[Federal Register Volume 75, Number 153 (Tuesday, August 10, 2010)]
[Rules and Regulations]
[Pages 48458-48523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-19412]



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Part III





Federal Trade Commission





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16 CFR Part 310



Telemarketing Sales Rule; Final Rule

  Federal Register / Vol. 75, No. 153 / Tuesday, August 10, 2010 / 
Rules and Regulations  

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FEDERAL TRADE COMMISSION

16 CFR Part 310


Telemarketing Sales Rule

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

ACTION: Final rule amendments.

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SUMMARY: In this document, the Commission adopts amendments to the 
Telemarketing Sales Rule (``TSR'' or ``Rule'') that address the 
telemarketing of debt relief services. These amendments define debt 
relief services, prohibit debt relief providers from collecting fees 
until after services have been provided, require specific disclosures 
of material information about offered debt relief services, prohibit 
specific misrepresentations about material aspects of debt relief 
services, and extend the TSR's coverage to include inbound calls made 
to debt relief companies in response to general media advertisements. 
The amendments are necessary to protect consumers from deceptive or 
abusive practices in the telemarketing of debt relief services.

DATES: These final amendments are effective on September 27, 2010, 
except for Sec.  310.4(a)(5), which is effective on October 27, 2010.

ADDRESSES: Requests for copies of these amendments to the TSR and this 
Statement of Basis and Purpose (``SBP'') should be sent to: Public 
Reference Branch, Federal Trade Commission, 600 Pennsylvania Avenue NW, 
Room 130, Washington, D.C. 20580. The complete record of this 
proceeding is also available at that address. Relevant portions of the 
proceeding, including the final amendments to the TSR and SBP, are 
available at (http://www.ftc.gov).

FOR FURTHER INFORMATION CONTACT: Alice Hrdy, Allison Brown, Evan 
Zullow, or Stephanie Rosenthal, Attorneys, Division of Financial 
Practices, Bureau of Consumer Protection, Federal Trade Commission, 600 
Pennsylvania Avenue NW, Room NJ-3158, Washington, D.C. 20580, (202) 
326-3224.

SUPPLEMENTARY INFORMATION:

I. Overview and Background

A. Overview

    This document states the basis and purpose for the Commission's 
decision to adopt amendments to the TSR that were proposed and 
published for public comment on August 19, 2009.\1\ After careful 
review and consideration of the entire record on the issues presented 
in this rulemaking proceeding, including public comments submitted by 
321 interested parties,\2\ the Commission has decided to adopt, with 
several modifications, the proposed amendments to the TSR intended to 
curb deceptive and abusive practices in the telemarketing of debt 
relief services. The Rule provisions will: (1) prohibit debt relief 
service providers\3\ from collecting a fee for services until a debt 
has been settled, altered, or reduced; (2) require certain disclosures 
in calls marketing debt relief services; (3) prohibit specific 
misrepresentations about material aspects of the services; and (4) 
extend the TSR's coverage to include inbound calls made to debt relief 
companies in response to general media advertisements.
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    \1\ TSR Proposed Rule, 74 FR 41988 (Aug. 19, 2009). The TSR is 
set forth at 16 CFR 310.
    \2\ The comments and other material placed on the rulemaking 
record are available at (http://www.ftc.gov/os/comments/tsrdebtrelief/index.shtm). In addition, a list of commenters cited 
in this SBP, along with their short citation names or acronyms used 
throughout the SBP, follows Section V of this SBP. When a commenter 
submitted more than one comment, the comment is also identified by 
date.
    \3\ Throughout the SBP, the Commission uses the term 
``providers'' to refer to ``sellers and telemarketers'' as defined 
in the TSR. ``Seller'' is defined as ``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.'' 16 CFR 310.2(aa). ``Telemarketer'' is 
defined as ``any person who, in connection with telemarketing, 
initiates or receives telephone calls to or from a customer or 
donor.'' 16 CFR 310.2(cc).
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    Beginning on September 27, 2010, sellers and telemarketers of debt 
relief services will be required to comply with the amended TSR 
requirements, except for Sec.  310.4(a)(5), the advance fee ban 
provision, which will be effective on October 27, 2010.

B. The Commission's Authority Under the TSR

    Enacted in 1994, the Telemarketing and Consumer Fraud and Abuse 
Prevention Act (``Telemarketing Act'' or ``Act'') targets deceptive and 
abusive telemarketing practices, and directed the Commission to adopt a 
rule with anti-fraud and privacy protections for consumers receiving 
telephone solicitations to purchase goods or services.\4\ Specifically, 
the Act directed the Commission to issue a rule defining and 
prohibiting deceptive and abusive telemarketing acts or practices.\5\ 
In addition, the Act mandated that the FTC promulgate regulations 
addressing some specific practices, which the Act designated as 
``abusive.''\6\ The Act also authorized state attorneys general or 
other appropriate state officials, as well as private persons who meet 
stringent jurisdictional requirements, to bring civil actions in 
federal district court.\7\
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    \4\ 15 U.S.C. 6101-6108. Subsequently, the USA PATRIOT Act, Pub. 
L. No. 107-56, 115 Stat. 272 (Oct. 26, 2001), expanded the 
Telemarketing Act's definition of ``telemarketing'' to encompass 
calls soliciting charitable contributions, donations, or gifts of 
money or any other thing of value.
    \5\ 15 U.S.C. 6102(a).
    \6\ 15 U.S.C. 6102(a)(3).
    \7\ 15 U.S.C. 6103, 6104.
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    Pursuant to the Act's directive, the Commission promulgated the 
original TSR in 1995 and subsequently amended it in 2003 and again in 
2008 to add, among other things, provisions establishing the National 
Do Not Call Registry and addressing the use of pre-recorded 
messages.\8\ 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.''\9\ The Telemarketing Act, however, 
explicitly states that the jurisdiction of the Commission in enforcing 
the Rule is coextensive with its jurisdiction under Section 5 of the 
Federal Trade Commission Act (``FTC Act'').\10\ As a result, some 
entities and products fall outside the scope of the TSR.\11\
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    \8\ TSR and Statement of Basis and Purpose and Final Rule (``TSR 
Final Rule''), 60 FR 43842 (Aug. 23, 1995); Amended TSR and 
Statement of Basis and Purpose (``TSR Amended Rule''), 68 FR 4580 
(Jan. 29, 2003); Amended TSR and Statement of Basis and Purpose 
(``TSR Amended Rule 2008''), 73 FR 51164 (Aug. 29, 2008).
    \9\ 16 CFR 310.2(cc) (using the same definition as the 
Telemarketing Act, 15 U.S.C. 6106(4)). The TSR excludes from the 
definition of telemarketing:
    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.
    Id.
    \10\ 15 U.S.C. 6105(b).
    \11\ See 15 U.S.C. 44, 45(a)(2), which exclude or limit from the 
Commission's jurisdiction several types of entities, including bona 
fide nonprofits, bank entities (including, among others, banks, 
thrifts, and federally chartered credit unions), and common 
carriers, as well as the business of insurance.
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    In addition, the Rule wholly or partially exempts several types of 
calls from its coverage. For example, the Rule generally exempts 
inbound calls placed by consumers in response to direct mail or general 
media advertising.\12\

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However, there are certain ``carve-outs'' from some of the TSR's 
exemptions that limit their reach, such as the carve-out for calls 
initiated by a customer in response to a general advertisement relating 
to investment opportunities.\13\
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    \12\ 16 CFR 310.6(b)(5)-(6). Moreover, the Rule exempts from the 
National Do Not Call Registry provisions calls placed by for-profit 
telemarketers to solicit charitable contributions; such calls are 
not exempt, however, from the ``entity-specific'' do not call 
provisions or the TSR's other requirements. 16 CFR 310.6(a).
    \13\ See, e.g., 16 CFR 310.6(b)(5)-(6) (provisions related to 
general advertisements and direct mail solicitations).
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    The TSR is designed to protect consumers in a number of different 
ways. First, the Rule includes provisions governing communications 
between telemarketers and consumers, requiring certain disclosures and 
prohibiting material misrepresentations.\14\ Second, the TSR requires 
telemarketers to obtain consumers' ``express informed consent'' to be 
charged on a particular account before billing or collecting payment 
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.\15\ Third, the Rule prohibits as an 
abusive practice requesting or receiving any fee or consideration in 
advance of obtaining any credit repair services;\16\ recovery 
services;\17\ or offers of a loan or other extension of credit, the 
granting of which is represented as ``guaranteed'' or having a high 
likelihood of success.\18\ Fourth, the Rule prohibits credit card 
laundering\19\ and other forms of assisting and facilitating sellers or 
telemarketers engaged in violations of the TSR.\20\ Fifth, the TSR, 
with narrow exceptions, prohibits telemarketers from calling consumers 
whose numbers are on the National Do Not Call Registry or who have 
specifically requested not to receive calls from a particular 
entity.\21\ Finally, the TSR requires that telemarketers transmit to 
consumers' telephones accurate Caller ID information\22\ and places 
restrictions on calls made by predictive dialers\23\ and those 
delivering pre-recorded messages.\24\
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    \14\ The TSR requires that telemarketers soliciting sales of 
goods or services promptly disclose several key pieces of 
information in an outbound telephone call or an internal or external 
upsell: (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); see also 16 CFR 310.2(ee) (defining ``upselling''). 
Telemarketers also must disclose in any telephone sales call the 
cost of the goods or services and certain other material 
information. 16 CFR 310.3(a)(1).
    In addition, 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 false or 
misleading statements to induce any person to pay for goods or 
services or to induce charitable contributions. 16 CFR 310.3(a)(4).
    \15\ 16 CFR 310.4(a)(7); 16 CFR 310.3(a)(3).
    \16\ 16 CFR 310.4(a)(2).
    \17\ 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 Final Rule, 60 FR at 43854.
    \18\ 16 CFR 310.4(a)(4); see TSR Amended Rule, 68 FR at 4614 
(finding that these three services were ``fundamentally bogus'').
    \19\ 16 CFR 310.3(c).
    \20\ 16 CFR 310.3(b).
    \21\ 16 CFR 310.4(b)(iii).
    \22\ 16 CFR 310.4(a)(7).
    \23\ 16 CFR 310.4(b)(1)(iv) (a call abandonment safe harbor is 
found at 16 CFR 310.4(b)(4)).
    \24\ 16 CFR 310.4(b)(1)(v).
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C. Overview of Debt Relief Services

    Debt relief services have proliferated in recent years as the 
economy has declined and greater numbers of consumers hold debts they 
cannot pay.\25\ A range of nonprofit and for-profit entities - 
including credit counselors, debt settlement companies, and debt 
negotiation companies - offer debt relief services, frequently through 
telemarketing. Thus, consumers with debt problems have several options 
for which they may qualify. Those who have sufficient assets and income 
to repay their full debts over time, if their creditors make certain 
concessions (e.g., a reduction in interest rate), can enroll in a debt 
management plan with a credit counseling agency. On the other end of 
the spectrum, for consumers who are so far in debt that they can never 
catch up, declaring Chapter 13 or Chapter 7 bankruptcy might be the 
most appropriate course. Debt settlement is ostensibly designed for 
consumers who fall between these two options, i.e., consumers who 
cannot repay their full debt amount, but could pay some percentage of 
it.\26\
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    \25\ See, e.g., TASC (Oct. 26, 2009) at 7; NFCC at 2; Federal 
Reserve Board, Charge-off and Delinquency Rates (May 24, 2010), 
available at (http://www.federalreserve.gov/releases/chargeoff/delallsa.htm) (charting recent increase in credit card delinquency 
rate); Debt Settlement: Fraudulent, Abusive, and Deceptive Practices 
Pose Risk to Consumers: Hearing on The Debt Settlement Industry: The 
Consumer's Experience Before the S. Comm. on Commerce, Science, & 
Transportation, 111\th\ Cong. at 1 (2010) (statement of Philip A. 
Lehman, Assistant Attorney General, North Carolina Department of 
Justice) (``NC AG Testimony'').
    \26\ See Weinstein (Oct. 26, 2009) at 8 (see attached Bernard L. 
Weinstein & Terry L. Clower, Debt Settlement: Fulfilling the Need 
for An Economic Middle Ground at 7 (Sept. 2009) (``Weinstein 
paper'')). It is not clear, however, how wide a ``slice'' of the 
debt-impaired population is suitable for debt settlement programs. 
See Summary of Communications (June 16, 2010) at 1 (according to 
industry groups, consumers who can afford to pay 1.5-2% of their 
debt amount each month should enter debt settlement). Moreover, even 
for those consumers for whom debt settlement might be appropriate, 
the practice of charging large advance fees makes it much less 
likely that those consumers can succeed in such a program. CFA at 9; 
CareOne at 4; see SBLS at 2-3.
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    Over the last several years, the Commission has addressed consumer 
protection concerns about debt relief services through law enforcement 
actions,\27\ consumer education,\28\ and outreach to industry and other 
relevant parties.\29\ The brief description of the debt relief services 
industry in the next section is based upon information in the record, 
the enforcement activities of the FTC and the states, and independent 
research by Commission staff.\30\
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    \27\ See List of FTC Law Enforcement Actions Against Debt Relief 
Companies, following Section V of the SBP, for a list of cases that 
the FTC has prosecuted since 2003 (``FTC Case List''). In addition, 
as detailed in the subsequent List of State Law Enforcement Actions 
Against Debt Relief Companies (``State Case List''), state law 
enforcement agencies have brought at least 236 enforcement actions 
against debt relief companies in the last decade.
    \28\ See, e.g., FTC, Settling Your Credit Card Debts (2010); 
FTC, Fiscal Fitness: Choosing a Credit Counselor (2005); FTC, For 
People on Debt Management Plans: A Must-Do List (2005); FTC, Knee 
Deep in Debt (2005).
    \29\ In September 2008, the Commission held a public workshop 
entitled ``Consumer Protection and the Debt Settlement Industry'' 
(``Workshop''), which brought together stakeholders to discuss 
consumer protection concerns associated with debt settlement 
services, one facet of the debt relief services industry. Workshop 
participants also debated the merits of possible solutions to those 
concerns, including the various remedies that were subsequently 
included in the proposed rule. An agenda and transcript of the 
Workshop are available at (http://www.ftc.gov/bcp/workshops/debtsettlement/index.shtm). Public comments associated with the 
Workshop are available at (http://www.ftc.gov/os/comments/debtsettlementworkshop/index.shtm). As discussed below, in November 
2009, the Commission held a public forum on issues specific to the 
rulemaking proceeding.
    \30\ A more detailed description of the history and evolution of 
these different forms of debt relief can be found in Section II of 
the Notice of Proposed Rulemaking in this proceeding.
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1. Credit Counseling Agencies
    Credit counseling agencies (``CCAs'') historically were nonprofit 
organizations that worked as liaisons between consumers and creditors 
to negotiate ``debt management plans'' (``DMPs''). DMPs are monthly 
payment plans for the repayment of credit card and other unsecured 
debt, enabling consumers to repay the full amount owed to their 
creditors under renegotiated terms that make repayment less 
onerous.\31\ To be eligible for a DMP,

[[Page 48460]]

a consumer generally must have sufficient income to repay the full 
amount of the debts, provided that the terms are adjusted to make such 
repayment possible. Credit counselors typically also provide 
educational counseling to assist consumers in developing manageable 
budgets and avoiding debt problems in the future.\32\
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    \31\ GP (Oct. 22, 2009) at 2; Cambridge (Oct. 26, 2009) at 1. 
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.
    \32\ GP (Oct. 22, 2009) at 2; Davis at 2; CCCS NY at 2; FECA 
(Oct. 26, 2009) at 2-3; DebtHelper at 1; Cambridge (Oct. 26, 2009) 
at 1 (``Roughly 85% of the individuals who contact Cambridge [a 
credit counseling agency] simply have questions about a particular 
aspect of their finances or wouldn't qualify for creditor 
concessions due to too much or too little income. Nevertheless, they 
receive the same financial analysis and Action Plan offered to 
Cambridge's DMP clients, and are also offered ongoing counseling, 
educational guides and web resources, free of charge.''). In fact, 
Section 501(c)(3) of the Internal Revenue Code (``IRC''), 26 U.S.C. 
501(c)(3), dictates that nonprofits must provide a substantial 
amount of free education and counseling to the public and prohibits 
them from refusing credit counseling services to a consumer if the 
consumer cannot pay. FECA (Oct. 26, 2009) at 4.
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    Nonprofit CCAs generally receive funding from two sources. First, 
consumers typically pay for their services: usually $25 to $45 to 
enroll in a DMP, followed by a monthly charge of roughly $25.\33\ The 
second source of funding is creditors themselves. After a consumer 
enrolls in a DMP, the consumer's creditors often pay the CCA a 
percentage of the monthly payments the CCA receives. In the past, this 
funding mechanism, known as a ``fair share'' contribution, has provided 
the bulk of a nonprofit CCA's operating revenue, but these agencies now 
typically receive less than 10% of their revenue from such 
contributions.\34\
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    \33\ Cambridge (Oct. 26, 2009) at 1; NWS (Oct. 22, 2009) at 6 
(see attached Hasnain Walji, Delivering Value to Consumers in a Debt 
Settlement Program at 6 (Oct. 16, 2009) (``Walji paper'')) (the 
average account set up fee is $25 and monthly maintenance fee is 
$15); see also Cards & Payments, Vol. 22, Issue 2, Credit 
Concessions: Assistance for Borrowers on the Brink (Feb. 1, 2009) 
(nonprofit agencies' counseling fees average about $25 per month); 
Miami Herald, Credit Counselors See Foreclosures on the Rise, July 
13, 2008, (CCAs charge an initial fee of $25 and a $25 monthly fee).
    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 and $40 monthly charge); Md. Code 
Ann. Sec.  12-901 et seq. (limiting fees 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. (limiting fees to an 
initial counseling fee of $50, provided the average initial 
counseling fee does not exceed $30 per debtor for all debtors 
counseled, and $50 per month for each debtor, provided the average 
monthly fee does not exceed $30 per debtor for all debtors 
counseled); N.C. Gen. Stat. Sec.  14-423 et seq. (limiting fees to 
$40 for set-up and 10% of the monthly payment disbursed under the 
DMP, not to exceed $40 per month).
    \34\ GP (McNamara), Transcript of Public Forum on Debt Relief 
Amendments to the TSR (``Tr.''), at 77-78; RDRI at 2 (creditor fair 
share has fallen to 4% to 5% of consumer debt amounts and in some 
cases has been eliminated); NWS (Oct. 22, 2009) at 5 (see attached 
Walji paper at 5) (fair share is 4% to 10%); see also National 
Consumer Law Center, Inc. & Consumer Federation of America, Credit 
Counseling in Crisis: The Impact on Consumers of Funding Cuts, 
Higher Fees and Aggressive New Market Entrants at 10-12 (April 
2003); NFCC (Binzel), Transcript of ``Consumer Protection and the 
Debt Settlement Industry'' Workshop, September 2008 (``Workshop 
Tr.'') at 37; but see JH (Oct. 24, 2009) at 8 (without citation, the 
commenter states that CCAs receive 22.5% of the total amount 
collected from each consumer).
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    Over the past decade, a number of larger CCAs entered the market. 
Many of these CCAs obtained nonprofit status from the Internal Revenue 
Service. Other CCAs openly operated as for-profit companies. In 
response to illegal practices by some of these new entrants, the FTC 
and state attorneys general brought a number of enforcement actions 
challenging these practices.\35\ Specifically, since 2003, the 
Commission has brought six cases against credit counseling entities for 
deceptive and abusive practices. In one of these cases, the FTC sued 
AmeriDebt, Inc., at the time one of the largest CCAs in the United 
States.\36\ The defendants in these cases allegedly engaged in several 
common patterns of deceptive conduct in violation of Section 5 of the 
FTC Act.\37\ First, most made allegedly deceptive statements regarding 
their nonprofit nature.\38\ Second, they allegedly made frequent 
misrepresentations about the benefits and likelihood of success 
consumers could expect from their services. These included false 
promises to provide counseling and educational services\39\ and 
overstatements of the amount or percentage of interest charges a 
consumer might save.\40\ Third, the Commission alleged that these 
entities misrepresented material information regarding their fees, 
including making false claims that they did not charge upfront fees\41\ 
or that fees were tax deductible.\42\ In addition to allegedly 
violating the FTC Act, some of these entities were engaging in outbound 
telemarketing and allegedly violating the TSR, particularly the Rule's 
disclosure requirements and prohibitions of misrepresentations, as well 
as its provisions on certain abusive practices, including violations of 
the National Do Not Call Registry provision.\43\
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    \35\ See FTC and State Case Lists, supra note 27.
    \36\ FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md., final 
order May 17, 2006). On the eve of trial, the FTC obtained a $35 
million settlement and thus far has distributed $12.7 million in 
redress to 287,000 consumers. See Press Release, FTC, FTC's 
AmeriDebt Lawsuit Resolved: Almost $13 Million Returned to 287,000 
Consumers Harmed by Debt Management Scam (Sept. 10, 2008), (http://www.ftc.gov/opa/2008/09/ameridebt.shtm).
    \37\ See, e.g., FTC v. Debt Solutions, Inc., No. 06-0298 JLR 
(W.D. Wash. filed Mar. 6, 2006); U.S. v. Credit Found. of Am., No. 
CV 06-3654 ABC(VBKx) (C.D. Cal. filed June 13, 2006); FTC v. 
AmeriDebt, Inc., No. PJM 03-3317 (D. Md. filed Nov. 19, 2003).
    \38\ See U.S. v. Credit Found. of Am., No. CV 06-3654 ABC(VBKx) 
(C.D. Cal. filed June 13, 2006); FTC v. Integrated Credit Solutions, 
Inc., No. 06-806-SCB-TGW (M.D. Fla. filed May 2, 2006) ; FTC v. 
Express Consolidation, No. 06-cv-61851-WJZ (S.D. Fla. Am. Compl. 
filed Mar. 21, 2007); FTC v. Debt Mgmt. Found. Servs., Inc., No. 04-
1674-T-17-MSS (M.D. Fla. filed July 20, 2004); FTC v. AmeriDebt, 
Inc., No. PJM 03-3317 (D. Md. filed Nov. 19, 2003). Although the 
defendants in these cases had obtained IRS designation as nonprofits 
under IRC Sec.  501(c)(3), they allegedly funneled revenues out of 
the CCAs and into the hands of affiliated for-profit companies and/
or the principals of the operation. Thus, the FTC alleged defendants 
were ``operating for their own profit or that of their members'' and 
fell outside the nonprofit exemption in the FTC Act. See 15 U.S.C. 
44, 45(a)(2).
    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. See 
Consumer Protection Issues in the Credit Counseling Industry: 
Hearing Before the Permanent Subcomm. on Investigations, S. Comm. 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 (http://www.ftc.gov/os/2004/03/040324testimony.shtm).
    \39\ See, e.g., FTC v. Integrated Credit Solutions,No. 06-806-
SCB-TGW(M.D. Fla. filed May 2, 2006); U.S. v. Credit Found. of Am., 
No. CV 06-3654 ABC(VBKx) (C.D. Cal. filed June 13, 2006); FTC v. 
Nat'l Consumer Council, No. SACV04-0474 CJC(JWJX) (C.D. Cal. filed 
Apr. 23, 2004).
    \40\ See U.S. v. Credit Found. of Am., No. CV 06-3654 ABC(VBKx) 
(C.D. Cal. filed June 13, 2006); FTC v. Integrated Credit Solutions, 
Inc., No. 06-806-SCB-TGW (M.D. Fla. filed May 2, 2006); FTC v. Debt 
Mgmt. Found. Servs., Inc., No. 04-1674-T-17-MSS (M.D. Fla. filed 
July 20, 2004).
    \41\ See FTC v. Express Consolidation, No. 06-cv-61851-WJZ (S.D. 
Fla. Am. Compl. filed Mar. 21, 2007); FTC v. AmeriDebt, Inc., No. 
PJM 03-3317 (D. Md. filed Nov. 19, 2003).
    \42\ See FTC v. Integrated Credit Solutions, No. 06-806-SCB-TGW 
(M.D. Fla. filed May 2, 2006); U.S. v. Credit Found. of Am., No. CV 
06-3654 ABC(VBKx) (C.D. Cal. filed June 13, 2006). 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. filed Mar. 6, 2006) .
    \43\ See FTC v. Express Consolidation, No. 06-cv-61851-WJZ (S.D. 
Fla. Am. Compl. filed Mar. 21, 2007); U.S. v. Credit Found. of Am., 
No. CV 06-3654 ABC(VBKx) (C.D. Cal. filed June 13, 2006).
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    Over the last several years, in response to abuses such as these, 
the

