in interest); FTC v. Select Pers. Mgmt., No. 07- 
0529 (N.D. Ill. 2007) (alleging defendants represented consumers 
would save a minimum of $2,500 in interest); FTC v. Debt Solutions, 
Inc., No. 06-0298 JLR (W.D. Wash. 2006) (alleging defendants 
promised to save consumers $2500).
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    The FTC has brought four actions against defendants for alleged 
deceptive debt negotiation practices.\139\ In each case, defendants 
relied on telemarketing to deliver alleged deceptive representations to 
consumers - i.e., that they could reduce consumers' interest payments 
by specific percentages or minimum amounts, in exchange for a fee of 
hundreds of dollars. The Commission also alleged that some of these 
entities falsely purported to be affiliated, or have close 
relationships, with consumers' creditors.\140\ Finally, in each case, 
the Commission charged defendants with violations of the TSR.
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    \139\ See FTC v. MCS Programs, LLC, No. C09-5380RJB (W.D. Wash. 
2009); FTC v. Group One Networks, Inc., No. 8:09-cv-352-T-26-MAP 
(M.D. Fla. 2009) (amended complaint); FTC v. Select Pers. Mgmt., No. 
07- 0529 (N.D. Ill. 2007); FTC v. Debt Solutions, Inc., No. 06-0298 
JLR (W.D. Wash. 2006).
    \140\ See FTC v. MCS Programs, LLC, No. C09-5380RJB, App. for 
T.R.O. at 7 (W.D. Wash. 2009) (alleging that defendants ``create the 
impression of affiliation with consumers' banks or credit card 
companies''); FTC v. Group One Networks, Inc., No. 8:09-cv-352-T-26-
MAP (M.D. Fla. 2009) (amended complaint) (alleging defendants 
claimed to have ``close working relationship with over 50,000'' 
creditors); FTC v. Select Pers. Mgmt., No. 07- 0529 (N.D. Ill. 2007) 
(alleging defendants claimed to be affiliated with consumers' credit 
card companies); FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. 
Wash. 2006) (alleging that defendants claimed to have ``special 
relationships'' with creditors).
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III. Discussion of the Proposed Rule

    Based on its enforcement and outreach experience, including 
information from the Workshop, the Commission tentatively has concluded 
that additional legal restrictions are needed to address pervasive 
illegal conduct occurring in the sale of debt relief services.\141\ 
Thus, the Commission

[[Page 41998]]

is proposing amendments to the TSR specifically to address debt relief 
services, the sale of which commonly involves telemarketing. The 
existing provisions of the TSR already apply to outbound calls made to 
induce the purchase of debt relief services and to any non-exempt 
inbound calls.\142\ The proposed amendments would bring all inbound 
debt relief calls in response to direct mail or general media 
advertisements under the Rule and would add tailored provisions to 
address specific concerns about deceptive and abusive practices 
prevalent in the marketing of such offers.
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    \141\ Workshop participants expressed support for a federal 
legislative or regulatory solution to concerns about debt 
settlement. See, e.g., American Credit Alliance (Franklin) Tr. at 
212 (agreeing that federal regulation is necessary); NCCUSL (Kerr) 
Tr. at 212 (agreeing that federal regulation of debt settlement 
advertising is needed); USPIRG (Mierzwinski) Tr. at 212-213 
(agreeing that federal regulation is necessary, but arguing that it 
should serve as a floor, not a ceiling, of protection); USOBA 
(Keehnen) Tr. at 213 (agreeing that federal regulation is necessary, 
but arguing that it should serve as a floor, not a ceiling, of 
protection); Gordon Feinblatt (Witzel) Tr. at 213 (agreeing that 
federal legislation is necessary); NFCC (Binzel) Tr. at 33 (``[I]f 
debt settlement companies are going to be allowed to do business, 
they should be subjected to strong Federal legislation. At a 
minimum, the legislation should define the scope of the services 
that may be provided;. . . set caps on the range of fees that may be 
charged and ensure that the fees are commensurate with the services 
being provided; prohibit the collection of fees until actual 
services are provided; require full disclosure to consumers to 
inform them of the fees that are being charged, the potential 
consequence of utilizing debt settlement, the potential impact of 
debt settlement services on their credit history and the tax 
consequences of debt settlement''); AADMO (Guimond) Tr. at 46 
(``AADMO does support federal legislation and state regulation that 
regulates both credit counseling and debt settlement, just not 
necessarily together'').
    \142\ Outbound telemarketing of debt relief services is already 
subject to the TSR. See, e.g., FTC v. Express Consolidation, No. 06-
cv-61851-WJZ (S.D. Fla. 2006) (alleging violation of TSR by 
defendant offering consumers assistance in obtaining lower credit 
card interest rates); FTC v. Debt Solutions, Inc., No. 06-0298 JLR 
(W.D. Wash. 2006) (alleging violations of the TSR by debt settlement 
company). Inbound telemarketing of debt relief services in response 
to general media advertisements currently is exempt from the Rule, 
16 CFR 310.6(b)(5), as is inbound calling in response to direct mail 
advertisements that make the requisite disclosures required in 
Section 310.3(a)(1) of the Rule. 16 CFR 310.6(b)(6). Inbound calls 
in response to direct mail advertisements that do not make these 
disclosures, however, are presently subject to the Rule. 16 CFR 
310.6(b)(6).
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    While the Commission believes that the proposed amendments are an 
important step in the effort to prevent harm to consumers considering 
debt relief options, it believes that a comprehensive approach is 
needed to address the important consumer protection concerns at issue. 
Therefore, in addition to this rulemaking initiative, the Commission 
intends to continue law enforcement, as well as its consumer education 
efforts, to ensure that consumers considering debt relief make informed 
choices. Further, the Commission believes that creditors and debt 
collectors can do more to address the concerns at issue in this 
proceeding, such as developing innovative loss mitigation 
techniques.\143\ Creditors are uniquely positioned to play a role in 
resolving issues related to debt relief because they have direct 
relationships with consumers in financial distress. With traditional 
DMPs out of reach for many consumers and significant concerns about the 
efficacy of the debt settlement model, at least as it currently exists, 
the Commission encourages creditors to step up efforts to reach 
consumers directly and determine what, if any, debt relief options may 
be available. One positive development in this regard came with the 
recent announcement that the ten top credit card issuers are amenable 
to more flexible DMPs.\144\
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    \143\ See CFA (Plunkett) Tr. at 101-02 (``It's not like there 
isn't some responsibility here on the part of the credit card 
industry for the fact that the debt settlement industry is surfacing 
and appears to be growing. Creditors do share some responsibility 
for this growth. As I mentioned, there's demand and CFA has 
documented over the last decade that credit card issuers have 
reduced the concessions, the benefits that they offer to consumers 
in credit counseling. So, therefore, the demand for an alternative 
has been even stronger. And we'd like to see creditors work harder 
in their work-out programs, their individual one-on-one programs, to 
meet the needs of the consumers who clearly have a hardship and 
clearly need some form of a settlement.'').
    \144\ See supra notes 35-38 and accompanying text; see also CFA 
(Plunkett) Tr. at 104 (``One of the market-based solutions that's 
very promising are the ongoing efforts by creditors and credit 
counseling agencies to develop what I think is a much more viable 
and a consumer-friendly alternative to bankruptcy and to, on the 
other extreme, a traditional debt management plan.'').
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    The Commission invites written comments on the proposed Rule, and, 
in particular, answers to the specific questions set forth in Section 
VIII, to assist it in determining whether the proposed Rule provisions 
strike an appropriate balance between maximizing protections for 
consumers from deceptive and abusive conduct in the telemarketing of 
debt relief services, while avoiding the imposition of unnecessary 
compliance burdens on legitimate industry actors.

A. Section 310.1: Scope

    Although no amendment is proposed with regard to the scope of the 
Rule, it is worth noting, for the benefit of those who may be 
unfamiliar with the TSR, that the Telemarketing Act dictates that the 
jurisdictional limits of the FTC Act apply to the TSR. Specifically, 
the Act states that ``no activity which is outside of the jurisdiction 
of [the FTC Act] shall be affected by this chapter.''\145\ One example 
of such an activity, which merits mention here, is the exemption of 
nonprofit entities from the jurisdiction of the FTC Act and, by 
extension, the TSR. This jurisdictional limitation is rooted in 
Sections 4 and 5 of the FTC Act which, by their terms, provide the 
Commission with jurisdiction only over persons, partnerships, or 
corporations organized to carry on business for their profit or that of 
their members.\146\
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    \145\ 15 U.S.C. 6105(a).
    \146\ Section 5(a)(2) of the FTC Act states: ``The Commission is 
hereby empowered and directed to prevent persons, partnerships, or 
corporations . . . from using unfair or deceptive acts or practices 
in or affecting commerce.'' 15 U.S.C. 45(a)(2). Section 4 of the Act 
defines ``corporation'' to include: ``any company, trust, so-called 
Massachusetts trust, or association, incorporated or unincorporated, 
which is organized to carry on business for its own profit or that 
of its members. . . .'' 15 U.S.C. 44 (emphasis added).
---------------------------------------------------------------------------

    Thus, legitimate nonprofit credit counseling agencies that conduct 
telemarketing campaigns on their own behalf will not be subject to the 
amended Rule. As the Commission previously has stated, however, the TSR 
``does apply to any third-party telemarketers [that exempt] entities 
might use to conduct telemarketing activities on their behalf.''\147\ 
Thus, if a for-profit telemarketer is engaged on behalf of a nonprofit 
entity in a telemarketing campaign to offer a ``debt relief service,'' 
as defined in proposed Section 310.2(m), that telemarketer would be 
subject to the Rule.\148\ Additionally, the Commission has jurisdiction 
over sham nonprofits that operate as for-profit entities in 
practice.\149\
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    \147\ See TSR; Proposed Rule, 67 FR 4492, 4497 (Jan. 30, 2002) 
(citing TSR; Statement of Basis and Purpose and Final Rule, 60 FR, 
43842, 43843 (Aug. 23, 1995)) ( ``As the Commission stated when it 
promulgated the Rule, `[t]he Final Rule does not include special 
provisions regarding exemptions of parties acting on behalf of 
exempt organizations; where such a company would be subject to the 
FTC Act, it would be subject to the Final Rule as well.'''); see 
also Nat'l Fed'n of the Blind v. FTC, 420 F.3d 331, 334-35 (4th Cir. 
2005).
    \148\ Pursuant to the USA PATRIOT Act amendments to the TSR in 
2001, the Rule now reaches ``not only the sale of goods or services, 
but also charitable solicitations by for-profit entities on behalf 
of nonprofit organizations.'' TSR; Final Amended Rule, 68 FR 4580, 
4585 (Jan. 29, 2003).
    \149\ Supra note 147.
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    Indeed, the Commission's law enforcement record shows that sham 
nonprofit CCAs have been a source of significant consumer injury. 
Although these entities purport to operate as nonprofits, their 
activities in fact earn profits for affiliated entities or individuals. 
The Commission has obtained robust injunctive and monetary relief in 
actions against these bogus nonprofit credit counselors for deceptive 
practices in violation of the FTC Act.\150\
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    \150\ Specifically, in these actions, the Commission has secured 
injunctive relief and significant monetary judgments. See, e.g., FTC 
v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md. 2005) (stipulated final 
judgment for $172 million suspended judgment, and barring defendants 
from making nonprofit claims, with $12.7 million returned to 
consumers as a result of the FTC action and $7-million as a result 
of class action settlements); see also, e.g., FTC v. Express 
Consolidation, No. 06-cv-61851-WJZ (S.D. Fla. 2008) (stipulated 
final judgment for over $40 million); United States v. Credit Found. 
of Am., No. CV 06-3654 ABC(VBKx) (C.D. Cal. 2006) (stipulated final 
judgment of $926,754 in consumer redress and civil penalties, a 
$102,540 suspended judgment, and injunctive relief); FTC v. 
Integrated Credit Solutions, No. 06-806-SCB-TGW (M.D. Fla. 2006) 
(stipulated final judgment of $2,371,380 in consumer redress and 
ordering defendants to set aside $415,000 to refund enrollment 
fees); FTC v. Debt Mgmt. Found. Svcs., No. 04-1674-T-17-MSS (M.D. 
Fla. 2005)(stipulated suspended judgment for over $11 million and 
injunctive relief); FTC v. Nat'l Consumer Council, No. SACV04-
0474CJC(JWJX) (C.D. Cal. 2005) (stipulated suspended judgment of 
$84.3 million and injunctive relief).

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[[Page 41999]]

B. Section 310.2: Definitions

    The only proposed change to the definitions section of the Rule is 
the addition of newly renumbered Section 310.2(m), which defines the 
term ``debt relief service'' to mean:

 any service represented, directly or by implication, to renegotiate, 
settle, or in any way alter the terms of payment or other terms of the 
debt between a consumer and one or more unsecured creditors or debt 
collectors, including, but not limited to, a reduction in the balance, 
interest rate, or fees owed by a consumer to an unsecured creditor or 
debt collector.\151\

    \151\ Former Section 310.2(m) (definition of ``donor'') and all 
subsequent definitions have been renumbered accordingly in the 
proposed amended Rule.
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    The Commission intends that the definition of ``debt relief 
service'' encompass a broad swath of debt relief activities, including 
offers of debt settlement or negotiation services and debt management 
plans.\152\ The definition of ``debt relief service'' is, however, 
limited with regard to the underlying nature of the debt involved and 
would not reach offers regarding consumers' secured debt, such as 
mortgage loans. Deceptive foreclosure rescue and mortgage loan 
modification schemes, which have proliferated as a result of the 
mortgage crisis, cause significant harm to homeowners already in 
financial distress.\153\ The Commission tentatively has determined not 
to address these types of transactions under the proposed amendments 
because it anticipates comprehensively regulating such conduct under 
its new mortgage loan rulemaking authority pursuant to the Omnibus 
Appropriations Act.\154\ On June 1, 2009, the Commission commenced a 
rulemaking proceeding to address deceptive or unfair practices in 
connection with mortgage assistance relief services (including loan 
modification and foreclosure rescue).\155\ That Notice sets forth the 
law enforcement and education efforts undertaken by the Commission and 
state enforcers and seeks comment about the appropriate contours of a 
mortgage relief rule.
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    \152\ The definition is focused on the provision of debt relief 
services, but Section VIII of this Notice includes questions to aid 
the Commission in determining whether this definition, and by 
extension, the coverage of the proposed amendments, should include 
``debt relief products'' as well.
    \153\ The Commission has brought actions against entities and 
individuals alleging mortgage-related debt relief fraud using its 
authority under Section 5 of the FTC Act. These cases allege false 
guarantees of success; false representations about refund policies; 
undisclosed up-front fees; misrepresentations regarding affiliations 
with nonprofit or government entities; and failure to deliver the 
promised services. See FTC v. Dinamica Financiera LLC, No. 09-CV-
03554 CAS PJWx (C.D. Cal., filed May 19, 2009); FTC v. Cantkier, No. 
1:09-cv-00894 (D.D.C. filed May 14, 2009); FTC v. Federal Loan 
Modification Law Center, LLP, Case No. SACV09-401 CJC (MLGx) (C.D. 
Cal. filed Apr. 3, 2009); FTC v. (http://bailout.hud-gov.us) and 
Ryan, Civil No. 1:09-00535 (HHK) (D.D.C. filed Mar. 25, 2009); FTC 
v. Home Assure, LLC, Case No. 8:09-CV-00547-T-23T-SM (M.D. Fla. 
filed Mar. 24, 2009); FTC v. New Hope Property LLC, Case No. 1:09-
cv-01203-JBS-JS (D.N.J. filed Mar. 17, 2009); FTC v. Hope Now 
Modifications, LLC, Case No. 1:09-cv-01204-JBS-JS (D.N.J. filed Mar. 
17, 2009); FTC v. National Foreclosure Relief, Inc., Case No. 
SACV09-117 DOC (MLGx) (C.D. Cal. filed Feb. 2, 2009); FTC v. United 
Home Savers, LLP, Case No. 8:08-cv-01735-VMC-TBM (M.D. Fla. filed 
Sept. 3, 2008); FTC v. Foreclosure Solutions, LLC, No. 1:08-cv-01075 
(N.D. Ohio filed Apr. 28, 2008); FTC v. Mortgage Foreclosure 
Solutions, Inc., Case No. 8:08-cv-388-T-23EAJ (M.D. Fla. filed Feb. 
26, 2008); FTC v. Nat'l Hometeam Solutions, Inc., Case No. 4:08-cv-
067 (E.D. Tex. filed Feb. 26, 2008); see also FTC Press Release, 
Federal and State Agencies Crack Down on Mortgage Modification and 
Foreclosure Rescue Scams (Apr. 6, 2009), available at (www.ftc.gov/opa/2009/04/hud.shtm).
    \154\ See Omnibus Appropriations Act of 2009, Pub. L. No. 111-8, 
Sec.  626, 123 Stat. 524 (Mar. 11, 2009) (2009 Omnibus 
Appropriations Act). Further, to the extent that outbound 
telemarketing is used to further mortgage-related debt relief 
schemes, the Commission may use the existing provisions of the TSR, 
in addition to Section 5, to challenge the conduct if appropriate.
    \155\ See Advance Notice of Proposed Rulemaking: Mortgage 
Assistance Relief Services, 74 FR 26130 (June 1, 2009).
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C. Section 310.3: Deceptive Telemarketing Acts or Practices

    Section 310.3 of the Rule addresses deceptive acts or practices in 
telemarketing. Specifically, this provision sets forth required 
disclosures that must be made in every telemarketing call; prohibits 
misrepresentations of material information; requires that a 
telemarketer obtain a customer's express verifiable authorization by 
following specified procedures whenever a payment method other than a 
credit or debit card is used; prohibits false or misleading statements 
to induce a person to pay for goods or services or to induce a 
charitable contribution; holds liable anyone who provides substantial 
assistance to another in violating the Rule; and prohibits credit card 
laundering in telemarketing transactions.\156\
---------------------------------------------------------------------------

    \156\ See generally 16 CFR 310.3.
---------------------------------------------------------------------------

    Outbound calls to solicit the purchase of debt relief services are 
already subject to the TSR, including the provisions of Section 310.3. 
The proposed amendments to Section 310.6, discussed in detail below, 
would also bring inbound debt relief calls within the ambit of the 
Rule.\157\ As a result, virtually all debt relief telemarketing 
transactions would be subject to the TSR if the proposed modifications 
to the Rule are adopted.\158\
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    \157\ Most inbound calls placed by consumers in response to 
direct mail or general media advertising are exempt from the Rule. 
See 16 CFR 310.6(b)(5) & (6). Certain exceptions to the exemption 
have been created to require TSR compliance for the sale of products 
or services that have been the subject of significant fraudulent or 
deceptive telemarketing activity. The proposed amendments would 
create an exception to the direct mail and general media exemptions 
for the sale of debt relief services, requiring sellers and 
telemarketers of these services to comply with the Rule in both 
inbound and outbound calls.
    \158\ Another exemption provides that ``[t]elephone calls 
initiated by a customer or donor that are not the result of any 
solicitation by a seller, charitable organization, or telemarketer'' 
are exempt. 16 CFR 310.6(a)(4). Thus, if a customer were to call a 
seller or telemarketer regarding debt relief services independent of 
any solicitation, such a call would not be subject to the proposed 
revised TSR.
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    As context for examining how the Rule, including the proposed 
modifications, applies to debt relief marketing practices, it is 
important to understand the fundamental nature of debt relief services 
and the ways in which they are commonly marketed. As discussed above in 
Section II, various types of debt relief services have different goals, 
and each employs different means of reaching those goals. A debt 
management plan, for example, is intended to enable a consumer to repay 
his or her full debt by making regular payments over a period of 3 to 5 
years. Debt settlement, on the other hand, envisions a consumer 
repaying only a fraction of each debt owed by making one lump sum 
payment to each creditor. Distinct from DMPs or debt settlement 
services, debt negotiators offer to obtain interest rate reductions or 
other concessions to lower consumers' monthly payment to creditors. 
Nevertheless, there are some common techniques used to market these 
debt relief services. The following section explains how the existing 
provisions of the TSR and proposed amendments set forth in this NPRM 
would apply to debt relief services.

[[Page 42000]]

1) Application of Section 310.3(a)(1) to Debt Relief Services: 
Disclosure Obligations
    The existing requirements of Section 310.3(a)(1)(i)-(vii), while 
not subject to amendment in this proceeding, provide the framework for 
understanding the general disclosure obligations of sellers and 
telemarketers of debt relief services who are now (in the case of 
outbound telemarketing) or may be as a result of this rulemaking (in 
the case of most inbound telemarketing) subject to the TSR. The 
subparts that are most likely applicable to debt relief services - 
Sections 310.3(a)(1)(i), (ii), and (iii) - relate to disclosure of the 
total costs of services; all material restrictions, limitations or 
conditions to purchase, receive, or use the services; and the seller's 
refund policy.\159\ Accordingly, it is important to examine how these 
provisions establish the general obligations of debt relief providers.
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    \159\ See 16 CFR 310.3(a)(1)(i)-(iii). In addition to these 
provisions, Section 310.3(a)(1) of the TSR also requires disclosures 
specific to offers involving prize promotions, credit card loss 
protection plans, and negative option plans. See 16 CFR 
310.3(a)(1)(iv)-(vii).
---------------------------------------------------------------------------

    Section 310.3(a)(1)(i) of the TSR prohibits a telemarketer from 
failing to disclose truthfully, in a clear and conspicuous manner, 
certain material information including ``the total costs to purchase, 
receive, or use, and the quantity of, any goods or services that are 
the subject of the sales offer'' before a customer pays for goods or 
services offered. Debt relief companies and industry association 
representatives contend that industry members disclose costs to 
consumers during telemarketing sales calls or after the call, in 
written disclosures.\160\ Yet, law enforcement actions allege, and 
consumers consistently complain, that the debt relief telemarketers say 
little, if anything, about fees or misrepresent the amount and timing 
of fee payments.\161\ As a result of these practices, consumers who 
enter into debt relief agreements often do so unaware of the total 
costs they will incur, which commonly amount to thousands of dollars.
---------------------------------------------------------------------------