[[Page 48461]]

IRS has challenged the tax-exempt status of a number of purportedly 
nonprofit CCAs - both through enforcement of existing statutes and new 
tax code provisions.\44\ To enhance the IRS's ability to oversee CCAs, 
in 2006 Congress amended the IRC, adding Sec.  501(q) to provide 
specific eligibility criteria for CCAs seeking tax-exempt status as 
well as criteria for retaining that status.\45\ Among other things, 
Sec.  501(q) of the Code prohibits tax-exempt CCAs from refusing to 
provide credit counseling services due to a consumer's inability to pay 
or a consumer's ineligibility or unwillingness to enroll in a DMP; 
charging more than ``reasonable fees'' for services; or, unless allowed 
by state law, basing fees on a percentage of a client's debt, DMP 
payments, or savings from enrolling in a DMP.\46\ In addition to 
receiving regulatory scrutiny from the IRS, as a result of changes in 
the federal bankruptcy code, 158 nonprofit CCAs, including the largest 
such entities, have been subjected to rigorous screening by the 
Department of Justice's Executive Office of the U.S. Trustee 
(``EOUST'').\47\ Finally, nonprofits must comply with state laws in 49 
states, most of which set fee limits.\48\
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    \44\ In 2006, the IRS examined all tax-exempt CCAs, resulting in 
revocation or proposed revocation of the existing tax-exempt status 
of 41 of them, as well as increased scrutiny of new applications for 
tax-exempt status. TSR Proposed Rule, 74 FR at 41992; Hunter at 1; 
AICCCA at 5; FECA (Oct. 26, 2009) at 4; CareOne at 4; Eileen 
Ambrose, Credit firms' status revoked; IRS says 41 debt counselors 
will lose tax-exempt standing, Baltimore Sun, May 16, 2006.
    \45\ Pension Protection Act of 2006, Pub. L. No. 109-280, 
Section 1220 (Aug. 2006) (codified as 26 U.S.C. 501(q)).
    \46\ See 26 U.S.C. 501(q). Section 501(q) also limits the total 
revenues that a tax-exempt CCA may receive from creditors for DMPs 
and prohibits tax-exempt CCAs from making or receiving referral fees 
and from soliciting voluntary contributions from a client. 26 U.S.C. 
501(q)(1)-(2); see also FECA (Oct. 26, 2009) at 4-5.
    \47\ 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 discharge from bankruptcy. See Pub L. No. 
109-8, 119 Stat. 23 (codified as amended at 11 U.S.C. 101 et seq.). 
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. 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 remain, approved nonprofit budget 
and credit counseling agencies). A list of EOUST-approved credit 
counselors is available to consumers at (http://www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm).
    \48\ Supra note 33; see also CareOne at 4. Some of the state 
laws apply to for-profit credit counseling companies as well; others 
do not.
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2. For-Profit Debt Settlement Services
    Debt settlement companies purport to offer consumers the 
opportunity to obtain lump sum settlements with their creditors for 
significantly less than the full outstanding balance of their unsecured 
debts. Unlike a traditional DMP, the goal of a debt settlement plan is 
for the consumer to repay only a portion of the total owed.
The Promotion of Debt Settlement Services
    Debt settlement companies typically advertise through the Internet, 
television, radio, or direct mail.\49\ The advertisements generally 
follow the ``problem-solution'' approach - consumers who are over their 
heads in debt can be helped by enrolling in the advertiser's program. 
Many advertisements make specific claims that appeal to the target 
consumers - for example, claims that consumers will save 40 to 50 cents 
on each dollar of their credit card debts\50\ or will become debt-
free.\51\ The advertisements typically then urge consumers to call a 
toll-free number for more information.\52\
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    \49\ Able (Oct. 21, 2009) at 17; CFA at 2-3; Weinstein (Oct. 26, 
2009) at 7 (see attached Weinstein paper at 6); see also USOBA 
Workshop Comment at 9.
    \50\ In April 2010, FTC staff conducted a surf of debt 
settlement websites, based on a sample of the websites that a 
consumer searching for debt settlement services on a major search 
engine would encounter. In conducting the surf, staff searched on 
Google for the term ``debt settlement services,'' obtaining more 
than 24,000 results. To best duplicate what a typical consumer 
searching for these services would find, staff narrowed the results 
to the websites that appeared on the first six pages of the search 
results and eliminated duplicates. The staff found that 86% of the 
100 debt settlement websites reviewed represented that the provider 
could achieve a specific level of reduction in the amount of debt 
owed.
    See also, e.g., FTC v. Better Budget Fin. Servs., Inc., No. 04-
12326 (WG4) (D. Mass. filed Nov. 2, 2004) (Complaint, ] 12) 
(defendants' websites represented that they could ``reduce the 
amount of the consumer's debt by as much as 50% - 70%.''); infra 
note 566; Debt Settlement: Fraudulent, Abusive, and Deceptive 
Practices Pose Risk to Consumers: Hearing on The Debt Settlement 
Industry: The Consumer's Experience Before the Sen. Comm. On 
Commerce, Science, & Transportation, 111\th\ Cong. (2010) (testimony 
of the U.S. Government Accountability Office) (``GAO Testimony'') at 
13.
    \51\ Of the 100 websites FTC staff reviewed, see supra note 50, 
57% represented that they could settle or reduce all unsecured debts 
(websites made claims such as ``Become Debt Free,'' ``Debt free in 
as little as 24-48 months,'' and ``Achieve $0.00 Debt In 12-60 
Months.''); see also, e.g., FTC v. Edge Solutions, Inc., No. CV-07-
4087 (E.D.N.Y. filed Sept. 28, 2007) (Complaint, ] 16) (defendants' 
websites represented that ``we can reduce your unsecured debt by up 
to 60% and sometimes more and have you debt free in 18 to 30 
months.''); FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 GAF 
JTLx (C.D. Cal. filed Feb. 3, 2004) (Complaint, ] 26) (the company's 
website ``represent[ed] that, by using DRS's debt negotiation 
services, consumers can pay off their credit card debt for fifty 
percent or less of the amount currently owed and be debt free within 
three to 36 months.''); GAO Testimony, supra note 50, at 18.
    \52\ In its review of debt settlement websites, see supra note 
50, FTC staff found that 91% of websites reviewed directed the 
consumer to call a telephone number to learn more about the service. 
The Commission also has observed this practice in its law 
enforcement experience. See, e.g., FTC v. Debt-Set, Inc., No. 1:07-
CV-00558-RPM (D. Colo. filed Mar. 19, 2007); FTC v. Edge Solutions, 
Inc., No. CV-07-4087 (E.D.N.Y. filed Sept. 28, 2007); FTC v. 
Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. Am. Compl. filed 
Nov. 27, 2006); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC 
(Ex) (C.D. Cal. filed Aug. 19, 2002).
---------------------------------------------------------------------------

    Consumers who call the specified phone number reach a telemarketer 
working for or on behalf of the debt settlement provider. The 
telemarketer obtains information about the consumer's debts and 
financial condition and makes the sales pitch, often repeating the 
claims made in the advertisements as well as making additional ones. If 
the consumer agrees to enroll in the program, the provider mails a 
contract for signature. Providers sometimes pressure consumers to 
return payment authorization forms and signed contracts as quickly as 
possible following the call.\53\
---------------------------------------------------------------------------

    \53\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. 
Colo. filed Mar. 19, 2007) (Complaint ] 20) (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' telemarketers 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.'').
---------------------------------------------------------------------------

The Debt Settlement Program
    In the typical scenario, consumers enroll one or more of their 
unsecured debts into the program and begin making payments into a 
dedicated bank account established by the provider.\54\ These payments 
are apportioned in some fashion between the provider's fees and money 
set aside for settlements of the debts. According to industry 
representatives, debt settlement providers assess each consumer's 
financial condition and, based on that individualized assessment and 
the provider's historical experience, calculate a single monthly 
payment that

[[Page 48462]]

the consumer must make to both save for settlements and pay the 
provider's fee.\55\ The providers typically tell consumers that the 
monthly payments - often in the 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. The provider generally will not begin 
negotiations with creditors until the consumer has saved money 
sufficient to fund a possible settlement of the debt.\56\ The provider 
pursues settlements on an individual, debt-by-debt basis as the 
consumer accumulates sufficient funds for each debt. According to 
industry representatives, the process of settling all of a consumer's 
debts can take three years or more to complete.\57\
---------------------------------------------------------------------------

    \54\ See SBLS at 1; USDR (Oct. 20, 2009) at 14; Orion (Jan. 12, 
2009) at 5; NWS (Oct. 29, 2009) at 10 (see attached Walji paper at 
10). In fact, most state debt management laws, including the Uniform 
Debt-Management Services Act (``UDMSA''), require providers to keep 
client funds in separate, dedicated bank accounts. ULC at 2; CareOne 
at 6.
    \55\ See, e.g., FDR (Jan. 14, 2010) at 2; TASC (Oct. 26, 2009) 
at 7.
    \56\ USOBA (Oct. 26, 2009) at 32. A trade association reported 
that creditors may not consider settlements until an account is at 
least 60 days delinquent. USOBA (Oct. 26, 2009) at 32. If consumers 
are current on their debts, debt settlement providers sometimes 
advise them to stop making payments to their creditors so that they 
can achieve the duration of delinquency necessary for the provider 
to initiate negotiations. Infra note 73.
    \57\ DSA/ADE at 8; see also CO AG at 5 (based on data submitted 
by industry members, the average program length was 32.3 months).
---------------------------------------------------------------------------

    While the consumer is accumulating funds, the debt settlement 
provider often advises the consumer not to talk to the associated 
creditors or debt collectors.\58\ In addition, some providers instruct 
the consumer to assign them power of attorney\59\ and to send creditors 
a letter, directly or through the provider, instructing the creditor to 
cease communication with the consumer.\60\ In some cases, providers 
have even executed a change of address form substituting their address 
for the consumer's, thereby redirecting billing statements and 
collection notices so that the consumer does not receive them.\61\ Some 
providers represent that they maintain direct contact with the 
consumer's creditors or debt collectors and that collection calls and 
lawsuits will cease upon the consumer's enrollment in the debt 
settlement program.\62\
---------------------------------------------------------------------------

    \58\ See CFA at 9; SOLS at 2; AFSA at 2; JH (Oct. 24, 2009) at 
14; NC AG Testimony, supra note 25, at 3-4 (``The whole premise of 
debt settlement is based on consumers not paying their debts and not 
communicating with creditors.''); see also, e.g., FTC v. Connelly, 
No. SA CV 06-701 DOC (RNBx) (C.D. Cal. Am. Compl. filed Nov. 27, 
2006); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC (Ex) (C.D. 
Cal. filed Aug. 19, 2002).
    \59\ AFSA at 5 (``Debt settlement providers frequently use such 
means to block communication between the creditor and the consumer. 
This prevents the creditor from being able to put together a workout 
plan that would be free for the consumer.''). However, ACA 
International (``ACA''), a trade organization representing third-
party debt collectors, stated that the power of attorney documents 
prepared by debt settlement providers frequently are legally 
deficient under state law. See ACA Workshop Comment (Dec. 1, 2008) 
at 5-8. Further, unless presented by an attorney, a power of 
attorney may permit, but does not require, a creditor to contact the 
debt settlement provider. Accordingly, it appears that this strategy 
often does not stop collection calls, lawsuits, or garnishment 
proceedings, but instead may actually escalate the collection 
process. See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. 
Colo. filed Mar. 19, 2007)(alleging defendants sent power of 
attorney documents to consumers); FTC v. Better Budget Fin. Servs., 
Inc., No. 04-12326 (WG4) (D. Mass. filed Nov. 2, 2004) (alleging 
that consumers were instructed to sign power of attorney forms); FTC 
v. Nat'l Credit Council, Case No. SACV04-0474 CJC (JWJx) (C.D. Cal. 
2004) (alleging that defendants used power of attorney documents).
    \60\ AFSA at 6; RDRI at 5 (``The issuance of `cease and desist' 
letters from debt settlement companies to creditors provides a false 
sense of security to consumers that their accounts are being 
successfully negotiated and that there is not any threat of 
impending legal action.''); see also ACA Workshop Comment (Dec. 1, 
2008) at 4-7; Consumer Bankers Association Workshop Comment (Dec. 1, 
2008) at 2-3. Creditors have expressed displeasure, however, that 
once debt settlement providers intercede on behalf of consumers, the 
providers are not responsive to creditor contacts. See, e.g., AFSA 
at 2. 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 the failure to make payments. See ABA 
(O'Neill), Workshop Tr. at 96.
    \61\ See, e.g., FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 
ABC (Ex) (C.D. Cal. filed Aug. 19, 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 Exh. 7 (D. Colo. Mar. 20, 2007) (same).
    \62\ NACCA at 5; AFSA at 8; FTC v. Connelly, No. SA CV 06-701 
DOC (RNBx) (C.D. Cal. Am. Compl. filed Nov. 27, 2006); Better 
Business Bureau, BBB on Differences Between Debt Consolidation, Debt 
Negotiation and Debt Elimination Plans (Mar. 2, 2009) , available at 
(http://www.bbb.org/us/article/bbb-on-differences-between-debt-consolidation-debt-negotiation-debt-elimination-plans-9350).
---------------------------------------------------------------------------

Debt Settlement Fee Models
    Many debt settlement providers charge significant advance fees. 
Some require consumers to pay 40% or more of the total fee within the 
first three or four months of enrollment and the remainder over the 
ensuing 12 months or fewer.\63\ These fees must be paid whether or not 
the provider has attempted or achieved any settlements. An increasing 
number of providers utilize a so-called ``pay as you go'' model, 
spreading the fees over the first fifteen months or more of the 
program, yet still requiring consumers to pay hundreds of dollars in 
fees before they receive a single settlement.\64\ Even when providers 
spread the fee over the anticipated duration of the program (usually 
three years), consumers typically are required to pay a substantial 
percentage of the fee before any portion of their funds is paid to 
creditors.\65\
---------------------------------------------------------------------------

    \63\ USDR (Oct. 20, 2009) at 2; NAAG (Oct. 23, 2009) at 3; CFA 
at 4, 8-10; SBLS at 4; QLS at 2; SOLS at 2; see also, e.g., FTC v. 
Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. Am. Compl. filed 
Nov. 27, 2006) (alleging that defendants required consumers to make 
a ``down payment'' of 30% to 40% of the total fee in the first two 
or three months with the remainder paid over the following six to 12 
months). A debt settlement trade association (USOBA) obtained 
information about providers' fee structures from 58 providers and 
reported that six of the 58 primarily use this ``front end fee 
model.'' USOBA (Jan. 29, 2010) at 3 (providing no information as to 
whether the 58 respondents are representative of the trade 
association or the industry as a whole).
    \64\ DRS (Jan. 12, 2010) at 1 (fee of 15% of enrolled debt 
balance is collected over 15 months); FDR (Oct. 26, 2009) at 14 
(fees are collected over the first 18 months or longer of the 
program); JH (Jan. 12, 2010) at 4 (The first payment goes toward 
fees; the remainder of the fee is collected in installments over 
one-half of the program. The company's total fee is 15% of enrolled 
debt, plus a $49 per month maintenance fee. Formerly, the company 
collected the 15% fee over the first 12 months.); Hunter at 3 
(``[I]t is becoming more common for companies to charge a one-time, 
flat enrollment fee and prorate the remaining percentage of the fee 
over at least half the life of the program.''); NC AG Testimony, 
supra note 25, at 4 (``a significant portion of the consumer's 
initial payments is diverted to the settlement company's fees.'').
    \65\ See USOBA (Jan. 29, 2010) at 3; CSA (Witte), Tr. at 64 
(company collects its entire fee monthly, in even amounts, 
throughout the program); USDR (Johnson), Tr. at 187 (same); SDS 
(Jan. 22, 2010) at 1-2 (no fee is taken from the first payment; the 
fee is then taken in equal amounts from the next 20 payments for 36-
month programs).
---------------------------------------------------------------------------