    \160\ See Debt Settlement USA (Craven) Tr. at 109 (stating that 
all fees are disclosed to consumers in the telemarketing call); TASC 
(Young) Tr. at 155-156 (noting that fees should be disclosed on the 
phone and again in writing following the call). The Commission's law 
enforcement experience suggests that in many cases, post hoc written 
disclosures contradict what telemarketers have told consumers. See, 
e.g., FTC v. Connelly, No. SA CV 06-701 DOC (RNBx), Opp. to FTC Mot. 
Summ. J., at 12 (Aug. 3, 2006) (arguing that subsequent telephone 
calls would have ``corrected any misconceptions the consumer had 
about the program based on [previous] correspondence''). However, 
such contradictory post hoc disclosures do not adequately modify or 
qualify the claims made in the telemarketing sales pitch. See, e.g., 
Resort Car Rental System, Inc. v. FTC, 518 F.2d 962, 964 (9th Cir. 
1975).
    \161\ See, e.g., FTC v. Better Budget Fin. Servs., Inc., No. 04-
12326 (WG4) (D. Mass. 2004) (alleging that defendant obfuscated the 
total costs for the products and services by separately reeling off 
various fees, such as retainer fees, monthly fees, and fees 
correlated to the percentage of money that a customer saves using 
the services, without ever disclosing the total cost, which 
sometimes was as high as thousands of dollars); FTC v. Debt-Set, 
Inc., No. 1:07-cv-00558-RPM (D. Colo. 2007) (alleging that, in 
numerous instances, defendants represented that there would be no 
up-front fees or costs for their debt settlement program, when in 
fact the defendants required consumers to pay, through monthly 
payments, an up-front fee of approximately 8% of the consumers' 
total unsecured debt); FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) 
(C.D. Cal. 2006) (alleging that defendant failed to disclose to 
consumers that they would have to pay 45% of their total program 
fees up-front, before any payments would be made to the customers' 
creditors).
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    The Commission believes that disclosure of total costs is 
particularly crucial in the sale of debt relief services.\162\ This is 
especially true for debt settlement plans, for which the costs are 
often significant. According to TASC, the median fee under the 
predominant debt settlement model calls for a consumer to pay the 
equivalent of 14% to 18% of the debt enrolled in the program.\163\ 
Using this formula, a consumer with $20,000 in debt would pay between 
$2,800 and $3,600 for debt settlement services. Such large amounts of 
money are especially significant given that the typical consumer 
seeking debt relief is almost certainly experiencing serious financial 
distress and thus, is unable to afford existing financial obligations. 
Similarly, in the sale of debt management plans, disclosure of total 
costs is crucial to ensure that consumers understand what they will 
need to pay for the touted services. Indeed, in the cases brought 
against sham nonprofit credit counselors, consumers allegedly have been 
misled not only as to the total costs, but also as to the nature of 
monies paid because they are told that the only fees are ``voluntary 
contributions'' used to offset the operating expenses of the allegedly 
nonprofit service provider.\164\ Adherence to the requirements of 
Section 310.3(a)(1)(i) by all sellers and telemarketers of debt relief 
services will provide consumers with material information necessary to 
evaluate their offers.\165\
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    \162\ According to one industry participant, ``disclosure is 
often very inadequate, especially with regards to program fees.'' 
Debt Settlement USA - Revised White Paper at 10.
    \163\ TASC, General Response (Dec. 1, 2008), at 2 (stating that 
in the predominant flat fee model, the cost for debt settlement 
services ``is calculated based on a percentage of debt enrolled into 
the program. The approximate median flat fee is 14% to 18% of the 
debt brought into the program depending on the amount of debt 
enrolled.'').
    \164\ See, e.g., FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md. 
2003) (alleging that, ``[i]n response to the question, `How much 
will it cost me to be on the Debt Management Program,' AmeriDebt's 
website . . . stated, `Due to the fact that AmeriDebt is a nonprofit 
organization, we do not charge any advance fees for our service. We 
do request that clients make a monthly contribution to our 
organization to cover the costs involved in handling the accounts on 
a monthly basis.''' In fact, the Commission alleged that defendants 
retained all of consumers' first monthly payment as a fee without 
notice to the consumer.).
    \165\ The Commission previously has explained the compliance 
obligations when marketing installment contracts, some of which are 
particularly applicable to debt relief services. Specifically, the 
Commission noted that ``it is possible to state the cost of an 
installment contract in such a way that, although literally true, 
obfuscates the actual amount that the consumer is being asked to 
pay.'' TSR; Proposed Rule, 67 FR 4492, 4502 (Jan. 30, 2002). It goes 
on to state that ``[t]he Commission believes that the best practice 
to ensure the clear and conspicuous standard is met is to do the 
math for the consumer wherever possible. For example, where the 
contract entails 24 monthly installments of $8.99 each, the best 
practice would be to disclose that the consumer will be paying 
$215.76. In open-ended installment contracts, it may not be possible 
to do the math for the consumer. In such a case, particular care 
must be taken to ensure that the cost disclosure is easy for the 
consumer to understand.'' Id. at n.92. (emphasis supplied, internal 
quotations omitted).
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    Section 310.3(a)(1)(ii) requires disclosure of ``[a]ll material 
restrictions, limitations, or conditions to purchase, receive, or use 
the goods or services that are the subject of the sales offer.'' A 
seller or telemarketer of debt relief services would be required, 
pursuant to this provision, to disclose that the debt relief services 
will only extend to unsecured debt, if that is the case. Similarly, if 
a debt relief provider places other limits on the services they provide 
- such as requiring that a consumer have a minimum amount of debt to be 
eligible or providing that only individual debts of a certain amount 
will be enrolled - this would need to be disclosed pursuant to Section 
310.3(a)(1)(ii). Such information would be material to consumers in 
determining whether the offered services would provide all, or merely 
some, of the debt relief they seek.
    Section 310.3(a)(1)(iii) of the TSR requires that ``[i]f the seller 
has a policy of not making refunds, cancellations, exchanges, or 
repurchases,'' disclosure of this policy must be made to consumers. 
Further, the provision requires that, ``if the seller or telemarketer 
makes a representation about a refund, cancellation, exchange, or 
repurchase policy, a statement of all material terms and conditions of 
such policy'' be made. This TSR provision signifies the Commission's 
view that a seller's unwillingness to provide refunds is a material 
term that a consumer must know about before

[[Page 42001]]

paying for goods or services. Similarly, if a seller or telemarketer 
chooses to tout the availability of a refund policy, that entity is 
affirmatively obliged to disclose the material terms and conditions of 
the policy. Application of this provision to sellers and telemarketers 
of debt relief services is particularly important given that data from 
law enforcement actions and consumer complaints indicate that, 
commonly, consumers either are not apprised that refunds are 
unavailable or are misled by material omissions regarding the full 
terms and conditions of these policies.\166\
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    \166\ See, e.g., FTC v. Select Personnel Mgmt., Inc., No. 07-
0529 (N.D. Ill. 2007); FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) 
(C.D. Cal. 2006); FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. 
Wash. 2006); FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 GAF 
JTLx (C.D. Cal. 2004); FTC v. Debt Mgmt. Found. Svcs., No. 04-1674-
T-17-MSS (M.D. Fla. 2004). Commission staff has reviewed a sample of 
debt relief complaints received between April 1, 2008, and March 31, 
2009, included in the Commission's Consumer Sentinel database. These 
complaints routinely allege that debt relief providers fail to give 
dissatisfied consumers refunds.
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2) Proposed Amendments to Section 310.3(a)(1): Disclosure Obligations
    In addition to the application of the relevant provisions of the 
existing Rule, Section 310.3(a)(1) of the proposed Rule contains a new 
disclosure provision specifically applicable to the sale of debt relief 
services. Proposed Section 310.3(a)(1)(viii) would prohibit a 
telemarketer of any debt relief service from failing to disclose, 
clearly and conspicuously before any services are rendered,\167\ six 
material pieces of information. These proposed disclosures have been 
tailored to address recurrent concerns that arise in Commission and 
state enforcement actions, and consumer complaints, regarding the 
practices of debt relief providers. Each of these proposed amendments 
is discussed immediately below.
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    \167\ Note that proposed Section 310.3(a)(1) provides that all 
of the disclosures required under that provision be made not only 
before the consumer pays, but also ``before any services are 
rendered.'' This change is intended to account for the fact that, 
under proposed Section 310.4(a)(5), debt relief services would be 
prohibited from requesting or receiving an advance fee and as a 
result would be providing services before the consumer has paid for 
them. Under proposed Section 310.3(a)(1), a debt relief service 
entity must provide a consumer with all required disclosures before 
it enrolls that consumer in a debt relief program and begins 
providing services.
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    Proposed Section 310.3(a)(1)(viii)(A) would require telemarketers 
of debt relief services to disclose ``the amount of time necessary to 
achieve the represented results, and to the extent that the offered 
service may include the making of a settlement offer to one or more of 
the customer's creditors or debt collectors, the specific time by which 
the debt relief service provider will make such a bona fide settlement 
offer to each of the customer's creditors or debt collectors.'' 
Proposed Section 310.3(a)(viii)(B) would require covered entities to 
disclose, ``to the extent that the offered service may include the 
making of a settlement offer to one or more of the customer's creditors 
or debt collectors, the amount of money or the percentage of each 
outstanding debt that the customer must accumulate before a debt relief 
service provider will make a bona fide settlement offer to each of the 
customer's creditors or debt collectors.'' These disclosures are 
intended to ensure that consumers have material information about how 
debt relief services operate, thereby enabling them to make an informed 
purchasing decision before paying for the offered services.
    The Commission's law enforcement actions and consumer complaints 
show that consumers often do not understand the mechanics of debt 
relief. Indeed, some Workshop participants suggested that consumers are 
often unaware of their ability, independent of a third party, to 
initiate debt settlement negotiations.\168\ In particular, consumers 
may not understand the amount of time required to achieve the 
represented results or that there may be prerequisites to attaining 
debt relief. For example, consumers considering a DMP may not know that 
these plans often take three to five years to complete. In the case of 
debt settlement, consumers often fail to understand that certain 
conditions must be present in order for a debt settlement offer to be 
accepted. In particular, consumers misunderstand that settlement 
negotiations rarely, if ever, begin immediately upon enrollment. 
Indeed, debt settlement negotiations generally do not begin until the 
consumer has saved a significant portion - often 50%- of the total 
amount of a single debt enrolled in the program and is significantly 
delinquent. Only when both these conditions are met is it likely that a 
creditor or debt collector will find agreeing to settle the account is 
advantageous.
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    \168\ See American Express (Flores) Tr. 142-43 (``[American 
Express'] primary goal as a company is to work directly with our 
card members in resolving these sorts of issues. We don't feel that 
there is anything, any service or benefit that a debt settlement 
company can offer one of our card members that we can't offer 
ourselves directly.''); ABA (O'Neill) Tr. at 96-97 (opining that 
debt settlement providers are unnecessary because consumers can 
obtain same options as the provider and noting that interposition of 
debt settlement providers hinders a creditor's ability to inform 
consumers of their options).
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    Given this information deficit, the Commission intends that the 
disclosures in proposed Section 310.3(a)(1)(viii)(A) and (B) will put 
consumers on notice about the length of time it will take to achieve 
the represented results. In particular, the disclosures address the 
fact that the timing and likelihood of success may be, as is generally 
the case for debt settlement, entirely contingent on the consumer's 
ability to accumulate sufficient funds and to become sufficiently 
delinquent for settlement. In the case of a consumer who has six 
outstanding accounts to be included in the debt settlement plan, each 
with balances of between $4,000 and $8,000, for example, a debt 
settlement provider would be required to explain the anticipated length 
of the entire program and also the specific time frame under which each 
debt included in the program is expected to be settled to comply with 
Section 310.3(a)(1)(viii)(A). In so doing, the debt relief provider 
must disclose the fact that negotiations will not take place with all 
creditors simultaneously, but rather seriatim, if such is the case. To 
comply with Section 310.3(a)(1)(viii)(B), the debt settlement provider 
or telemarketer would have to disclose the specific amount or 
percentage of money that must be accumulated before an offer of 
settlement could be made to the first creditor or debt collector and 
that additional monies would have to accumulate to make an offer to a 
second creditor or debt collector, and so on.
    These disclosures will help a consumer to understand not only the 
time commitment required for the plan to achieve its full effect, but 
also that each debt brought into the program would likely be settled 
one by one, and not as part of a single negotiation, if that is the 
case. Further, they will make clear that the debt relief is conditioned 
upon the consumer saving enough money to make a settlement offer. 
Awareness of these key facets of the debt relief program, together with 
the information required to be disclosed by proposed Section 
310.3(a)(viii)(E) regarding failure to make timely payments, will 
provide the consumer with material information about the risks involved 
in failing to make timely payments to creditors for long periods of 
time, as settlement negotiations may not begin for months or even 
years, if ever.
    Proposed Section 310.3(a)(1)(viii)(C) would require telemarketers 
of debt relief services to disclose that ``not all creditors or debt 
collectors will accept a reduction in the balance, interest rate, or 
fees a customer owes such creditor or

[[Page 42002]]

debt collector.'' The fact that some creditors and debt collectors will 
not participate in debt relief programs - whether to offer concessions 
or accept a lower balance repayment option - is likely unknown to 
consumers.\169\ Similarly, consumers may be unaware that even those 
creditors and debt collectors that do not have a blanket policy against 
debt relief will evaluate each consumer's circumstances individually 
and may be unwilling to grant favorable terms to a consumer based on a 
variety of factors. Debt relief providers often tout their ability to 
obtain favorable outcomes for consumers, representing that they have 
special expertise or relationships with creditors and debt collectors 
that give them an edge in negotiations.\170\ Particularly in light of 
these claims in advertising and telemarketing pitches, and their 
significance to consumers, the Commission believes that disclosure of 
the fact that not all creditors or debt collectors will participate in 
debt relief plans is material to a consumer's decision whether to pay 
for debt relief services.
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    \169\ See, e.g., CFA (Plunkett) Tr. at 101 (``[T]here is no 
guarantee . . . or reasonable chance of a guarantee of a reduction 
in the amount of debt owed by consumers who meet required 
conditions. In fact, some creditors insist that they won't 
settle.''); American Express (Flores) Tr. at 164 (``[O]ur policy is 
not to . . . accept settlements from debt settlement companies.''); 
see also, e.g., Phil Britt , Debt Settlement Companies Largely 
Ignored by Banks, Inside ARM (Nov. 3, 2008)(noting statement by 
Discover Financial Services spokesman that ``[w]e choose not to work 
with debt settlement companies''), available at (www.insidearm.com/go/arm-news/debt-settlement-companies-largely-ignored-by-banks).
    \170\ See e.g., FTC v. Group One Networks, Inc., No. 8:09-cv-
352-T-26-MAP (M.D. Fla. 2009) (amended complaint) (alleging 
defendants claimed to have close working relationships with over 
50,000 creditors); FTC v. Select Pers. Mgmt., No. 07- 0529 (N.D. 
Ill. 2007) (alleging defendants claimed to be affiliated with 
consumers' credit card companies); see also, e.g., FTC v. Debt 
Solutions, Inc., No. 06-0298 JLR (W.D. Wash. 2006); FTC v. Better 
Budget Fin. Servs., Inc., No. 04-12326 (WG4), Mem. Supp. T.R.O. Mot. 
at 6 (D. Mass. 2004).
---------------------------------------------------------------------------

    Proposed Section 310.3(a)(1)(viii)(D) would require disclosure 
``that pending completion of the represented debt relief services, the 
customer's creditors or debt collectors may pursue collection efforts, 
including initiation of lawsuits.'' Thus, to comply with this 
provision, a telemarketer of debt relief services would have to 
disclose that enrollment alone will not stop creditors' collection 
efforts, including lawsuits. Indeed, creditors and debt collectors may 
continue to call a consumer pending resolution of the debt and even 
proceed with a lawsuit and later enforcement of any judgment, such as 
through garnishment.\171\ It is vital that telemarketers of debt relief 
services disclose this information because, in many instances, 
consumers who seek debt relief services are already behind on payments 
and are regularly contacted by creditors or collectors. Accordingly, 
they may be motivated to seek debt relief services, in part, as a means 
of stopping such contacts. Thus, the fact that debt relief services may 
fail to achieve this result is material to a consumer's purchase 
decision.
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    \171\ The FDCPA governs, among other things, debt collectors' 
communications with consumers and provides consumers the right to 
request that a debt collector cease communication. 15 U.S.C. 1692c. 
Creditors collecting their own debts, however, are not subject to 
this provision. See also supra Section II.B.1, and notes 86-88.
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    Proposed Section 310.3(a)(1)(viii)(E) would require disclosure 
that, ``to the extent that any aspect of the debt relief service relies 
upon or results in the customer failing to make timely payments to 
creditors or debt collectors, that use of the debt relief service will 
likely adversely affect the customer's creditworthiness, may result in 
the customer being sued by one or more creditors or debt collectors, 
and may increase the amount of money the customer owes to one or more 
creditors or debt collectors due to the accrual of fees and interest.'' 
Given the harm that can accrue from missing even a few payments, the 
Commission believes that it is important to require a debt relief 
provider to disclose the likely adverse consequences of failing to make 
timely payments to creditors. This is especially important for 
consumers who are, in fact, able to make monthly payments, but who stop 
paying creditors and instead fund a settlement account - either because 
they are encouraged to do so or because they simply cannot afford to 
both make monthly payments and pay fees to the debt settlement 
company.\172\
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    \172\ See supra note 105 and accompanying text.
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    If consumers stop paying their creditors, their creditworthiness 
will likely be harmed as a result.\173\ This fact is likely material to 
a consumer's decision about whether to purchase debt settlement 
services because it imposes a significant cost on proceeding in this 
manner - the risk that a consumer's ability to obtain credit in the 
future will be negatively impacted.\174\ Another serious and negative 
consequence that may result from a consumer's decision to engage a debt 
relief service provider is the accrual of late fees or interest on 
their accounts. Finally, if payments are missed, the likelihood of 
being sued by one or more creditors may actually increase.
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    \173\ See CFA (Plunkett) Tr. at 102 (noting that the length of 
time it takes to achieve settlement, combined with withheld 
payments, has a negative effect on consumers); see also Fair Isaac 
Corp, Understanding Your FICO Score, at 7 (noting that payment 
history is typically the most important factor used to determine a 
consumer's FICO score), available at (www.myfico.com/Downloads/Files/myFICO_UYFS_Booklet.pdf.)
    \174\ As frequently noted by the Commission, a consumer's credit 
score can impact the availability of a wide variety of 
opportunities, including the ability to obtain loans, find 
employment, or even obtain affordable insurance. See, e.g., FTC , 
Need Credit or Insurance? Your Credit Score Helps Determine What 
You'll Pay, available at (www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm).
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    The Commission recognizes that some consumers considering debt 
relief are unable to make payments, and may be subject to late fees or 
other charges in any event. However, the record shows that, in a 
significant number of instances, particularly in debt settlement 
programs, consumers are counseled to stop making payments to their 
creditors in order to facilitate settlement.\175\ In other cases, 
consumers are misled regarding the use to which their monthly payments 
will be put and erroneously believe that money the debt relief provider 
is making monthly payments to creditors when this is not the case.\176\ 
Thus, proposed Section 310.3(a)(1)(viii)(E) is designed to ensure that, 
in cases where the debt relief service relies upon or results in the 
customer failing to make timely payments to creditors or debt 
collectors, the telemarketer of the debt relief service discloses the 
likely negative consequences - i.e., harm to creditworthiness, an 
increase in the amount owed and possible lawsuits.
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    \175\ See, e.g., FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) 
(C.D. Cal. 2006); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC 
(Ex) (C.D. Cal 2002).
    \176\ See FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM, Mem. 
Supp. Mot. T.R.O. at 8-9 (D. Colo. Mar. 20, 2007) (``Defendants lead 
consumers to conclude that, once enrolled, the Defendants in turn 
will disburse consumers' monthly payments to the appropriate 
creditors every month.'').
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    Finally, proposed Section 310.3(a)(1)(viii)(F) would require that a 
telemarketer of debt relief services disclose ``that savings a customer 
realizes from use of a debt relief service may be taxable income.'' 
Participants at the Workshop noted that many consumers fail to 
understand that savings realized from a debt relief program may be 
considered taxable income.\177\ If savings realized from debt

[[Page 42003]]

relief programs may be considered taxable income,\178\ then the 
financial benefits of such programs may be significantly limited. As a 
result, the Commission believes that this fact is material to a 
consumer's decision about whether to pursue debt relief and should be 
disclosed to consumers.
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    \177\ See Debt Settlement USA (Craven) Tr. at 91 (``Amounts 
greater than $600 in savings obtained through a settlement may be 
reported to the IRS. Again, this has to be disclosed to 
consumers.''); American Credit Alliance (Franklin), Tr. at 223 
(``Unless they get that early disclosure that they may have the tax 
consequence, they may opt for the - what sounds to be the better of 
the two, which would be the debt settlement, which might not be the 
best solution for them. So, there has to be some sort of a 
disclosure that says look, this is it. If you're going to settle a 
debt for greater than $600, you're going to have an IRS tax 
consequence this year.'').
    \178\ IRS, Publication 525 - Taxable and Nontaxable Income (Feb. 
19, 2009), at 19-20 (``Generally, if a debt you owe is canceled or 
forgiven, other than as a gift or bequest, you must include the 
canceled amount in your income.''), available at (www.irs.gov/pub/irs-pdf/p525.pdf).
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3) Application of Section 310.3(a)(2) to Debt Relief Services: 
Prohibited Misrepresentations
    Section 310.3(a)(2) prohibits a seller or telemarketer from making 
certain prohibited misrepresentations of material information. As with 
the analysis above relating to Section 310.3(a)(1), the existing 
provisions of Section 310.3(a)(2) establish the general obligations of 
sellers and telemarketers of debt relief services who are now, or may 
be as a result of this rulemaking, subject to the TSR. The subparts of 
Section 310.3(a)(2) that are most likely applicable to debt relief 
services prohibit misrepresentations regarding the total costs of 
services; any material restriction to purchase, receive, or use the 
services; any limitation about any material aspect of the performance, 
efficacy, nature, or central characteristics of the services; the 
seller's refund policy; and a seller's or telemarketer's affiliation 
with, or endorsement or sponsorship by, any person or government 
entity.\179\
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    \179\ See 16 CFR 310.3(a)(2)(i)-(iv), (vii). Section 
310.3(a)(2)(vii) of the TSR prohibits misrepresentations of 
``seller's or telemarketer's affiliation with, or endorsement or 
sponsorship by, any person or government entity.''
---------------------------------------------------------------------------

    Specifically, Section 310.3(a)(2)(i) of the TSR prohibits 
misrepresentations regarding the ``total costs to purchase, receive, or 
use, and the quantity of, any goods or services that are the subject of 
a sales offer.'' As with the parallel required disclosure of total 
costs contained in Section 310.3(a)(1)(i), and discussed above, the 
Commission believes the prohibition of misrepresentations regarding the 
cost of debt relief services is critical to ensure that consumers 
receive complete and truthful information regarding the monetary cost 
of the services offered. While in many cases telemarketers of debt 
relief services fail to disclose any information about the total costs 
involved, in other instances telemarketers misrepresent the costs.\180\ 
Deception involving the true costs of the services, which often are 
significant, is particularly harmful to consumers whose financial 
situation already is tenuous. Adherence to this requirement by all 
sellers and telemarketers of debt relief services is important to 
ensure that consumers have truthful and accurate information on which 
to base their decisions about whether to use such services.
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    \180\ Debt relief providers also sometimes request consumers' 
billing information during the telemarketing sales call or pressure 
them to return payment authorization forms and signed contracts as 
quickly as possible following the call. See, e.g., FTC v. Debt-Set, 
Inc., No. 1:07-cv-00558-RPM (D. Colo. 2007) (alleging ``[c]onsumers 
who agree to enroll . . . are sent an initial set of enrollment 
documents from Debt Set Colorado. During their telephone pitches, 
the defendants' telemarkers also exhort consumers to fill out the 
enrollment documents and return the papers as quickly as possible . 
. . . Included in these documents are forms for the consumer to 
authorize direct withdrawals from the consumer's checking account, 
to identify the amounts owed to various creditors, and a Client 
Agreement.''). Consequently, unauthorized payments may automatically 
be taken from consumers' accounts without their consent. The TSR 
currently prohibits telemarketers from charging consumers' accounts 
without first obtaining express informed consent in all 
transactions, and it requires express verifiable authorization in 
cases where a consumer uses a payment method other than a credit or 
debit card. See 16 CFR 310.3(a)(3); 16 CFR 310.4(a)(6). The proposed 
amended Rule would apply these existing requirements to inbound debt 
relief telemarketing calls, as well.
---------------------------------------------------------------------------

    Section 310.3(a)(2)(ii) of the TSR prohibits misrepresentations 
regarding ``any material restriction, limitation, or condition to 
purchase, receive, or use goods or services that are the subject of a 
sales offer.'' This provision, too, has a parallel required disclosure, 
found at Section 310.3(a)(1)(ii). Taken together with Section 
310.3(a)(2)(iii), which prohibits misrepresentations regarding ``any 
material aspect of the performance, efficacy, nature, or central 
characteristics of goods or services that are the subject of a sales 
offer,'' these provisions would ensure that the important aspects or 
features of offered debt relief services are not misrepresented to 
consumers in the course of a telemarketing transaction.
    Section 310.3(a)(2)(iv) of the TSR prohibits misrepresentations 
regarding ``any material aspect of the nature or terms of the seller's 
refund, cancellation, exchange, or repurchase policies.'' For the 
reasons enunciated above, in the section discussing the parallel 
disclosure of debt relief services sellers' refund policies, this 
prohibited misrepresentation protects consumers by ensuring that they 
are not deceived regarding the existence or terms of a seller's refund 
policies. Given the low success rates for all consumers who pay 
telemarketers for debt relief plans and the evidence showing consumers' 
frustration regarding their inability to receive refunds for these 
plans, this provision provides essential protections in the context of 
debt relief.
4) Proposed Amendments to Section 310.3(a)(2): Prohibited 
Misrepresentations
    The proposed Rule contains a new misrepresentation prohibition to 
address specifically the sale of debt relief services. While these 
specific prohibited misrepresentations regarding debt relief services 
are arguably covered by the existing provision of Section 310.3(a)(2), 
as well as the broad prohibition contained in Section 310.3(a)(4) 
against ``[m]aking a false or misleading statement to induce any person 
to pay for goods or services,'' the Commission believes that expressly 
including them in the proposed amended Rule text provides the best 
opportunity for stakeholders to evaluate and comment on them.\181\ 
Further, the Commission believes that setting forth these requirements 
with specificity provides greater clarity to debt relief service 
providers subject to the TSR of their obligations to ensure their 
claims are truthful and non-deceptive.\182\ Accordingly, proposed 
Section 310.3(a)(2)(x) would prohibit telemarketers of debt relief 
services from making misrepresentations regarding any material aspect 
of any debt relief service, including, but not limited to:
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    \181\ Moreover, this decision is consistent with the inclusion 
elsewhere in the Rule of specific misrepresentations made in the 
sale of other goods or services. See, e.g., 16 CFR 310.3(a)(2)(v) 
(prohibiting certain misrepresentation in connection with prize 
promotions); 16 CFR 310.3(a)(2)(vi) (prohibiting certain 
misrepresentations in connection with investment opportunities).
    \182\ Claims made by debt relief providers must be truthful and 
non-deceptive. To establish that a claim is deceptive in violation 
of Section 5 of the FTC Act, the Commission must prove that the 
representation, omission, or practice is likely to mislead consumers 
acting reasonably under the circumstances and is material. See In re 
Cliffdale Assocs., 103 F.T.C. 110 (1984). To be non-deceptive, 
specific, unqualified performance claims made by marketers of debt 
relief services must be true for the typical consumer who pays money 
to enroll in a debt relief service. See FTC v. Five-Star Auto Club, 
Inc., 97 F. Supp. 2d 502, 528-29 (S.D.N.Y. 2000) (holding that, in 
the face of express earnings claims for multi-level marketing 
scheme, it was reasonable for consumers to have assumed the promised 
rewards were achieved by the typical Five Star participant).
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    <bullet> the amount of money or the percentage of the debt amount 
that a customer may save by using such service;
    <bullet> the amount of time necessary to achieve the represented 
results;

[[Page 42004]]

    <bullet> the amount of money or the percentage of each outstanding 
debt that the customer must accumulate before the provider of the debt 
relief service will initiate attempts with the customer's creditors 
debt collectors to negotiate, settle, or modify the terms of customer's 
debt;
    <bullet> the effect of the service on a customer's 
creditworthiness;
    <bullet> the effect of the service on collection efforts of the 
consumer's creditors or debt collectors;
    <bullet> the percentage or number of customers who attain the 
represented results; and
    <bullet> whether a service is offered or provided by a nonprofit 
entity.
    Proposed Section 310.3(a)(2)(x) contains a prohibition on 
misrepresentations about ``the amount of money or the percentage of the 
debt amount that a customer may save by using such service,'' which is 
intended to ensure that consumers are not misled regarding the 
potential financial benefits of various debt relief services. The 
Commission's law enforcement experience and consumer complaints show 
that a pivotal claim made in most debt relief telemarketing pitches is 
that the offered plan can save the consumer money, either by lowering 
monthly payments or by eliminating debt altogether.\183\ Thus, this 
prohibition will help ensure that consumers are not misled regarding 
this fundamental characteristic of the offered services.
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    \183\ As noted above, the FTC has alleged deceptive debt 
settlement operations often promise to reduce consumer debt by large 
amounts. See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. 
Colo. 2007) (promising to reduce amount owed to 50% to 60% of amount 
at time of enrollment); FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) 
(C.D. Cal. 2006) (promising to reduce overall amount owed by up to 
40% to 60%). In other cases, the FTC has alleged that defendants 
made deceptive promises to lower consumer consumers' monthly 
payments. See, e.g., FTC v. Express Consolidation, No. 06-cv-61851-
WJZ (S.D. Fla. 2006); United States v. Credit Found. of Am., No. CV 
06-3654 ABC(VBKx) (C.D. Cal. 2006); FTC v. Debt Mgmt. Found. Svcs., 
Inc., No. 04-1674-T-17-MSS (M.D. Fla. 2004); FTC v. Integrated 
Credit Solutions, No. 06-806-SCB-TGW (M.D. Fla. 2006).
---------------------------------------------------------------------------

    Proposed Section 310.3(a)(2)(x) would also prohibit telemarketers 
of debt relief services from misrepresenting ``the amount of time 
necessary to achieve the promised results'' and ``the amount of money 
or the percentage of each outstanding debt that the customer must 
accumulate before the provider of the debt relief service will initiate 
attempts with the customer's creditors debt collectors to negotiate, 
settle, or modify the terms of customer's debt.'' As set forth in 
detail above in the discussion of Proposed Section 310.3(a)(1)(viii)(A) 
and (B), consumers often have little understanding of the mechanics of 
the debt collection process and are often deceived about the fact that 
many sellers collect fees up-front before any funds are saved to be 
used as payments to creditors. As a result it would take months, or 
even years, for a final resolution of all of a consumer's debts to be 
achieved. Often, however, telemarketers of these services tell 
consumers that results can be achieved more quickly.\184\ Consumers 
seeking debt relief are often in exigent circumstances, having 
exhausted their financial resources and are eager to end their debt 
problems. The Commission believes that this prohibition against 
misrepresenting the time necessary to achieve the promised results will 
serve two key purposes. First, it will prevent consumer confusion about 
the time commitment necessary to attain results, and second, it will 
act as a check on unscrupulous practices by purveyors of debt relief 
services who might otherwise misrepresent the speed with which results 
can be achieved in order to induce a consumer to enroll in a debt 
relief plan.
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    \184\ See, e.g., FTC v. Debt Solutions, Inc., No. 06-0298 JLR 
(W.D. Wash. 2006) (alleging that defendant misrepresented that 
consumers could pay off debt three to five times faster without 
increasing monthly payments); FTC v. Integrated Credit Solutions, 
No. 06-806-SCB-TGW (M.D. Fla. 2006) (alleging that defendants 
misrepresented that debt relief would be achieved before consumers' 
next billing cycle); FTC v. Better Budget Fin. Servs., Inc., No. 04-
12326 (WG4) (D. Mass. 2004)(alleging defendant told consumers it 
could shorten period of time to pay off debts).
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    Another provision of proposed Section 310.3(a)(2)(x) would prohibit 
misrepresentations regarding ``the effect of the service on a 
customer's creditworthiness.'' Like the disclosure required by proposed 
Section 310.3(a)(1)(viii)(E), discussed above, this provision is 
designed to ensure that consumers are not misled about the negative 
effects that will likely result if they fail to make timely payments to 
their creditors.
    Proposed Section 310.3(a)(2)(x) would also prohibit a telemarketer 
from misrepresenting the ``effect of the service on collection efforts 
of the consumer's creditors or debt collectors.'' This provision, like 
the disclosure required by proposed Section 310.3(a)(1)(viii)(D), 
discussed above, would ensure that consumers are not misled regarding 
the effect that enrollment in a debt relief plan may have on collection 
efforts.
    Another prohibited misrepresentation relates to ``the percentage of 
customers who attain the represented results.'' As noted above, success 
rates for debt relief services appear to be low, even according to 
industry-provided data.\185\ Given this fact, the Commission believes 
that it is imperative that telemarketers of debt relief services not 
mislead consumers regarding the likelihood of success if they enroll in 
such services. In particular, this provision would operate to curb 
misrepresentations that state or imply that more customers have 
attained the promised results than is truly the case.
---------------------------------------------------------------------------

    \185\ See supra notes 102-104; CFA (Plunkett) Tr. at 102 (``It 
appears to be a crap shoot. It's not like settlement doesn't occur, 
but it does appear - there does appear to be significant evidence 
that these firms are greatly exaggerating the number of settlements 
that do occur.'').
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    Finally, proposed Section 310.3(a)(2)(x) would prohibit 
telemarketers of debt relief services from misrepresenting ``whether a 
service is offered or provided by a nonprofit entity.'' This provision 
is particularly relevant to entities that masquerade as nonprofits, but 
in fact operate for their own profit, or that of related entities. The 
Commission has brought law enforcement actions against such entities, 
each of which represented that it operated as a nonprofit and could 
provide debt relief services - often involving credit counseling or 
debt negotiation - to consumers.\186\ As the Commission has stated in 
testimony before the Permanent Subcommittee on Investigations of the 
Senate Committee on Governmental Affairs, significant harm to consumers 
may accrue from misrepresentations regarding an entity's nonprofit 
status.\187\
---------------------------------------------------------------------------

    \186\ See, e.g., FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md. 
2003); FTC v. Debt Mgmt. Found. Svcs., No. 04-1674-T-17-MSS (M.D. 
Fla. 2004); FTC v. Integrated Credit Solutions, No. 06-806-SCB-TGW 
(M.D. Fla. 2006); FTC v. Express Consolidation, No. 06-cv-61851-WJZ 
(S.D. Fla. 2006).
    \187\ See Consumer Protection Issues in the Credit Counseling 
Industry: Hearing Before the Permanent Subcommittee on 
Investigations Senate Committee on Governmental Affairs, 108 th 
Cong. 2d Sess. (2004) (Testimony of the FTC) (``[S]ome CCAs appear 
to use their 501(c)(3) status to convince consumers to enroll in 
their DMPs and pay fees or make donations. These CCAs may, for 
example, claim that consumers' `donations' will be used simply to 
defray the CCA's expenses. Instead, the bulk of the money may be 
passed through to individuals or for-profit entities with which the 
CCAs are closely affiliated. Tax-exempt status also may tend to give 
these fraudulent CCAs a veneer of respectability by implying that 
the CCA is serving a charitable or public purpose. Finally, some 
consumers may believe that a `non-profit' CCA will charge lower fees 
than a similar for-profit.''), available at (www.ftc.gov/os/2004/03/040324testimony.shtm).
---------------------------------------------------------------------------

5) Application of Section 310.3(a)(4): Prohibited False or Misleading 
Statements
    In addition to the prohibited misrepresentations contained in 
Section 310.3(a)(2), Section 310.3(a)(4) of the TSR prohibits covered 
telemarketers

[[Page 42005]]

from ``[m]aking a false or misleading statement to induce any person to 
pay for goods or services or to induce a charitable 
contribution.''\188\ Thus, this provision acts as a catch-all 
prohibition of misrepresentations and other deceptive statements, some 
of which are also captured by specific subsections of Section 
310.3(a)(2). Accordingly, it prohibits a number of false 
representations commonly observed in the debt relief services industry, 
including some specifically set forth in proposed amended Section 
310.3(a)(2)(x) above.
---------------------------------------------------------------------------

    \188\ 16 CFR 310.3(a)(4).
---------------------------------------------------------------------------

    By way of illustration, the FTC has brought cases against debt 
relief service providers alleging violations of this provision for 
misleading statements made in connection with outbound telemarketing, 
including statements that the entity:
    <bullet> will obtain a favorable settlement of the consumer's debt 
promptly or in a specific period of time;\189\
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    \189\ See, e.g., FTC v. Nat'l Consumer Council, No. SACV04-0474 
CJC(JWJX) (C.D. Cal. 2004).
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    <bullet> will stop or lessen creditors' collection efforts against 
the consumer;\190\
---------------------------------------------------------------------------

    \190\ See, e.g., id.; FTC v. Group One Networks, Inc., Case No. 
8:09-cv-352-T-26-MAP (M.D. Fla. 2009) (amended complaint).
---------------------------------------------------------------------------

    <bullet> will secure concessions, such as interest rates, by 
specific amounts or percentages;\191\
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    \191\ See, e.g., FTC v. Debt Mgmt. Found. Svcs., Inc., No. 04-
1674-T-17-MSS (M.D. Fla. 2004).
---------------------------------------------------------------------------

    <bullet> that the provider has a close relationship with the 
creditor;\192\
---------------------------------------------------------------------------

    \192\ See, e.g., FTC v. Group One Networks, Inc., Case No. 8:09-
cv-352-T-26-MAP (M.D. Fla. 2009) (amended complaint).
---------------------------------------------------------------------------

    Under the proposed amended Rule, debt relief service providers 
would be prohibited from making these sorts of misleading statements, 
and others prohibited by existing Section 310.3(a)(4), in not only 
outbound, but also inbound telemarketing transactions.

D. Section 310.4: Abusive Telemarketing Acts or Practices

    The Commission proposes to amend Section 310.4 to prohibit a debt 
relief service provider from requesting or receiving any fee until it 
has provided the customer with documentation that a particular debt 
has, in fact, been renegotiated, settled, reduced, or otherwise 
altered. An overview of the requirements of the Section and a 
discussion of the proposed amendment follow.
1) Background
    The Telemarketing Act authorizes the Commission to promulgate rules 
``prohibiting deceptive telemarketing acts or practices and other 
abusive telemarketing acts or practices.''\193\ Section 310.4 of the 
TSR sets forth telemarketing acts or practices deemed abusive, together 
with provisions to curb the deleterious effects these acts or practices 
may have on consumers. Compliance with the existing provisions of 
Section 310.4 already is required for outbound telemarketing calls 
offering debt relief services and would be required for inbound calls 
as well if the proposed amendments to Section 310.6(a)(5) and (a)(6) 
are adopted.
---------------------------------------------------------------------------

    \193\ 15 U.S.C. 6102(a)(1) (emphasis added).
---------------------------------------------------------------------------

    The Rule delineates five categories of abusive conduct: (1) abusive 
conduct generally;\194\ (2) conduct related to the pattern of calls, 
including the Rule's Do Not Call provisions;\195\ (3) violations of the 
Rule's calling time restrictions;\196\ (4) failure to make required 
oral disclosures in the sale of goods or services;\197\ and (5) failure 
to make required oral disclosures in charitable solicitations.\198\ The 
first of these categories is at issue in this proceeding.
---------------------------------------------------------------------------

    \194\ 16 CFR 310.4(a) (this category includes the following acts 
or practices: threats, intimidation, or the use of profane or 
obscene language; requesting or receiving an advance fee for credit 
repair or recovery services or the arrangement of a loan or other 
extension of credit when the telemarketer guarantees or represents a 
high likelihood of success; disclosing or receiving, for 
consideration, unencrypted consumer account numbers for use in 
telemarketing; causing billing information to be submitted for 
payment, directly or indirectly, without the express informed 
consent of the customer or donor; and failure to transmit Caller ID 
information).
    \195\ 16 CFR 310.4(b).
    \196\ 16 CFR 310.4(c).
    \197\ 16 CFR 310.4(d).
    \198\ 16 CFR 310.4(e).
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    As discussed at considerable length in the January 2002 NPRM,\199\ 
issued pursuant to the initial review of the TSR, the Commission has 
articulated an analytical framework for implementing its authority to 
proscribe abusive telemarketing acts or practices.\200\ The 
Telemarketing Act directs the Commission to include in the TSR 
provisions to address three specific practices denominated by Congress 
as ``abusive.''\201\ However, the Act ``does not limit the Commission's 
authority to address abusive practices beyond these three practices 
legislatively determined to be abusive.''\202\
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    \199\ See TSR; Proposed Rule, 67 FR 4492 (Jan. 30, 2002).
    \200\ See id. at 4510-4511.
    \201\ 15 U.S.C. 6102(a)(3) (these three delineated practices are 
for any telemarketer to: (1) ``[u]ndertake a pattern of unsolicited 
telephone calls which the reasonable consumer would consider 
coercive or abusive of such consumers right to privacy; (2) make 
unsolicited phone calls to consumers during certain hours of the day 
or night; and (3) fail to promptly and clearly disclose to the 
person receiving the call that the purpose of the call is to sell 
goods or services and make such other disclosures as the Commission 
deems appropriate, including the nature and price of the goods and 
services.).
    \202\ See TSR; Proposed Rule, 67 FR at 4510.
---------------------------------------------------------------------------

    In determining which conduct should be characterized by the TSR as 
abusive, the Commission noted that each of the statutorily-denominated 
abusive practices implicate consumers' privacy.\203\ Nevertheless, the 
plain meaning of the term ``abusive'' suggests that no such inherent 
limitation in the meaning of the term constrains the Commission in 
crafting the Rule.\204\ Thus, to give full effect to the statutory 
mandate to protect consumers from harmful telemarketing practices, the 
Commission has used its authority to prohibit abusive practices related 
to telemarketing of credit repair services, recovery services, and 
advance fee loans. Although not rooted in privacy protection, each of 
these services had been the subject of significant numbers of law 
enforcement actions and consumer complaints and resulted in 
demonstrated consumer harm.
---------------------------------------------------------------------------

    \203\ See id.
    \204\ The ordinary meaning of abusive is (1) wrongly used; 
perverted; misapplied; catachrestic; (2) given to or tending to 
abuse, (which is in turn defined as improper treatment or use; 
application to a wrong or bad purpose). See Webster's International 
Dictionary, Unabridged (1949).
---------------------------------------------------------------------------

    As explained in the 2002 NPRM, ``[w]hen the Commission seeks to 
identify practices as abusive that are less distinctly within [the 
ambit of privacy], the Commission now thinks it appropriate and prudent 
to do so within the purview of its traditional unfairness analysis as 
developed in Commission jurisprudence.''\205\ Thus, in considering any 
amendment to Section 310.4 of the TSR not relating to consumers' 
privacy rights, the Commission will determine whether the conduct at 
issue meets the criteria for unfairness. To make such a showing, the 
Commission must demonstrate that: 1) the conduct at issue causes 
substantial injury to consumers; 2) the harm resulting from the conduct 
is not outweighed by any countervailing benefits; and 3) the harm is 
not reasonably avoidable.\206\
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    \205\ See TSR; Proposed Rule, 67 FR at 4511.
    \206\ 15 U.S.C. 45(n) (codifying the Commission's unfairness 
analysis); see also Letter from the FTC to Hon. Wendell Ford and 
Hon. John Danforth, Committee on Commerce, Science and 
Transportation, United States Senate, Commission Statement of Policy 
on the Scope of Consumer Unfairness Jurisdiction, reprinted in In re 
Int'l Harvester Co., 104 F.T.C. 949, 1079, 1074 n.3 (1984) 
(``Unfairness Policy Statement'').
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2) Advance Fees for Debt Relief Services as an Abusive Practice
    It appears that requesting or receiving payment of a fee for any 
debt relief service before the seller has provided

[[Page 42006]]

the customer with documentation that the promised services have been 
rendered meets the criteria for unfairness, as is the case with credit 
repair services, recovery services, and advance fee loans, each of 
which is subject to an advance fee ban under the TSR.\207\ With respect 
to these services, the Commission found that telemarketers commonly 
take consumers' money for services that the seller has no intention of 
providing and in fact does not provide.\208\ Each of these services had 
been the subject of large numbers of consumer complaints and 
enforcement actions, and in each case caused substantial injury to 
consumers.\209\ Taking money without providing anything in return 
caused substantial harm to consumers without any countervailing 
benefits to consumers or competition.\210\ Finally, having no way to 
know these offered services were illusory, consumers had no reasonable 
means to avoid the harm that resulted from accepting the offers.\211\ 
Thus, an advance fee ban for such services was found to meet the test 
for unfairness.
---------------------------------------------------------------------------

    \207\ In addition to the ban on advance fees for credit repair 
in the TSR, the Credit Repair Organizations Act expressly prohibits 
any credit repair organization from charging or receiving ``any 
money or other valuable consideration for the performance of any 
service which the credit repair organization has agreed to perform 
for any consumer before such service is fully performed.'' 15 U.S.C. 
1679b(b).
    \208\ See TSR; Final Rule, 68 FR 4580, 4614 (Jan. 29, 2003).
    \209\ See id.
    \210\ See id.
    \211\ See id.
---------------------------------------------------------------------------

    At the Workshop, consumer advocates and others argued that unless 
and until a debt is settled, the job is incomplete and it is therefore 
unfair for a provider to request or receive a fee.\212\ These 
participants generally agreed that a ban on the receipt of fees for 
debt settlement services prior to the performance of those services is 
essential to effect consumer protection in this area. Pending the 
receipt of public comment, the Commission agrees with this view, and 
information currently available to the Commission indicates that other 
debt relief services, including debt negotiation and for-profit credit 
counseling, should similarly be subject to such a ban. The analysis 
supporting the Commission's current view is set forth below.
---------------------------------------------------------------------------

    \212\ See CFA (Plunkett) Tr. at 106 (``[T]here is really no 
service that's being offered until there is a settlement. And just 
like credit repair organizations are forbidden under the Credit 
Repair Organizations Act from charging up-front fees for services, 
we think there should be a prohibition on up-front fees for services 
here because the major service that's being promised, the only 
service consumers really want is a settlement. If you can't get a 
settlement, you shouldn't have to pay a fee.''); see also NFCC 
(Binzel) Tr. at 33 (arguing that debt settlement companies should be 
subject to strong federal regulation, including a prohibition on the 
collection of fees until actual services are provided); NFCC 
(Binzel) Tr. at 40 (endorsing the idea that the government should 
intervene to prohibit debt settlement companies from collecting fees 
until services have been provided); SCDCA (Lybarker) Tr. at 223 
(positing that there should not be any sort of payment until 
activity begins on the account); National Consumer Law Center, Inc., 
An Investigation of Debt Settlement Companies: An Unsettling 
Business for Consumers (2005), at 9 (``It is possible that the fee 
arrangements described above would be justifiable if the companies 
actually earned those fees. Unfortunately, it is not easy to 
determine what the companies actually do to earn these fees. As 
noted above, the debt settlement trade association (USOBA) and 
companies we called have either refused to speak with us or provided 
vague responses.'').
---------------------------------------------------------------------------

    Substantial Injury to Consumers. As an initial matter, the 
information available to the Commission from its complaint data, its 
law enforcement experience, as well as state enforcement efforts, the 
Workshop record, and additional independent research conducted by 
Commission staff indicates that collecting up-front fees for debt 
relief services causes substantial injury to consumers.\213\ Consumers 
suffer monetary harm - often in the hundreds or thousands of dollars - 
when they pay in advance for services that, in most cases, are never 
provided. Further, in the case of debt settlement, in order to pay 
these high fees, consumers typically need to (and are frequently 
encouraged to) stop paying their creditors and therefore suffer lasting 
injury to their creditworthiness. These main categories of harm caused 
are detailed below as follows:
---------------------------------------------------------------------------

    \213\ The injury caused by up-front fees applies particularly to 
debt settlement. However, it appears that, like debt settlement, 
other debt relief services, such as for-profit credit counseling 
services, commonly take consumers' money in advance for services 
that are almost never provided. For that reason, the proposed Rule's 
advance fee ban reaches all providers of debt relief services.
---------------------------------------------------------------------------

    (1) The low likelihood of success. At the most fundamental level, 
it appears that a ban on advance fees may be justified in the 
telemarketing of debt relief services because the information currently 
available on the debt relief industry indicates that, in the vast 
majority of cases, consumers are required to pay in advance for 
services that, in most cases, are never rendered. The information 
obtained through FTC law enforcement actions against debt relief 
providers suggests that most consumers do not receive the promised debt 
relief services. For example, in one FTC case only 1.4% of consumers 
enrolled in a debt settlement plan by the defendants obtained the 
promised results.\214\ The New York Attorney General recently filed 
cases against two debt settlement companies alleging that, 
respectively, these entities were providing the represented services to 
only 1% and 1/3% of their consumers.\215\ This information is not 
sufficiently rebutted by industry data to the limited extent it has 
been provided.\216\ Accordingly, based on the current record available, 
the prevailing debt settlement business model requires consumers to pay 
in advance for services that, according to available data, in most 
cases, are never provided to the vast majority of consumers.
---------------------------------------------------------------------------

    \214\ See FTC v. Nat'l Consumer Council, Inc., No. SACV04-0474 
CJC(JWJX) (C.D. Cal. 2004); see also supra notes 102-104 (setting 
forth the low rates of success characteristic of cases brought by 
the FTC and the states against debt relief providers and explaining 
that little probative empirical evidence has been offered by 
industry members to the contrary).
    \215\ Press Release, Attorney General Cuomo Sues Debt Settlement 
Companies for Deceiving and Harming Consumers (May 20, 2009), 
available at (www.oag.state.ny.us/media_center/2009/may/may19b_09.html).
    \216\ See supra notes 103-104.
---------------------------------------------------------------------------

    Similarly, in other types of debt relief services, including for-
profit credit counseling and debt negotiation, it appears that advance 
fees are taken and the represented services are never provided in the 
majority of cases. A primary concern regarding for-profit credit 
counseling is that, after fees are taken, the represented counseling 
services are often not provided and, instead, consumers are placed in 
DMPs without regard to whether such plans will be an appropriate means 
of providing them debt relief.\217\ In cases the Commission has brought 
against providers of debt negotiation services, advance fees are taken, 
but claims that credit card interest rates can be reduced turn out to 
be false.\218\
---------------------------------------------------------------------------

    \217\ See, e.g., FTC v. Integrated Credit Solutions, No. 06-806-
SCB-TGW (M.D. Fla. 2006); FTC v. Nat'l Consumer Council, No. SACV04-
0474 CJC(JWJX) (C.D. Cal. 2004); FTC v. AmeriDebt, Inc., No. PJM 03-
3317 (D. Md. 2003).
    \218\ See, e.g., FTC v. Debt Solutions, Inc., No. 06-0298 JLR, 
App. for T.R.O. (W.D. Wash. Mar. 6, 2006) at 15 (``Approximately 
four months' worth of consumer data obtained from Defendants show 
that they failed to achieve interest rate reductions [to the 
promised rate] on 99.5 percent of the accounts reviewed and failed 
to achieve any interest rate reductions at all in 80.4 percent of 
the accounts.'');. see also FTC v. Group One Networks, Inc., No. 
8:09-cv-352-T-26-MAP (M.D. Fla. 2009) (amended complaint); FTC v. 
Select Pers. Mgmt., No. 07- 0529 (N.D. Ill. 2007). The Commission 
acknowledges that debt negotiation services were not the focus of 
the FTC's September 2008 Workshop and, therefore, that the current 
record with regard to this category of service is based largely on 
the agency's law enforcement actions against debt negotiation 
entities. Accordingly, the Commission invites comments, including 
any data, demonstrating the ability (or lack thereof) of debt 
negotiation entities to secure the results they represent to 
consumers.