    Many debt settlement companies break their fee into separate 
components, such as an initial fee, monthly fees, and/or contingency 
fees based on the amount of savings the company obtains for the 
consumer.\66\ While fee models vary greatly, they generally require a 
substantial portion of the fee in advance of any settlements.\67\ As 
described more fully below, the large initial commitment required of 
consumers has contributed to the high

[[Page 48463]]

rate at which consumers drop out of these programs before their debts 
are settled.
---------------------------------------------------------------------------

    \66\ CRN (Jan. 21, 2010) at 4; FCS (Oct. 27, 2009) at 2; ACCORD 
(Oct. 9, 2009) at 2-3; SBLS at 4 (Financial Consulting Services, 
National Asset Services, and American Debt Arbitration, three 
different companies that share identical websites, have charged a 
``set-up fee'' of $399, an ``enrollment fee'' equal to half of each 
of the first six monthly payments, a $49 monthly maintenance fee, a 
$7.20 monthly bank fee, and a settlement fee of 29% of the savings 
on each settlement. Two other providers, Debt Choice and the Palmer 
Firm, have charged an 8% set-up fee, a $65 monthly fee, and a 33% 
settlement fee on realized savings at the time of settlement. A debt 
settlement company called Allegro Law has charged a 16% fee 
collected over 18 months and a $59.99 monthly fee; the 16% fee is 
due immediately if the customer drops out of the program within the 
first 18 months. Morgan Drexen and the Eric A. Rosen law firm have 
charged a set-up fee of 5%, monthly fees of $48, and a 25% 
settlement fee based on realized savings at time of settlement).
    \67\ GAO Testimony, supra note 50, at 9. The wide variety of fee 
models makes it difficult for consumers to shop for the lowest cost 
service. See Loeb (Mallow), Tr. at 206.
---------------------------------------------------------------------------

Consumer Protection Concerns
    Debt settlement plans, as they are often marketed and implemented, 
raise several consumer protection concerns. First, many providers' 
advertisements and ensuing telemarketing pitches include false, 
misleading, or unsubstantiated representations, including claims that
     the provider will or is highly likely to obtain large debt 
reductions for enrollees, e.g., a 50% reduction of what the consumer 
owes;\68\
---------------------------------------------------------------------------

    \68\ Supra note 50; infra note 566.
---------------------------------------------------------------------------

     the provider will or is highly likely to eliminate the 
consumer's debt entirely in a specific time frame, e.g., 12 to 36 
months;\69\
---------------------------------------------------------------------------

    \69\ Supra note 51.
---------------------------------------------------------------------------

     harassing calls from debt collectors and collection 
lawsuits will cease;\70\
---------------------------------------------------------------------------

    \70\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. 
Colo. filed Mar. 19, 2007); FTC v. Better Budget Fin. Servs., Inc., 
No. 04-12326 (WG4) (D. Mass. filed Nov. 2, 2004); FTC v. Jubilee 
Fin. Servs., Inc., No. 02-6468 ABC (Ex) (C.D. Cal. filed Aug. 19, 
2002); GAO Testimony, supra note 50, at 13; see also, e.g., In re 
Positive Return, Inc. (Cal. Dep't of Corps., desist and refrain 
order May 28, 2004).
---------------------------------------------------------------------------

     the provider has special relationships with creditors and 
expert knowledge about available techniques to induce settlement;\71\ 
and
---------------------------------------------------------------------------

    \71\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. 
Colo. filed Mar. 19, 2007); FTC v. Better Budget Fin. Servs., Inc., 
No. 04-12326 (WG4) (D. Mass. filed Nov. 2, 2004); Press Release, 
Florida Attorney General, Two Duval County Debt Negotiation 
Companies Sued for Alleged Deceptions (Mar. 5, 2008), available at 
(myfloridalegal.com/__852562220065EE67.nsf/0/1E9B7637235FE16C85257403005C595F?Open&Highlight=0,ryan,boyd); In re Am. Debt 
Arb., No. 06CS01309 (Cal. Dep't of Corps., desist and refrain order 
June 30, 2008).
---------------------------------------------------------------------------

     the provider's service is part of a government program, 
through the use of such terms as ``credit relief act,'' ``government 
bailout,'' or ``stimulus money.''\72\
---------------------------------------------------------------------------

    \72\ See, e.g., NAAG (July 6, 2010) at 2; FTC v. Dominant Leads, 
LLC, No. 1:10-cv-00997 (D.D.C. filed June 15, 2010); GAO Testimony, 
supra note 50, at 13-14; Steve Bucci, Bankrate.com, Settle Credit 
Card Debt For Pennies? (Feb. 2, 2010), available at (http://www.bankrate.com/finance/credit-cards/settle-credit-card-debt-for-pennies-1.aspx).
---------------------------------------------------------------------------

Many providers also tell consumers that they can, and should, stop 
paying their creditors, while not disclosing that failing to make 
payments to creditors may actually increase the amounts consumers owe 
(because of accumulating fees and interest) and will adversely affect 
their creditworthiness.\73\ The rulemaking record, discussed in detail 
below, establishes that a large proportion of consumers who enter a 
debt settlement plan do not attain results close to those commonly 
represented.
---------------------------------------------------------------------------

    \73\ See, e.g., FTC v. Connelly,No. SA CV 06-701 DOC (RNBx) 
(C.D. Cal. Am. Compl. filed Nov. 27, 2006); FTC v. Jubilee Fin. 
Servs., Inc., No. 02-6468 ABC (Ex) (C.D. Cal. filed Aug. 19, 2002); 
see also Texas Attorney General, Press Release, Attorney General 
Abbott Pursues Restitution for Texans from ``Debt Settlement 
Company'' in Bankruptcy Court (Aug. 20, 2009), available at (http://www.oag.state.tx.us/oagNews/release.php?id=3088); Florida v. Hacker 
(Fl. Cir. Ct. - 4th filed Feb 21, 2008); GAO Testimony, supra note 
50, at 9; NC AG Testimony, supra note 25, at 4 (``The theory is that 
the older and more delinquent the debt, the easier it will be to 
negotiate.''); Debt Settlement: Fraudulent, Abusive, and Deceptive 
Practices Pose Risk to Consumers: Hearing on The Debt Settlement 
Industry: The Consumer's Experience Before the Sen. Comm. On 
Commerce, Science, & Transportation, 111\th\ Cong. (2010) (Statement 
of Holly Haas) (``Haas Testimony''), at 2 (``We were instructed by 
[the debt settlement company] not to pay our credit card bills 
because the credit card companies would not negotiate settlements 
with current accounts.''); RDRI at 5.
---------------------------------------------------------------------------

    In the context of the widespread deception in this industry, the 
advance fee model used by many debt settlement providers causes 
substantial consumer injury. Consumers often are not aware that their 
initial payments are taken by the provider as its fees and are not 
saved for settlement of their debt; in many instances, providers 
deceptively underestimate the time necessary to complete the 
program.\74\ As a result, many consumers fall further behind on their 
debts, incur additional charges, harm their creditworthiness, including 
credit scores, and, in some cases, suffer legal action against them to 
collect the debt.\75\ Moreover, in a large percentage of cases, 
consumers are unable to continue making payments while their debts 
remain undiminished and drop out of the program, usually forfeiting all 
the payments they made towards the provider's fees.\76\
---------------------------------------------------------------------------

    \74\ See, e.g., Debt Settlement USA, Growth of the Debt 
Settlement Industry,at 10 (Oct. 17, 2008) (``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.''); see also, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-
00558-RPM (D. Colo. filed Mar. 19, 2007).
    \75\ One of the Commission's enforcement actions, FTC v. 
Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal. Am. Compl. filed 
Nov. 27, 2006), is particularly illustrative of the risk of 
litigation. In that case, between 2004 and 2005, nearly a third of 
defendants' 18,116 customers were sued by creditors or debt 
collectors. See id.,Trial Exs. 382, 561, 562, 623 & Schumann Test., 
Day 4, Vol. III, 37:21 - 40:12; 34:17 - 37:4.
    \76\ NC AG Testimony, supra note 25, at 4 (``If the consumer 
drops out before the settlement process is concluded, as is usually 
the case, he or she will lose the fee payments, while facing 
increased debt account balances.''); see infra Section 
III.C.2.a.(1); FTC Case List, supra note 27.
---------------------------------------------------------------------------

    Both the Commission and state enforcers have brought numerous law 
enforcement actions targeting deceptive and unfair practices in the 
debt settlement industry.\77\ Since 2001, the Commission has brought 
nine actions against debt settlement entities under the FTC Act for 
many of the abuses detailed above.\78\ As in the FTC's actions against 
deceptive credit counselors, these suits commonly alleged that the 
provider misrepresented, or failed to disclose adequately, the amount 
and/or timing of its substantial advance fees.\79\ Additionally, the 
Commission alleged that the defendants in these cases falsely promised 
high success rates and results that were, in fact, unattainable;\80\ 
misrepresented their refund policies;\81\ and failed to disclose the 
accumulation of creditor late fees and other negative consequences of 
their programs.\82\
---------------------------------------------------------------------------

    \77\ See FTC and State Case Lists, supra note 27.
    \78\ See FTC Case List, supra note 27.
    \79\ See, e.g., FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo. 
filed Mar. 19, 2007) (alleging that defendants misrepresented that 
they would not charge consumers any upfront fees before obtaining 
the promised debt relief, but in fact required a substantial upfront 
fee).
    \80\ See, e.g., id; FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) 
(C.D. Cal. Am. Compl. filed Nov. 27, 2006).
    \81\ See, e.g., FTC v. Innovative Sys. Tech., Inc., No. CV04-
0728 GAF JTLx (C.D. Cal. filed Feb. 3, 2004) (defendants 
misrepresented that they would refund consumers' money if 
unsuccessful).
    \82\ See, e.g., id.; FTC v. Connelly,No. SA CV 06-701 DOC (RNBx) 
(C.D. Cal. Am. Compl. filed Nov. 27, 2006); FTC v. Debt-Set, No. 
1:07-cv-00558-RPM (D. Colo. filed Mar. 19, 2007).
---------------------------------------------------------------------------

    The states also have been active in attacking abuses in this 
industry. State regulators and attorneys general have filed numerous 
law enforcement actions against debt settlement providers\83\ under 
their state unfair and deceptive acts and practices statutes\84\ or 
other state laws or regulations.\85\ In addition, many states have 
enacted statutes specifically designed to combat deceptive debt 
settlement practices;\86\ in

[[Page 48464]]

fact, six states have banned for-profit debt settlement services 
entirely.\87\ Most state laws, however, allow these services but impose 
certain requirements or restrictions, for example, banning advance 
fees,\88\ requiring that providers be licensed in the state,\89\ 
providing consumers with certain key disclosures (e.g., a schedule of 
payments and fees),\90\ and granting consumers some right to cancel 
their enrollment.\91\
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    \83\ See State Case List, supra note 27.
    \84\ See, e.g. State of Illinois v. Clear Your Debt, LLC, No. 
2010-CH-00167 (Cir. Ct. 7\th\ Judicial Cir. filed Feb. 10, 2010); 
State of Texas v. CSA-Credit Solutions of Am., Inc., No. 09-000417 
(Dist. Travis Cty. filed Mar. 26, 2009); State of Florida v. Boyd, 
No. 2008-CA-002909 (Cir. Ct. 4th Cir. Duval Cty filed Mar. 5, 2008).
    \85\ See, e.g., Press Release, Colorado Attorney General, Eleven 
Companies Settle With The State Under New Debt-Management And Credit 
Counseling Regulations (Mar. 12, 2009), available at (http://www.ago.state.co.us/press_detail.cfmpressID=957.html).
    \86\ Some states restrict the amount and timing of fees, 
including initial fees and subsequent monthly charges. In 2005, the 
Uniform Law Commission (``ULC'') drafted the UDMSA in an attempt to 
foster consistent regulation of both for-profit and nonprofit debt 
relief services across the United States. ULC at 2. Among the key 
consumer protection provisions in the UDMSA are: a fee cap, 
mandatory education requirements, a requirement that the provider 
employ certified counselors, and accreditation requirements for 
sellers of debt management services. Id. To date, six states have 
adopted the UDMSA with some modifications; additional state 
legislatures currently are considering doing so. Id.
    \87\ See, e.g., La. Rev. Stat. Sec.  14:331, et seq.; N.D. Cen. 
Code Sec.  13-06-02; Wyo. Stat. Ann. Sec.  33-14-101, et seq.; Haw. 
Rev. Stat. Ann. Sec.  446-2; Mass. Gen. Laws Ann. Ch. 180 Sec.  4A; 
N.J. Stat. Ann. Sec.  17:16G-2.
    \88\ N.C. Gen. Stat. Sec.  14-423 et seq.
    \89\ 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.
    \90\ 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.
    \91\ 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.
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3. Debt Negotiation
    In addition to credit counseling and debt settlement, there is a 
third category of debt relief services, often referred to as ``debt 
negotiation.'' Debt negotiation companies offer to obtain interest rate 
reductions or other concessions to lower the amount of consumers' 
monthly payment owed to creditors.\92\ Unlike DMPs or debt settlement, 
debt negotiation does not purport to implement a full balance payment 
plan or obtain lump sum settlements for less than the full balance the 
consumer owes.
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    \92\ NAAG (Oct. 23, 2009) at 3-4; MN AG at 2 (``Minnesotans are 
being deluged with phone calls and advertising campaigns promising 
to lower credit card interest rates, reduce bills, or repair damaged 
credit''); see, e.g., FTC v. Advanced Mgmt. Servs. NW, LLC, No. 10-
148-LRS (E.D. Wash. filed May 10, 2010); FTC v. Econ. Relief Techs., 
LLC, No. 09-CV-3347 (N.D. Ga. filed Nov. 30, 2009); FTC v. 2145183 
Ontario, Inc., No. 09-CV-7423 (N.D. Ill. filed Nov. 30, 2009); FTC 
v. JPM Accelerated Servs., Inc., No. 09-CV-2021 (M.D. Fla. Am. 
Compl. filed Jan. 19, 2010); FTC v. Group One Networks, Inc., No. 
8:09-cv-352-T-26-MAP (M.D. Fla. Am. Compl. filed Apr. 14, 2009); FTC 
v. Select Pers. Mgmt., No. 07-CV-0529 (N.D. Ill. Am. Compl. filed 
Aug. 18, 2007); FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. 
Wash. filed Mar. 6, 2006); see also, e.g., Press Release, West 
Virginia Attorney General, Attorney General McGraw Announces WV 
Refunds of $214,000 in Debt Relief Companies Settlement (Jan. 13, 
2010), available at (http://www.wvago.gov/press.cfm?ID=500&fx=more); 
Press Release, Minnesota Attorney General, Attorney General Swanson 
Files Three Lawsuits Against companies Claiming to Help Consumers 
Lower Their Credit Card Interest Rates (Sept. 22, 2009), available 
at (http://www.ag.state.mn.us/consumer/pressrelease/090922ccinterestrates.asp).
---------------------------------------------------------------------------

    Debt negotiation providers often market to consumers through so-
called ``robocalls.''\93\ Like debt settlement companies, some debt 
negotiation providers charge significant advance fees.\94\ 
Additionally, like some debt settlement companies, debt negotiators may 
promise specific results, such as a particular interest rate reduction 
or amount of savings that will be realized.\95\ In some cases, the 
telemarketers of debt negotiation services refer to themselves as 
``card services'' or a ``customer service department'' during telephone 
calls with consumers in order to mislead them into believing that the 
telemarketers are associated with consumers' credit card companies.\96\ 
In other cases, debt negotiators represent that they can secure savings 
for consumers, but the sole service provided is creation of an 
accelerated payment schedule that recommends increased monthly 
payments.\97\ Although increased monthly payments would result in 
interest savings, consumers seeking these services usually cannot 
afford the recommended payments.
---------------------------------------------------------------------------

    \93\ See, e.g., FTC v. Advanced Mgmt. Servs. NW, LLC, No. 10-
148-LRS (E.D. Wash. filed May 10, 2010); FTC v. Econ. Relief Techs., 
LLC, No. 09-CV-3347 (N.D. Ga. filed Nov. 30, 2009) .
    \94\ NAAG (Oct. 23, 2009) at 3-4; FTC v. Advanced Mgmt. Servs. 
NW, LLC, No. 10-148-LRS (E.D. Wash. filed May 10, 2010) (alleging 
defendants charged an upfront fee of $499 to $1,590); FTC v. Econ. 
Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga. filed Nov. 30, 2009) 
(alleging defendants charged an upfront fee of $990 to $1,495); FTC 
v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill. filed Nov. 30, 
2009) (alleging defendants charged an upfront fee of $495 to 
$1,995); FTC v. JPM Accelerated Servs., Inc., No. 09-CV-2021 (M.D. 
Fla. Am. Compl. filed Jan. 19, 2010) (alleging defendants charged an 
upfront fee of $495 to $995); FTC v. Group One Networks, Inc., No. 
8:09-cv-352-T-26-MAP (M.D. Fla. Am. Compl. filed Apr. 14, 2009) 
(alleging defendants charged an upfront fee of $595 to $895); FTC v. 
Select Pers. Mgmt., No. 07-CV-0529 (N.D. Ill. Am. Compl. filed Aug. 
18, 2007) (alleging defendants charged an upfront fee of $695); FTC 
v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. Wash. filed Mar. 6, 
2006) (alleging defendants charged an upfront fee of $399 to $629).
    \95\ See, e.g., FTC v. Advanced Mgmt. Servs. NW, LLC, No. 10-
148-LRS (E.D. Wash. filed May 10, 2010) (alleging defendants 
represented that if the consumer did not save the promised amount of 
$2,500 or more in a short time, the consumer would receive a full 
refund); FTC v. Econ. Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga. 
filed Nov. 30, 2009) (alleging defendants represented that if 
consumers did not save a ``guaranteed'' amount - typically $4,000 or 
more - they could get a full refund of the upfront fee); FTC v. 
2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill. filed Nov. 30, 
2009) (alleging defendants claimed that their interest rate 
reduction services would provide substantial savings to consumers, 
typically $2,500 or more in a short time); FTC v. JPM Accelerated 
Servs., Inc., No. 09-CV-2021 (M.D. Fla. Am. Compl. filed Jan. 19, 
2010) (same); FTC v. Group One Networks, Inc., No. 8:09-cv-352-T-26-
MAP (M.D. Fla. Am. Compl. filed Apr. 14, 2009) (alleging defendants 
represented they would provide consumers with savings of $1,500 to 
$20,000 in interest) ; FTC v. Select Pers. Mgmt., No. 07-CV-0529 
(N.D. Ill. Am. Compl. filed Aug. 18, 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. filed Mar. 
6, 2006) (alleging defendants promised to save consumers $2,500).
    \96\ MN AG at 2; see also, e.g., FTC v. JPM Accelerated Servs., 
Inc., No. 09-cv-2021 (M.D. Fla. Am. Compl. filed Jan. 19, 2010).
    \97\ NAAG (Oct. 23, 2009) at 3-4; see also, e.g., FTC v. 
Advanced Mgmt. Servs. NW, LLC, No. 10-148-LRS (E.D. Wash. filed May 
10, 2010).
---------------------------------------------------------------------------

    The FTC has brought nine actions against defendants alleging 
deceptive and abusive debt negotiation practices.\98\ In each case, the 
defendants used telemarketing to deliver representations that they 
could reduce consumers' interest payments by specific percentages or 
minimum amounts. In many of these cases, the Commission also alleged 
that the defendants falsely purported to be affiliated, or have close 
relationships, with consumers' creditors.\99\ Finally, in each case, 
the Commission charged defendants with violations of the TSR.
---------------------------------------------------------------------------