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[[Page 42007]]

    (2) The significant burden on consumers of front-loaded fees. As 
discussed above in Section II, of the three basic fee models in the 
debt settlement industry, the front-end fee model is the most 
prevalent. Under this model, as much as 40% or more of the fee is 
collected within the first three or four months of enrollment, with the 
remaining fee collected over a twelve-month period.\219\ Collecting 
fees in advance of providing the represented services also appears to 
be the most common business model in for-profit credit counseling and 
debt negotiation.\220\
---------------------------------------------------------------------------

    \219\ See supra notes 89-92 and accompanying text.
    \220\ See, e.g., FTC v. Debt Solutions, Inc., No. 06-0298 JLR 
(W.D. Wash. 2006) (alleging that consumers paid an advance fee of 
between $329 and $629 before any debt negotiation was attempted); 
FTC v. Integrated Credit Solutions, No. 06-806-SCB-TGW (M.D. Fla. 
2006) (alleging that defendants charged between $99 and $499 as an 
initial fee for credit counseling services that were not, in fact, 
provided).
---------------------------------------------------------------------------

    As discussed above, substantial harm accrues when debt relief 
providers charge fees and then fail to provide the represented 
services. The practice of charging substantial up-front fees, as is the 
case with many debt relief services, is inherently inconsistent with 
the purported goal of the services. Specifically, debt settlement 
providers represent settlement as a way to pay off unsecured debts with 
a one-time lump sum payment. However, given that consumers to whom they 
market are typically already delinquent or in danger of becoming 
delinquent on their payments to creditors, the practice of taking 
substantial up-front fees before any monies are saved for the purported 
settlement forces many consumers - who cannot pay both the debt 
settlement provider and their creditors - to stop making payments to 
creditors. Additionally, once consumers realize that the telemarketers 
have kept their initial payments as a large up-front fee, many then 
drop out of the program, often with higher balances, among other 
detrimental results, thereby suffering substantial injury.\221\ At the 
Workshop, even a representative from the industry group, TASC, 
expressed concern about the front-end fee model.\222\
---------------------------------------------------------------------------

    \221\ See, e.g., FTC v. Edge Solutions, No. CV-07-4087 (E.D.N.Y 
Oct. 1, 2007) (complaint alleging that ``[c]ontrary to Defendants' 
representations,'' consumers in numerous instances ``have in fact 
increased the amount of their debt by incurring late fees, finance 
charges and overdraft charges, causing their financial situation to 
worsen. In numerous instances, as a result of Defendants' services, 
consumers' credit reports include significant negative information 
such as late payments, charge-offs, collections, and 
garnishments.''); see also FTC v. Debt-Set, Inc., No. 07-558, Mem. 
Supp. Mot. T.R.O. at 16-19 (D. Colo. Mar. 20, 2007) (alleging that 
``[c]onsumers' financial condition deteriorates precipitously with 
hundreds, if not thousands, of dollars in monthly payments lost to 
Defendants''); FTC v. Express Consolidation, No. 06-cv-61851-WJZ, 
Pls. Mem. Law Supp. T.R.O. at 17 (S.D. Fla. Dec. 11, 2006) (alleging 
consumers paid up-front fees and that savings claims ``falsely 
report benefit to the consumer from plans that actually will make 
the consumer worse off''); FTC v. Better Budget Fin. Servs., Inc., 
No. 04-12326 (WG4), Pls. Mem. Law Supp. T.R.O. at 8-9 (D. Mass. 
2004) (alleging that ``[t]ypically, consumers leave the program 
after finding that defendants have never contacted their creditors, 
nor done anything to stop creditors from making harassing calls to 
consumers, as promised. When consumers do terminate their contracts, 
they often find that their overall debt has actually increased 
because they owe interest and late fees due to not paying creditors 
as required by defendants' program. Many consumers, prior to 
entering the program, were able to pay their credit accounts on 
time, but find that enrolling in defendants' debt management scheme 
caused their financial situation to deteriorate. Some consumers find 
their financial situation has deteriorated to the point of their 
being forced to file bankruptcy.'').
    \222\ TASC (Young) Tr. at 183 (arguing that fees should be 
``spread out over no less than half of the length of the program'' 
so the consumer can save money to pay creditors).
---------------------------------------------------------------------------

    In this regard, it is telling that nearly all states have now 
adopted laws that regulate the provision of some or all debt relief 
services, and some of these directly address the ability of a debt 
relief service provider to take an up-front fee. Several of these laws 
ban for-profit debt settlement entirely,\223\ while others prohibit the 
charging of up-front fees.\224\ However, at present a larger number of 
states instead allow debt relief service providers to charge a small 
up-front or set-up fee (i.e., less than one hundred dollars), and then 
some combination of the following: (1) subsequent flat monthly fees for 
service; or (2) a choice between flat monthly fees for service or some 
set percentage (i.e., a percentage of the total debt enrolled in the 
program or a percentage of the amount by which the consumer's debt is 
reduced).\225\
---------------------------------------------------------------------------

    \223\ See, e.g., Conn. Gen. Stat. Sec.  36A-655 et seq.; La. 
Rev. Stat. Sec.  RS 14:331 et seq., & 37:2581, et seq.; N.D. Gen. 
Stat. Sec.  13-06-01-03 & 13-07-01-07; Wyo. Stat. Sec.  33-14-101 et 
seq.
    \224\ See, e.g., N.C. Gen. Stat Sec.  14-423 et seq.
    \225\ See, e.g., supra note 125. To the extent that state laws 
permit, rather than mandate, that fees for debt relief services be 
collected before the promised goods or services are documented as 
provided, there is no conflict with the proposed Rule, and thus, no 
preemption. See 16 CFR 310.7(b) (``Nothing contained in this Section 
shall prohibit any attorney general or other authorized state 
official from proceeding in state court on the basis of an alleged 
violation of any civil or criminal statute of such state.'').
---------------------------------------------------------------------------

    The record indicates that the harm to consumers from advance fees 
for debt relief services is substantial because they pay in advance for 
services that it appears are only rarely rendered. Further, the record 
suggests that substantial fees - such as those commonly charged for 
debt settlement - are particularly onerous because they may actually 
impede the ultimate goal of attaining debt relief for the consumer. In 
addition, the recognition by state legislatures of the need to regulate 
these fees indicates that federal regulation of fees for debt relief 
services may be justified.\226\
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    \226\ See supra notes 121, 125; see, e.g., Illinois Attorney 
General, Press Release, Attorney General Madigan Sues Two Debt 
Settlement Firms (May 4, 2009) (encouraging ``consumers in financial 
trouble to consider credit counseling instead of debt settlement 
services'' and ``to look for credit counseling services that charge 
modest fees and provide true financial and budget counseling based 
on a consumer's personal circumstances''), available at 
(www.illinoisattorneygeneral.gov/pressroom/2009_05/20090504.pdf).
---------------------------------------------------------------------------

    Potential Countervailing Benefits. The second prong of the 
unfairness test requires a determination of whether the harm to 
consumers is outweighed by countervailing benefits to consumers or 
competition.\227\ The inclusion of this criteria signals the 
recognition that costs and benefits attach to most business practices. 
As the Commission previously has stated, it will ``not find that a 
practice unfairly injures consumers unless it is injurious in its net 
effects.''\228\
---------------------------------------------------------------------------

    \227\ Unfairness Policy Statement at 1073 (``The Commission also 
takes account of the various costs that a remedy would entail. These 
include not only the costs to the parties directly before the 
agency, but also the burdens on society in general in the form of 
increased paperwork, increased regulatory burdens on the flow of 
information, reduced incentives to innovation and capital formation, 
and similar matters.''); see also J. Howard Beales, The FTC's Use of 
Unfairness Authority: Its Rise, Fall, and Resurrection, available at 
(www.ftc.gov/speeches/beales/unfair0603.shtm) (noting that 
``[g]enerally, it is important to consider both the costs of 
imposing a remedy (such as the cost of requiring a particular 
disclosure in advertising) and any benefits that consumers enjoy as 
a result of the practice, such as the avoided costs of more 
stringent authorization procedures and the value of consumer 
convenience.'').
    \228\ Id. at 1075 (``As we have indicated before, the Commission 
believes that considerable attention should be devoted to the 
analysis of whether substantial net harm has occurred, not only 
because that is part of the unfairness test, but also because the 
focus on injury is the best way to ensure that the Commission acts 
responsibly and uses its resources wisely.'').
---------------------------------------------------------------------------

    Representatives of the debt relief industry have advanced several 
arguments as to the countervailing benefits of charging advance fees. 
First, they have stated that cash flow is a benefit of the up-front fee 
structure prevalent in the industry and that disallowing this fee 
method would limit new entrants to the industry. Specifically, debt 
settlement industry representatives argue that allowing only back-end 
fees would be an unsustainable business model and that no new companies 
would enter the market, which would reduce competition.\229\
---------------------------------------------------------------------------

    \229\ See, e.g., TASC (Young) Tr. at 186-87.

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[[Page 42008]]

    Second, one debt settlement industry association claims that their 
fees are required to pay for labor or services engaged in before 
settlement occurs.\230\ The debt relief provider must obtain 
information about the consumer's debts, familiarize themselves with the 
consumer's finances, and call creditors and/or debt collectors to 
ascertain whether debt relief is possible for the consumer. According 
to one participant at the Commission's workshop, such an effort can 
involve numerous phone calls to the creditor.\231\ If the creditor or 
debt collector agrees to provide some kind of debt relief, the 
telemarketers must coordinate the execution of the debt relief, which 
may include, for example, arranging the debt management plan terms, 
ensuring the savings or transfer of funds for settlement, and receipt 
of appropriate documentation of completed services. These operating 
costs must be recovered for the firm to remain solvent, and under the 
prevailing model whereby these providers operate on a for profit basis, 
the costs are likely recovered substantially in the form of up-front 
fees.
---------------------------------------------------------------------------

    \230\ See TASC, Study on the Debt Settlement Industry (2007), at 
6 (``Debt settlement companies do not simply negotiate the debts at 
the beginning of the contract and act as a repayment collection 
clearinghouse for the creditors, as is the case with credit 
counseling agencies. Debt settlement companies must negotiate and 
actively monitor the creditor's activities with respect to their 
client's accounts throughout the length of the program.'').
    \231\ See Debt Settlement USA (Craven) Tr. at 113.
---------------------------------------------------------------------------

    Third, industry representatives have expressed concern that if they 
complete services before receiving payment, they may become one of 
their clients' creditors.\232\ Because their customer base, to a large 
extent, is comprised of financially distressed consumers with limited 
ability to pay their current debts, they argue that ensuring that the 
debt relief firm can obtain payment for services dictates that the fees 
are collected up-front.
---------------------------------------------------------------------------

    \232\ See, e.g., TASC (Young) Tr. at 185.
---------------------------------------------------------------------------

    Based on the evidence in the record at this time, it appears that 
insufficient empirical data have been presented to substantiate that 
these purported benefits outweigh what appears to be substantial harm 
to consumers. With regard to the possible curtailment of competition if 
an advance fee ban is imposed, the Commission acknowledges that, at 
least conceivably, such a prohibition could increase the costs incurred 
by any legitimate providers of debt relief services, make it impossible 
for some firms to continue to exist, and reduce the ability of new 
firms to enter the market. For example, additional capitalization, in 
the form of borrowing or investment, may be necessary for firms who 
would otherwise have relied upon advance fees for cash flow.\233\ If 
existing providers' costs are increased, they could be forced to 
increase the prices they charge consumers for their services in order 
to remain solvent. However, the record lacks empirical data on whether 
debt relief companies actually provide the debt relief as represented 
to consumers. In fact, the federal and state law enforcement record 
demonstrates that few, if any consumers who pay upfront fees, receive 
any benefits from the advance fee practice. Thus, any increase in costs 
resulting from the advance fee ban would be unlikely to outweigh the 
consumer injury resulting from the current fee practice.
---------------------------------------------------------------------------

    \233\ Some states already impose licensing and bonding 
requirements on companies and thus require some capitalization. See, 
e.g., Kan. Stat. Ann. Sec.  50-1116, et seq.; Me. Rev. Stat. Ann. 
Tit. 17 Sec.  701, et seq. & tit. 32 Sec. Sec.  6171-82, 1101-03; 
S.C. Code Ann. Sec.  37-7-101, et seq.
---------------------------------------------------------------------------

    Moreover, while the Commission acknowledges that debt relief 
services may have labor and operating costs, it notes that the actual 
benefit of allowing entities to recover these costs largely rests on 
their ability to deliver represented results - an ability that still 
remains largely unsupported by the record. In addition, industry has 
conceded that a large portion of its purported operating costs are 
actually devoted to marketing, and not provision of services to 
consumers.\234\ Finally, the proposed Rule's allowance for legitimate, 
third-party escrow services is intended to ensure that debt relief 
service entities will be able to obtain payment if, and once, they have 
completed their represented services.
---------------------------------------------------------------------------

    \234\ As TASC has commented: ``One of the primary costs is the 
client acquisition. . . . Since the concept of debt settlement is 
not well-known to the public, debt settlement companies must spend 
more time, effort and money marketing their services. The lead cost 
for acquiring one debt settlement client ranges from $300 to $400. 
Once the intake costs associated with contacting the potential 
clients and the overhead costs are factored into the lead costs, the 
cost to acquire and set up a single debt settlement client can range 
from approximately $425 to $1,000. The data reveals that most debt 
settlement companies report this cost at $700 to $1,000 range. This 
necessitates debt settlement companies to charge a greater portion 
of fees during the initial phase of the program.'' TASC, Study on 
the Debt Settlement Industry (2007), at 4.
---------------------------------------------------------------------------

    Reasonably Avoidable Harm. The third and final prong of the 
unfairness analysis precludes a finding of unfairness in cases where 
the injury is one that consumers can reasonably avoid.\235\ The extent 
to which a consumer may reasonably avoid injury is determined in part 
by whether the consumer can make an informed choice. In this regard, 
the Unfairness Policy Statement explains:
---------------------------------------------------------------------------

    \235\ Unfairness Policy Statement at 1073.

 Normally we expect the marketplace to be self-correcting, and we rely 
on consumer choice - the ability of individual consumers to make their 
own private purchasing decisions without regulatory intervention - to 
govern the market. We anticipate that consumers will survey the 
available alternatives, choose those that are most desirable, and avoid 
those that are inadequate or unsatisfactory. However, it has long been 
recognized that certain types of sales techniques may prevent consumers 
from effectively making their own decisions, and that corrective action 
may then become necessary. Most of the Commission's unfairness matters 
are brought under these circumstances. They are brought, not to second-
guess the wisdom of particular consumer decisions, but rather to halt 
some form of seller behavior that unreasonably creates or takes 
advantage of an obstacle to the free exercise of consumer 
---------------------------------------------------------------------------
decisionmaking.\236\

    \236\ Id.
---------------------------------------------------------------------------

    Consumers seeking debt relief services are unable reasonably to 
avoid the injury caused by the payment of up-front fees because 
business practices prevalent among debt relief service providers make 
it impossible for consumers to know the offered services are illusory. 
Relying on the representations made in advertisements and in 
telemarketing calls, these vulnerable consumers expect to receive the 
promised services from those who purport to be experts and have no way 
of knowing that the promised services are almost never provided.\237\ 
Further, deceptive representations and inadequate disclosures about 
fees and their timing leave consumers unaware that the bulk of fees 
will be collected as up-front payments.\238\ As a result, in many 
instances, consumers do not even anticipate that they will be paying 
fees before settlements are achieved.
---------------------------------------------------------------------------

    \237\ See Summary of Prepared Remarks of Commissioner Roscoe B. 
Starek, III, FTC, Advertising and Promotion Law 1997 (July 25, 1997) 
(``In assessing whether injury is reasonably avoidable, the 
Commission looks at how susceptible the affected audience may be to 
the act or practice in question.'').
    \238\ See supra note 161.
---------------------------------------------------------------------------

    Thus, the Commission proposes a ban on advance fees for the 
provision of debt relief services. As described above, the practice 
appears to meet the statutory test for unfairness because it appears to 
cause significant harm to consumers that is not outweighed by 
countervailing benefits to consumers or competition,

[[Page 42009]]

and the harm is not reasonably avoidable.
    Accordingly, proposed amended Rule Section 310.4(a)(5) would 
prohibit:

 Requesting or receiving payment of any fee or consideration from a 
person for any debt relief service until the seller has provided the 
customer with documentation in the form of a settlement agreement, debt 
management plan, or other such valid contractual agreement, that the 
particular debt has, in fact, been renegotiated, settled, reduced, or 
otherwise altered.\239\

    \239\ The provisions currently contained in 310.4(a)(5) - 
310.4(a)(7) will be renumbered to accommodate the new section 
310.4(a)(5) and will shift to 310.4(a)(6) - 310.4(a)(8), 
respectively.
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    The focus of the provision is to prevent a seller or telemarketer 
from charging a fee in advance of completion of represented services.
    The Commission intends for this proposed amendment to apply to all 
of the debt relief services described in this Notice and encompassed by 
proposed amended provision 310.2(m). With regard to debt settlement, 
proposed amended Section 310.4(a)(5) is intended to prohibit up-front 
fees, and require debt settlement entities to provide the represented 
services - that is, to settle a consumer's debt - before collecting any 
fee in connection with that debt.\240\ The Commission does not intend 
that the advance fee ban be interpreted to prohibit a consumer from 
using legitimate escrow services - services where funds are controlled 
by the consumer - to save money in anticipation of settlement, 
including money that may eventually be used to pay a debt relief 
service provider. Such monies held in escrow are the consumer's 
property, held by a fiduciary. However, the proposed advance fee ban 
would prohibit any debt relief provider from taking any fee or 
consideration from funds held in escrow until such time as the 
represented services are delivered. At such time, a fee proportional to 
the work completed may be requested by the debt settlement provider. In 
the context of for-profit credit counseling, the proposed amended Rule 
would require that the provider successfully provide the consumer with 
the represented services, such as counseling and enrollment in a DMP - 
with the consent of both the consumer and his or her creditors - before 
charging any fees.\241\ In the context of debt negotiation, the 
proposed amended Rule would require that the debt negotiation provider 
successfully negotiate an agreement between the consumer and his or her 
creditor(s) to provide the concession or result represented by the debt 
negotiation entity (e.g., a lower interest rate, lower monthly 
payments, etc.).\242\
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    \240\ Accordingly, if a consumer has more than one debt enrolled 
in a debt settlement program, amended Section 310.4(a)(5) would 
allow the debt settlement entity to collect the fee associated with 
each individual debt once it has settled that debt.
    \241\ As noted in Section II, CCAs commonly charge consumers not 
only an initial setup fee, but also periodic - usually monthly - 
fees throughout the consumer's enrollment in the DMP after the 
consumer is enrolled. Proposed amended Rule Section 310.4(a)(5) 
would prohibit CCAs from charging periodic fees before the consumer 
has enrolled in a DMP, but would not prevent subsequent periodic 
fees taken for servicing the account.
    \242\ Although proposed amended Rule Section 310.4(a)(5) would 
prohibit a debt negotiator from charging any fee until it has 
achieved the represented results, if multiple accounts are to be 
negotiated a proportional fee may be charged as work on each account 
is completed.
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    Moreover, in light of the abuses observed in the debt relief 
services industry, the proposed rule would require providers to give 
consumers proof that they have received the debt relief services as 
contracted for or promised. In the case of debt settlement, this would 
require delivery of proof to the customer that the accounts subject to 
debt settlement have, indeed, been successfully settled.\243\ The 
Commission has learned that, presently, many creditors prepare a 
written instrument referred to as a ``settlement in full'' to 
memorialize the settlement of a debt in connection with a debt 
settlement service provider. The Commission intends for proposed 
amended Rule Section 310.4(a)(5) to encompass not only the ``settlement 
in full'' document, but also such other legally-binding documents as 
may be presently used by other debt relief services or adapted in the 
future. For, example, in the case of for-profit credit counseling, an 
executed DMP, accepted by each of the consumers creditors as well as 
the consumer, would evidence that the proffered services had been 
successfully completed. With regard to debt negotiation, documentation 
that, for example, a creditor has agreed to lower the interest rate for 
a particular credit card would suffice. These documents would serve as 
objective proof to the consumer that the promises or contracted 
services have, indeed, been provided.
---------------------------------------------------------------------------

    \243\ See, e.g., USOBA at 8 (``After the final payment is 
processed by the creditor or collection agency, a request for a 
confirmation letter is made showing the settlement agreement amount 
has been paid, along with the settlement agreement and copies of 
payments to the creditor or collection agency which serve as a 
record that the account has been satisfied and no outstanding 
balance is owed.'').
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    Section VIII of this Notice solicits comments regarding this 
provision. Specifically, as set forth in the questions in Section VIII, 
the Commission seeks input regarding an advance fee ban for the debt 
relief industry that parallels the advance fee loan ban.\244\ Under 
that alternative formulation, sellers or telemarketers of debt relief 
services would be prohibited from requesting or receiving payment of 
any fee or consideration for debt relief services only when the seller 
or telemarketer has guaranteed or represented a high likelihood of 
success in obtaining or arranging the promised debt relief for a 
person. In Section VIII, the Commission seeks comments on the relative 
merits of the two versions of the advance fee ban, other possible 
alternatives, and the impact on industry of this proposed amendment.
---------------------------------------------------------------------------

    \244\ See 16 CFR 310.4(a)(4).
---------------------------------------------------------------------------

E. Section 310.5: Recordkeeping

    Section 310.5 of the Rule describes the types of records sellers or 
telemarketers must keep, and the time period for retention. 
Specifically, this provision requires that telemarketers must keep for 
a period of 24 months: all substantially different advertising, 
brochures, scripts, and promotional materials; information about prize 
recipients; information about customers, including what they purchased, 
when they made their purchase and how much they paid for the goods or 
services they purchased; information about employees; and all 
verifiable authorizations or records of express informed consent or 
express agreement required to be provided or received under this 
Rule.\245\
---------------------------------------------------------------------------

    \245\ 16 CFR 310.5.
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    Although the provisions of this section remain unchanged in the 
proposed Rule, the operation of the other proposed amendments may 
result in some providers of debt relief services being subject to this 
provision of the TSR for the first time. As a result, the Commission 
believes it prudent to direct the attention of interested parties to 
the recordkeeping provision of the Rule, 16 CFR 310.5. Further, the 
Commission solicits comments with regard to the impact of this 
provision on the business operations of providers of debt relief 
services and responses to the specific questions regarding this 
provision in Section VIII of this Notice.

[[Page 42010]]

F. Section 310.6: Proposed Modification to General Media and Direct 
Mail Exemptions for Debt Relief Services

    Section 310.6 sets forth the Rule's exemptions, which are designed 
to ensure that legitimate businesses are not unduly burdened by the 
Rule. Each is justified by one of four factors: (1) whether Congress 
intended a particular activity to be exempt from the Rule; (2) whether 
the conduct or business in question is already the subject of extensive 
federal or state regulation;\246\ (3) whether the conduct at issue 
lends itself easily to the forms of abuse or deception the 
Telemarketing Act was intended to address; and (4) whether the risk 
that fraudulent sellers or telemarketers would avail themselves of the 
exemption outweighs the burden to legitimate industry of compliance 
with the Rule.
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    \246\ One such exemption involves the sale of franchises and 
business opportunities. See 16 C.F.R. 310.6(b)(2). When originally 
promulgated in 1995, the TSR included an exemption for the sale of 
franchises and business opportunities subject to the Commission's 
Rule entitled ``Disclosure Requirements and Prohibitions Concerning 
Franchising and Business Opportunity Ventures,'' 16 C.F.R. Part 436. 
See TSR; Statement of Basis and Purpose and Final Rule, 60 FR 43842, 
43859 (Aug. 23, 1995). However, in 2007, the Commission took the 
final step to separate the rule requirements applicable to 
franchises from those applicable to business opportunity ventures. 
Disclosure Requirements and Prohibitions Concerning Franchising and 
Business Opportunities; Final Rule, 72 FR 15444 Mar. 30, 2007. Part 
436 now covers only franchises, while a newly-numbered Part 437 
preserves the text of the original rule in so far as it covers 
business opportunity ventures. The bifurcation of the original 
Franchise Rule necessitates a non-substantive modification to the 
language of TSR Section 310.6(b)(2) to clarify that sales of 
franchises subject to the Franchise Rule, 16 C.F.R. Part 436, and 
business opportunities subject to the Business Opportunities Rule, 
16 C.F.R. Part 437, are exempt from the TSR. Any business venture 
not covered either by Part 436 or Part 437 remains outside the scope 
of the exemption set forth at TSR Sec.  310.6(b)(2).
    In addition, the Commission is conducting a separate proceeding 
to consider amendments to what is now designated Part 437, the 
Business Opportunity Rule. See Business Opportunity Rule; Proposed 
Rule, 73 FR 16110 (Mar. 26, 2008). The proposed amendments would 
embody a more streamlined regulatory approach and require far fewer 
disclosures, while broadening the coverage of the Business 
Opportunity rule to reach ventures previously regulated by neither 
the Franchise Rule nor the Business Opportunity Rule. If rules along 
these lines are adopted, the Commission would need to evaluate 
whether the final Business Opportunity Rule would obviate the need 
for the protections of the TSR.
---------------------------------------------------------------------------

    Based on its law enforcement experience and the information gleaned 
from the Workshop, the Commission proposes to modify the general media 
exemption and the direct mail exemption (Sections 310.6(b)(5) and 
310.6(b)(6)) to make them unavailable to telemarketers of debt relief 
services.\247\ This treatment would parallel the existing exceptions 
for investment opportunities, business opportunities other than 
business arrangements covered by the Franchise Rule,\248\ credit card 
loss protection plans, credit repair services, recovery services, and 
advance fee loans.\249\ Like debt relief services, each of those 
services has been the subject of significant numbers of deceptive 
telemarketing campaigns that capitalize on mass media or general 
advertising to entice their victims to place an inbound telemarketing 
call.
---------------------------------------------------------------------------

    \247\ Section 310.6(b)(3) would continue to exempt telemarketing 
of debt relief services where the sale of services is not completed, 
and payment or authorization of payment is not required until after 
a face-to-face sales presentation by the seller from compliance with 
most provisions of the Rule.
    \248\ The bifurcation of the Franchise Rule, see supra note 246, 
necessitates a non-substantive modification to the language of 
Sections 310.6(b)(5) and (6). Specifically, the general media and 
direct mail exemptions to the Rule (Sections 310.6(b)(5) and (6), 
respectively) are amended to make clear that those exemptions do not 
apply to calls initiated by a customer or donor in response to an 
advertisement relating to business opportunities other than business 
arrangements covered by the Franchise Rule or the Business 
Opportunity Rule.
    \249\ Each of these categories is excepted from the exemptions 
for both general media and direct mail advertising. In addition, 
prize promotions are excepted from the direct mail exemption.
---------------------------------------------------------------------------

    The Commission, using its authority under Section 5 of the FTC Act, 
has devoted significant law enforcement resources to combating 
deceptive and unfair practices by debt relief services providers over 
the last several years.\250\ All indications are that the industry is 
growing. Industry statistics suggest that the number of firms offering 
debt settlement services has increased in recent years from 300 to over 
1,000.\251\ It is reasonable to assume that this trend will continue, 
given that increasing numbers of consumers are in financial distress 
and thus ripe for solicitation by debt relief providers. The growth in 
the industry has been accompanied by a rise in the volume of complaints 
about deceptive, unfair, and abusive practices involving debt 
settlement. Recognizing that telemarketing fraud perpetrated by debt 
relief services providers is a prevalent and growing phenomenon, the 
Commission proposes to make the general media advertising exemption and 
the direct mail exemption unavailable to sellers and telemarketers of 
debt relief services. Otherwise, the Commission believes that the 
proposed amended Rule's focus on debt relief services may create some 
incentive for unscrupulous sellers to market these programs via general 
media advertising or direct mail specifically to ensure that their 
efforts are exempt from the Rule's coverage. The proposed modification 
to the exemptions will ensure that sellers and telemarketers who market 
these goods and services would be required to abide by the Rule 
regardless of the medium used to advertise their services.
---------------------------------------------------------------------------

    \250\ See, e.g., FTC v. MCS Programs, LLC, No. C09-5380RJB (W.D. 
Wash 2009); FTC v. Group One Networks, Inc., Case No. 8:09-cv-352-T-
26-MAP (M.D. Fla. 2009) (amended complaint); FTC v. Edge Solutions, 
Inc., No. CV-07-4087 (E.D.N.Y. 2007); FTC v. Express Consolidation, 
No. 06-cv-61851-WJZ (S.D. Fla. 2006); FTC v. Debt-Set, Inc., No. 
1:07-cv-00558-RPM (D. Colo. 2007); FTC v. Select Personnel Mgmt., 
Inc., No. 07-0529 (N.D. Ill. 2007); FTC v. Integrated Credit 
Solutions, Inc., No. 06-806-SCB-TGW (M.D. Fla. 2006); FTC v. 
Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. 2006); United 
States v. Credit Found. of Am., No. CV 06-3654 ABC(VBKx) (C.D. Cal. 
2006); FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. Wash. 
2006); FTC v. Debt Mgmt. Found. Svcs., Inc., No. 04-1674-T-17-MSS 
(M.D. Fla. 2004); FTC v. Nat'l Consumer Council, No. SACV04-0474 
CJC(JWJX) (C.D. Cal. 2004); FTC v. Better Budget Fin. Servs., Inc., 
No. 04-12326 (WG4) (D. Mass. 2004); FTC v. Innovative Sys. Tech., 
Inc., No. CV04-0728 GAF JTLx (C.D. Cal. 2004); FTC v. AmeriDebt, 
Inc., No. PJM 03-3317 (D. Md. 2003); FTC v. Jubilee Fin. Servs., 
Inc., No. 02-6468 ABC (Ex) (C.D. Cal 2002).
    \251\ See Birnbaum, Jane, Debt Relief Can Cause Headaches of Its 
Own, N.Y. Times, Feb. 9, 2008.
---------------------------------------------------------------------------

    The Commission solicits comments with regard to the impact of these 
proposed amendments to Section 310.6 and responses to the specific 
questions regarding this provision in Section VIII of this Notice.

IV. Public Forum

    FTC staff will conduct a public forum to discuss the issues raised 
in this NPRM and the written comments received in response to this 
Notice. The Commission will post the date, time, and location of the 
public forum on its website no later than 30 days after the publication 
of this NPRM. The purpose of the forum is to afford Commission staff 
and interested parties an opportunity to discuss issues raised by the 
proposal and in the comments and, in particular, to examine publicly 
any areas of significant controversy or divergent opinion that are 
raised in the written comments. The forum is not intended to achieve a 
consensus among participants or between participants and Commission 
staff with respect to any issue raised in the comments. Commission 
staff will consider the views and suggestions made during the forum, in 
conjunction with the written comments, in formulating its final 
recommendation to the Commission regarding amendment of the TSR.
    The forum will be open to the public, and there is no fee for 
attendance. For admittance to the building, all attendees will be 
required to show a valid photo identification, such as a driver's 
license. Pre-registration is not required for attendees. Members of the 
public and the press who cannot attend in person may view a live 
webcast of the forum on the FTC's website. The proceedings will

[[Page 42011]]

be transcribed, and the transcript will be placed on the public record.
    The forum venue will be accessible to persons with disabilities. If 
you need an accommodation related to a disability, call Carrie 
McGlothin at (202) 326-3388. Such requests should include a detailed 
description of the accommodations needed and a way to contact you if we 
need more information. Please provide advance notice of any needs for 
such accommodations.
    Commission staff will select a limited number of parties from among 
those who submit requests to participate to represent the significant 
interests affected by the issues raised in the Notice. These parties 
will participate in an open discussion of the issues, including asking 
and answering questions based on their respective comments. In 
addition, the forum will be open to the general public.
    To the extent possible, Commission staff will select parties to 
represent the following interests: providers of debt relief services; 
telemarketers, lead generators, and aggregators; consumer advocacy 
groups; federal and state law enforcement and regulatory authorities; 
and any other interests that Commission staff may identify and deem 
appropriate for representation. FTC staff will select panelists based 
on the following criteria: 1) the party has expertise in or knowledge 
of the issues that are the focus of the workshop; 2) the party's 
participation would promote a balance of interests represented at the 
workshop; and 3) the party has been designated by one or more 
interested parties (who timely file requests to participate) as a party 
who shares the interests of the designator(s). Members of the general 
public who attend the workshop may have an opportunity to make brief 
oral statements presenting their views on issues raised in the NPRM. 
Oral statements by members of the general public will be limited on the 
basis of the time available and the number of persons who wish to make 
statements.
    Parties interested in participating as panelists must submit 
written comments addressing the issues raised in the NPRM, in addition 
to a formal written request to participate in the form and manner 
described above. Parties must include in their request a brief 
statement setting forth their expertise or knowledge of the issues on 
which the workshop will focus, as well as their contact information, 
including, if available: a telephone number, facsimile number, and e-
mail address to enable the FTC to notify requesters whether they have 
been selected to participate.

V. Communications by Outside Parties to the Commissioners or Their 
Advisors

    Written communications and summaries or transcripts of oral 
communications respecting the merits of this proceeding from any 
outside party to any Commissioner or Commissioner's advisor will be 
placed on the public record.\252\
---------------------------------------------------------------------------

    \252\ See 16 CFR 1.26(b)(5).
---------------------------------------------------------------------------

VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act of 1980 (``RFA'')\253\ requires a 
description and analysis of proposed and final rules that will have a 
significant economic impact on a substantial number of small 
entities.\254\ The RFA requires an agency to provide an Initial 
Regulatory Flexibility Analysis (``IRFA'')\255\ with the proposed Rule 
and a Final Regulatory Flexibility Analysis (``FRFA'')\256\ with the 
final rule, if any. The Commission is not required to make such 
analyses if a rule would not have such an economic effect.\257\
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    \253\ 5 U.S.C. 601-612.
    \254\ The RFA definition of ``small entity'' refers to the 
definition provided in the Small Business Act, which defines a 
``small-business concern'' as a business that is ``independently 
owned and operated and which is not dominant in its field of 
operation.'' 15 U.S.C. 632(a)(1).
    \255\ 5 U.S.C. 603.
    \256\ 5 U.S.C. 604.
    \257\ 5 U.S.C. 605.
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    The Commission does not have sufficient empirical data at this time 
regarding the debt relief industry to determine whether the proposed 
amendments to the Rule may impact a substantial number of small 
entities as defined in the RFA.\258\ It is also unclear whether the 
proposed amended Rule would have a significant economic impact on small 
entities. Thus, to obtain more information about the impact of the 
proposed rule on small entities, the Commission has decided to publish 
the following IRFA pursuant to the RFA and to request public comment on 
the impact on small businesses of its proposed amended Rule.
---------------------------------------------------------------------------

    \258\ In response to a request for comments issued in 
conjunction with the Workshop, the Commission received no empirical 
data regarding the revenues of debt relief companies generally, or 
debt settlement companies specifically. One Workshop commenter 
opined, without attribution, that the vast majority of debt 
settlement companies have fewer than 100 employees. See Able Debt 
Settlement at 6 (``[o]f the thousand plus or minus companies whose 
business activities are related to debt settlement, the estimates 
for the numbers of companies and the numbers of individuals either 
working for or affiliated with them are as follows: Two percent 
consist of more than 100 individuals; Eight percent consist of 25 to 
100 individuals; and the remaining Ninety percent consist of less 
than 25 individuals.'').
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A. Description of the Reasons Why Action by the Agency is Being 
Considered

    As described in Section III, above, the proposed amendments are 
intended to address consumer protection concerns regarding 
telemarketing of debt relief services and are based on evidence in the 
record to date suggesting that deceptive and abusive acts are pervasive 
in telemarketing of debt relief services to consumers.

B. Succinct Statement of the Objectives of, and Legal Basis for, the 
Proposed Amended Rule

    The objective of the proposed amended Rule is to curb deceptive and 
abusive practices occurring in the telemarketing of debt relief 
services. The legal basis for the proposed amendments is the 
Telemarketing Act.

C. Description and Estimate of the Number of Small Entities to Which 
the Proposed Amended Rule Will Apply

    The proposed amendments to the Rule will affect sellers and 
telemarketers of debt relief services engaged in ``telemarketing,'' as 
defined by the Rule to mean ``a plan, program, or campaign which is 
conducted to induce the purchase of goods or services or a charitable 
contribution, by use of one or more telephones and which involves more 
than one interstate telephone call.''\259\ Staff estimates that the 
proposed amended Rule will apply to approximately 2000 entities. 
Determining a precise estimate of how many of these are small entities, 
or describing those entities further, is not readily feasible because 
the staff is unaware of published data that reports annual revenue 
figures for debt relief service providers.\260\ Further, the 
Commission's requests for information about the number and size of debt 
settlement companies yielded virtually no information.\261\ The 
Commission invites comment and information on this issue.
---------------------------------------------------------------------------

    \259\ 16 CFR 310.2(cc) (in the proposed amended Rule, this 
definition is renumbered as Section 310.2(dd)).
    \260\ Directly covered entities under the proposed amended Rule 
are classified as small businesses under the Small Business Size 
Standards component of the North American Industry Classification 
System (``NAICS'') as follows: All Other Professional, Scientific 
and Technical Services (NAICS code 541990) with no more than $7.0 
million dollars in average annual receipts (no employee size limit 
is listed). See SBA, Table of Small Business Size Standards Matched 
to North American Industry Classification System codes (Aug. 22, 
2008), available at (www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf)
    \261\ See Able Debt Settlement at 6.

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[[Page 42012]]

D. Description of the Projected Reporting, Recordkeeping and Other 
Compliance Requirements of the Proposed rule, Including an Estimate of 
the Classes of Small Entities which will be Subject to the Requirement 
and the Type of Professional Skills Necessary for Preparation of the 
Report or Record

    The proposed amended Rule would impose disclosure and recordkeeping 
burden within the meaning of the PRA, as set forth in Section VII of 
this NPRM. The Commission is seeking clearance from the OMB for these 
requirements, and the Commission's Supporting Statement submitted as 
part of that process is being made available on the public record of 
this rulemaking. Specifically, the proposed amended Rule would require 
specific disclosures in telemarketing of debt relief services,\262\ and 
it would subject inbound debt relief service telemarketing to the 
Rule's requirements, including the existing disclosure and 
recordkeeping provisions. In addition, the proposed amended Rule would 
prohibit a seller or telemarketer of debt relief services from 
requesting or receiving a fee in advance of providing the offered 
services.
---------------------------------------------------------------------------

    \262\ See Proposed Rule Section 310.3(a)(1)(viii).
---------------------------------------------------------------------------

    The classes of small entities affected by the amendments include 
telemarketers or sellers engaged in acts or practices covered by the 
Rule. The types of professional skills required to comply with the 
Rule's recordkeeping, disclosure, or other requirements would include 
attorneys or other skilled labor needed to ensure compliance. As noted 
in the PRA analysis below, the total estimated cost burden for all 
entities subject to the proposed rule will be approximately $967,436. 
The Commission seeks further comment on the costs and burdens of small 
entities in complying with the requirements of the proposed amended 
Rule.

E. Identification, to the Extent Practicable, of all Relevant Federal 
Rules which may Duplicate, Overlap or Conflict with the Proposed 
Amended Rule

    The FTC has not identified any other federal statutes, rules, or 
policies currently in effect which may duplicate, overlap or conflict 
with the proposed rule. However, several state laws do regulate debt 
relief services.\263\ The Commission invites comment and information 
regarding any potentially duplicative, overlapping, or conflicting 
federal statutes, rules, or policies.
---------------------------------------------------------------------------

    \263\ See supra notes 120-125.
---------------------------------------------------------------------------

F. Description of any Significant Alternatives to the Proposed Rule

    In drafting the proposed amended rule, the Commission has made 
every effort to avoid unduly burdensome requirements for entities. The 
Commission believes that the proposed amendments that are specific to 
the debt relief services industry - including the newly proposed 
disclosures, prohibited misrepresentations, and the advance fee ban - 
are necessary in order to protect consumers considering the purchase of 
debt relief services. Similarly, at this time the Commission is 
proposing to extend the coverage of the existing provisions of the Rule 
to inbound telemarketing of debt relief services. This amendment is 
designed to ensure that in all telemarketing transactions to sell debt 
relief services, consumers receive the benefit of the Rule's 
protections. For each of these proposed amendments, the Commission has 
attempted to tailor the provision to the concerns evidenced by the 
record to date. On balance, the Commission believes that the benefits 
to consumers of each outweighs the costs to industry of implementation.
    The Commission considered, but decided against, providing an 
exemption for small entities in the proposed amended Rule. The 
protections afforded to consumers from the proposed amendments are 
equally important regardless of the size of the debt relief service 
provider with whom they transact. Indeed, small debt relief service 
providers possess no intrinsic characteristics that would warrant 
exempting them from provisions, such as the proposed debt relief 
disclosures. The information provided in the disclosures is material to 
the consumer regardless of the size of the entity offering the 
services. Similarly, the protections afforded to consumers by the 
advance fee ban are equally necessary regardless of the size of the 
entity providing the services. Thus, the Commission believes that 
creating an exemption for small businesses from compliance with the 
proposed amendments would be contrary to the goals of the amendments 
because it would arbitrarily limit their reach to the detriment of 
consumers.
    Nonetheless, the Commission has taken care in developing the 
proposed amendments to set performance standards, which establish the 
objective results that must be achieved by regulated entities, but do 
not establish a particular technology that must be employed in 
achieving those objectives. For example, the Commission does not 
specify the form in which records required by the TSR must be kept.
    The Commission seeks comments on the ways in which the rule could 
be modified to reduce any costs or burdens for small entities.

VII. Paperwork Reduction Act

    The Commission is submitting this proposed amended Rule and a 
Supporting Statement to OMB for review under the Paperwork Reduction 
Act (``PRA'').\264\ The recordkeeping and disclosure requirements under 
the proposed amendments to the TSR discussed above constitute 
``collections of information'' for purposes of the PRA.\265\ 
Accordingly, the Commission is providing PRA burden estimates for those 
requirements, which are set forth below.
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    \264\ 44 U.S.C. 3501-3521.
    \265\ See 5 CFR 1320.3(c).
---------------------------------------------------------------------------

    The proposed amendments would require specific new disclosures in 
the sale of a ``debt relief service,'' as that term is defined in 
proposed Section 310.2(m), which would result in PRA burden for all 
entities - both new and existing respondents\266\ - that engage in 
telemarketing of these services. In addition, if the proposed 
amendments are adopted, new respondents would be subject to the 
existing provisions of the TSR, including its general sales disclosures 
and recordkeeping provisions.\267\ Specifically, as a result of the 
proposed exceptions to the general media and direct mail exemptions, 
entities that currently engage exclusively in inbound telemarketing of 
debt relief services, and thus are likely exempt under the current 
Rule, would be covered by the amended Rule. The PRA burden of these 
requirements will depend on various factors, including the number of 
covered firms and the percentage of such firms that conduct inbound or 
outbound telemarketing.
---------------------------------------------------------------------------

    \266\ ``Respondents'' denote already existing entities that have 
or will have, as a result of this proceeding, recordkeeping and/or 
disclosure obligations under the TSR.
    \267\ See 16 CFR 310.3(a)(1); 16 CFR 310.5.
---------------------------------------------------------------------------

    The definition of ``debt relief service'' in the proposed Rule 
would include debt settlement companies, for-profit credit counselors, 
and debt negotiation companies. Commission staff estimates that 
approximately 2,000 entities sell debt relief services and thus would 
be covered by the Commission's proposed Rule.\268\ This includes 
existing entities already subject to the TSR for which there would be 
new recordkeeping or disclosure requirements (``existing

[[Page 42013]]

respondents''),\269\ as well as existing entities that newly will be 
subject to the TSR (``new respondents'').\270\ Staff has arrived at 
this estimate by using available figures obtained through research and 
from industry sources of the number of debt settlement companies\271\ 
and the number of for-profit credit counselors.\272\ Although these 
inputs suggest that an estimate of 2,000 entities might be overstated, 
staff has used it in its burden calculations in an effort to account 
for all entities that would be subject to the proposed amendments, 
including debt negotiation companies, for which no reliable external 
estimates are available.
---------------------------------------------------------------------------

    \268\ To err in favor of being over inclusive, staff assumes 
that every entity that sells debt relief services does so using 
telemarketing.
    \269\ Outbound telemarketing and non-exempt inbound 
telemarketing of debt relief services are currently subject to the 
TSR. Non-exempt inbound telemarketing would include calls to debt 
relief service providers by consumers in response to direct mail 
advertising that does not contain disclosures required by Section 
310.3(a)(1) of the Rule. See 16 CFR 310.6(b)(6) (providing an 
exemption for ``[t]elephone calls initiation by a customer . . . in 
response to a direct mail solicitation . . . that clearly, 
conspicuously, and truthfully discloses all material information 
listed in Sec.  310.3(a)(1) of this Rule . . . .'').
    \270\ Inbound telemarketing calls in response to advertisements 
in any medium other than direct mail solicitation are generally 
exempt from the Rule's coverage under the ``general media 
exemption.'' 16 CFR 310.6(b)(5). Inbound telemarketing calls in 
response to direct mail advertisements are also exempt to the extent 
that the direct mail pieces ``clearly, conspicuously, and truthfully 
disclose[] all material information listed in Sec.  310.3(a)(1) of 
this Rule.'' 16 CFR 310.6(b)(6).
    \271\ See Streitfeld, David, Debt Settlers Offer Promises But 
Little Help, N.Y. Times, Apr. 19, 2009 (stating, without 
attribution, that ``[a]s many as 2,000 settlement companies operate 
in the United States, triple the number of a few years ago''); 
Birnbaum, Jane, Debt Relief Can Cause Headaches of Its Own, N.Y. 
Times, Feb. 9, 2008 (noting that ``[a] thousand such [debt 
settlement] companies exist nationwide, up from about 300 a couple 
of years ago, estimated David Leuthold, vice president of the 
Association of Settlement Companies, which has 70 members and is 
based in Madison, Wis.''); Able Debt Settlement at 5 (``At the time 
of this FTC Workshop there are nearly a thousand debt settlement 
companies within the US and a few companies servicing US consumers 
from outside the US with operations in Canada, Mexico, Argentina, 
India and Malaysia.''); see also SIC Code 72991001 (``Debt 
Counseling or Adjustment Service, Individuals''): 1,598 entities.
    \272\ According to industry sources consulted by Commission 
staff, there are believed to be fewer than 100 for-profit credit 
counseling firms operating in the United States.

---------------------------------------------------------------------------
    Burden Statement:

    Estimated Additional Annual Hours Burden: 42,580 hours

    As explained below, the estimated annual burden for recordkeeping 
attributable to the proposed Rule amendments, averaged over a 
prospective 3-year PRA clearance, is 29,886 hours for all industry 
members affected by the Rule. Although the first year of compliance 
will entail setting up compliant recordkeeping systems, burden will 
decline in succeeding years as they will then have such systems in 
place. The estimated burden for the disclosures that the Rule requires, 
including the newly proposed disclosures relating to debt relief 
services, is 12,694 hours for all affected industry members. Thus, the 
total PRA burden is 42,580 hours.