    \98\ See FTC Case List, supra note 27.
    \99\ See, e.g., FTC v. Econ. Relief Techs., LLC, No. 09-cv-3347 
(N.D. Ga. filed Nov. 30, 2009); FTC v. 2145183 Ontario, Inc., No. 
09-CV-7423 (N.D. Ill. filed Nov. 30, 2009); FTC v. Group One 
Networks, Inc., No. 8:09-cv-352-T-26- MAP (M.D. Fla. Am. Compl. 
filed Apr. 14, 2009) (alleging defendants claimed to have ``close 
working relationships with over 50,000'' creditors); FTC v. Select 
Pers. Mgmt., No. 07-CV-0529 (N.D. Ill. Am. Compl. filed Aug. 18, 
2007) (alleging defendants claimed to be affiliated with consumers' 
credit card companies); FTC v. Debt Solutions, Inc., No. 06-0298 JLR 
(W.D. Wash. filed Mar. 6, 2006) (alleging that defendants claimed to 
have ``special relationships'' with creditors); see also MN AG at 2.
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II. Overview of the Proposed Rule and Comments Received

    On August 19, 2009, the Commission published its Notice of Proposed 
Rulemaking (``NPRM'') proposing revisions to the TSR (``proposed 
rule'') to cover debt relief services. The Commission proposed 
amendments to:
     Define the term ``debt relief service'' to cover any 
service to renegotiate, settle, or in any way alter the terms of a debt 
between a consumer and any unsecured creditor or debt collector, 
including a reduction in the balance, interest rate, or fees owed;
     Prohibit providers from charging fees until they have 
provided the debt relief services;
     Require providers to make six specific disclosures about 
the debt relief services being offered;
     Prohibit misrepresentations about material aspects of debt 
relief services, including success rates and whether a provider is a 
nonprofit entity; and
     Extend the TSR to cover calls consumers make to debt 
relief service

[[Page 48465]]

providers in response to general media advertising.
    During the course of this rulemaking, the Commission received 
comments from 321 stakeholders, including representatives of the debt 
relief industry, creditors, law enforcement, consumer groups, and 
individual consumers.\100\ Most industry commenters supported parts of 
the proposal but opposed the advance fee ban.\101\ One industry member 
opposed virtually the entire proposal,\102\ while a few supported the 
proposal as a whole.\103\ In contrast, state attorneys general and 
regulators, consumer advocates, legal aid attorneys, and creditors 
generally supported the proposed amendments, including the advance fee 
ban.\104\ The comments and the basis for the Commission's adoption or 
rejection of the commenters' suggested modifications to the proposed 
rule are analyzed in detail in Section III below.
---------------------------------------------------------------------------

    \100\ These 321 commenters consist of: 35 industry 
representatives, 10 industry trade associations and groups, 26 
consumer groups and legal services offices, six law enforcement 
organizations, three academics, two labor unions, the Uniform Law 
Commission, the Responsible Debt Relief Institute, the Better 
Business Bureau, and 236 individual consumers. Of these commenters, 
three sought and obtained confidential treatment of data submitted 
as part of their comments pursuant to FTC Rule 4.9(c), 16 CFR 
4.9(c).
    \101\ See, e.g., TASC (Oct. 26, 2009) at 2; USOBA (Oct. 26, 
2009) at 3. Two industry commenters supported a partial advance fee 
ban allowing debt relief providers to receive fees to cover 
administrative expenses before providing the promised services. CRN 
(Oct. 2, 2009) at 10-11; USDR (Oct. 20, 2009) at 2.
    \102\ MD (Oct. 26, 2009) at 4.
    \103\ ACCORD (Oct. 9, 2009) at 1; FCS (Oct. 27, 2009) at 1; 
CareOne at 1.
    \104\ NAAG (Oct. 23, 2009) at 1; NACCA at 1; CFA at 2; SBLS at 
1; QLS at 2; AFSA at 3; ABA at 2.
---------------------------------------------------------------------------

    On November 4, 2009, the Commission held a public forum to discuss 
the issues raised by the commenters in this proceeding. Many of those 
who had filed comments on the proposed rule participated as panelists 
at the forum, and members of the public had the opportunity to make 
statements on the record. A transcript of the proceeding was placed on 
the public record.\105\ After the forum, Commission staff sent letters 
to trade associations and individual debt relief providers that had 
submitted public comments, soliciting additional information in 
connection with certain issues that arose at the public forum.\106\ 
Sixteen organizations responded and provided data. Finally, Commission 
staff met with industry and consumer representatives to discuss the 
issues under consideration in the rulemaking proceeding.
---------------------------------------------------------------------------

    \105\ The public record in this proceeding, including the 
transcript of the forum, is available at (http://www.ftc.gov/bcp/rulemaking/tsr/tsr-debtrelief/index.shtm) and in Room 130 at the 
FTC, 600 Pennsylvania Avenue, NW, Washington, D.C. 20580, telephone 
number: 202-326-2222.
    \106\ The letters are posted at (http://www.ftc.gov/os/comments/tsrdebtrelief/index.shtm).
---------------------------------------------------------------------------

III. Summary of the Final Amended Rule and Comments Received

    The Commission has carefully reviewed and analyzed the entire 
record developed in this proceeding. The record, as well as the 
Commission's own law enforcement experience and that of its state 
counterparts, shows that amendments to the TSR are warranted and 
appropriate.\107\ As discussed in detail in this SBP, the Final Rule 
addresses deceptive and abusive practices of debt relief service 
providers and includes the following elements:
---------------------------------------------------------------------------

    \107\ The Commission's decision to amend the Rule is made 
pursuant to the rulemaking authority granted by the Telemarketing 
Act to protect consumers from deceptive and abusive practices. 15 
U.S.C. 6102(a)(1) and (a)(3).
---------------------------------------------------------------------------

     Defines the term ``debt relief service'' as proposed in 
the NPRM;
     Prohibits providers from charging or collecting fees until 
they have provided the debt relief services, but (1) permits such fees 
as individual debts are resolved on a proportional basis, or if the fee 
is a percentage of savings,\108\ and (2) allows providers to require 
customers to place funds in a dedicated bank account that meets certain 
criteria;
---------------------------------------------------------------------------

    \108\ See infra Section III.C.5.b.
---------------------------------------------------------------------------

     Requires four disclosures in promoting debt relief 
services, in addition to the existing disclosures required by the TSR: 
(1) the amount of time it will take to obtain the promised debt relief; 
(2) with respect to debt settlement services, the amount of money or 
percentage of each outstanding debt that the customer must accumulate 
before the provider will make a bona fide settlement offer; (3) if the 
debt relief program entails not making timely payments to creditors, a 
warning of the specific consequences thereof; and (4) if the debt 
relief provider requests or requires the customer to place funds in a 
dedicated bank account, that the customer owns the funds held in the 
account and may withdraw from the debt relief service at any time 
without penalty, and receive all funds remitted to the account.
     Prohibits misrepresentations about material aspects of 
debt relief services, including success rates and a provider's 
nonprofit status; and
     Extends the TSR to cover calls consumers make to debt 
relief services in response to advertisements disseminated through any 
medium, including direct mail or email.
    The final amended Rule adopted here is substantially the same in 
most respects to the proposed rule, but includes certain important 
modifications. The Commission bases these modifications on the entire 
record in this proceeding, including the public comments, the forum and 
workshop records, consumer complaints, recent testimony on debt 
settlement before Congress, and the law enforcement experience of the 
Commission and state enforcers. The major differences between the 
proposed amendments and the final amendments are as follows:
     The advance fee ban provision now explicitly sets forth 
three conditions before a telemarketer or seller may charge a fee: (1) 
the consumer must execute a debt relief agreement with the creditor; 
(2) the consumer must make at least one payment pursuant to that 
agreement; and (3) the fee must be proportional either to the fee 
charged for the entire debt relief service (if the provider uses a flat 
fee structure) or a percentage of savings achieved (if the provider 
uses a contingency fee structure);
     Notwithstanding the advance fee ban, the Final Rule allows 
providers to require consumers to place funds for the provider's fee 
and for payment to consumers' creditors or debt collectors into a 
dedicated bank account if they satisfy five specified criteria; and
     The Final Rule eliminates three of the proposed 
disclosures that the Commission has determined are unnecessary, and it 
adds one new disclosure.

A. Section 310.1: Scope

    Many commenters raised concerns regarding the TSR's scope as 
applied to the debt relief industry, in particular its treatment of 
nonprofits, creditors, and debt collectors.\109\ First, several 
commenters expressed concern that while nonprofit entities are a major 
part of the debt relief industry, the Rule does not apply to them, thus 
establishing a potential competitive imbalance. Some of these 
commenters requested that the FTC explicitly apply the Rule to 
nonprofits.\110\ Others argued that the TSR is not an appropriate 
vehicle for regulating the debt relief industry because the FTC cannot 
regulate bona fide nonprofits through it.\111\
---------------------------------------------------------------------------

    \109\ The proposed rule did not modify the scope of the TSR.
    \110\ SOLS at 3; Orion (Oct. 1, 2009) at 1; CareOne at 8; TASC 
(Oct. 26, 2009) at 29.
    \111\ USOBA (Oct. 26, 2009) at 40; MD (Mar. 22, 2010) at 16 n.9; 
TASC (Young), Tr. at 229; see also USOBA (Ansbach), Tr. at 231-32; 
ULC at 6.
---------------------------------------------------------------------------

    As stated above, the FTC Act exempts nonprofit entities, and, 
pursuant to the

[[Page 48466]]

Telemarketing Act, this jurisdictional limit applies to the TSR.\112\ 
As a result, the Commission has no discretion to include nonprofits in 
the Final Rule.\113\ Nonprofits, however, must comply with 49 state 
laws and stringent IRS regulations.\114\ These regulations include 
strict limitations on fee income.\115\ Additionally, based on 
examination of consumer complaints and other research, and in light of 
the IRS and EOUST programs, it appears many of the concerns about 
deceptive practices, including deceptive claims of nonprofit status, 
have been addressed.\116\ Thus, the Commission does not believe that 
the TSR's exclusion of nonprofits is likely to create an unfair 
competitive disadvantage for for-profit debt relief services.\117\
---------------------------------------------------------------------------

    \112\ 15 U.S.C. 6105(b) (providing that the jurisdiction of the 
Commission in enforcing the Rule is coextensive with its 
jurisdiction under Section 5 of the FTC Act).
    \113\ 15 U.S.C. 44 and 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). 
Although nonprofit entities are exempt, telemarketers or sellers 
that solicit on their behalf are nonetheless covered by the TSR. See 
TSR Amended Rule, 68 FR at 4631. Indeed, several commenters 
requested that the Commission carve out an explicit exemption for 
nonprofits. See, e.g., CareOne (Croxson), Tr. at 243. The 
Commission, however, believes it is unnecessary to state in the Rule 
what is already clear in the Telemarketing Act, and it therefore 
declines to include an express statement in the Rule that nonprofits 
are exempt. See TSR Amended Rule, 68 FR at 4586.
    \114\ Supra Section I.C.1; GP (McNamara), Tr. at 245-46. In 
addition, 158 nonprofit CCAs, including the largest entities, have 
been approved by the EOUST after rigorous screening.
    \115\ Supra note 33.
    \116\ The Commission is continuing to monitor this industry, 
particularly for evidence of a resurgence of sham nonprofits. See 
CareOne at 4 (``A wave of tough state debt management laws and 
increased federal oversight over the past several years has helped 
clean up the debt management side of the debt relief industry.'').
    \117\ In any event, the government need not ``regulate all 
aspects of a problem before it can make progress on any front.'' FTC 
v. Mainstream Mktg. Servs., Inc., 358 F.3d 1228, 1238 (10th Cir. 
2004) (holding that the FTC's Do Not Call Registry, which applies to 
commercial calls but not calls made by charities or politicians, was 
not unconstitutionally underinclusive under the First Amendment).
---------------------------------------------------------------------------

    Some commenters raised concerns that the proposed rule could be 
read to apply to creditors and others collecting on unsecured debts to 
the extent that they offer concessions to individual debtors. For 
example, a financial services industry association expressed concern 
that the proposed rule would potentially cover an affiliate entity 
servicing an unsecured loan or credit card account on behalf of a 
creditor.\118\ A banking trade group stated that the FTC should clarify 
that the Rule is not intended to apply to the legitimate outreach and 
loss mitigation activities of creditors and their agents or 
affiliates.\119\ Similarly, an association of debt collectors sought to 
clarify that the Rule would exclude routine communications between 
consumers and credit grantors or debt collectors about settling debts, 
restructuring debt terms, waiving fees, reducing interest rates, or 
arranging for other account changes.\120\
---------------------------------------------------------------------------

    \118\ AFSA at 7; see also FSR at 1-2 (the rule should clarify 
that the proposal does not include ``the legitimate activities of 
servicers seeking collection on loans they own or service for others 
pursuant to bona fide servicing relationships.'').
    \119\ ABA at 3.
    \120\ ACA at 6. NACCA also commented that it was not clear 
whether the Rule excludes holders of the debt or entities that are 
contracted to service the debt for the debt holder, and recommended 
that it exclude such entities. NACCA at 2.
---------------------------------------------------------------------------

    The TSR only covers the practice of ``telemarketing,'' defined as 
``a plan, program, or campaign which is conducted to induce the 
purchase of goods or services . . . .''\121\ The types of debt 
collection and debt servicing activities described by the commenters do 
not fall within this definition because they are not intended to induce 
purchases. Therefore, it is unnecessary to explicitly exempt creditors 
or debt collectors from compliance with this provision of the Final 
Rule.\122\
---------------------------------------------------------------------------

    \121\ 16 CFR 310.2(dd).
    \122\ See TSR Amended Rule, 68 FR at 4615. In the event that a 
creditor or debt collector is engaging in the sale of a service to 
assist in altering debts of the consumer that it does not itself own 
or service, the entity would be subject to the Rule. More generally, 
the Fair Debt Collection Practices Act (``FDCPA''), 15 U.S.C. 1692, 
governs the debt collection practices of third-party collectors; 
creditors collecting on their own debts are not covered by the 
FDCPA, but are subject to the general prohibition of unfair or 
deceptive acts or practices in Section 5 of the FTC Act.
---------------------------------------------------------------------------

B. Section 310.2: Definitions

    The Final Rule defines ``debt relief service'' as ``any service or 
program 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 person 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 person to an unsecured creditor or 
debt collector.'' This definition is virtually unchanged from the 
proposed rule.\123\
---------------------------------------------------------------------------

    \123\ The only difference is the addition of the word 
``program'' to the definition to clarify that the term ``service'' 
is not intended to be limiting in any way. Thus, regardless of its 
form, anything sold to consumers that consists of a specific group 
of procedures to renegotiate, settle, or in any way alter the terms 
of a consumer debt, is covered by the definition. The definition is 
not intended, however, to cover services or products that offer to 
refinance existing loans with a new loan as a way of eliminating the 
original debts, as such a process would result in a new extension of 
credit that replaces the existing debts rather than altering them.
---------------------------------------------------------------------------

    The Commission received several comments about the definition of 
``debt relief service'' with respect to its (1) breadth, (2) limitation 
to unsecured debts, (3) product coverage, and (4) application to 
attorneys.
1. Breadth of Definition of Debt Relief Service
    Several commenters addressed the breadth of the debt relief service 
definition. For example, the National Association of Attorneys General 
(``NAAG'') supported the proposed definition, stating that because the 
debt relief industry is constantly evolving, the definition of ``debt 
relief'' should be broad enough to account for future developments in 
the industry.\124\ NAAG noted that in recent years, the debt settlement 
industry has engaged in particularly abusive practices, but the same 
concerns exist with respect to all forms of debt relief.\125\ The 
National Association of Consumer Credit Administrators (``NACCA'') 
emphasized that many providers of debt relief services purchase 
consumer contact information from so-called ``lead generators'' - 
intermediaries that produce and disseminate advertisements for debt 
relief services to generate ``leads'' that they then sell to actual 
providers.\126\ NACCA recommended that lead generators be covered by 
the Rule.\127\ A coalition of consumer groups commented that the 
definition should be broad and include debt management, debt 
settlement, and debt negotiation,\128\ noting that some companies 
provide a range of debt relief options.\129\ A consumer law professor 
also advocated a definition that covers credit counseling and debt 
settlement, asserting that many of the abuses are common to both types 
of services.\130\ Moreover, some industry commenters

[[Page 48467]]

supported a broad definition that includes debt management plans and 
debt settlement arrangements.\131\ On the other hand, a nonprofit 
credit counseling agency stated that CCAs and debt management plans 
should be excluded entirely from the debt relief services definition 
because they provide consumers with financial education.\132\
---------------------------------------------------------------------------

    \124\ NAAG (Oct. 23, 2009) at 4.
    \125\ Id.
    \126\ NACCA at 3 (representing 49 state government agencies that 
regulate non-depository consumer lending and debt relief companies); 
see also ULC at 7 (``The regulations go further than the UDMSA in 
reaching lead generation firms that solicit debtors for debt relief 
providers but provide no direct consumer services themselves. The 
ULC whole-heartedly supports this additional regulation.''); FTC v. 
Dominant Leads, LLC, No. 1:10-cv-00997 (D.D.C. filed June 15, 2010) 
(alleging that defendants misrepresented that they were the 
government, or were affiliated with the government, on multiple 
websites, then provided consumers toll-free numbers connecting them 
to third-party companies that marketed purported debt relief 
services for a fee).
    \127\ NACCA at 3; see also GP (Oct. 22, 2009) at 2.
    \128\ CFA at 7-8.
    \129\ Id. at 7.
    \130\ Greenfield at 1.
    \131\ CareOne at 3; USDR (Oct. 20, 2009) at 12.
    \132\ CCCS CNY at 1.
---------------------------------------------------------------------------

    After considering the comments, and other than the addition of the 
word ``program,'' as noted in footnote 123, the Commission has 
determined not to change the proposed rule's definition of ``debt 
relief service.'' The Commission believes that this definition 
appropriately covers all current and reasonably foreseeable forms of 
debt relief services, including debt settlement, debt negotiation, and 
debt management, as well as lead generators for these services.\133\ 
This definition is consistent with the goal of ensuring that consumers 
are protected regardless of how a debt relief service is structured or 
denominated. The Commission does not believe there is sufficient basis 
for excluding CCAs and debt management plans from the definition. 
Indeed, the record shows that some for-profit CCAs have engaged in the 
types of deceptive or abusive practices that the Rule is designed to 
curtail.
---------------------------------------------------------------------------

    \133\ Depending on the facts, lead generators for debt relief 
services may be covered under the TSR's primary provisions or its 
assisting and facilitating provision. See 16 CFR 310.3(b).
---------------------------------------------------------------------------

2. Limitation to Unsecured Debts
    Several comments related to the definition's limitation to 
unsecured debt. A creditor trade association expressed concern that the 
Rule would not cover relationships with most installment lenders, title 
lenders, auto finance lenders, secured card issuers, or residential 
mortgage lenders, all of which typically provide secured credit.\134\ 
By contrast, a representative of an association of state legislators 
agreed with the limitation to unsecured debts because secured debts are 
governed by the Uniform Commercial Code, which may conflict with some 
elements of the Rule.\135\
---------------------------------------------------------------------------

    \134\ AFSA at 7 (``There does not appear to be a reason in the 
Rule for limiting debt repair services to relationships only with 
unsecured creditors.'').
    \135\ ULC (Kerr), Tr. at 252. In addition, the evidence in the 
record suggests that debt relief services generally do not seek to 
alter secured debts such as installment loans and title loans. NACCA 
(Keiser), Tr. at 250; see also USDR (Oct. 20, 2009) at 12 
(supporting the definition's limitation to unsecured debts).
---------------------------------------------------------------------------

    The Commission has determined to keep the proposed rule's 
limitation of debt relief services to unsecured debt. The definition in 
the Final Rule covers all types of unsecured debts, including credit 
card, medical, and tax debts. There is no evidence in the record of 
deceptive or abusive practices in the promotion of services for the 
relief of non-mortgage secured debt.\136\ The Commission notes that it 
is addressing the practices of entities that purport to negotiate 
changes to the terms of mortgage loans or avert foreclosure in a 
separate rulemaking proceeding.\137\ Commenters generally agreed that 
concerns regarding mortgage relief services are appropriately addressed 
in a separate rulemaking.\138\
---------------------------------------------------------------------------