A. Number of Respondents

    Based on its estimate that 2,000 entities sell debt relief 
services, and that each of these entities engages in telemarketing as 
defined by the TSR, staff estimates that 879 new respondents will be 
subject to the Rule as a result of the proposed amendments. The latter 
figure is derived by a series of calculations, beginning with an 
estimate of the number of these entities that conduct inbound versus 
outbound telemarketing of debt relief services. This added estimate is 
needed to determine how many debt relief service providers are existing 
respondents and how many are new respondents, the distinction being 
relevant because their respective PRA burdens will differ.
    Staff is unaware of any source that directly states the number of 
outbound or inbound debt relief telemarketers; instead, estimates of 
these numbers are extrapolated from external data. According to the 
DMA, 21% of all direct marketing in 2007 was by inbound telemarketing 
and 20% was by outbound telemarketing.\273\ Using this relative 
weighting, staff estimates that the number of inbound debt relief 
telemarketers is 1,024 (2,000 x 21 / (20 + 21)) and the number of 
outbound telemarketers is 976 (2,000 x 20 / (20 + 21).
---------------------------------------------------------------------------

    \273\ See Direct Marketing Association Statistical Fact Book 17 
(30 th ed. 2008).
---------------------------------------------------------------------------

    Of the estimated 1,024 entities engaged in inbound telemarketing of 
debt relief services, an estimated 217 entities conduct inbound debt 
relief telemarketing through direct mail; the remaining 807 entities do 
so through general media advertising and would thus far largely be 
exempt from the Rule's current requirements.\274\ Of the 217 entities 
using direct mail, staff estimates that 72, approximately one-third, 
make the disclosures necessary to exempt them from the Rule's existing 
requirements.\275\ Thus, an estimated 879 entities (807 + 72) are new 
respondents that will be newly subject to the TSR and its PRA burden, 
including burden derived from the new debt relief disclosures.
---------------------------------------------------------------------------

    \274\ According to the DMA, 21.2% of annual U.S. advertising 
expenditures for direct marketing is through direct mail; the 
remaining 78.8% is through all other forms of general media (e.g., 
newspapers, television, Internet, Yellow Pages). See Id. at 11. 
Thus, applying these percentages to the above estimate of 1,024 
inbound telemarketers, 217 entities (21.2%) advertise by direct mail 
and 807 (78.8%) use general media.
    \275\ The apportionment of one-third is a longstanding 
assumption stated in past FTC analyses of PRA burden for the TSR. 
See, e.g., Agency Information Collection Activities, 74 FR 25540, 
25543 (May 28, 2009); Agency Information Collection Activities, 71 
FR 28698, 28700 (May 17, 2006). No comments have been received to 
date with an alternative apportionment or reasons to modify it.
---------------------------------------------------------------------------

    The remaining 145 entities (217 - 72) conducting inbound 
telemarketing for debt relief through direct mail would be existing 
respondents because they receive inbound telemarketing calls in 
response to direct mail advertisements that do not make the requisite 
disclosures to qualify for the direct mail exemption.\276\ The 
estimated 976 entities conducting outbound telemarketing of debt relief 
services are already subject to the TSR and thus, too, would be 
existing respondents. Accordingly, an estimated 1,121 telemarketers 
selling debt relief services would be subject only to the additional 
PRA burden imposed by the newly proposed debt relief disclosures in 
proposed amended Rule Section 310.3(a)(1)(viii).
---------------------------------------------------------------------------

    \276\ 16 CFR 310.6(b)(6).
---------------------------------------------------------------------------

B. Recordkeeping Hours

    Staff estimates that in the first year following promulgation of 
the proposed amended Rule, it will take 100 hours for each of the 879 
new respondents identified above to set up compliant recordkeeping 
systems. This estimate is consistent with the amount of time allocated 
in other PRA analyses that have addressed new entrants, i.e., newly 
formed entities subject to the TSR.\277\ The recordkeeping burden for 
these entities in the first year following the proposed amended Rule's 
adoption is 87,900 hours (879 new respondents x 100 hours each). In 
subsequent years, when TSR-compliant recordkeeping systems will, 
presumably, have already been established, the burden for these 
entities should parallel the one hour of ongoing recordkeeping burden 
staff has previously estimated for existing respondents under the 
Rule.\278\ Thus, annualized over a prospective three-year PRA clearance 
period, cumulative annual recordkeeping burden for the 879 new 
respondents would be 29,886 hours (87,900 hours in Year 1: 879 hours 
for each of Years 2 and 3). Burden

[[Page 42014]]

accruing to new entrants, 100 hours apiece to set up new recordkeeping 
systems compliant with the Rule, has already been factored into the 
FTC's existing clearance from OMB for an estimated 75 entrants per 
year, and is also incorporated within the FTC's latest pursuit of 
renewed clearance for the TSR under OMB Control No. 3084-0097.\279\
---------------------------------------------------------------------------

    \277\ See, e.g., Agency Information Collection Activities, 74 FR 
at 25542; Agency Information Collection Activities, 71 FR at 28699.
    \278\ Id.
    \279\ Agency Information Collection Activities, 74 FR at 25542 
(``The Commission staff also estimates that 75 new entrants per year 
would need to spend 100 hours each developing a recordkeeping system 
that complies with the TSR for an annual total of 7,500 burden 
hours.''). The term ``new entrant'' denotes an entity that has not 
yet, but may in the future come into being.
---------------------------------------------------------------------------

    Staff believes that the 1,121 existing respondents identified above 
will not have recordkeeping burden associated with setting up compliant 
recordkeeping systems. These entities are already required to comply 
with the Rule, and thus should already have recordkeeping systems in 
place. As noted above, these existing respondents will each require 
approximately one hour per year to file and store records required by 
the TSR. Here, too, however, this recordkeeping task is already 
accounted for in the FTC's existing PRA clearance totals and included 
within the latest request for renewed OMB clearance for the TSR.\280\
---------------------------------------------------------------------------

    \280\ Id.
---------------------------------------------------------------------------

C. Disclosure Hours

    As has been stated in prior FTC analyses for the TSR under the PRA, 
staff believes that in the ordinary course of business a substantial 
majority of sellers and telemarketers make the disclosures the Rule 
requires because doing so constitutes good business practice.\281\ To 
the extent this is so, the time and financial resources needed to 
comply with disclosure requirements do not constitute ``burden.''\282\ 
Moreover, some state laws require the same or similar disclosures as 
the Rule mandates. Thus, the disclosure hours burden attributable to 
the Rule is far less than the total number of hours associated with the 
disclosures overall. Staff continues to assume that most of the 
disclosures the Rule requires would be made in at least 75 percent of 
telemarketing calls even absent the Rule.\283\
---------------------------------------------------------------------------

    \281\ See, e.g., id. (``Staff believes that in the ordinary 
course of business a substantial majority of sellers and 
telemarketers make the disclosures the Rule requires because to do 
so constitutes good business practice.'').
    \282\ 16 CFR 1320.3(b)(2).
    \283\ See, e.g., Agency Information Collection Activities, 74 FR 
at 25543; Agency Information Collection Activities, 71 FR at 28699. 
Accordingly, staff has continued to estimate that the hours burden 
for most of the Rule's disclosure requirements is 25 percent of the 
total hours associated with disclosures of the type the TSR 
requires.
---------------------------------------------------------------------------

    To determine the number of outbound and inbound calls regarding 
debt relief services, staff has combined external data with internal 
assumptions. Staff assumes that outbound calls to sell and inbound 
calls to buy debt relief services are made only to and by consumers who 
are delinquent on one or more credit cards.\284\ For simplicity, and 
lacking specific information to the contrary, staff further assumes 
that each such consumer or household will receive one outbound call and 
place one inbound call for these services.
---------------------------------------------------------------------------

    \284\ By extension upsells on these initial calls would not be 
applicable. Moreover, staff believes that few, if any, upsells on 
initial outbound and inbound calls would be for debt relief.
---------------------------------------------------------------------------

    According to recently published figures, 78% of U.S. households, or 
91.1 million households, had one or more credit cards at the end of 
2008.\285\ The Federal Reserve Board reported in May 2009 that the 
delinquency rate for credit cards had risen to 6.5%.\286\ Applying this 
rate to the stated number of households, 91.1 million, yields 5,921,500 
consumers who will receive and place a call for debt relief services in 
a given year.
---------------------------------------------------------------------------

    \285\ See Woolsey, Ben and Schulz, Matt, Credit Card Statistics, 
industry facts, debt statistics, available at (www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php).
    \286\ FRB, Federal Reserve Statistical Release: Charge Offs and 
Delinquency Rates on Loans and Leases at Commercial Banks, available 
at (www.federalreserve.gov/releases/chargeoff/delallsa.htm) 
(reporting a 6.5% delinquency rate for credit cards for the first 
quarter of 2009).
---------------------------------------------------------------------------

    Because outbound calls are already subject to the existing 
provisions of the TSR, each such call will entail only the incremental 
PRA burden resulting from the new debt relief disclosures. For inbound 
calls, however, there will be new respondents in addition to existing 
ones, and associated underlying distinctions between current exemptions 
applicable to direct marketing via direct mail and those for general 
media (discussed further below). Accordingly, separate estimates are 
necessary for inbound debt relief calls attributable to each.
    To determine the number of inbound debt relief calls attributable 
to general media advertising versus direct mail advertising, staff 
relied upon the DMA estimate that 21.2% of direct marketing is done by 
direct mail\287\ and 78.8% of direct marketing is done by general media 
methods.\288\ Applying these percentages to the above-noted estimate of 
5,921,500 inbound debt relief calls translates to 4,666,142 calls 
resulting from general media advertising and 1,255,358 calls arising 
from direct mail. Staff then estimated that 1/3 of inbound direct mail 
debt relief calls, or 418,453 such calls, are currently exempt from the 
TSR because they are in response to direct mail advertising that makes 
the requisite Section 310.3(a)(1) disclosures. The remaining 2/3, or 
836,905 inbound direct mail calls, are non-exempt.
---------------------------------------------------------------------------

    \287\ Supra note 274.
    \288\ Id.
---------------------------------------------------------------------------

1) Existing respondents' disclosure burden
    As discussed above in this NPRM, the proposed amended Rule includes 
a new provision, Section 310.3(a)(1)(viii), which includes six 
disclosures specific to providers of debt relief services. Staff 
estimates that reciting these disclosures in each sales call pertaining 
to debt relief services will take 12 seconds.
    For outbound calls, the disclosure burden for existing entities 
from the new debt relief disclosures is 4,935 hours [5,921,500 outbound 
calls involving debt relief x 12 seconds each (for new debt relief 
disclosures) x 25% TSR burden].
    Similarly, currently non-exempt inbound calls - inbound calls 
placed as a result of direct mail solicitations that do not include the 
Section 310.3(a)(1) disclosures - will only entail the incremental PRA 
burden resulting from the new debt relief disclosures. As noted above, 
this totals 836,905 such calls each year. The associated disclosure 
burden for these calls would be 697 hours (836,905 non-exempt direct 
mail inbound calls x 12 seconds for debt relief disclosures x 25% 
burden from TSR).
    Thus, the total disclosure burden under the proposed amended Rule 
for all existing respondents is 5,632 hours (4,935 hours for entities 
conducting outbound calls + 697 hours for entities conducting inbound, 
non-exempt telemarketing).
2) New respondents' disclosure burden
    New respondents - those currently exempt from the Rule's coverage 
as a result of the direct mail or general media exemptions for inbound 
calls - will incur disclosure burden not only for the debt relief 
disclosures in proposed Section 310.3(a)(1)(viii), but also for the 
existing general disclosures for which such entities will newly be 
responsible.\289\
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    \289\ See Agency Information Collection Activities, 74 FR at 
25542.
---------------------------------------------------------------------------

    As noted above, inbound calls responding to debt relief services 
advertised in general media are

[[Page 42015]]

currently exempt from the Rule.\290\ The disclosure burden for these 
calls would be 20 seconds each [8 seconds for existing Section 
310.3(a)(1) disclosures + 12 seconds for debt relief disclosures]. 
Applying this unit measure to the estimated 4,666,142 inbound debt 
relief calls arising from general media advertising, the cumulative 
disclosure burden is 6,481 hours per year (4,666,142 inbound debt 
relief calls in response to general media advertising x 20 seconds x 
25% burden from TSR).
---------------------------------------------------------------------------

    \290\ This is so because, at present, no limitation or exemption 
would limit use of the general media exemption by those selling debt 
relief services via inbound telemarketing. See 16 CFR 310.6(b)(5) 
(the general media exemption, unlike the direct mail exemption, is 
not conditional and does not presently except from its coverage debt 
relief services).
---------------------------------------------------------------------------

    Applying the previously stated estimates and assumptions, the 
disclosure burden for new respondents attributable to currently exempt 
inbound calls tied to direct mail (i.e., currently exempt when the 
requisite Section 310.3(a)(1) disclosures are made), is 581 hours per 
year (418,453 exempt inbound direct mail calls x 20 seconds x 25% 
burden from TSR).
    Thus, the total disclosure burden attributable to the revised 
proposed Rule is 12,694 hours (4,935 + 697 + 6,481 + 581).
    Estimated Annual Labor Cost: $905,726
    Estimated Annual Non-Labor Cost: $61,716

D. Recordkeeping Labor and Non-Labor Costs

1) Labor Costs
    Assuming a cumulative burden of 87,900 hours in Year 1 (of a 
prospective 3-year PRA clearance for the TSR) to set up compliant 
recordkeeping systems for existing debt relief service providers newly 
subject to the Rule (879 new respondents x 100 hours each in Year 1 
only), and applying to that a skilled labor rate of $25/hour,\291\ 
labor costs would approximate $2,197,500 in the first year of 
compliance for new respondents.\292\ As discussed above, however, in 
succeeding years, recordkeeping associated with the Rule will only 
require 879 hours, cumulatively, per year. Applied to a clerical wage 
rate of $14/hour, this would amount to $12,306 in each of those years. 
Thus, the estimated annual labor costs for recordkeeping associated 
with the revised proposed Rule, averaged over a prospective 3-year 
clearance period, is $740,704.
---------------------------------------------------------------------------

    \291\ This rounded figure is derived from the mean hourly 
earnings shown for computer support specialists found in the 
National Compensation Survey: Occupational Earnings in the United 
States 2007, U.S. Department of Labor released August 2008, Bulletin 
2704, Table 3 (``Full-time civilian workers,'' mean and median 
hourly wages). See (www.bls.gov/ncs/ncswage2007.htm).
    \292\ As discussed above, existing respondents should already 
have compliant recordkeeping systems and thus are not included in 
this calculation.
---------------------------------------------------------------------------

2) Non-Labor Costs
    Staff believes that the capital and start-up costs associated with 
the TSR's information collection requirements are de minimis. The 
Rule's recordkeeping requirements mandate that companies maintain 
records, but not in any particular form. While those requirements 
necessitate that affected entities have a means of storage, industry 
members should have that already regardless of the Rule. Even if an 
entity finds it necessary to purchase a storage device, the cost is 
likely to be minimal, especially when annualized over the item's useful 
life.
    Affected entities need some storage media such as file folders, 
electronic storage media or paper in order to comply with the Rule's 
recordkeeping requirements. Although staff believes that most affected 
entities would maintain the required records in the ordinary course of 
business, staff estimates that the previously determined 879 new 
respondents newly subject to the revised proposed Rule will spend an 
annual amount of $50 each on office supplies as a result of the Rule's 
recordkeeping requirements, for a total recordkeeping cost burden of 
$43,950.

E. Disclosure Labor & Non-Labor Costs

1) Labor Costs
    The estimated annual labor cost for disclosures for under the 
revised proposed Rule is $165,022. This total is the product of 
applying an assumed hourly wage rate of $13\293\ to the earlier stated 
estimate of 12,694 hours pertaining to general and specific disclosures 
in initial outbound and inbound calls.
---------------------------------------------------------------------------

    \293\ This rounded figure is derived from the mean hourly 
earnings shown for telemarketers found in the National Compensation 
Survey: Occupational Earnings in the United States 2007, U.S. 
Department of Labor released August 2008, Bulletin 2704, Table 3 
(``Full-time civilian workers,'' mean and median hourly wages). See 
(www.bls.gov/ncs/ncswage2007.htm).
---------------------------------------------------------------------------

2) Non-Labor Costs
    Estimated outbound disclosure hours (4,935) per above multiplied by 
an estimated commercial calling rate of 6 cents per minute ($3.60 per 
hour) equals $17,766 in phone-related costs.\294\
---------------------------------------------------------------------------

    \294\ Staff believes that remaining non-labor costs would 
largely be incurred by affected entities, regardless, in the 
ordinary course of business and/or marginally be above such costs.
---------------------------------------------------------------------------

    The Commission invites comments on: (1) whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the FTC, including whether the information will have 
practical utility; (2) the accuracy of the FTC's estimate of the burden 
of the proposed collection of information; (3) ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(4) ways to minimize the burden of collecting information on those who 
respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology, e.g., permitting electronic 
submission of responses.

VIII. Questions for Comment

    The Commission seeks comment on various aspects of the proposed 
Rule. Without limiting the scope of issues on which it seeks comment, 
the Commission is particularly interested in receiving comments on the 
questions that follow. In responding to these questions, include 
detailed, factual supporting information whenever possible.

A. General Questions for Comment

    Please provide comment on each aspect of the proposed Rule, 
including answers to the following questions.
    (1) How would the proposed Rule impact different entities or the 
provision of different types of debt relief services? Please provide as 
much detail as possible. Useful information would include information 
about the services provided by particular entities or types of 
entities, and how different entities perform their services.
    a. In particular, do entities differ in how they currently collect 
their fees, e.g., what payments are required before the services are 
begun, what payments are required while services are being provided, 
and what payments are not collected until after the work is completed? 
Which providers of debt relief services currently require consumers to 
make some payment before services are completely provided? Which 
entities do and do not require such payments? How much of the total fee 
do the various providers charge prior to completion of the services 
being offered?
    b. How do the various types of entities measure their success in 
providing the represented services and what level of success are they 
able to achieve? (Please

[[Page 42016]]

provide data to support these representations.)
    (2) What would be the effect of the proposed Rule changes 
(including any benefits and costs), if any, on consumers? Would the 
benefits to consumers differ depending on the service offered or the 
type of provider offering it, and if so, how? What evidence is there 
that consumers are or are not misled in the promotion and sale of 
different types of goods or services or by different providers? Please 
provide as much detail as possible.
    (3) What would be the impact of the proposed Rule changes 
(including any benefits and costs), if any, on industry?
    (4) What changes, if any, should be made to the proposed Rule to 
increase benefits to consumers and competition?
    (5) What changes, if any, should be made to the proposed Rule to 
decrease any unnecessary cost to industry or consumers?
    (6) How would the proposed Rule affect small business entities with 
respect to costs, profitability, competitiveness, and employment?

B. Questions on Proposed Specific Provisions

Section 310.2 - Definitions
    (1) Does the definition of ``debt relief service'' in proposed 
Section 310.2(m) adequately describe the scope of the proposed Rule's 
coverage? If not, how should it be modified? Is the proposed definition 
accurate? Are there alternative definitions that the Commission should 
consider? Should additional terms be defined, and, if so, how? What 
would be the costs and benefits of each suggested definition?
    (2) Are there reasons to broaden the definition of ``debt relief 
service'' to include the word ``product''? Would the addition of 
``products'' allow the Rule to reach additional deceptive and abusive 
practices engaged in by sellers and telemarketers of debt relief 
products and services? Are there reasons to include ``products'' to 
ensure that the scope of the definition is appropriately broad to 
anticipate likely changes in the marketplace? Why or why not?
    (3) The definition of ``debt relief service'' in proposed Section 
310.2(m) would apply to ``any service represented, directly or by 
implication, to renegotiate, settle, or in any way alter the terms of 
payment or other terms of the debt between a consumer and one or more 
unsecured creditors or debt collectors.'' (emphasis added). The 
Commission has so limited the provision in anticipation of covering 
mortgage loan modification and foreclosure rescue services under its 
new rulemaking authority with respect to mortgage loans. As a result of 
this determination, with a few exceptions, only outbound telemarketing 
calls to sell mortgage loan modification or foreclosure rescue debt 
relief services would be covered by the TSR. Is this determination 
appropriate? Why or why not?
    (4) Should any entities encompassed by the definition in proposed 
Section 310.2(m) be excluded or exempted from this definition? If so, 
which entities? Why or why not?
Section 310.3 -Deceptive telemarketing acts or practices
    (1) The proposed amended Rule contemplates extending coverage of 
the existing TSR disclosure and misrepresentation provisions contained 
in Section 310.3(a) to inbound debt relief sales calls (as defined in 
the proposal). Would this adequately address the harms to consumers 
that occur in the sale of debt relief services? Why or why not?
    (2) Proposed Section 310.3(a)(1)(viii) has six required 
disclosures. For each disclosure, please provide comment on the 
following questions:
    a. Is this disclosure appropriate to address harms to consumers 
that occur in the sale of debt relief services? If not, why or why not? 
How could the proposed amended Rule be modified to better address such 
harms?
    b. Should this provision be applicable to all providers of debt 
relief services, or should this provision be tailored to apply only to 
certain debt relief providers? Why or why not? If so, which entities 
should be covered?
    c. What would be the benefits to consumers of this proposed 
requirement?
    d. What burdens would be imposed on providers of debt relief 
services if this requirement were adopted?
    e. As a practical matter, how would providers comply with the 
requirement? Would it be necessary to provide disclosures that were 
specific to the situation of an individual consumer or could the 
requirement be satisfied with a generic disclosure that would be given 
to all of the provider's potential customers? What would such a 
disclosure look like?
    f. Are there changes that could be made to lessen the burdens 
without reducing the benefits to consumers?
    (3) Are there other disclosures that should be included in the Rule 
to address harmful practices in the sale of debt relief services? If 
so, provide the suggested disclosure and discuss the relative costs and 
benefits to industry and consumers of such a requirement.
    (4) Proposed Section 310.3(a)(2)(x) prohibits misrepresentations of 
any material aspect of a debt relief services, and provides specific 
examples of such prohibited misrepresentations. Is each specified 
misrepresentation sufficiently widespread to justify inclusion in the 
Rule?
    (5) Are there other prohibited misrepresentations that should be 
specified in the Rule to address harmful practices in the sale of debt 
relief services? If so, why?
    (6) Does the proposed Rule need to be modified in any way to better 
address any misrepresentations or omissions, and if so, what should 
those modifications be?
Section 310.4 - Abusive telemarketing acts or practices
    (1) What has been the experience in states that have regulated the 
fees that debt relief providers can charge - for example, allowing a 
limited initial or set-up fee, and then limiting the fees that can be 
charged while the services are being provided? Have providers of debt 
relief services been able to comply with these restrictions and still 
operate successfully in those states? What kinds of providers have been 
able to do so? Would it be appropriate for the Commission to consider 
such an approach? Why or why not? If providers were permitted to 
collect such limited fees, what fees should be permitted and what 
limits should be established on them?
    (2) To what extent does proposed Section 310.4(a)(5) prevent harm 
to consumers that would not be eliminated by the disclosure 
requirements in proposed Section 310.3(a)(1) and misrepresentation 
prohibitions in proposed Section 310.3(a)(2)? Alternatively, if you 
believe that proposed Section 310.4(a)(5) would not prevent any 
additional harms, please explain why.
    (3) Proposed Section 310.4(a)(5) provides that payment may not be 
requested or received until a seller provides a customer with 
``documentation in the form of a settlement agreement, debt management 
plan, or other such valid contractual agreement, that the particular 
debt has, in fact, been renegotiated, settled, reduced, or otherwise 
altered.'' Is it appropriate to require provision of these documents 
before a covered entity can request or receive payment of any fee or 
consideration? In addition to those listed in the proposed amended Rule 
or described this Notice, are there other documents that typically 
evidence the completion of a debt relief service? Do such documents 
adequately

[[Page 42017]]

demonstrate that a consumer's debt has been successfully renegotiated, 
settled, reduced, or otherwise altered? Is one type of document 
preferable to another?
    (4) Should any type or portion of fees charged by entities offering 
debt relief services be exempted from Section 310.4(a)(5)? If so, which 
fees - either by type of entity providing the service or by type of fee 
- should be exempted, and why? Will entities that offer a measurably 
beneficial service to consumers be adversely affected by this proposed 
Section? Why or why not? Will covered providers find it is no longer 
possible to provide particular types of services if this requirement is 
imposed? Which services will it no longer be economic to provide and 
why will it no longer be economic to provide them?
    (5) Would an alternative formulation of an advance fee ban, such as 
the one in Section 310.4(a)(4) of the existing Rule (prohibiting 
requesting or receiving a fee in advance only when the seller or 
telemarketer has guaranteed or represented a high likelihood of success 
in obtaining or arranging the promised services), be more appropriate 
than a ban conditioned on the provision of the promised goods or 
services? Why or why not?
    (6) Are there alternatives to an advance fee ban exist that would 
sufficiently address the problem of low success rates in the debt 
settlement industry? If so, please explain.
    (7) As noted, the Commission does not intend that the advance fee 
ban be interpreted to prohibit a consumer from using legitimate escrow 
services - services controlled by the consumer - to save money in 
anticipation of settlement. Is it appropriate to allow the use of such 
escrow services? Why or why not?
Section 310.5 - Recordkeeping requirements
    (1) No changes to Section 310.5 are included in the proposed Rule, 
but the application of the Rule to inbound debt relief calls would 
require some sellers and telemarketers to comply with these 
requirements for the first time. What would be the costs and benefits 
to industry and consumers of this result?
Section 310.6 - Exemptions
    (1) Proposed Sections 310.6(b)(5) and 310.6(b)(6) modify the 
general media and direct mail inbound call exemptions to make them 
unavailable to telemarketers of debt relief services. Is there a 
sufficient basis for this modification? Why or why not?
Regulatory Flexibility Act
    (1) As noted in this NPRM, it is not readily feasible to determine 
a precise estimate of how many small entities will be subject to the 
proposed Rule. Please provide any information which would assist in 
making this determination.
    (2) Identify any statutes or rules that may conflict with the 
proposed Rule requirements, as well as any other state, local, or 
industry rules or policies that require covered entities to implement 
practices that comport with the requirements of the proposed Rule.
    (3) Do the prohibited practices in the proposed Rule impose a 
significant impact upon a substantial number of small entities? If so, 
what modifications to the proposed Rule should the Commission consider 
to minimize the burden on small entities?