    \136\ To the extent any entity markets debt relief related to 
automobile title loans or other secured debts, Section 5 of the FTC 
Act covers such marketing.
    \137\ Mortgage Assistance Relief Services Notice of Proposed 
Rulemaking, 75 FR 10707 (Mar. 9, 2010). This rulemaking addresses 
the industry of for-profit companies purporting to obtain mortgage 
loan modifications or other relief for consumers facing foreclosure. 
Under the proposed rule in that proceeding, companies could not 
receive payment until they have obtained for the consumer a 
documented offer from a mortgage lender or servicer that comports 
with the promises they have made.
    \138\ FCS (Oct. 27, 2009) at 3; FDR (Linderman), Tr. at 115.
---------------------------------------------------------------------------

3. Coverage of Products
    Some commenters recommended that the Commission add the term 
``products'' to the term ``debt relief services'' to ensure that 
providers cannot evade the Rule by selling books, CDs, or other 
tangible materials promising debt relief, or by including such products 
as part of the service.\139\ Another commenter disagreed, stating that 
products should be excluded from the definition. This commenter noted 
that a consumer who purchases a product (e.g., a book) intended to help 
relieve debt is himself responsible for taking the steps stated 
therein; in contrast, an individual who purchases a service is paying 
the seller to provide that service.\140\
---------------------------------------------------------------------------

    \139\ CFA at 7; ULC (Kerr), Tr. at 258; AFSA (Sheeran), Tr. at 
259-60; FDR (Linderman), Tr. at 256 (for products that are sold with 
a guarantee).
    \140\ Centricity (Manganiello), Tr. at 239; see also MP at 3 
(stating that expanding the definition to products is ``completely 
unnecessary,'' as ``the FTC already has adequate authority to deal 
with deceptive marketing of such products.'' The commenter also 
stated that ``where the true intention of the product offering is to 
`up-sell' consumers to a full-service debt program, then the 
proposed rule-change would already govern.'').
---------------------------------------------------------------------------

    The Commission declines to modify the Rule to include products in 
the definition of debt relief services. The Rule is targeted at 
practices that take place in the provision of services, and the record 
does not indicate that deceptive or abusive practices in the sale of 
products, such as books or other goods containing information or 
advice, are common. This limitation, however, should not be used to 
circumvent the rule by calling a service - in which the provider 
undertakes certain actions to provide assistance to the purchaser - a 
``product.'' Nor can a provider evade the rule by including a 
``product,'' such as educational material on how to manage debt, as 
part of the service it offers. The Commission further notes that 
deceptive or abusive practices in the telemarketing of products already 
are prohibited by the TSR and/or the FTC Act. Therefore, the Final Rule 
does not add the term ``product'' to the definition of ``debt relief 
services.''
4. Coverage of Attorneys
    A number of commenters expressed views as to whether the Rule 
should cover attorneys who provide debt relief services. Several 
commenters argued that attorneys generally should be covered by the 
Rule when they are providing covered services.\141\ One commenter 
stated that exempting attorneys would create a major loophole for 
providers engaged in deception or abuse.\142\ A second commenter agreed 
that an exemption would make it easy for debt relief companies to ally 
themselves with lawyers to escape the Rule.\143\ By contrast, two 
commenters argued that attorneys should be exempt from the Rule because 
state bars separately license them, and the bars' ethics rules and 
complaint systems

[[Page 48468]]

govern their behavior.\144\ A different commenter, however, questioned 
whether state bar rules are effective in deterring unfair and deceptive 
practices.\145\
---------------------------------------------------------------------------

    \141\ TASC (Oct. 26, 2009) at 13 (``Consumers should be entitled 
to the same protections whether or not their provider is an 
attorney.''); ACCORD (Noonan), Tr. at 236-37 (recommending an 
exception for attorneys who attempt to settle debts as a de minimis, 
incidental part of their primary businesses); see also CFA (Grant), 
Tr. at 240.
    \142\ MN LA (Elwood), Tr. at 233. Another commenter noted that 
the Commission has played an active role in policing unfair and 
deceptive practices by attorneys in other industries, such as credit 
repair and debt collection. ACCORD (Noonan), Tr. at 237.
    \143\ FDR (Linderman), Tr. at 234; see also TASC (Young), Tr. at 
238; FTC v. Nat'l Consumer Council, No. SACV04-0474 CJC(JWJX) (C.D. 
Cal. June 10, 2004) (Supplement to Report of Temporary Receiver's 
Activities, First Report to the Court at 2) (defendant would assign 
certain debt settlement contracts with consumers to a law firm 
because of certain state qualification restrictions). The FTC has 
filed a number of lawsuits against mortgage assistance relief 
service providers, in an analogous context, that affiliated 
themselves with attorneys in order to come within attorney 
exemptions in state statutes. In those cases, the Commission has 
named both the providers and the attorneys themselves as defendants. 
See, e.g., FTC v. US Foreclosure Relief Corp., No. SACV09-768 JVS 
(MGX) (C.D. Cal. filed July 7, 2009) ; FTC v. LucasLawCenter 
``Inc.,'' No. 09-CV-770 (C.D. Cal. filed July 7, 2009); FTC v. Fed. 
Loan Modification Law Ctr., LLP, No. SACV09-401 CJC (MLGx) (C.D. 
Cal. filed Apr. 3, 2009).
    \144\ USOBA (Ansbach), Tr. at 231; USOBA (Oct. 26, 2009) at 42; 
MD (Oct. 26, 2009) at 28, 38, 57-58.
    \145\ MN LA (Elwood), Tr. at 232-33.
---------------------------------------------------------------------------

    The existing TSR currently covers attorneys who engage in 
telemarketing.\146\ Based on the record in this proceeding, the 
Commission has concluded that an exemption from the amended rule for 
attorneys engaged in the telemarketing of debt relief services is not 
warranted. The Commission believes that the final amended Rule strikes 
the appropriate balance between permitting attorneys to provide bona 
fide legal services and curbing deceptive and abusive practices engaged 
in by some attorneys in this industry. Several factors support this 
conclusion.
---------------------------------------------------------------------------

    \146\ In fact, the only exemption for attorneys found in the TSR 
is a very limited one that permits attorneys who help consumers 
recover funds lost as a result of telemarketing fraud to collect an 
upfront fee. See 16 CFR 310.4(a)(3); TSR Final Rule, 60 FR at 43854 
(``[T]he Commission does not wish to hinder legitimate activities by 
licensed attorneys to recover funds lost by consumers through 
deceptive telemarketing.'').
---------------------------------------------------------------------------

    First, as a threshold matter, the TSR applies only to persons, 
regardless of their professional affiliation, who engage in 
``telemarketing'' - i.e., ``a plan, program, or campaign which is 
conducted to induce the purchase of goods or services'' and that 
involves interstate telephone calls.\147\ In general, attorneys who 
provide bona fide legal services do not utilize a plan, program, or 
campaign of interstate telephonic communications in order to solicit 
potential clients to purchase debt relief services. Thus, an attorney 
who makes telephone calls to clients on an individual basis to provide 
assistance and legal advice generally would not be engaged in 
``telemarketing.''
---------------------------------------------------------------------------

    \147\ 16 CFR 310.2(cc).
---------------------------------------------------------------------------

    Second, even if an attorney is engaged in telemarketing as defined 
in the TSR, it is common for the attorney to meet with prospective 
clients in person before agreeing to represent them. These attorneys 
would not be covered by the TSR under the Rule's exemption for 
transactions where payment is not required until after a face-to-face 
meeting.\148\ It should be noted, however, that even in transactions 
falling within the face-to-face exemption, telemarketers must abide by 
certain restrictions in the Rule.\149\
---------------------------------------------------------------------------

    \148\ See 16 CFR 310.6(b)(3). The Commission considered whether 
it should explicitly exempt attorneys representing clients in 
bankruptcy proceedings from the Rule's coverage, as attorneys in 
such proceedings generally advise their clients about handling their 
debt. The Commission determined that such an exemption was 
unnecessary, because bankruptcy attorneys typically would not be 
involved in ``telemarketing,'' and, in any event, likely would meet 
with their clients face-to-face.
    \149\ See 16 CFR 310.6(b)(3). Sellers engaged in telemarketing 
that qualify for the face-to-face exemption must not fail to comply 
with the National Do Not Call Registry provisions; call outside 
permissible calling hours; abandon calls; fail to transmit Caller ID 
information; threaten or intimidate a consumer or use obscene 
language; or cause any telephone to ring or engage a person in 
conversation with the intent to annoy, abuse, or harass the person 
called. Id.
---------------------------------------------------------------------------

    Third, the Commission believes that attorneys acting in compliance 
with state bar rules and providing bona fide legal services already 
fall outside of the TSR's coverage in most instances. For example, 
state bar rules typically prohibit attorneys from making outbound 
telemarketing calls to prospective clients.\150\ State bar rules also 
restrict another practice common to telemarketers - the provision of 
services to consumers in multiple states or nationwide.\151\ State bar 
rules also require an attorney to provide basic, competent legal 
services and to charge a reasonable fee.\152\ Accordingly, attorneys 
who limit their contact with clients to telemarketing calls and then 
charge hundreds or thousands of dollars for those services may also 
violate these rules. Finally, based on the Commission's experience, 
telemarketers frequently split fees, pay for referrals, and engage in 
other activity that would run afoul of other state bar rules.\153\
---------------------------------------------------------------------------

    \150\ See, e.g., Model Rules of Prof. Conduct 7.3(a); Cal. Rules 
of Prof. Conduct 1-400; Florida Rules of Prof. Conduct 4-7.4(a).
    \151\ See, e.g., Model Rules of Prof. Conduct 5.5 (prohibiting 
attorneys from providing legal services to consumers outside of the 
state in which he or she is licensed).
    \152\ See, e.g., Model Rules of Prof. Conduct 1.1, 1.3, & 1.5. 
For example, some state bars recently suggested that attorneys who 
refuse to meet in person with prospective clients may be violating 
some of these basic requirements. See Press Release, CA Bar, State 
Bar Takes Action to Aid Homeowners in Foreclosure Crisis (Sept. 18, 
2009) (``The State Bar suggests that consumers be wary of attorneys 
offering loan modification services . . . [who are] too busy or not 
willing to meet personally with prospective clients.''), available 
at (http://www.calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10144&n=96395); Helen Hierschbiels, Working with 
Loan Modification Agencies, Oregon State Bar Bulletin, Aug./Sept. 
2009 (attorneys who join companies that ``do not contemplate the 
lawyer ever meeting or speaking with the client . . . risk violating 
the duties of competence, diligence and communication''). 
Additionally, the Ohio Supreme Court has sanctioned attorneys hired 
by a foreclosure ``rescue'' company for, inter alia, failing to 
engage in adequate preparation and failing to properly pursue 
clients' individual objectives. In so doing, it noted that the 
attorneys relegated responsibility for meeting with clients to non-
attorneys at the company and ``did not as a rule meet with [the 
company's] clients.'' See Cincinnati Bar Ass'n v. Mullaney, 894 N.E. 
2d 1210 (Ohio 2008).
    \153\ Id. Model Rules of Prof. Conduct 5.4, 7.2(b) . Cf. Supreme 
Court of New Jersey Adv. Comm. Professional Ethics & Comm. on 
Unauthorized Practice of Law, Lawyers Performing Loan or Mortgage 
Modification Services for Homeowners, 197 N.J.L.J. 59 (June 26, 
2009) (noting that attorneys are being approached by mortgage loan 
modification entities and asked to enter impermissible fee sharing 
agreements).
---------------------------------------------------------------------------

    Fourth, it is important to retain Rule coverage for attorneys, and 
those partnering with attorneys, who principally rely on telemarketing 
to obtain debt relief service clients, because they have engaged in the 
same types of deceptive and abusive practices as those committed by 
non-attorneys and that are proscribed by the Rule. For example, 
attorneys have been sued in numerous law enforcement actions alleging 
deceptive practices in violation of the TSR.\154\ In some cases, law 
enforcement authorities have alleged that a law firm served as a 
referral service for a non-attorney third party, and many consumers 
selected the company believing they would be represented by a law 
firm.\155\ Some public comments also detailed deception and abuse by 
attorneys.\156\ State bar rules, while important and

[[Page 48469]]

effective when enforced, have not eliminated these practices.
---------------------------------------------------------------------------

    \154\ See, e.g., FTC v. Express Consolidation, No. 06-cv-61851-
WJZ (S.D. Fla. Am. Compl. filed Mar. 21, 2007) (a Florida attorney, 
his debt management services company, and a telemarketer charged 
with using abusive telemarketing and deception to sell debt 
management services to consumers nationwide); Florida v. Hess, No. 
08007686 (17\th\ Jud. Cir., Broward Cty. 2008) ; Alabama v. Allegro 
Law LLC, No. 2:2009cv00729 (M.D. Ala. 2009) ; North Carolina v. Hess 
Kennedy Chartered, LLC, No. 08CV002310, (N.C. Super. Ct., Wake Cty. 
2008); California Dep't of Corps. v. Express Consolidation, Inc., 
No. 943-0122 (2008) ; In re The Consumer Protection Law Ctr. 
(California Dep't of Corps. Amended Desist and Refrain Order filed 
Jan. 9, 2009); (WV) State ex rel. McGraw v. Hess Kennedy Chartered 
LLC, No. 07-MISC-454 (Cir. Ct., Kanawha Cty. 2007); see also, e.g., 
Alabama State Bar, The Alabama Lawyer, 71 Ala. Law. 90, 91 (Jan. 
2010) (noting suspension of attorney purporting to provide debt 
settlement services to over 15,000 consumers nationwide); Press 
Release, Maryland Attorney General, Richard A. Brennan Jailed for 
Contempt: Brennan Ordered to Pay More Than $2.5 Million in 
Restitution (July 31, 2009), available at (http://www.oag.state.md.us/Press/2009/073109.htm).
    \155\ Press Release, Alabama Attorney General, A.G. King and 
Securities Commission Sue Prattville Companies Operating Alleged 
National Debt Settlement Scheme, available at (http://www.ago.state.al.us/news_template.cfm?Newsfile=http://www.ago.alabama.gov/news/07102009.htm).
    \156\ For instance, a legal services lawyer identified six 
consumers who were harmed by law firms offering debt relief services 
or partnering with companies that offered the services. SBLS at 2-4; 
see also TASC (Young), Tr. at 229. A consumer advocate noted that 
public websites contain numerous complaints about law firms engaging 
in unfair or deceptive debt relief practices. CFA (Grant), Tr. at 
241.
---------------------------------------------------------------------------

    Finally, the Commission's determination not to extend a special 
exemption to attorneys is consistent with the existing scope of the TSR 
and several other statutes and FTC rules designed to curb deception, 
abuse, and fraud. For example, the Credit Repair Organizations Act 
(``CROA'') contains no exemption for attorneys.\157\ The fact that the 
CROA and TSR cover attorneys reflects the reality that the number of 
attorneys who have engaged in unfair, deceptive, and abusive acts that 
fall within the Commission's law enforcement authority is not de 
minimis.\158\
---------------------------------------------------------------------------

    \157\ 15 U.S.C. 1679-1679j.
    \158\ See, e.g., FTC v. Credit Restoration Brokers, LLC, No. 
2:10-cv-0030-CEH-SPC (M.D. Fla. filed Jan. 19, 2010) (alleging, 
inter alia, violations of CROA by attorney engaged in credit 
repair); FTC v. US Foreclosure Relief Corp., No. SACV09-768 JVS 
(MGX) (C.D. Cal. filed July 7, 2009)(alleging violations of FTC Act 
and TSR against attorney purporting to provide mortgage assistance 
relief services); FTC v. Rawlins & Rivera, Inc., No. 07-146 (M.D. 
Fla. filed Jan. 31, 2007) (alleging violations of the FDCPA against 
attorney); U.S. v. Entrepreneurial Strategies, Ltd., No. 2:06-CV-15 
(WCO)(N.D. Ga. filed Jan. 24, 2006) (alleging violations of TSR 
against attorney assisting debt relief entity); FTC v. Express 
Consolidation, No. 06-cv-61851-WJZ (S.D. Fla. Am. Compl. filed Mar. 
21, 2007) (alleging violations of the FTC Act and TSR against 
attorney engaged in debt relief); U.S. v. Schrold, No. 98-6212-CIV-
ZLOCH (S.D. Fla. filed Mar. 3, 1998) (alleging violations of the FTC 
Act and CROA against attorney credit repair provider); FTC v. 
Capital City Mortgage Corp., No. 98-237 (JHG) (D.D.C. Sec. Am. 
Compl. filed Mar. 19, 2003) (alleging FDCPA violations against 
attorney); FTC v. Watson, No. 98-C-1218 (N.D. Ill. filed Feb. 26, 
1998) (alleging violations of CROA and FTC Act against attorney); 
FTC v. Gill, No. 98-1436 LGB (Mcx) (C.D. Cal. filed Mar. 2, 1998) 
(same).
---------------------------------------------------------------------------

    In light of the above factors, the Commission concludes that 
attorneys who choose to offer debt relief services using telemarketing 
should be treated no differently under the TSR than non-attorneys who 
do the same.

C. Section 310.4: Abusive Telemarketing Acts or Practices - Advance Fee 
Ban

    As noted earlier, the existing TSR bans the abusive practice of 
collecting advance fees for three other services - credit repair 
services, recovery services, 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.\159\ Section 310.4(a)(5) of the 
proposed rule would have prohibited as ``abusive'' the request or 
receipt by a debt relief provider of payment of any fee from a consumer 
until the provider obtained a valid settlement contract or agreement 
showing that the particular debt had been renegotiated, settled, 
reduced, or otherwise altered. The Final Rule includes an advance fee 
ban, but in a form modified from the proposed rule. In short, the Final 
Rule sets forth three conditions before a debt relief provider may 
collect a fee for resolving a particular debt: (1) the consumer must 
execute a debt relief agreement with the creditor or debt collector; 
(2) the consumer must make at least one payment pursuant to that 
agreement; and (3) the fee must be proportional, i.e., the same 
fraction of the total fee as the size of the debt resolved is of the 
total debt enrolled, or, alternatively, the fee collected must be based 
on a percentage of savings that the debt relief company achieves for 
the consumer. In addition, the Final Rule allows the provider to 
require consumers to place funds in a dedicated bank account for fees 
and payments to their creditor(s) or debt collector(s) in advance of 
securing the debt relief, provided certain conditions are met.\160\
---------------------------------------------------------------------------

    \159\ 16 CFR 310.4(a)(4).
    \160\ See infra Section III.C.5.c.
---------------------------------------------------------------------------

    The Commission concludes that the collection of advance fees in 
transactions that frequently are characterized by deception is an 
abusive practice. In reaching this conclusion, the Commission has 
applied the unfairness analysis set forth in Section 5(n) of the FTC 
Act,\161\ finding that this practice: (1) causes or is likely to cause 
substantial injury to consumers that (2) is not outweighed by 
countervailing benefits to consumers or competition and (3) is not 
reasonably avoidable.\162\ The Commission's decision to adopt the 
advance fee ban is based on its review of the entire record in this 
proceeding, including the public comments, the forum and workshop 
records, consumer complaints, recent testimony on debt settlement 
before Congress, and the law enforcement experience of the Commission 
and state enforcers. In this section, the Commission: (1) reviews 
comments supporting the advance fee ban, (2) reviews comments opposing 
the advance fee ban, (3) sets forth its legal analysis, and (4) 
describes the operation of this provision of the Final Rule.
---------------------------------------------------------------------------

    \161\ The Telemarketing Act authorizes the Commission to 
promulgate Rules ``prohibiting deceptive telemarketing acts or 
practices and other abusive telemarketing acts or practices.'' 15 
U.S.C. 6102(a)(1) (emphasis added). In determining whether a 
practice is ``abusive,'' the Commission has used the Section 5(n) 
unfairness standard. See TSR Amended Rule, 68 FR at 4614.
    \162\ See 15 U.S.C. 45(n) (codifying the Commission's unfairness 
analysis, set forth in a 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'').
---------------------------------------------------------------------------

1. Comments Supporting the Proposed Ban on Advance Fees
    Numerous commenters supported the proposed ban on advance 
fees.\163\ In supporting the advance fee ban, NAAG, representing over 
forty state attorneys general, cited its law enforcement experience in 
this area. Over the past decade, 29 states have brought at least 236 
enforcement actions against debt relief companies, at least 127 of 
which targeted debt settlement providers.\164\ Typical allegations in 
these cases targeted deceptive television and radio advertising, 
deceptive telemarketing pitches, and failure to provide promised 
services. In 2009, the New York and Florida Attorneys General announced 
investigations of 19 debt settlement companies, which are still 
pending.\165\
---------------------------------------------------------------------------