IX. Proposed Rule

List of Subjects in 16 CFR Part 310

    Telemarketing, Trade Practices

0
Therefore, as stated in the preamble, the Federal Trade Commission 
proposes to revise part 310 of title 16, Code of Federal Regulations, 
to read as follows:

PART 310--TELEMARKETING SALES RULE

Section Contents
Sec.  310.1 Scope of regulations of this part.
Sec.  310.2 Definitions.
Sec.  310.3 Deceptive telemarketing acts or practices.
Sec.  310.4 Abusive telemarketing acts or practices.
Sec.  310.5 Recordkeeping requirements.
Sec.  310.6 Exemptions.
Sec.  310.7 Actions by states and private persons.
Sec.  310.8 Fee for access to the National Do Not Call Registry.
Sec.  310.9 Severability.

    Authority: 15 U.S.C. 6101-6108.


Sec.  310.1  Scope of regulations of this part.

    This part implements the Telemarketing and Consumer Fraud and Abuse 
Prevention Act, 15 U.S.C. 6101-6108, as amended.


Sec.  310.2  Definitions.

    (a) Acquirer means a business organization, financial institution, 
or an agent of a business organization or financial institution that 
has authority from an organization that operates or licenses a credit 
card system to authorize merchants to accept, transmit, or process 
payment by credit card through the credit card system for money, goods 
or services, or anything else of value.
    (b) Attorney General means the chief legal officer of a state.
    (c) Billing information means any data that enables any person to 
access a customer's or donor's account, such as a credit card, 
checking, savings, share or similar account, utility bill, mortgage 
loan account, or debit card.
    (d) Caller identification service means a service that allows a 
telephone subscriber to have the telephone number, and, where 
available, name of the calling party transmitted contemporaneously with 
the telephone call, and displayed on a device in or connected to the 
subscriber's telephone.
    (e) Cardholder means a person to whom a credit card is issued or 
who is authorized to use a credit card on behalf of or in addition to 
the person to whom the credit card is issued.
    (f) Charitable contribution means any donation or gift of money or 
any other thing of value.
    (g) Commission means the Federal Trade Commission.
    (h) Credit means the right granted by a creditor to a debtor to 
defer payment of debt or to incur debt and defer its payment.
    (i) Credit card means any card, plate, coupon book, or other credit 
device existing for the purpose of obtaining money, property, labor, or 
services on credit.
    (j) Credit card sales draft means any record or evidence of a 
credit card transaction.
    (k) Credit card system means any method or procedure used to 
process credit card transactions involving credit cards issued or 
licensed by the operator of that system.
    (l) Customer means any person who is or may be required to pay for 
goods or services offered through telemarketing.
    (m) Debt relief service means any service represented, directly or 
by implication, to renegotiate, settle, or in any way alter the terms 
of payment or other terms of the debt between a consumer and one or 
more unsecured creditors or debt collectors, including, but not limited 
to, a reduction in the balance, interest rate, or fees owed by a 
consumer to an unsecured creditor or debt collector.
    (n) Donor means any person solicited to make a charitable 
contribution.
    (o) Established business relationship means a relationship between 
a seller and a consumer based on:
    (1) the consumer's purchase, rental, or lease of the seller's goods 
or services or a financial transaction between the consumer and seller, 
within the eighteen (18) months immediately preceding the date of a 
telemarketing call; or
    (2) the consumer's inquiry or application regarding a product or

[[Page 42018]]

service offered by the seller, within the three (3) months immediately 
preceding the date of a telemarketing call.
    (p) Free-to-pay conversion means, in an offer or agreement to sell 
or provide any goods or services, a provision under which a customer 
receives a product or service for free for an initial period and will 
incur an obligation to pay for the product or service if he or she does 
not take affirmative action to cancel before the end of that period.
    (q) Investment opportunity means anything, tangible or intangible, 
that is offered, offered for sale, sold, or traded based wholly or in 
part on representations, either express or implied, about past, 
present, or future income, profit, or appreciation.
    (r) Material means likely to affect a person's choice of, or 
conduct regarding, goods or services or a charitable contribution.
    (s) Merchant means a person who is authorized under a written 
contract with an acquirer to honor or accept credit cards, or to 
transmit or process for payment credit card payments, for the purchase 
of goods or services or a charitable contribution.
    (t) Merchant agreement means a written contract between a merchant 
and an acquirer to honor or accept credit cards, or to transmit or 
process for payment credit card payments, for the purchase of goods or 
services or a charitable contribution.
    (u) Negative option feature means, in an offer or agreement to sell 
or provide any goods or services, a provision under which the 
customer's silence or failure to take an affirmative action to reject 
goods or services or to cancel the agreement is interpreted by the 
seller as acceptance of the offer.
    (v) Outbound telephone call means a telephone call initiated by a 
telemarketer to induce the purchase of goods or services or to solicit 
a charitable contribution.
    (w) Person means any individual, group, unincorporated association, 
limited or general partnership, corporation, or other business entity.
    (x) Preacquired account information means any information that 
enables a seller or telemarketer to cause a charge to be placed against 
a customer's or donor's account without obtaining the account number 
directly from the customer or donor during the telemarketing 
transaction pursuant to which the account will be charged.
    (y) Prize means anything offered, or purportedly offered, and 
given, or purportedly given, to a person by chance. For purposes of 
this definition, chance exists if a person is guaranteed to receive an 
item and, at the time of the offer or purported offer, the telemarketer 
does not identify the specific item that the person will receive.
    (z) Prize promotion means:
    (1) A sweepstakes or other game of chance; or
    (2) An oral or written express or implied representation that a 
person has won, has been selected to receive, or may be eligible to 
receive a prize or purported prize.
    (aa) Seller means any person who, in connection with a 
telemarketing transaction, provides, offers to provide, or arranges for 
others to provide goods or services to the customer in exchange for 
consideration.
    (bb) State means any state of the United States, the District of 
Columbia, Puerto Rico, the
    Northern Mariana Islands, and any territory or possession of the 
United States.
    (cc) Telemarketer means any person who, in connection with 
telemarketing, initiates or receives telephone calls to or from a 
customer or donor.
    (dd) Telemarketing means a plan, program, or campaign which is 
conducted to induce thepurchase of goods or services or a charitable 
contribution, by use of one or more telephones and which involves more 
than one interstate telephone call. The term does not include the 
solicitation of sales through the mailing of a catalog which: contains 
a written description or illustration of the goods or services offered 
for sale; includes the business address of the seller; includes 
multiple pages of written material or illustrations; and has been 
issued not less frequently than once a year, when the person making the 
solicitation does not solicit customers by telephone but only receives 
calls initiated by customers in response to the catalog and during 
those calls takes orders only without further solicitation. For 
purposes of the previous sentence, the term ``further solicitation'' 
does not include providing the customer with information about, or 
attempting to sell, any other item included in the same catalog which 
prompted the customer's call or in a substantially similar catalog.
    (ee) Upselling means soliciting the purchase of goods or services 
following an initial transaction during a single telephone call. The 
upsell is a separate telemarketing transaction, not a continuation of 
the initial transaction. An ``external upsell'' is a solicitation made 
by or on behalf of a seller different from the seller in the initial 
transaction, regardless of whether the initial transaction and the 
subsequent solicitation are made by the same telemarketer. An 
``internal upsell'' is a solicitation made by or on behalf of the same 
seller as in the initial transaction, regardless of whether the initial 
transaction and subsequent solicitation are made by the same 
telemarketer.


Sec.  310.3  Deceptive telemarketing acts or practices.

    (a) Prohibited deceptive telemarketing acts or practices. It is a 
deceptive telemarketing act or practice and a violation of this Rule 
for any seller or telemarketer to engage in the following conduct:
    (1) Before a customer pays \295\ for goods or services offered, and 
before any services are rendered, failing to disclose truthfully, in a 
clear and conspicuous manner, the following material information:
---------------------------------------------------------------------------

    \295\ When a seller or telemarketer uses, or directs a customer 
to use, a courier to transport payment, the seller or telemarketer 
must make the disclosures required by Sec.  310.3(a)(1) before 
sending a courier to pick up payment or authorization for payment, 
or directing a customer to have a courier pick up payment or 
authorization for payment.
---------------------------------------------------------------------------

    (i) The total costs to purchase, receive, or use, and the quantity 
of, any goods or services that are the subject of the sales offer;\296\
---------------------------------------------------------------------------

    \296\ For offers of consumer credit products subject to the 
Truth in Lending Act, 15 U.S.C. 1601 et seq., and Regulation Z, 12 
CFR 226, compliance with the disclosure requirements under the Truth 
in Lending Act and Regulation Z shall constitute compliance with 
Sec.  310.3(a)(1)(i) of this Rule.
---------------------------------------------------------------------------

    (ii) All material restrictions, limitations, or conditions to 
purchase, receive, or use the goods or services that are the subject of 
the sales offer;
    (iii) If the seller has a policy of not making refunds, 
cancellations, exchanges, orrepurchases, a statement informing the 
customer that this is the seller's policy; or, if the seller or 
telemarketer makes a representation about a refund, cancellation, 
exchange, or repurchase policy, a statement of all material terms and 
conditions of such policy;
    (iv) In any prize promotion, the odds of being able to receive the 
prize, and, if the odds are not calculable in advance, the factors used 
in calculating the odds; that no purchase or payment is required to win 
a prize or to participate in a prize promotion and that any purchase or 
payment will not increase the person's chances of winning; and the no-
purchase/no-payment method of participating in the prize promotion with 
either instructions on how to participate or an address or local or 
toll-free telephone number to which customers may write or call for 
information on how to participate;
    (v) All material costs or conditions to receive or redeem a prize 
that is the subject of the prize promotion;

[[Page 42019]]

    (vi) In the sale of any goods or services represented to protect, 
insure, or otherwise limit a customer's liability in the event of 
unauthorized use of the customer's credit card, the limits on a 
cardholder's liability for unauthorized use of a credit card pursuant 
to 15 U.S.C. 1643;
    (vii) If the offer includes a negative option feature, all material 
terms and conditions of the negative option feature, including, but not 
limited to, the fact that the customer's account will be charged unless 
the customer takes an affirmative action to avoid the charge(s), the 
date(s) the charge(s) will be submitted for payment, and the specific 
steps the customer must take to avoid the charge(s); and
    (viii) In the sale of any debt relief service,
    (A) the amount of time necessary to achieve the represented 
results, and to the extent that the offered service may include the 
making of a settlement offer to one or more of the customer's creditors 
or debt collectors, the specific time by which the debt relief service 
provider will make such a bona fide settlement offer to each of the 
customer's creditors or debt collectors;
    (B) to the extent that the offered service may include the making 
of a settlement offer to one or more of the customer's creditors or 
debt collectors, the amount of money or the percentage of each 
outstanding debt that the customer must accumulate before a debt relief 
service provider will make a bona fide settlement offer to each of the 
customer's creditors or debt collectors;
    (C) that not all creditors or debt collectors will accept a 
reduction in the balance, interest rate, or fees a customer owes such 
creditor or debt collector;
    (D) that pending completion of the represented debt relief 
services, the customer's creditors or debt collectors may pursue 
collection efforts, including initiation of lawsuits;
    (E) to the extent that any aspect of the debt relief service relies 
upon or results in the customer failing to make timely payments to 
creditors or debt collectors, that use of the debt relief service will 
likely adversely affect the customer's creditworthiness, may result in 
the customer being sued by one or more creditors or debt collectors, 
and may increase the amount of money the customer owes to one or more 
creditors or debt collectors due to the accrual of fees and interest; 
and
    (F) that savings a customer realizes from use of a debt relief 
service may be taxable income.
    (2) Misrepresenting, directly or by implication, in the sale of 
goods or services any of the following material information:
    (i) The total costs to purchase, receive, or use, and the quantity 
of, any goods or services that are the subject of a sales offer;
    (ii) Any material restriction, limitation, or condition to 
purchase, receive, or use goods or services that are the subject of a 
sales offer;
    (iii) Any material aspect of the performance, efficacy, nature, or 
central characteristics of goods or services that are the subject of a 
sales offer;
    (iv) Any material aspect of the nature or terms of the seller's 
refund, cancellation, exchange, or repurchase policies;
    (v) Any material aspect of a prize promotion including, but not 
limited to, the odds of being able to receive a prize, the nature or 
value of a prize, or that a purchase or payment is required to win a 
prize or to participate in a prize promotion;
    (vi) Any material aspect of an investment opportunity including, 
but not limited to, risk, liquidity, earnings potential, or 
profitability;
    (vii) A seller's or telemarketer's affiliation with, or endorsement 
or sponsorship by, any person or government entity;
    (viii) That any customer needs offered goods or services to provide 
protections a customer already has pursuant to 15 U.S.C. 1643;
    (ix) Any material aspect of a negative option feature including, 
but not limited to, the fact that the customer's account will be 
charged unless the customer takes an affirmative action to avoid the 
charge(s), the date(s) the charge(s) will be submitted for payment, and 
the specific steps the customer must take to avoid the charge(s); or
    (x) Any material aspect of any debt relief service, including, but 
not limited to, the amount of money or the percentage of the debt 
amount that a customer may save by using such service; the amount of 
time necessary to achieve the represented results; the amount of money 
or the percentage of each outstanding debt that the customer must 
accumulate before the provider of the debt relief service will initiate 
attempts with the customer's creditors debt collectors to negotiate, 
settle, or modify the terms of customer's debt; the effect of the 
service on a customer's creditworthiness; the effect of the service on 
collection efforts of the consumer's creditors or debt collectors; the 
percentage or number of customers who attain the represented results; 
and whether a debt relief service is offered or provided by a non-
profit entity.
    (3) Causing billing information to be submitted for payment, or 
collecting or attempting to collect payment for goods or services or a 
charitable contribution, directly or indirectly, without the customer's 
or donor's express verifiable authorization, except when the method of 
payment used is a credit card subject to protections of the Truth in 
Lending Act and Regulation Z,\297\ or a debit card subject to the 
protections of the Electronic Fund Transfer Act and Regulation E.\298\ 
Such authorization shall be deemed verifiable if any of the following 
means is employed:
---------------------------------------------------------------------------

    \297\ Truth in Lending Act, 15 U.S.C. 1601 et seq., and 
Regulation Z, 12 CFR part 226.
    \298\ Electronic Fund Transfer Act, 15 U.S.C. 1693 et seq., and 
Regulation E, 12 CFR part 205.
---------------------------------------------------------------------------

    (i) Express written authorization by the customer or donor, which 
includes the customer's or donor's signature; \299\
---------------------------------------------------------------------------

    \299\ For purposes of this Rule, the term ``signature'' shall 
include an electronic or digital form of signature, to the extent 
that such form of signature is recognized as a valid signature under 
applicable federal law or state contract law.
---------------------------------------------------------------------------

    (ii) Express oral authorization which is audio-recorded and made 
available upon request to the customer or donor, and the customer's or 
donor's bank or other billing entity, and which evidences clearly both 
the customer's or donor's authorization of payment for the goods or 
services or charitable contribution that are the subject of the 
telemarketing transaction and the customer's or donor's receipt of all 
of the following information:
    (A) The number of debits, charges, or payments (if more than one);
    (B) The date(s) the debit(s), charge(s), or payment(s) will be 
submitted for payment;
    (C) The amount(s) of the debit(s), charge(s), or payment(s);
    (D) The customer's or donor's name;
    (E) The customer's or donor's billing information, identified with 
sufficient specificity such that the customer or donor understands what 
account will be used to collect payment for the goods or services or 
charitable contribution that are the subject of the telemarketing 
transaction;
    (F) A telephone number for customer or donor inquiry that is 
answered during normal business hours; and
    (G) The date of the customer's or donor's oral authorization; or
    (iii) Written confirmation of the transaction, identified in a 
clear and conspicuous manner as such on the outside of the envelope, 
sent to the customer or donor via first class mail prior to the 
submission for payment of the customer's or donor's billing 
information, and that includes all of the information contained in

[[Page 42020]]

Sec. Sec.  310.3(a)(3)(ii)(A)-(G) and a clear and conspicuous statement 
of the procedures by which the customer or donor can obtain a refund 
from the seller or telemarketer or charitable organization in the event 
the confirmation is inaccurate; provided, however, that this means of 
authorization shall not be deemed verifiable in instances in which 
goods or services are offered in a transaction involving a free-to-pay 
conversion and preacquired account information.
    (4) Making a false or misleading statement to induce any person to 
pay for goods or services or to induce a charitable contribution.
    (b) Assisting and facilitating. It is a deceptive telemarketing act 
or practice and a violation of this Rule for a person to provide 
substantial assistance or support to any seller or telemarketer when 
that person knows or consciously avoids knowing that the seller or 
telemarketer is engaged in any act or practice that violates Sec. Sec.  
310.3(a), (c) or (d), or Sec.  310.4 of this Rule.
    (c) Credit card laundering. Except as expressly permitted by the 
applicable credit card system, it is a deceptive telemarketing act or 
practice and a violation of this Rule for:
    (1) A merchant to present to or deposit into, or cause another to 
present to or deposit into, the credit card system for payment, a 
credit card sales draft generated by a telemarketing transaction that 
is not the result of a telemarketing credit card transaction between 
the cardholder and the merchant;
    (2) Any person to employ, solicit, or otherwise cause a merchant, 
or an employee, representative, or agent of the merchant, to present to 
or deposit into the credit card system for payment, a credit card sales 
draft generated by a telemarketing transaction that is not the result 
of a telemarketing credit card transaction between the cardholder and 
the merchant; or
    (3) Any person to obtain access to the credit card system through 
the use of a business relationship or an affiliation with a merchant, 
when such access is not authorized by the merchant agreement or the 
applicable credit card system.
    (d) Prohibited deceptive acts or practices in the solicitation of 
charitable contributions. It is a fraudulent charitable solicitation, a 
deceptive telemarketing act or practice, and a violation of this Rule 
for any telemarketer soliciting charitable contributions to 
misrepresent, directly or by implication, any of the following material 
information:
    (1) The nature, purpose, or mission of any entity on behalf of 
which a charitable contribution is being requested;
    (2) That any charitable contribution is tax deductible in whole or 
in part;
    (3) The purpose for which any charitable contribution will be used;
    (4) The percentage or amount of any charitable contribution that 
will go to a charitable organization or to any particular charitable 
program;
    (5) Any material aspect of a prize promotion including, but not 
limited to: the odds of being able to receive a prize; the nature or 
value of a prize; or that a charitable contribution is required to win 
a prize or to participate in a prize promotion; or
    (6) A charitable organization's or telemarketer's affiliation with, 
or endorsement or sponsorship by, any person or government entity.


Sec.  310.4  Abusive telemarketing acts or practices.