    \163\ As explained below, the advance fee ban in the Final Rule 
differs from that in the proposed rule in certain respects. The 
discussion of the commenters' views refers to the proposed version.
    \164\ NAAG (Oct. 23, 2009) at 1-2 & NAAG (July 6, 2010), 
supplemented by Commission staff research; see State Case List, 
supra note 27. Of the 127 state debt settlement cases, 84 were 
brought by state attorneys general and 43 by state regulatory 
agencies. In addition, state attorneys general have brought 21 cases 
against credit counseling companies and 14 cases against debt 
negotiation companies. States have also brought 64 actions against 
debt relief companies for failure to file requisite state 
registrations or obtain proper licenses.
    \165\ See State Case List, supra note 27, for names of companies 
under investigation by New York and Florida.
---------------------------------------------------------------------------

    NAAG further stated that prohibiting the collection of advance fees 
would provide regulators and enforcement authorities a bright line 
method to identify entities that merit immediate investigation and 
prosecution.\166\ NAAG further asserted that debt relief providers 
currently have minimal incentives to perform promised services because 
they collect substantial advance fees whether or not they negotiate 
debt reductions for the consumer.\167\ NACCA also filed a comment 
supporting the advance fee ban.\168\
---------------------------------------------------------------------------

    \166\ NAAG (Oct. 23, 2009) at 10; NAAG (July 6, 2010) at 1 (``A 
prohibition on advance fees for debt settlement services is the most 
essential element of the proposed Rule.'').
    \167\ NAAG (Oct. 23, 2009)at 9.
    \168\ NACCA at 2 (providing general statement of support without 
elaboration).
---------------------------------------------------------------------------

    The Colorado Attorney General filed a supplemental comment 
supporting the Commission's advance fee ban. It cited data supplied by 
debt relief providers showing that only 7.81% of Colorado consumers who 
had entered a debt settlement program since the beginning of 2006 had 
completed their programs

[[Page 48470]]

by the end of 2008.\169\ At the end of that period of less than three 
years, 39% of the consumers were still active, while 53% had dropped 
out of the program.\170\ Thus, over half of enrolled consumers had 
dropped out in less than three years.
---------------------------------------------------------------------------

    \169\ CO AG at 5. These consumers executed a total of 1,357 
consumer agreements with about 13 companies.
    \170\ Id. at 5.
---------------------------------------------------------------------------

    A coalition of 19 consumer advocacy groups filed a comment stating 
that an advance fee ban is ``essential'' to protect consumers who pay 
fees in advance but receive few, if any services.\171\ According to 
this comment, debt settlement firms often mislead consumers about the 
likelihood of a settlement and the consequences of the settlement 
process on debt collection activities and the consumer's 
creditworthiness. The coalition asserted that having to pay advance 
fees prevents consumers from saving enough money to fund settlement 
offers satisfactory to creditors or debt collectors.\172\
---------------------------------------------------------------------------

    \171\ CFA at 8; see also NC AG Testimony, supra note 25, at 5 
(``the advance fee ban . . . is the key to preventing fraud and 
ensuring that debt settlement services will be performed.'').
    \172\ CFA at 4-5.
---------------------------------------------------------------------------

    Three legal services offices also submitted comments supporting the 
advance fee ban.\173\ The comment by SBLS highlighted eight consumers 
whose financial situations had deteriorated as a result of entering 
debt settlement programs; each of them paid over $1,000 in fees to debt 
settlement companies while receiving virtually no benefits.\174\ QLS 
commented that consumers who leave debt settlement programs after 
several months typically have accumulated little, if any, money to fund 
settlements because of the large upfront fees they were required to 
pay.\175\ QLS recounted the experience of a husband and wife who paid 
$3,200 in fees to a debt settlement provider, only to be sued by a 
creditor within five months. The provider refused to refund the fees, 
even though it had not settled any of the couple's debts.\176\
---------------------------------------------------------------------------

    \173\ QLS at 2-3; SBLS at 8; SOLS at 2. In addition, two 
additional legal services offices, Mid-Minnesota Legal Assistance 
and Jacksonville Area Legal Aid, were part of the coalition of 
consumer groups discussed above.
    \174\ SBLS at 2-4.
    \175\ QLS at 3.
    \176\ Id.
---------------------------------------------------------------------------

    A law professor commented in support of the advance fee ban, 
stating that debt settlement companies should not be allowed to collect 
and retain a fee before any beneficial service is provided.\177\ Two 
creditor trade groups also supported the advance fee ban.\178\ One 
group stated that its members often get one or two letters from a debt 
settlement service provider, but then stop hearing from the provider 
entirely, even when the creditor requests a response.\179\
---------------------------------------------------------------------------

    \177\ Greenfield at 1-2.
    \178\ AFSA at 3; ABA at 2.
    \179\ AFSA at 9. The second group claimed that an average of 63% 
of identified accounts enrolled in debt settlement programs are 
charged off, as compared to only 16% of accounts placed by a credit 
counseling agency into a debt management plan. ABA at 4. Charged off 
debt is the term used to describe debt that is written off as a 
nonperforming asset by a creditor because of severe delinquency, 
typically after 180 days. If a creditor charges off the debt or 
sends it to a collection agency, it ``will likely have a severe 
negative impact'' on a consumer's credit score. See Fair Isaac 
Corp., Credit Q&A, What are the different categories of late 
payments and how does your FICO score consider late payments?, 
available at (http://www.myfico.com/CreditEducation/Questions/Late-Credit-Payments.aspx).
---------------------------------------------------------------------------

    Some debt relief industry commenters also supported the proposed 
rule's advance fee ban. One debt settlement company (CRN) credits its 
success in obtaining settlements to its practice of not charging fees 
until the service is performed and the creditor is paid.\180\ Another 
debt settlement company (FCS) stated that it has been implementing a 
debt settlement program that does not require any advance fees.\181\ A 
small trade association, ACCORD, of which FCS is a member, also 
supported the advance fee ban.\182\ It stated that a ban on advance 
fees and a requirement that fees be based on the savings achieved would 
protect consumers from debt settlement programs that leave them in 
worse financial shape than when they started.\183\
---------------------------------------------------------------------------

    \180\ CRN (Oct. 8, 2009) at 1. CRN recommended allowing a 
nominal monthly service fee. Id. at 10-11.
    \181\ FCS (Oct. 27, 2009) at 2.
    \182\ ACCORD (Oct. 9, 2009) at 1. Another debt settlement 
industry association asserted that ACCORD only has one member. USOBA 
(Oct. 26, 2009) at 48. As of July 2010, the ACCORD website lists six 
members. See (http://www.accordusa.org/members-area.html).
    \183\ ACCORD (Oct. 9, 2009) at 2.
---------------------------------------------------------------------------

    A third debt settlement company (USDR) commented that, if an 
advance fee ban were imposed, consumers would be able to evaluate debt 
relief companies more easily, and poorly performing companies would 
need to improve their service levels in order to get paid.\184\ 
Moreover, consumers would be able to change providers if they were 
dissatisfied with a company's services without forfeiting the large 
sums they had paid in fees, thus increasing competition in the debt 
relief market.\185\
---------------------------------------------------------------------------

    \184\ USDR (Oct. 20, 2009) at 2, 12. USDR encouraged the FTC to 
allow an initial set-up fee and monthly fees consistent with the 
Uniform Act.
    \185\ Id. at 2.
---------------------------------------------------------------------------

    For-profit debt relief company CareOne Services also supported a 
form of an advance fee ban,\186\ noting that the predominant business 
model of the debt settlement industry has been based on significant 
upfront fees that make it difficult for consumers to amass funds for a 
settlement, while forcing them to endure extensive creditor collection 
efforts.\187\ CareOne posited that it would be economically feasible 
for it to provide effective debt settlement services even with an 
advance fee ban.\188\
---------------------------------------------------------------------------

    \186\ CareOne at 4-5. CareOne has traditionally provided 
consumers with credit counseling and DMP services. In 2009, CareOne 
began a pilot debt settlement program designed for consumers who do 
not qualify for a DMP and who are not candidates for bankruptcy. Id. 
at 2.
    \187\ Id. at 4.
    \188\ Id. at 5.
---------------------------------------------------------------------------

    Two associations of nonprofit credit counselors, NFCC and AICCCA, 
supported the advance fee ban.\189\ AICCCA stated that its member CCAs 
saw the victims of debt settlement scams on a regular basis,\190\ and 
asserted that an advance fee ban would both protect consumers from 
paying for promised benefits that may prove entirely illusory, and 
force debt settlement providers to deliver on their promises if they 
wish to be compensated. Other commenters opined that an advance fee ban 
would motivate providers to engage in a more robust qualification 
process to ensure that the program is suitable for the consumer.\191\
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    \189\ NFCC at 1, 12; AICCCA at 6. AICCCA supported the ban on 
the condition that the Final Rule explicitly exempt nonprofit debt 
relief providers. AICCCA at 6.
    \190\ AICCCA at 2. Other CCAs stated that they, too, regularly 
counsel consumers who paid debt settlement companies but never 
received the promised services. FECA (Oct. 26, 2009) at 4; GP (Oct. 
22, 2009) at 1.
    \191\ CRN (Oct. 8, 2009) at 4; WV AG (Googel), Tr. at 222; 
ACCORD (Noonan), Tr. at 275-76.
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2. Comments Opposing the Proposed Ban on Advance Fees for Debt Relief 
Services
    Numerous commenters - in particular, members of the debt settlement 
industry - opposed the advance fee ban.\192\ The overall theme of most 
of these comments can be summarized as follows: many enrollees in debt 
settlement programs (including some who drop out before completing the

[[Page 48471]]

program) obtain significant reductions in their debt. Therefore, debt 
settlement is a useful product for many people, the benefits of which 
would be lost if providers went out of business because they could not 
collect fees necessary to fund their operations until they settled the 
debts.
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    \192\ Twenty companies, five trade associations, two employees 
of debt settlement companies, three other entities, and over 190 
consumers filed comments opposing the proposed advance fee ban. Of 
these commenters, two industry members supported a partial ban that 
would allow debt relief providers to receive fees to cover 
administrative expenses in advance of delivering settlements. CRN 
(Oct. 2, 2009) at 10-11; USDR (Oct. 20, 2009) at 2; see also CSA at 
14 (``if the FTC chooses to regulate the fees charged for debt 
settlement services,'' it should follow the UDMSA framework and 
allow specific set-up fees and monthly fees).
---------------------------------------------------------------------------

    The commenters advanced a number of specific arguments in support 
of this position, including the following: (1) debt settlement and 
other forms of debt relief services provide significant benefits to 
consumers, which, according to industry's comments, is demonstrated by 
survey data and the numerous consumers who are satisfied with their 
debt settlement programs; (2) consumers obtain better outcomes from 
debt settlement services than other debt relief options; (3) advance 
fees provide needed cash flow for debt settlement providers to fund 
their operations; (4) advance fees compensate debt settlement providers 
for services undertaken before settlement occurs; (5) advance fees 
ensure that debt settlement providers get paid; (6) the advance fee ban 
violates the First Amendment; (7) state regulation of debt relief 
services is preferable to federal regulation; (8) the TSR is not the 
appropriate mechanism for regulating debt relief services; (9) the 
problematic practices in the debt settlement industry are limited to a 
relatively few ``bad actors,'' and the services are not ``fundamentally 
bogus;'' and (10) an advance fee ban does not provide proper incentives 
for debt settlement companies. The following section addresses each 
point in turn.
a. Point 1: Debt Relief Services Provide Benefits to a Significant 
Number of Consumers
    Several industry commenters sought to demonstrate that debt relief 
services provide benefits to a significant proportion of their 
customers.\193\ Some debt settlement providers and their 
representatives submitted data about the number of debts that they or 
their members have settled in recent years.\194\ Several credit 
counseling companies also submitted information about the number of 
DMPs they have arranged for their customers.\195\ In contrast, no debt 
negotiation company provided any data or other information showing that 
it successfully achieved interest rate reductions or other debt 
alterations for consumers.
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    \193\ The FTC has sought data on this issue from the industry 
since July 2008. See (http://www.ftc.gov/opa/2008/07/debtsettlement.shtm) (Topics for Comment link). In response to the 
July 2008 request, only TASC provided some information about success 
and cancellation rates. It submitted a so-called ``preliminary 
study'' purporting to show ``completion rates'' ranging from 35% to 
60% for consumers in TASC member debt settlement programs. TASC, 
Study on the Debt Settlement Industry, at 1 (2007). The study's 
probative value, however, was limited due to methodological issues. 
See TSR Proposed Rule, 74 FR at 41995 n.104; see also NAAG (Oct. 23, 
2009) at 8-9.
    \194\ E.g., TASC (Oct. 26, 2009) at 2 (respondents to a TASC 
survey settled in the aggregate almost 95,000 accounts in 2008); FCS 
(Oct. 27, 2009) at 1 (FCS and its family of companies have obtained 
over 70,000 settlements since 2003); FDR (Oct. 26, 2009) at 3 (FDR 
has obtained more than 100,000 settlements); Loeb at 1-2 (10 
companies settled 23,586 accounts between 2003 and 2009); 
Confidential Comment at 2 (company has obtained 21,651 settlements 
for 24,323 active clients from March 2007 to Sept. 2009). Although 
the absolute number of debts that providers have settled over the 
years may be sizable, as discussed below, the record indicates that 
many consumers either receive no settlements or save less than the 
fees and other costs that they pay.
    \195\ Cambridge (Jan. 15, 2009) at 1 (171,089 accounts enrolled 
in DMPs between July 1, 2004 and December 31, 2009); GP (Jan. 15, 
2010) at 1 (75,485 accounts enrolled in a total of 13,328 DMPs in 
2009); CareOne at 1 (over 225,000 consumers enrolled in DMPs); 
AICCCA at 1 (member CCAs serve about 500,000 clients enrolled in 
DMPs).
    Only two for-profit credit counseling companies, CCC and 
CareOne, commented in this proceeding. Only CareOne provided data, 
stating that (1) over 700,000 consumers have called the company for 
counseling assistance; (2) over 225,000 customers enrolled in a DMP; 
(3) nearly 700,000 customer service calls have been made; (4) over 
nine million creditor payments were processed; (5) nearly $650 
million in payments have moved from consumers to their creditors; 
and (6) fewer than 35 Better Business Bureau complaints were filed 
in the previous year on approximately 70,000 new customers, and all 
had been successfully resolved. CareOne at 1-2.
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Debt Settlement Data
    With respect to debt settlement, some commenters submitted specific 
data purporting to show that they obtain substantial savings for a 
significant share of their customers. The industry association TASC 
submitted results from a 2009 survey covering 75% of customer debt 
enrolled in its members' programs (``TASC survey''). In addition, 17 
commenters provided individual debt settlement company data. 
Collectively, these data fall into five primary categories:\196\ (1) 
completion and dropout rates, (2) outcomes for dropouts, (3) average 
percentage savings and savings-to-fee ratios, (4) settlement rates for 
all enrollees, and (5) testimonials from satisfied consumers. Each 
category is examined in turn in the following section.
---------------------------------------------------------------------------

    \196\ Most of these commenters did not submit data in all five 
categories.
---------------------------------------------------------------------------

(1) Completion and Dropout Rates
    Completion and dropout rates are important measures of the 
effectiveness of a debt settlement program; only consumers who complete 
the program are able to eliminate their debts by using the 
service.\197\ Only a small number of parties submitted company-specific 
completion rate data, however, even after FTC staff sent letters to 
commenters in late December 2009 asking detailed follow-up questions 
relating to completion rates.\198\
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    \197\ See USDR (Oct. 20, 2009) at 3 (citing retention rates and 
graduation rates as important indicators of debt relief service 
success); RDRI at 6 (the percent of customers that complete the 
program within 39 months is an ``essential metric'').
    A commenter stated that the Commission should not impose a 
``100% standard'' on debt settlement companies. FDR (Oct. 26, 2009) 
at 8; see also Franklin at 17; MD (Mar. 22, 2010) at 13. Nothing in 
the Final Rule would require providers to achieve any particular 
completion rate; rather, they must deliver whatever they claim. For 
example, if a provider expressly or by implication represents that 
it will eliminate consumers' debt, consumers have a right to expect 
that all of the debts they enroll in the program will be resolved.
    \198\ The request was in connection with the November 2009 
public forum. The letters are posted at (http://www.ftc.gov/os/comments/tsrdebtrelief/index.shtm).
---------------------------------------------------------------------------

    The TASC member survey and seven individual commenters provided 
some information about debt settlement completion and dropout rates. 
The TASC survey estimated that 24.6% of consumers who remained in a 
debt settlement program for three years completed the program - defined 
as having settlements for at least 75% of their overall debt amount - 
with another 9.8% still active at the three-year point.\199\
---------------------------------------------------------------------------

    \199\ TASC (Oct. 26, 2010) at 10.
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    The TASC survey methodology has several limitations. First, the 
survey is not representative of the entire industry's performance. Only 
12 debt settlement companies reported sufficient data to determine a 
three-year dropout rate, a very small number relative to the hundreds 
of operating debt settlement providers.\200\ These companies may not be 
representative of the industry as a whole and, in fact, may have been 
comparatively more successful.\201\ Indeed, it is unlikely that 
providers that have low success rates would identify themselves by 
participating in a survey the results of which will be provided to a 
federal agency with enforcement authority over

[[Page 48472]]

them.\202\ Second, many of the consumers counted as ``completed'' had 
significant debts left after exiting the program.\203\ Third, TASC 
members themselves reported the data to an accountant hired by the 
organization; neither the accountant nor any other entity validated 
that the data were complete or accurate.\204\
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    \200\ TASC (Mar. 15, 2010) at 4-5. TASC stated that the survey 
as a whole was based on 75% of customer debt enrolled in its 
members' programs, as several very large members participated in the 
survey. TASC sent the survey questionnaires only to the 20 largest 
TASC members, representing approximately 80% of the debt settlement 
consumers served by TASC members. TASC (Mar. 15, 2010) at 4. The 
survey included data on over 43,000 consumers who had enrolled in a 
debt settlement plan offered by one of the 12 firms that responded 
to the survey. TASC (Oct. 26, 2009) at 9.
    \201\ TASC stated that its membership represented about 25% of 
the industry. TASC (Housser), Tr. at 61.
    \202\ In general, self-selection and self-reporting bias can 
result in an over-representation of successful respondents. See, 
e.g., Alyse S. Adams, et al., Evidence of Self-report Bias in 
Assessing Adherence to Guidelines, International Journal for Quality 
in Health Care 11:187-192 (1999). In addition, providers that join 
trade associations may tend to conform to higher standards than 
nonmembers. USOBA (Ansbach), Tr. at 106; TASC (Oct. 26, 2009) at 4-
5.
    \203\ As noted above, ``completion'' was defined as settlement 
of at least 75% of the individual's total debt amount enrolled. TASC 
(Oct. 26, 2009) at 9. See CU (Hillebrand), Tr. at 55 (``[c]onsumers 
are not getting what they expected to get, if only 25 percent are 
even getting close.'').
    \204\ TASC (Housser), Tr. at 60. See FTC v. SlimAmerica, Inc., 
77 F. Supp. 2d 1263, 1274 (S.D. Fla. 1999) (holding that defendant's 
weight loss claims were unsupported where, inter alia, defendant 
failed to obtain proper scientific validation of those claims); FTC 
v. Cal. Pac. Research, Inc., 1991 WL 208470, at *5 (D. Nev. Aug. 27, 
1991) (holding that defendants failed to properly substantiate hair 
loss claims because studies they cited did not meet basic scientific 
requirements demonstrating validity and reliability).
    Law enforcement authorities' experience has shown that self-
reported data may not be reliable. For example, the New York 
Attorney General reported to the GAO that a consumer testified that 
she received a ``congratulations'' letter from the company for 
completing a debt settlement program, citing to settlements on four 
small accounts, even though the largest balance included in the 
program was not settled, and the creditor sued the consumer for the 
full amount of that debt, plus penalties and interest. GAO 
Testimony, supra note 50, at 26. In addition, the GAO reported that 
some consumers who finished a debt settlement program ``complained 
of being deceived and harmed by the group. Nearly half of them 
actually paid more than they owed.'' Id. at 25.
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    In any event, even assuming that (1) the survey accurately 
represents overall industry performance, (2) 75% of debts settled is an 
appropriate demarcation of ``success,'' and (3) the 9.8% ``still 
active'' consumers ultimately receive the promised results, nearly two-
thirds of enrolled consumers dropped out of the programs within the 
first three years.\205\
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    \205\ The Commission analyzes industry data on outcomes for 
dropouts in the following subsection, Section III.C.2.a.(2).
---------------------------------------------------------------------------