    (a) Abusive conduct generally. It is an abusive telemarketing act 
or practice and a violation of this Rule for any seller or telemarketer 
to engage in the following conduct:
    (1) Threats, intimidation, or the use of profane or obscene 
language;
    (2) Requesting or receiving payment of any fee or consideration for 
goods or services represented to remove derogatory information from, or 
improve, a person's credit history, credit record, or credit rating 
until:
    (i) The time frame in which the seller has represented all of the 
goods or services will be provided to that person has expired; and
    (ii) The seller has provided the person with documentation in the 
form of a consumer report from a consumer reporting agency 
demonstrating that the promised results have been achieved, such report 
having been issued more than six months after the results were 
achieved. Nothing in this Rule should be construed to affect the 
requirement in the Fair Credit Reporting Act, 15 U.S.C. 1681, that a 
consumer report may only be obtained for a specified permissible 
purpose;
    (3) Requesting or receiving payment of any fee or consideration 
from a person for goods or services represented to recover or otherwise 
assist in the return of money or any other item of value paid for by, 
or promised to, that person in a previous telemarketing transaction, 
until seven (7) business days after such money or other item is 
delivered to that person. This provision shall not apply to goods or 
services provided to a person by a licensed attorney;
    (4) Requesting or receiving payment of any fee or consideration in 
advance of obtaining a loan or other extension of credit when the 
seller or telemarketer has guaranteed or represented a high likelihood 
of success in obtaining or arranging a loan or other extension of 
credit for a person;
    (5) Requesting or receiving payment of any fee or consideration 
from a person for any debt relief service until the seller has provided 
the customer with documentation in the form of a settlement agreement, 
debt management plan, or other such valid contractual agreement, that 
the particular debt has, in fact, been renegotiated, settled, reduced, 
or otherwise altered.
    (6) Disclosing or receiving, for consideration, unencrypted 
consumer account numbers for use in telemarketing; provided, however, 
that this paragraph shall not apply to the disclosure or receipt of a 
customer's or donor's billing information to process a payment for 
goods or services or a charitable contribution pursuant to a 
transaction;
    (7) Causing billing information to be submitted for payment, 
directly or indirectly, without the express informed consent of the 
customer or donor. In any telemarketing transaction, the seller or 
telemarketer must obtain the express informed consent of the customer 
or donor to be charged for the goods or services or charitable 
contribution and to be charged using the identified account. In any 
telemarketing transaction involving preacquired account information, 
the requirements in paragraphs (a)(6)(i) through (ii) of this section 
must be met to evidence express informed consent.
    (i) In any telemarketing transaction involving preacquired account 
information and a free-to-pay conversion feature, the seller or 
telemarketer must:
    (A) obtain from the customer, at a minimum, the last four (4) 
digits of the account number to be charged;
    (B) obtain from the customer his or her express agreement to be 
charged for the goods or services and to be charged using the account 
number pursuant to paragraph (a)(6)(i)(A) of this section; and,
    (C) make and maintain an audio recording of the entire 
telemarketing transaction.
    (ii) In any other telemarketing transaction involving preacquired 
account information not described in paragraph (a)(6)(i) of this 
section, the seller or telemarketer must:
    (A) at a minimum, identify the account to be charged with 
sufficient specificity for the customer or donor to understand what 
account will be charged; and

[[Page 42021]]

    (B) obtain from the customer or donor his or her express agreement 
to be charged for the goods or services and to be charged using the 
account number identified pursuant to paragraph (a)(6)(ii)(A) of this 
section; or
    (8) Failing to transmit or cause to be transmitted the telephone 
number, and, when made available by the telemarketer's carrier, the 
name of the telemarketer, to any caller identification service in use 
by a recipient of a telemarketing call; provided that it shall not be a 
violation to substitute (for the name and phone number used in, or 
billed for, making the call) the name of the seller or charitable 
organization on behalf of which a telemarketing call is placed, and the 
seller's or charitable organization's customer or donor service 
telephone number, which is answered during regular business hours.
    (b) Pattern of calls.
    (1) It is an abusive telemarketing act or practice and a violation 
of this Rule for a telemarketer to engage in, or for a seller to cause 
a telemarketer to engage in, the following conduct:
    (i) Causing any telephone to ring, or engaging any person in 
telephone conversation, repeatedly or continuously with intent to 
annoy, abuse, or harass any person at the called number;
    (ii) Denying or interfering in any way, directly or indirectly, 
with a person's right to be placed on any registry of names and/or 
telephone numbers of persons who do not wish to receive outbound 
telephone calls established to comply with Sec.  310.4(b)(1)(iii);
    (iii) Initiating any outbound telephone call to a person when:
    (A) that person previously has stated that he or she does not wish 
to receive an outbound telephone call made by or on behalf of the 
seller whose goods or services are being offered or made on behalf of 
the charitable organization for which a charitable contribution is 
being solicited; or
    (B) that person's telephone number is on the ``do-not-call'' 
registry, maintained by the Commission, of persons who do not wish to 
receive outbound telephone calls to induce the purchase of goods or 
services unless the seller
    (i) has obtained the express agreement, in writing, of such person 
to place calls to that person. Such written agreement shall clearly 
evidence such person's authorization that calls made by or on behalf of 
a specific party may be placed to that person, and shall include the 
telephone number to which the calls may be placed and the signature 
\300\ of that person; or
---------------------------------------------------------------------------

    \300\ For purposes of this Rule, the term ``signature'' shall 
include an electronic or digital form of signature, to the extent 
that such form of signature is recognized as a valid signature under 
applicable federal law or state contract law.
---------------------------------------------------------------------------

    (ii) as an established business relationship with such person, and 
that person has not stated that he or she does not wish to receive 
outbound telephone calls under paragraph (b)(1)(iii)(A) of this 
section; or
    (iv) Abandoning any outbound telephone call. An outbound telephone 
call is``abandoned'' under this section if a person answers it and the 
telemarketer does not connect the call to a sales representative within 
two (2) seconds of the person's completed greeting.
    (v) Initiating any outbound telephone call that delivers a 
prerecorded message, other than a prerecorded message permitted for 
compliance with the call abandonment safe harbor in Sec.  
310.4(b)(4)(iii), unless:
    (A) in any such call to induce the purchase of any good or service, 
the seller has obtained from the recipient of the call an express 
agreement, in writing, that:
    (i) The seller obtained only after a clear and conspicuous 
disclosure that the purpose of the agreement is to authorize the seller 
to place prerecorded calls to such person;
    (ii) The seller obtained without requiring, directly or indirectly, 
that the agreement be executed as a condition of purchasing any good or 
service;
    (iii) Evidences the willingness of the recipient of the call to 
receive calls that deliver prerecorded messages by or on behalf of a 
specific seller; and
    (iv) Includes such person's telephone number and signature; \301\ 
and
---------------------------------------------------------------------------

    \301\ For purposes of this Rule, the term ``signature'' shall 
include an electronic or digital form of signature, to the extent 
that such form of signature is recognized as a valid signature under 
applicable federal law or state contract law.
---------------------------------------------------------------------------

    (B) In any such call to induce the purchase of any good or service, 
or to induce a charitable contribution from a member of, or previous 
donor to, a non-profit charitable organization on whose behalf the call 
is made, the seller or telemarketer:
    (i) Allows the telephone to ring for at least fifteen (15) seconds 
or four (4) rings before disconnecting an unanswered call; and
    (ii) Within two (2) seconds after the completed greeting of the 
person called, plays a prerecorded message that promptly provides the 
disclosures required by Sec.  310.4(d) or (e), followed immediately by 
a disclosure of one or both of the following:
    (A) In the case of a call that could be answered in person by a 
consumer, that the person called can use an automated interactive voice 
and/or keypress-activated opt-out mechanism to assert a Do Not Call 
request pursuant to Sec.  310.4(b)(1)(iii)(A) at any time during the 
message. The mechanism must:
    (1) Automatically add the number called to the seller's entity-
specific Do Not Call list;
    (2) Once invoked, immediately disconnect the call; and
    (3) Be available for use at any time during the message; and
    (B) In the case of a call that could be answered by an answering 
machine or voicemail service, that the person called can use a toll-
free telephone number to assert a Do Not Call request pursuant to Sec.  
310.4(b)(1)(iii)(A). The number provided must connect directly to an 
automated interactive voice or keypress-activated opt-out mechanism 
that:
    (1) Automatically adds the number called to the seller's entity-
specific Do Not Call list;
    (2) Immediately thereafter disconnects the call; and
    (3) Is accessible at any time throughout the duration of the 
telemarketing campaign; and
    (iii) Complies with all other requirements of this part and other 
applicable federal and state laws.
    (C) Any call that complies with all applicable requirements of this 
paragraph (v) shall not be deemed to violate Sec.  310.4(b)(1)(iv) of 
this part.
    (D) This paragraph (v) shall not apply to any outbound telephone 
call that delivers a prerecorded healthcare message made by, or on 
behalf of, a covered entity or its business associate, as those terms 
are defined in the HIPAA Privacy Rule, 45 CFR 160.103.
    (2) It is an abusive telemarketing act or practice and a violation 
of this Rule for any person to sell, rent, lease, purchase, or use any 
list established to comply with Sec.  310.4(b)(1)(iii)(A), or 
maintained by the Commission pursuant to Sec.  310.4(b)(1)(iii)(B), for 
any purpose except compliance with the provisions of this Rule or 
otherwise to prevent telephone calls to telephone numbers on such 
lists.
    (3) A seller or telemarketer will not be liable for violating Sec.  
310.4(b)(1)(ii) and (iii) if it can demonstrate that, as part of the 
seller's or telemarketer's routine business practice:
    (i) It has established and implemented written procedures to comply 
with Sec.  310.4(b)(1)(ii) and (iii);
    (ii) It has trained its personnel, and any entity assisting in its 
compliance, in the procedures established pursuant to Sec.  
310.4(b)(3)(i);

[[Page 42022]]

    (iii) The seller, or a telemarketer or another person acting on 
behalf of the seller or charitable organization, has maintained and 
recorded a list of telephone numbers the seller or charitable 
organization may not contact, in compliance with Sec.  
310.4(b)(1)(iii)(A);
    (iv) The seller or a telemarketer uses a process to prevent 
telemarketing to any telephone number on any list established pursuant 
to Sec.  310.4(b)(3)(iii) or 310.4(b)(1)(iii)(B), employing a version 
of the ``do-not-call'' registry obtained from the Commission no more 
than thirty-one (31) days prior to the date any call is made, and 
maintains records documenting this process;
    (v) The seller or a telemarketer or another person acting on behalf 
of the seller or charitable organization, monitors and enforces 
compliance with the procedures established pursuant to Sec.  
310.4(b)(3)(i); and
    (vi) Any subsequent call otherwise violating Sec.  310.4(b)(1)(ii) 
or (iii) is the result of error.
    (4) A seller or telemarketer will not be liable for violating Sec.  
310.4(b)(1)(iv) if:
    (i) The seller or telemarketer employs technology that ensures 
abandonment of no more than three (3) percent of all calls answered by 
a person, measured over the duration of a single calling campaign, if 
less than 30 days, or separately over each successive 30-day period or 
portion thereof that the campaign continues.
    (ii) The seller or telemarketer, for each telemarketing call 
placed, allows the telephone to ring for at least fifteen (15) seconds 
or four (4) rings before disconnecting an unanswered call;
    (iii) Whenever a sales representative is not available to speak 
with the person answering the call within two (2) seconds after the 
person's completed greeting, the seller or telemarketer promptly plays 
a recorded message that states the name and telephone number of the 
seller on whose behalf the call was placed\302\; and
---------------------------------------------------------------------------

    \302\ This provision does not affect any seller's or 
telemarketer's obligation to comply with relevant state and federal 
laws, including but not limited to the TCPA, 47 U.S.C. 227, and 47 
CFR part 64.1200.
---------------------------------------------------------------------------

    (iv) The seller or telemarketer, in accordance with Sec.  310.5(b)-
(d), retains records establishing compliance with Sec.  310.4(b)(4)(i)-
(iii).
    (c) Calling time restrictions. Without the prior consent of a 
person, it is an abusive telemarketing act or practice and a violation 
of this Rule for a telemarketer to engage in outbound telephone calls 
to a person's residence at any time other than between 8:00 a.m. and 
9:00 p.m. local time at the called person's location.
    (d) Required oral disclosures in the sale of goods or services. It 
is an abusive telemarketing act or practice and a violation of this 
Rule for a telemarketer in an outbound telephone call or internal or 
external upsell to induce the purchase of goods or services to fail to 
disclose truthfully, promptly, and in a clear and conspicuous manner to 
the person receiving the call, the following information:
    (1) The identity of the seller;
    (2) That the purpose of the call is to sell goods or services;
    (3) The nature of the goods or services; and
    (4) That no purchase or payment is necessary to be able to win a 
prize or participate in a prize promotion if a prize promotion is 
offered and that any purchase or payment will not increase the person's 
chances of winning. This disclosure must be made before or in 
conjunction with the description of the prize to the person called. If 
requested by that person, the telemarketer must disclose the no-
purchase/no-payment entry method for the prize promotion; provided, 
however, that, in any internal upsell for the sale of goods or 
services, the seller or telemarketer must provide the disclosures 
listed in this section only to the extent that the information in the 
upsell differs from the disclosures provided in the initial 
telemarketing transaction.
    (e) Required oral disclosures in charitable solicitations. It is an 
abusive telemarketing act or practice and a violation of this Rule for 
a telemarketer, in an outbound telephone call to induce a charitable 
contribution, to fail to disclose truthfully, promptly, and in a clear 
and conspicuous manner to the person receiving the call, the following 
information:
    (1) The identity of the charitable organization on behalf of which 
the request is being made; and
    (2) That the purpose of the call is to solicit a charitable 
contribution.


Sec.  310.5  Recordkeeping requirements.

    (a) Any seller or telemarketer shall keep, for a period of 24 
months from the date the record is produced, the following records 
relating to its telemarketing activities:
    (1) All substantially different advertising, brochures, 
telemarketing scripts, and promotional materials;
    (2) The name and last known address of each prize recipient and the 
prize awarded for prizes that are represented, directly or by 
implication, to have a value of $25.00 or more;
    (3) The name and last known address of each customer, the goods or 
services purchased, the date such goods or services were shipped or 
provided, and the amount paid by the customer for the goods or 
services; \303\
---------------------------------------------------------------------------

    \303\ For offers of consumer credit products subject to the 
Truth in Lending Act, 15 U.S.C. 1601 et seq., and Regulation Z, 12 
CFR 226, compliance with the recordkeeping requirements under the 
Truth in Lending Act, and Regulation Z, shall constitute compliance 
with Sec.  310.5(a)(3) of this Rule.
---------------------------------------------------------------------------

    (4) The name, any fictitious name used, the last known home address 
and telephone number, and the job title(s) for all current and former 
employees directly involved in telephone sales or solicitations; 
provided, however, that if the seller or telemarketer permits 
fictitious names to be used by employees, each fictitious name must be 
traceable to only one specific employee; and
    (5) All verifiable authorizations or records of express informed 
consent or express agreement required to be provided or received under 
this Rule.
    (b) A seller or telemarketer may keep the records required by Sec.  
310.5(a) in any form, and in the same manner, format, or place as they 
keep such records in the ordinary course of business. Failure to keep 
all records required by Sec.  310.5(a) shall be a violation of this 
Rule.
    (c) The seller and the telemarketer calling on behalf of the seller 
may, by written agreement, allocate responsibility between themselves 
for the recordkeeping required by this Section. When a seller and 
telemarketer have entered into such an agreement, the terms of that 
agreement shall govern, and the seller or telemarketer, as the case may 
be, need not keep records that duplicate those of the other. If the 
agreement is unclear as to who must maintain any required record(s), or 
if no such agreement exists, the seller shall be responsible for 
complying with Sec. Sec.  310.5(a)(1)-(3) and (5); the telemarketer 
shall be responsible for complying with Sec.  310.5(a)(4).
    (d) In the event of any dissolution or termination of the seller's 
or telemarketer's business, the principal of that seller or 
telemarketer shall maintain all records as required under this section. 
In the event of any sale, assignment, or other change in ownership of 
the seller's or telemarketer's business, the successor business shall 
maintain all records required under this section.


Sec.  310.6  Exemptions.

    (a) Solicitations to induce charitable contributions via outbound 
telephone calls are not covered by Sec.  310.4(b)(1)(iii)(B) of this 
Rule.
    (b) The following acts or practices are exempt from this Rule:

[[Page 42023]]

    (1) The sale of pay-per-call services subject to the Commission's 
Rule entitled ``Trade Regulation Rule Pursuant to the Telephone 
Disclosure and Dispute Resolution Act of 1992,'' 16 CFR Part 308, 
provided, however, that this exemption does not apply to the 
requirements of Sec. Sec.  310.4(a)(1), (a)(7), (b), and (c);
    (2) The sale of franchises subject to the Commission's Rule 
entitled ``Disclosure Requirements and Prohibitions Concerning 
Franchising,'' (``Franchise Rule'') 16 CFR Part 436, and the sale of 
business opportunities subject to the Commission's Rule entitled 
``Disclosure Requirements and Prohibitions Concerning Business 
Opportunities,'' (``Business Opportunities Rule'') 16 CFR Part 437, 
provided, however, that this exemption does not apply to the 
requirements of Sec. Sec.  310.4(a)(1), (a)(7), (b), and (c);
    (3) Telephone calls in which the sale of goods or services or 
charitable solicitation is not completed, and payment or authorization 
of payment is not required, until after a face-to-face sales or 
donation presentation by the seller or charitable organization, 
provided, however, that this exemption does not apply to the 
requirements of Sec. Sec.  310.4(a)(1), (a)(7), (b), and (c);
    (4) Telephone calls initiated by a customer or donor that are not 
the result of any solicitation by a seller, charitable organization, or 
telemarketer, provided, however, that this exemption does not apply to 
any instances of upselling included in such telephone calls;
    (5) Telephone calls initiated by a customer or donor in response to 
an advertisement through any medium, other than direct mail 
solicitation, provided, however, that this exemption does not apply to 
calls initiated by a customer or donor in response to an advertisement 
relating to investment opportunities, debt relief services, business 
opportunities other than business arrangements covered by the Franchise 
Rule or the Business Opportunity Rule, or advertisements involving 
goods or services described in Sec. Sec.  310.3(a)(1)(vi) or 
310.4(a)(2)-(4); or to any instances of upselling included in such 
telephone calls;
    (6) Telephone calls initiated by a customer or donor in response to 
a direct mail solicitation, including solicitations via the U.S. Postal 
Service, facsimile transmission, electronic mail, and other similar 
methods of delivery in which a solicitation is directed to specific 
address(es) or person(s), that clearly, conspicuously, and truthfully 
discloses all material information listed in Sec.  310.3(a)(1) of this 
Rule, for any goods or services offered in the direct mail 
solicitation, and that contains no material misrepresentation regarding 
any item contained in Sec.  310.3(d) of this Rule for any requested 
charitable contribution; provided, however, that this exemption does 
not apply to calls initiated by a customer in response to a direct mail 
solicitation relating to prize promotions, investment opportunities, 
debt relief services, business opportunities other than business 
arrangements covered by the Franchise Rule or the Business Opportunity 
Rule, or goods or services described in Sec. Sec.  310.3(a)(1)(vi) or 
310.4(a)(2)-(4); or to any instances of upselling included in such 
telephone calls; and
    (7) Telephone calls between a telemarketer and any business, except 
calls to induce the retail sale of nondurable office or cleaning 
supplies; provided, however, that Sec.  310.4(b)(1)(iii)(B) and Sec.  
310.5 of this Rule shall not apply to sellers or telemarketers of 
nondurable office or cleaning supplies.


Sec.  310.7  Actions by states and private persons.

    (a) Any attorney general or other officer of a state authorized by 
the state to bring an action under the Telemarketing and Consumer Fraud 
and Abuse Prevention Act, and any private person who brings an action 
under that Act, shall serve written notice of its action on the 
Commission, if feasible, prior to its initiating an action under this 
Rule. The notice shall be sent to the Office of the Director, Bureau of 
Consumer Protection, Federal Trade Commission, Washington, D.C. 20580, 
and shall include a copy of the state's or private person's complaint 
and any other pleadings to be filed with the court. If prior notice is 
not feasible, the state or private person shall serve the Commission 
with the required notice immediately upon instituting its action.
    (b) Nothing contained in this Section shall prohibit any attorney 
general or other authorized state official from proceeding in state 
court on the basis of an alleged violation of any civil or criminal 
statute of such state.


Sec.  310.8  Fee for access to the National Do Not Call Registry.

    (a) It is a violation of this Rule for any seller to initiate, or 
cause any telemarketer to initiate, an outbound telephone call to any 
person whose telephone number is within a given area code unless such 
seller, either directly or through another person, first has paid the 
annual fee, required by Sec.  310.8(c), for access to telephone numbers 
within that area code that are included in the National Do Not Call 
Registry maintained by the Commission under Sec.  310.4(b)(1)(iii)(B); 
provided, however, that such payment is not necessary if the seller 
initiates, or causes a telemarketer to initiate, calls solely to 
persons pursuant to Sec. Sec.  310.4(b)(1)(iii)(B)( i ) or ( ii ), and 
the seller does not access the National Do Not Call Registry for any 
other purpose.
    (b) It is a violation of this Rule for any telemarketer, on behalf 
of any seller, to initiate an outbound telephone call to any person 
whose telephone number is within a given area code unless that seller, 
either directly or through another person, first has paid the annual 
fee, required by Sec.  310.8(c), for access to the telephone numbers 
within that area code that are included in the National Do Not Call 
Registry; provided, however, that such payment is not necessary if the 
seller initiates, or causes a telemarketer to initiate, calls solely to 
persons pursuant to Sec. Sec.  310.4(b)(1)(iii)(B)( i ) or ( ii ), and 
the seller does not access the National Do Not Call Registry for any 
other purpose.
    (c) The annual fee, which must be paid by any person prior to 
obtaining access to the National Do Not Call Registry, is $54 for each 
area code of data accessed, up to a maximum of $14,850; provided, 
however, that there shall be no charge to any person for accessing the 
first five area codes of data, and provided further, that there shall 
be no charge to any person engaging in or causing others to engage in 
outbound telephone calls to consumers and who is accessing area codes 
of data in the National Do Not Call Registry if the person is permitted 
to access, but is not required to access, the National Do Not Call 
Registry under this Rule, 47 CFR 64.1200, or any other Federal 
regulation or law. Any person accessing the National Do Not Call 
Registry may not participate in any arrangement to share the cost of 
accessing the registry, including any arrangement with any telemarketer 
or service provider to divide the costs to access the registry among 
various clients of that telemarketer or service provider.
    (d) Each person who pays, either directly or through another 
person, the annual fee set forth in Sec.  310.8(c), each person 
excepted under Sec.  310.8(c) from paying the annual fee, and each 
person excepted from paying an annual fee under Sec.  
310.4(b)(1)(iii)(B), will be provided a unique account number that will 
allow that person to access the registry data for the selected area 
codes at any time for the twelve month period beginning on the first 
day of the month in which the person paid the fee (``the annual 
period''). To obtain access to additional area codes of data during the

[[Page 42024]]

first six months of the annual period, each person required to pay the 
fee under Sec.  310.8(c) must first pay $54 for each additional area 
code of data not initially selected. To obtain access to additional 
area codes of data during the second six months of the annual period, 
each person required to pay the fee under Sec.  310.8(c) must first pay 
$27 for each additional area code of data not initially selected. The 
payment of the additional fee will permit the person to access the 
additional area codes of data for the remainder of the annual period.
    (e) Access to the National Do Not Call Registry is limited to 
telemarketers, sellers, others engaged in or causing others to engage 
in telephone calls to consumers, service providers acting on behalf of 
such persons, and any government agency that has law enforcement 
authority. Prior to accessing the National Do Not Call Registry, a 
person must provide the identifying information required by the 
operator of the registry to collect the fee, and must certify, under 
penalty of law, that the person is accessing the registry solely to 
comply with the provisions of this Rule or to otherwise prevent 
telephone calls to telephone numbers on the registry. If the person is 
accessing the registry on behalf of sellers, that person also must 
identify each of the sellers on whose behalf it is accessing the 
registry, must provide each seller's unique account number for access 
to the national registry, and must certify, under penalty of law, that 
the sellers will be using the information gathered from the registry 
solely to comply with the provisions of this Rule or otherwise to 
prevent telephone calls to telephone numbers on the registry.


Sec.  310.9  Severability.

    The provisions of this Rule are separate and severable from one 
another. If any provision is stayed or determined to be invalid, it is 
the Commission's intention that the remaining provisions shall continue 
in effect.
    By direction of the Commission.

Donald S. Clark,
Secretary

Federal Register

Attachment A

Consumer Protection and the Debt Settlement Industry Workshop 
Commenters

    Able Debt Settlement, Inc. (``Able Debt Settlement'')
    ACA International (``ACA'')
    American Association of Debt Management Organizations (``AADMO'')
    American Financial Services Association (``AFSA'')
    CareOne Credit Counseling Services (``CareOne'')
    Carlson, N. (``Carlson'')
    Consumer Bankers Association (``CBA'')
    Consumer Recovery Network (``CRN'')
    Credit Advisors, Inc. (``Credit Advisors'')
    Debt Settlement USA (``Debt Settlement USA'')
    First Stone Credit Counseling (``First Stone'')
    Gilpin, William (``Gilpin'')
    Manning, Robert (``Manning'')
    McClendon (``McClendon'')
    Merry, Jack (``Merry'')
    Morgan Drexen Integrated Legal Systems (``Morgan Drexen'')
    Rhode, Steve (``Rhode'')
    The Association of Settlement Companies (``TASC'')
    United States Organizations for Bankruptcy Alternatives (``USOBA'')
    US Debt Resolve (``US Debt Resolve'')

Federal Register

Attachment B

Consumer Protection and the Debt Settlement Industry Workshop 
Participants

    American Association of Debt Management Organizations (``AADMO''): 
Mark Guimond
    American Bankers Association, Center for Regulatory Compliance 
(``ABA''): Virginia O'Neill
    American Credit Alliance, Inc. (American Credit Alliance''): Alan 
Franklin
    American Express, Consumer Affairs Division (``American Express''): 
Anna Flores
    Center for Consumer Financial Services, Rochester Institute of 
Technology (``CCFS''): Robert Manning
    Consumer Federation of America (``CFA''): Travis Plunkett
    Debt Settlement USA (``Debt Settlement USA''): Jack Craven
    EFA Data Processing, L.P (``EFA'').: John Ansbach
    Federal Trade Commission (``FTC''): Lydia Parnes
    Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC (``Gordon 
Feinblatt''): Carla Stone Witzel
    Internal Revenue Service (``IRS''), EO Technical Group, Ruling and 
Agreements: Steve Grodnitzky
    Loeb & Loeb, LLP (``Loeb''): Michael Mallow
    Maryland Consumer Rights Coalition (``MCRC''): Stephen Hannan
    National Conference of Commissioners on Uniform State Laws 
(``NCCUSL''): Michael Kerr
    National Foundation for Credit Counseling (``NFCC''): William 
Binzel
    South Carolina Department of Consumer Affairs (``SCDCA''): Carolyn 
Lybarker
    The Association of Settlement Companies (``TASC''): Wesley Young
    US Debt Resolve (``US Debt Resolve''): Scott Johnson
    United States Organizations for Bankruptcy Alternatives, 
Inc.(``USOBA''): Jenna Keehnen
    U. S. Public Interest Research Group (``USPIRG''): Ed Mierzwinski

[FR Doc. E9-19749 Filed 8-18-09: 8:45 am]
BILLING CODE: 6750-01-S


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