    In addition to the TASC survey, individual debt settlement 
providers reported a range of dropout rates. A paper by Dr. Richard 
Briesch reported on a sample of 4,500 consumers from one company, 
finding that the cancellation rate was 60% over two years.\206\ Three 
other commenters reported dropout rates of 71.9%,\207\ 54.4%,\208\ and 
20%.\209\ Some debt settlement providers reported that careful 
screening, strong customer service, and full disclosure greatly reduced 
the number of dropouts.\210\
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    \206\ JH (Oct. 24, 2009) at 20 (see attached paper, Richard A. 
Briesch, Economic Factors and the Debt Management Industry 2 (Aug. 
2009) (``Briesch paper'')). The paper is based on data from Credit 
Solutions, identified on page 15 of the Briesch paper in a footnote.
    \207\ SDS (Jan. 22, 2010) at 2. Of consumers enrolled in the 
program at least 36 months earlier, fewer than 17% had completed the 
program and 11.2% were still active.
    \208\ DMB (Feb. 12, 2010) at 6. Of consumers who had enrolled in 
the program at least 36 months earlier, about 40% had completed the 
program and about 5% were still active.
    Debt settlement provider FDR provided data about completion 
rates, but its data also comprised a very substantial part of the 
TASC data; accordingly, its data are not a separate reference point. 
Specifically, FDR stated that 32% of the enrollees who remained in 
its program for three years or more completed the program with 100% 
of debts settled, while 10.3% were still active. These numbers were 
based on 7,803 consumers who had enrolled in the FDR program at 
least 36 months before the analysis was performed. FDR (Oct. 26, 
2009) at 10. Therefore, 57.7% of consumers dropped out within three 
years of entering the program. See id.
    Debt settlement company Orion also provided some completion 
data. It stated that out of 825 customers who had made at least one 
payment, approximately 29% had completed the program, and 12.7% were 
still active. Orion (Jan. 12, 2010) at 5. It noted that the numbers 
were based upon its former business model, in which customers saved 
funds to be used for settlements in their own bank accounts, rather 
than in special purpose accounts monitored by the company. Id.
    \209\ JH (Jan. 12, 2010) at 5. Of consumers who had enrolled in 
this debt settlement program at least two years and nine months 
earlier, about 41% had completed the program and about 39% were 
still active. The company considered fewer than 1,000 consumers in 
calculating the dropout rate, as it had only been providing services 
for two years and nine months at the time of the response. Summary 
of Communications with FTC Staff Placed on the Public Record (Apr. 
13, 2010).
    \210\ ACCORD (Oct. 9, 2009) at 3. In addition, debt settlement 
provider CRN reported that of all consumers that had enrolled in its 
program from April 2007 through September 2009, 39% had completed 
the program. CRN (Jan. 21, 2010) at 6. CRN has enrolled 1,218 
consumers in total, and it stated that its practice of refraining 
from charging fees other than the initial membership fee of $495 
allows its customers to achieve success sooner. Id. at 2, 4; CRN 
(Oct. 8, 2009) at 1. CRN's business model is unique; after receipt 
of the initial membership fee, it provides instructions to consumers 
on how to achieve debt settlements by calling creditors themselves. 
Subsequently, if the consumer specifically requests help, the 
company negotiates on the customer's behalf and charges additional 
fees if it obtains successful settlements. CRN (Oct. 8, 2009) at 1. 
CRN did not provide data separately for consumers using its do-it-
yourself model and those using its negotiation services. See CRN 
(Jan. 21, 2010) at 2, 6.
---------------------------------------------------------------------------

    As several commenters noted, not all dropouts are attributable to 
the failure of the provider.\211\ Several commenters, on the other 
hand, asserted that providers are primarily responsible for the 
dropouts, because they enroll consumers who are not financially 
suitable for the program, collect large fees in advance that are not 
adequately disclosed, and ultimately fail to settle the debts.\212\ 
Several commenters provided survey information about the reasons 
consumers drop out, finding that consumers drop out for various 
reasons, e.g., because they paid off the debts themselves, settled the 
debts themselves, failed to save enough money for settlements, filed 
for bankruptcy, or experienced ``buyer's remorse.''\213\
---------------------------------------------------------------------------

    \211\ JH (Oct. 24, 2009) at 34 (see attached Briesch paper at 
16); Loeb at 4 (citing Briesch paper); Arnold & Porter (Mar. 17, 
2010) at Exhs. 4 & 5; MD (Mar. 22, 2010) at Exhs. E-8 & E-9; see 
also FTC v. Connelly, 2006 WL 6267337, at *11-12 (C.D. Cal. Dec. 20, 
2006) (holding that the reasons for the approximately 75% dropout 
rate for a debt settlement program were genuine issues of fact. 
Defendants claimed that consumers dropped out because of their 
inability to save money for settlement purposes, whereas the FTC 
contended that consumers dropped out because of lawsuits, 
garnishments, property liens and other negative, undisclosed 
consequences of participation in the program.).
    \212\ NAAG (Oct. 23, 2009) at 4-8, CFA at 9; SBLS at 1-4; 
CareOne at 4; see GP (Oct. 22, 2009) at 3; ACCORD (Feb. 5, 2010) at 
3 (``the more the fee structure is weighted toward the settlement 
fee, the higher the completion rate.'').
    \213\ JH (Oct. 24, 2009) at 34 (see attached Briesch paper at 
16). This survey does not establish how many borrowers fall into 
each category, as 56% of consumer respondents chose ``other'' as the 
reason they dropped out. Id. In any event, the survey responses do 
not establish who is responsible for the dropouts. Indeed, if a 
consumer cannot afford to make the payments or files bankruptcy, it 
is not clear whether the consumer failed to complete the program 
because the provider misled the consumer about the amount of the 
monthly payments or the timing of the fees; the provider failed to 
engage in an effective suitability analysis; or the consumer took on 
new debt that made the program unsustainable.
    A different survey of 129 consumers who enrolled with a 
particular debt settlement provider and dropped out of the program 
after completing 50% of the program found that: 32% cancelled 
because they decided to settle the debts on their own; 42% could no 
longer afford or were not paying the monthly payment; 9% were 
generally dissatisfied; 9% were categorized as ``account lost 
through collection activity; could no longer collect;'' 5% were 
categorized as ``unwilling to go through the legal process,'' and 5% 
were categorized as ``other.'' QSS (Oct. 22, 2009) at 2.
    A third provider submitted survey information about 20,166 
consumers who dropped out of the program. The most frequent 
responses were: customer decided to file bankruptcy (24.9%); 
customer made other arrangements (16.8%); and customer did not have 
sufficient money in bank account for payments (11%). Arnold & Porter 
(Mar. 17, 2010) at Exhs. 4 & 5.
    Finally, a provider submitted results of a customer exit survey 
of an unspecified number of consumers who dropped out of the 
provider's program; the most frequent responses were: customer did 
not have sufficient money in bank account for payments (28.6%); 
customer could not afford payments (15.9%); customer decided to file 
bankruptcy (14%); and customer made other arrangements (9.5%). MD 
(Mar. 22, 2010) at Exh. E-8.
---------------------------------------------------------------------------

    In any event, the relevant issue for purposes of determining 
whether the advance fee ban is justified is the extent to which 
enrollees receive a net benefit

[[Page 48473]]

from the program. The net benefit takes into account whether consumers 
save more money than they paid in fees and other costs; it also 
considers other harms to consumers that result from participation in 
the program, such as harm to creditworthiness and continued collection 
activity in many cases. In addition, by enrolling in a debt settlement 
program, consumers forgo other alternatives, such as filing for 
bankruptcy, borrowing money from a relative, negotiating directly with 
creditors, or enrolling in a credit counseling program that may be 
better alternatives for them. Thus, many consumers suffer an 
opportunity cost when they enroll in debt settlement programs that do 
not benefit them.\214\ As discussed below, consumers who drop out of 
the program prior to completion generally do not obtain a net 
benefit.\215\
---------------------------------------------------------------------------

    \214\ Summary of Communications (June 16, 2010) at 2 (consumer 
group comments).
    \215\ SBLS (Tyler), Tr. at 187-88; see discussion of industry 
data on outcomes for dropouts in Section III.C.2.
---------------------------------------------------------------------------

(2) Outcomes for Dropouts
    As stated above, a major concern with debt settlement services is 
that most consumers drop out of the program after paying large, 
unrefunded fees to the provider. In response, industry commenters 
provided data purporting to show that a significant number of their 
dropouts obtained at least some value from the program in the form of 
one or more settled debts, prior to dropping out. It is true that some 
consumers who enroll in debt settlement programs, including some of 
those who subsequently drop out, may obtain some savings. For the 
reasons explained below, however, the submitted data provide little 
information about the proportion of dropouts who receive a net benefit 
from the program. To the extent that the net benefit can be estimated, 
it appears that dropouts generally pay at least as much in fees and 
other costs as they save in reduced debts.
    Several industry members or groups provided statistics on the 
number of settlements that dropouts obtained prior to exiting the 
program. TASC reported that 34.8% of the dropouts in its survey 
received at least one settlement - which means that 65.2% of the 
dropouts (representing over 42% of all consumers who enrolled) received 
no settlements.\216\ It also reported that the dropouts saved $58.1 
million in the aggregate (based on debt amounts at the time of 
settlement).\217\ These dropouts paid $55.6 million in fees, however, 
which alone virtually cancel out the savings. When the other costs 
associated with the program (e.g., creditor late fees and interest) are 
factored in, it is likely that the costs exceed the benefits.\218\ 
Moreover, as described earlier, there are a number of methodological 
concerns about this survey that likely skew the results in the 
direction of showing greater success.
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    \216\ TASC (Oct. 26, 2009) at 10; CRL at 4.
    \217\ TASC (Mar. 15, 2010) at 3.
    \218\ To this point, TASC asserted that because interest and 
fees continued to accrue during the course of the program, if a 
consumer is in the program for two years and settles his debt for 
the amount that he owed at enrollment, he received a large benefit 
from the program. TASC (Young), Tr. at 56-57. Consumers reasonably 
expect, however, that the program will substantially reduce the debt 
they carry when they enter the program, not that much or all of the 
``benefit'' is from a reduction in the additional debt that accrues 
during the program. In one case, the Commission found that a 
telemarketer represented that the company could ``negotiate your 
debt down to about 50 cents on the dollar . . . [so that] you're 
looking at about $15,000, $16,000 in debt as opposed to [the] 
$30,000'' owed at the time of the call. FTC v. Debt-Set, No. 1:07-
cv-00558-RPM, Mem. Supp. Mot. T.R.O. at 9-10 & Exh. D (D. Colo. Mar. 
20, 2007); see also id. Exh. N (telemarketer representing that ``on 
$30,000 [owed], our settlement would be about $19,500''); see also 
FTC v. Edge Solutions, Inc., No. CV-07-4087, Mem. Supp. Mot. T.R.O., 
Exh. PX-6 (E.D.N.Y. Sept. 28, 2007) (consumer stating that ``[a]fter 
telling [the telemarketer] what my credit card balances were, [he] 
informed me that [defendant] could settle my $18,882 debt for 
$11,880'').
    In a similar example, a large TASC member, FDR, reported that 
the 4,496 customers who dropped out of its program before completion 
reduced their debt by approximately $9.1 million, based on their 
debt at the time of enrollment, and paid $8.7 million in fees. FDR 
(Jan. 13, 2010) at 4; see also FDR (Oct. 26, 2009) at 10. Thus, on 
average, each of the 4,496 terminated customers during this period 
saved $89.
---------------------------------------------------------------------------

    Dr. Briesch also analyzed a second company's data regarding 
dropouts. In that analysis, 43% of the dropouts settled at least one 
account.\219\ The 57% of dropouts who did not settle any accounts 
clearly did not obtain a net benefit from the program, having paid and 
forfeited at least some amount of fees. Even as to those consumers who 
did obtain one or more settlements before dropping out, Dr. Briesch did 
not report how much consumers paid in fees, nor did he report how many 
accounts were settled out of the total number of accounts enrolled in 
the program.
---------------------------------------------------------------------------

    \219\ According to Dr. Briesch, dropouts received settlements at 
a similar rate to consumers who stayed active in the program. See 
Briesch (dated Oct. 27, 2009, and filed with the FTC on Nov. 5, 
2009) at 1-2 (stating that these dropouts settled at least one 
account, and the average settlement percentage on the settled 
accounts was 58%, meaning that the average savings percentage was 
42%).
---------------------------------------------------------------------------

    Another debt settlement provider reported that it had settled at 
least one account for 30% of its dropouts.\220\ In that company's case, 
70% of dropouts did not receive any benefit from the program, and even 
as to the remaining 30%, there is no evidence that the consumers 
received savings significantly greater than the fees and costs they 
paid.
---------------------------------------------------------------------------

    \220\ SDS (Jan. 22, 2010) at 3.
---------------------------------------------------------------------------

(3) Average Percentage Savings and Savings-to-Fee Ratios
    Many debt settlement providers advertise that consumers using their 
services achieve debt reductions within a range of percentages, often 
40% to 60%.\221\ In their public comments, debt settlement providers 
reported that they achieved average savings ranging from 39% to 
72%.\222\ The Commission

[[Page 48474]]

believes, however, that the methodology used to calculate these 
percentages is fundamentally flawed. Specifically, the calculations do 
not account for (1) interest, late fees, and other creditor charges 
that accrued during the life of the program; (2) the provider's fees; 
(3) consumers who dropped out or otherwise failed to complete the 
program; and (4) debts that were not settled successfully. By failing 
to account for these factors, the providers substantially inflate the 
amount of savings that consumers generally can expect. The following 
paragraphs discuss each of these points in turn.
---------------------------------------------------------------------------

    \221\ In its review of 100 debt settlement websites, supra note 
50, FTC staff found that 86% of websites made specific savings 
claims. The most frequently used percentage claims were 40% to 60%, 
50%, and up to 70%; see also GAO Testimony, supra note 50, at 19.
    \222\ TASC (Oct. 26, 2009) at 11 (average debt reductions were 
55% of outstanding balances in 2008 and 58% in the first six months 
of 2009 for 14 respondents in TASC survey); USOBA (Jan. 29, 2010) at 
3 (51 respondents provided information to the trade association; the 
average percentage reduction from the amount owed at enrollment 
ranged from 27.9% to 72%, and the mean percentage reduction for all 
respondents was 53.23%); FDR (Oct. 26, 2009) at 3 (55.3% in 2008); 
JH (Oct. 24, 2009) at 35 (see attached Briesch paper at 17) (among 
consumers who received settlement of at least one account, savings 
were over 50% of the original amount owed); FCS (Oct. 27, 2009) at 1 
(49% reduction of the debt calculated from the time of enrollment); 
CRN (Jan. 12, 2010) at 3 (savings of 67% of the debt at the time of 
enrollment); SDS (Jan. 22, 2009) at 1 (savings of 51.19% of the debt 
at the time of enrollment); Orion (Jan. 12, 2010) at 4 (``For those 
consumers who have completed the program, the settlements have 
typically been between 50-75% of their incoming debt.''); Loeb at 9 
(providing raw numbers for ten unnamed companies without any 
description of the methodology; percentage saved ranged from 38.73% 
to 71.66% and averaged 45.15%); DRS (Jan. 21, 2010) at 1 (savings of 
44% of the debt at the time of enrollment; 53% at the time of 
settlement).
    In addition, QSS conducted surveys on behalf of TASC and NWS. 
The QSS-TASC survey consisted of 691 exit interviews of former 
customers of ``certain TASC members,'' including both dropouts and 
successful graduates, and reported that 69% of settled accounts 
experienced a balance reduction of at least 40%. QSS (Oct. 22, 2009) 
at 7. The QSS-NWS survey consisted of 329 exit interviews and 
reported that 79% of consumers settled their credit card debts at a 
discount of at least 40% or more of the outstanding balance. Id. at 
18. In reporting on these surveys, QSS provided limited information 
about the sample surveyed, such as the proportion of the relevant 
consumer population the interviewees represented or whether the TASC 
members involved were representative of the industry generally. NWS 
(Feb. 17, 2010) at 2-3. Moreover, the labels on the electronic files 
submitted by QSS indicate that the interviews were conducted with 
consumers from no more than five companies. QSS requested and 
received confidential treatment pursuant to FTC Rule 4.9(c), 16 CFR 
4.9(c), for the recorded interviews contained on the electronic 
files.
    The USOBA comment provided selected data about one of its member 
companies, which it claimed to have verified. The comment asserted 
that this member had settled significant numbers of consumer debts 
for 53 cents on the dollar, based on the amount of the debt at the 
time of enrollment, which would equate to savings of 47%. USOBA 
reported that this company had settled 32,450 accounts totaling $174 
million in debt settled. USOBA provided no other information about 
the methodology used to arrive at these figures, making it difficult 
to evaluate its reliability. USOBA (Oct. 26, 2009) at 28-29.
    Another debt settlement company stated that it had settled 
between 257 and 992 accounts with each of ten creditors and that 
debt reductions ranged from 58.07% to 61.57%. MD (Mar. 22, 2010) at 
Exh. E-8. The company provided information only for the ``top ten'' 
largest creditors; it did not explain whether these creditors were 
representative or why it chose to highlight results from these 
creditors. The comment provided virtually no information about the 
total population of accounts, nor any information about the amount 
of fees that consumers paid to the provider.
---------------------------------------------------------------------------

    First, some commenters calculated ``savings'' without accounting 
for the additional debt and losses consumers incur as a result of 
interest, late fees, and other charges imposed by the creditor(s) or 
debt collector(s) during the course of the program. For example, if a 
consumer enrolls $10,000 in debt, and the provider represents that it 
can achieve a 40% reduction, the consumer reasonably expects to have to 
pay $6,000 to completely resolve his debts. If, however, the size of 
the debt increases over the course of the program due to interest and 
creditor fees of $2,000, the consumer will have to pay $6,000 plus an 
additional $1,200 to cover the additional creditor charges (the 40% 
reduction would apply to the $2,000 in creditor charges as well as the 
original balance). Accordingly, the consumer must actually pay a total 
of $7,200 to settle the $10,000 in debt he enrolled, and he saves 
$2,800. Thus, the percentage of actual savings is lower than the 40% 
represented by the provider. In this example, putting aside the other 
issues, the percentage of savings would be 28%.
    Second, the industry data generally exclude provider fees in 
calculating percentage savings and thereby inflate the actual amount 
consumers saved. For example, if the provider charges $3,000 in fees to 
consumers with $10,000 in debt and represents that the consumers will 
obtain a 40% reduction, consumers who expected to be debt-free with the 
payment of $6,000 actually must pay $9,000, not counting possible 
penalties and interest. The actual percentage savings would be 10%, 
putting aside the other issues. Although consumers likely presume the 
provider charges some fees, it is unlikely they would realize that the 
fees are so substantial that they exceed savings for many consumers, 
especially because debt settlement advertisements and websites 
generally do not disclose the fees.\223\ Even an industry 
representative has stated that the various debt settlement fee models 
are confusing.\224\
---------------------------------------------------------------------------

    \223\ Of the 100 websites FTC staff reviewed, supra note 50, 
staff found that only 14% of debt settlement websites disclosed the 
specific fees that a consumer will have to pay upon enrollment in 
the service. An additional 34 out of the 100 websites mentioned fees 
but did not provide specific fee amounts. The Commission's law 
enforcement experience bears this out as well. See, e.g., FTC v. 
Debt-Set, Inc., No. 1:07-cv-00558-RPM (D. Colo. filed Mar. 19, 
2007); see also New York v. Credit Solutions, No. 401225 (N.Y. Sup. 
Ct. N.Y. Cty. filed May 19, 2009) (Complaint, ] 17).
    \224\ Smart Money, Debt Settlement: A Costly Escape (Aug. 6, 
2007)(quoting Jenna Keehnen, the executive director of USOBA, as 
saying, ``I have seen every kind of (fee) model you can think of . . 
. . It's very confusing.''), available at (http://articles.moneycentral.msn.com/SavingandDebt/ManageDebt/DebtSettlementACostlyEscape.aspx).
---------------------------------------------------------------------------

    Third, commenters often considered only the savings associated with 
consumers for whom settlements were obtained and excluded all those who 
dropped out of the programs.\225\ One analysis removed 78% of the 
provider's customers from the sample and merely reported the 
settlements received by the remaining customers, excluding those who 
had dropped out of the program and those who were still active but had 
not yet settled a debt.\226\ Fourth, even among the group that had 
settled at least one debt and therefore was included in the analysis, 
the savings calculations accounted only for those individual accounts 
that actually were settled, excluding those that were not.\227\
---------------------------------------------------------------------------

    \225\ See supra note 222.
    \226\ JH (Oct. 24, 2009) at 33 (see attached Briesch paper at 
15). In Dr. Briesch's comment to the FTC following publication of 
the paper, he reported that among active consumers in the sample, 
only 55.7% had obtained at least one settlement. Briesch (dated Oct. 
27, 2009 and filed with the FTC on Nov. 5, 2009) at 6-7. In arriving 
at the 78% figure stated in the text, the FTC calculated that 60%, 
or 2,700, of the 4,500 consumers in the database had dropped out; 
out of 1,800 active consumers, 44.3%, or 797, had not obtained any 
settlements at the time the data were collected. Thus, only 1,003, 
or 22.3% of the sample, were actually included in the analysis. See 
CU at 6.
    \227\ For example, Dr. Briesch stated that on average, about 50% 
of the consumer's debts were settled. JH (Oct. 24, 2009) at 35 (see 
attached Briesch paper at 17).
---------------------------------------------------------------------------

    No commenter provided the information necessary for the Commission 
to calculate actual average savings amounts using an appropriate 
methodology. Because the savings amounts reported by commenters were 
calculated using methodologies that substantially overstate the 
savings,\228\ the Commission concludes that the actual savings, if any, 
generally achieved by consumers in a debt settlement program are 
significantly lower than the average savings amounts commenters 
reported.\229\
---------------------------------------------------------------------------

    \228\ See supra note 222.
    \229\ In further support of their contention that debt 
settlement service providers obtain successful outcomes for 
consumers, some commenters asserted that debt settlement providers 
obtain more favorable settlements than consumers could obtain on 
their own. See Figuliuolo at 4 (``Debt settlement companies 
generally have substantial experience dealing with creditors, have 
access to large quantities of data, can engage in sophisticated 
analysis of those data, have a good understanding of what sorts of 
deals can realistically be struck with particular creditors, develop 
ongoing relationships with those creditors, and importantly their 
clients generally have the capital to fulfill the negotiated 
settlement at the time of negotiation.''); Franklin at 8-13. These 
commenters provided limited evidence in support of their assertions. 
Moreover, even if the assertions were true, they do not support the 
sorts of specific savings claims that providers have made, nor do 
they counsel against imposition of an advance fee ban.
---------------------------------------------------------------------------

    In addition to savings percentages, several commenters provided 
``savings-to-fee ratios.'' These ratios purport to compare the debt 
reductions consumers have received from debt settlement programs to the 
amount consumers have paid in fees to show the value provided to 
consumers.\230\ The ratios, however,

[[Page 48475]]

only account for debts that are settled; they fail to account for 
increased balances on debts that were not settled. Assessing whether 
consumers benefitted from the programs would require review of 
individual consumer circumstances, as well as determining harm to 
creditworthiness and harm resulting from continued collection activity. 
Additionally, neither the TASC survey respondents nor the individual 
commenters are representative of the industry; TASC selected its 
largest members, and only some of them provided responsive information. 
Thus, although the savings-to-fee ratios provided to the Commission 
suggest that some consumers of debt relief services may have benefitted 
to a certain extent, they do not establish that consumers generally 
achieved more in savings than they paid in fees and other expenses for 
their debts as a whole.
---------------------------------------------------------------------------

    \230\ The TASC survey reported that customers of the companies 
that participated in the survey, including dropouts, received $245 
million in savings at a cost of $126 million in fees, a savings-to-
fee ratio of nearly 2 to 1. TASC (Oct. 26, 2009) at 10. The 
calculations, however, do not account for interest, late fees, and 
other creditor charges that accrued during the life of the program.
    FDR asserted that active customers who had been in the program 
for at least three years reduced their debt by $6.5 million and paid 
$3.3 million in fees, a 1.97 to 1 ratio; completed customers reduced 
their debt by $25.2 million and paid $8.8 million in fees, a 2.86 to 
1 ratio; and terminated customers reduced their debt by $9.1 million 
and paid $8.7 million in fees, a 1.05 to 1 ratio. On average, each 
of the 4,496 terminated customers saved $89. FDR also calculated 
that enrollees as a whole reduced their debt by $40.8 million and 
paid $20.8 million in fees, a 1.96 to 1 ratio. FDR (Jan. 14, 2010) 
at 4-5. In these calculations, FDR estimated the amount consumers 
owed at enrollment to determine the savings.
    NCC reported that its savings-to-fee ratio was 1.5 to 1. Arnold 
& Porter (Mar. 17, 2010) at Exh. 1. Total fees paid were 
approximately $3 million, and total customer savings were 
approximately $4.5 million, a 1.5 to 1 savings-to-fee ratio. Id. NCC 
provided no information regarding whether the calculations use 
balances at enrollment or at settlement, the number of consumers who 
completed the program, or whether the data covered all consumers who 
completed the program.
    A debt settlement company provided confidential information, 
pursuant to FTC Rule 4.9(c), 16 CFR 4.9(c), reporting that its 
savings-to-fee ratio was 1.2 to 1, as total fees paid were almost 
$900,000 and total customer savings were slightly over $1 million. 
The company provided no information regarding whether the savings 
calculation used balances at enrollment or at settlement, the number 
of consumers who completed the program, or whether the data covered 
all consumers who completed the program.
---------------------------------------------------------------------------

(4) Settlement Rates for All Enrollees
    Several commenters asserted that many consumers receive settlement 
offers soon after enrollment and before they pay substantial fees to 
the provider.\231\ The CSA comment reported that among consumers who 
remained in CSA's program for one month or more, 56% received at least 
one settlement offer.\232\ The CSA comment, however, did not provide 
any information as to whether consumers accepted, or were able to fund, 
the offers.\233\ Moreover, the data do not measure the drop out rate or 
the success of enrollees as a whole.\234\ The CSA comment also did not 
disclose the amounts of the debts that were the subjects of the early 
offers, and it may be the case that the early settlements tended to be 
for relatively small debts.\235\ Finally, as was true with the Briesch 
study, CSA did not provide the amount of savings from the early 
settlements, nor the amount paid in fees by consumers. Thus, the data 
do not show whether consumers in CSA's program experienced a net 
benefit or net loss.
---------------------------------------------------------------------------

    \231\ If consumers obtain settlements soon after enrollment, 
providers should not be adversely affected by a ban on collecting 
fees before they procure settlements. As explained below, however, 
the record does not support this assertion.
    \232\ For consumers who stayed in the program for a minimum of 
three months, 67% received at least one offer (and 47% received at 
least three); among consumers who stayed in the program for a 
minimum of six months, 77% received at least one offer and 58% 
received three or more offers. All consumers who stayed in the 
program for 36 months received five or more offers. CSA at 5-6; see 
also CSA (Witte) at 29-30 (``And in the first month, we're able to 
get 56 percent of the people one offer and 28 percent of the people 
five or more offers, just in the first month. And I think everyone 
can agree that's pretty remarkable and sort of stands against what 
was in the [NPRM] that no work is being done at the beginning.'').
    \233\ See SBLS (Tyler), Tr. at 40 (``I had a client who got 
three offers. She had no money in the escrow account. She had no 
money to pay the offer.'').
    \234\ The comment only reported results for consumers who 
remained in the program until - or beyond - each time interval. 
Therefore, consumers who dropped out of the program by the end of 
each interval were excluded from the calculations of the next group 
of consumers.
    \235\ See RDRI at 5 (noting that settlement companies may begin 
with customer accounts that have the smallest balances or with 
``friendly'' creditors).
---------------------------------------------------------------------------

    A second provider stated that in recent years, 40.4% of its 
customers had settled at least one debt within the first year after 
enrolling.\236\ Thus, almost 60% failed to settle even one debt within 
that first year. Furthermore, the company provided no information about 
the amount of savings dropouts obtained from settlements, nor the 
amount consumers paid in fees.\237\
---------------------------------------------------------------------------

    \236\ SDS (Jan. 22, 2010) at 3.
    \237\ Another commenter stated that its figures were difficult 
to estimate but provided rough figures. The commenter estimated that 
of its customers who stayed in the program for at least four months, 
75% received at least one settlement in the first year. It also 
estimated that, of customers who stayed in the program for at least 
one year, more than 95% had at least one debt settled within two 
years. Finally, it estimated that about 15% to 20% of its customers 
drop out without settling any debts. The commenter noted that a 
significant portion of customers revoke their enrollment before six 
months and receive a refund; these individuals were not counted in 
any of the above statistics. Orion (Jan. 12, 2010) at 5.
---------------------------------------------------------------------------

(5) Testimonials from Satisfied Consumers
    Two-hundred thirty-nine consumers filed comments about their 
experiences with debt settlement companies, 193 of which expressed 
positive views. Several industry commenters also incorporated positive 
consumer testimonials into their comments.\238\
---------------------------------------------------------------------------

    \238\ USOBA (Oct. 26, 2009) at 85-212; CSA at 22-47; DRS (Sept. 
29, 2009) at 3-13; see also Franklin at 7-8.
---------------------------------------------------------------------------

    The Commission does not question that some consumers have had 
favorable experiences with debt settlement. That fact, however, does 
not establish that consumers generally benefit from these programs, or 
that they receive the results they were promised.\239\ Individual 
consumer testimonials are, by their nature, anecdotal; they do not 
constitute a representative sample of consumers who have enrolled in 
debt settlement programs.\240\ Moreover, it is not clear for many of 
the testimonials in the record that the individual consumer actually 
benefitted financially from the program. Many of the consumers did not 
provide any specific information about their debt settlement 
experiences,\241\ and, for some other consumers, it was not clear that 
they had obtained any settlements at the time they submitted their 
comment.\242\
---------------------------------------------------------------------------

    \239\ Similarly, in assessing whether a success or performance 
claim is deceptive under Section 5 of the FTC Act, courts 
consistently have held that the existence of some satisfied 
consumers is not adequate substantiation. See, e.g., FTC v. Amy 
Travel Serv., 875 F.2d 564, 572 (7th Cir.1989), cert. denied, 493 
U.S. 954 (1989); FTC v. Five-Star Auto Club, Inc., 97 F. Supp. 2d 
502, 530 (S.D.N.Y. 2000); FTC v. SlimAmerica, Inc., 77 F. Supp. 2d 
1263, 1273 (S.D. Fla. 1999).
    \240\ This is especially true here, where some providers 
actively solicited positive comments from specific consumers. Ho at 
2 (attaching email from debt settlement company encouraging the 
consumer to send positive comments to the FTC).
    \241\ See, e.g., Allen at 1; Clement at 1; Garner at 1; Gecha at 
1; Houghton at 1; Kaiser at 1; McInnis at 1; Neal at 1; Seigle at 1; 
Taillie at 1.
    \242\ See, e.g., Wheat at 1; Silverman at 1; Paquette at 1; 
Pratt at 1. Although an industry association argued that positive 
comments from consumers before they achieve any settlements shows 
that the companies provide value aside from obtaining settlements 
(USOBA (Oct. 26, 2009) at 33-34), the overriding purpose for which 
consumers enroll in debt relief programs is to resolve their debts, 
not to receive other ``benefits.'' See WV AG (Googel), Tr. at 45; 
SBLS (Tyler), Tr. at 38. Indeed, in some of the consumer comments, 
it was not even clear that the consumer had actually participated in 
a debt settlement program. See, e.g., Atkins at 1; Brodie at 1; 
Cheney at 1; Hargrove at 1; Hinksor at 1.
---------------------------------------------------------------------------

    In addition to the individual consumer comments, the QSS-TASC 
customer survey discussed previously included a satisfaction question. 
The survey concluded that 88% of consumers said they were ``satisfied'' 
or ``very satisfied'' with their settlement amounts.\243\ As explained 
above, however, QSS did not provide any information as to whether the 
consumers were representative in any sense of the population of 
consumers who use debt settlement services.\244\
---------------------------------------------------------------------------

    \243\ QSS (Oct. 22, 2009) at 8. In addition, the survey reported 
that 82% of consumers had an ``Excellent'' or ``Good'' experience in 
the debt settlement program. Id. at 9.
    \244\ Supra note 222.
---------------------------------------------------------------------------

b. Point 2: Debt Settlement is Superior to Other Debt Relief Services
    Several industry commenters argued that the Commission should not 
impose an advance fee ban on debt settlement services because they 
provide better outcomes for consumers than other types of debt relief, 
particularly bankruptcy and DMPs.\245\ The Briesch paper contended that 
consumers pay less overall in payments and fees in a successful debt 
settlement plan than in

[[Page 48476]]

a DMP.\246\ The paper included a hypothetical example of a consumer 
with $10,000 in debt who is on a DMP that lowers his credit card 
interest rates to 10%, requires the consumer to pay his debt over a 
period of five years, and charges a fee of $15 per month. Based on 
these assumptions, that consumer would pay $13,648 in total payments 
and generate $1,537 in revenue for the CCA.\247\ In contrast, if the 
consumer enrolls in a debt settlement program that reduces his debt by 
50%\248\ and imposes a fee of 15%, that same consumer would pay $6,500 
in total payments and generate $1,500 in fees for the debt settlement 
provider.
---------------------------------------------------------------------------

    \245\ In fact, the Final Rule applies to for-profit DMPs as well 
as debt settlement and other debt relief services.
    \246\ JH (Oct. 24, 2009) at 39 (see attached Briesch paper at 
21); see also USOBA (Oct. 26, 2009) at 25-26. Dr. Briesch also 
asserted that credit counseling has a higher dropout rate which, at 
different points, he asserts is 65% or 74%. The paper provides no 
citation to support the 65% number and cites to an unnamed NCLC 
report that relies on a National Foundation for Credit Counseling 
report for the 74% figure. A 2003 NCLC report actually cites a 79% 
dropout rate, citing to an earlier report published in 1999. 
National Consumer Law Center & Consumer Federation of America, 
Credit Counseling in Crisis 23 (April 2003). However, the dropout 
rates on DMPs are not comparable to dropout rates on debt settlement 
plans, as the initial fees are generally much lower for DMPs, and 
consumers have received the promised service - a creditor-approved 
plan that allows them to pay modified amounts if they make all of 
the required payments.
    \247\ JH (Oct. 24, 2009) at 39 (see attached Briesch paper at 
21).
    \248\ Dr. Briesch assumes the savings are based on the debt owed 
at the time of enrollment.
---------------------------------------------------------------------------

    However, credit counseling and debt management provide entirely 
different benefits from debt settlement, and it is misleading simply to 
measure how much a hypothetical consumer saves from each program.\249\ 
Dr. Briesch's analysis does not account for a significant advantage of 
DMPs: consumers enrolled in DMPs receive the benefits - in the form of 
creditor concessions - within a short time, providing more certainty 
than debt settlement and eliminating additional collection efforts. 
Late fees and other penalty fees generally stop accruing on a DMP. In 
contrast, consumers who enter a debt settlement program typically do 
not receive benefits (i.e., settlements) for many months, if not years. 
During that extended period, the consumer has no certainty that he or 
she will be successful, and creditor collection efforts are likely to 
continue.\250\ In addition, consumers obtain some benefits from a DMP 
even if they do not complete the programs because most of each monthly 
payment goes to their creditors and reduces their overall debt balance. 
In contrast, in the typical debt settlement plan, most of the money, 
for the first several months, goes to the non-refundable fees of the 
provider.
---------------------------------------------------------------------------

    \249\ GP (Oct. 22, 2009) at 2 (``With a DMP, the consumer is 
receiving ongoing benefits each month in the form of waived fees, 
lower interest rates and lower balances. In debt settlement, the 
consumer does not receive any benefits until a settlement is 
actually made, if it occurs at all.'').
    Additionally, Dr. Briesch's comparison of the relative costs to 
consumers of credit counseling and debt settlement was skewed. In 
calculating the ``total fees paid'' for credit counseling, he 
included the full amounts of fair share payments that creditors make 
to the agency. JH (Oct. 24, 2009) at 39 (see attached Briesch paper 
at 21); see also CSA at 9; Loeb at 2-3. Consumers do not make these 
payments, however. Moreover, the author offered no evidence that 
fair share payments are equivalent to the forgiven principal balance 
either in terms of dollar amounts or in overall benefits to the 
creditor. Nor did he consider whether creditors place value on the 
educational services that most credit counseling services provide, 
such as advice on budgeting. CU at 3; see also Consumer Federation 
of America, American Express, & Georgetown University Credit 
Research Center, Evaluating the Effects of Credit Counseling, (2006) 
(finding that effective debt management plans contain a meaningful 
educational component, ``significantly improved credit profiles,'' 
and a reduced risk of bankruptcy filing, which the report attributed 
to ``the DMP experience itself, e.g., budgeting to make regular DMP 
payments, continued interaction with and reinforcement from the 
counseling agency''); Cambridge (Oct. 26, 2009) at 1.
    \250\ See GP (Jan. 15, 2010) at 2.
---------------------------------------------------------------------------

    Dr. Briesch's analysis also failed to consider the relative impact 
of debt settlement and DMPs on consumers' creditworthiness, a 
significant factor in determining under which type of program a 
consumer would obtain a better ``outcome.''\251\ Indeed, Dr. Briesch 
employed very optimistic assumptions in the debt settlement examples - 
either the consumer can afford monthly payments of $625 for one year 
(if the debt reduction is 40% of the original debt balance) or the 
consumer can obtain debt reductions in the amount of 60% of the 
original debt balance and can make monthly payments of $458 over one 
year.\252\ These high monthly payment amounts are likely to be 
unrealistic for many consumers. In contrast, Dr. Briesch estimated that 
a consumer with $10,000 in debt would pay only $227 per month on a DMP 
for five years.
---------------------------------------------------------------------------

    \251\ The record does not contain conclusive evidence on this 
issue. The GAO reported that according to FICO, stopping payments to 
creditors as part of a debt settlement program can decrease credit 
scores anywhere between 65 to 125 points. GAO Testimony, supra note 
50, at 10. In addition, missed payments leading up to a debt 
settlement can remain on a consumer's credit report for seven years, 
even after a debt is settled. Id. A consumer testified that her 
credit score was harmed due to her enrollment in a debt settlement 
program. Haas Testimony, supra note 73, at 4 (``Our credit scores 
had gone from excellent to poor. All credit extended to us now is at 
a higher rate - if at all. Banks who once gladly financed our cars 
won't look at us. Insurance companies have given us higher quotes 
due to our credit history.''). According to a CCA commenter, the 
presence of settled accounts on a credit report is ``clearly a 
danger sign.'' Cambridge (Oct. 26, 2009) at 1.
    In contrast, a debt settlement industry commenter asserted that 
debt settlement may lead to improved creditworthiness and improved 
credit scores, as compared to bankruptcy or credit counseling. JH 
(Oct. 24, 2009) at 15. However, the NERA Economic Consulting report 
cited and attached to the foregoing comment does not address the 
creditworthiness of consumers who completed credit counseling. Id. 
at 47-54. In addition, the comment acknowledges that the initial 
effect of a debt settlement program on a consumer's credit score 
will be negative; it then focuses on creditworthiness after 
completion of the program. Id. at 47-48.
    \252\ JH (Oct. 24, 2009) at 40 (see attached Briesch paper at 
22). As stated above, according to the TASC survey results, based on 
information from 14 debt settlement companies, the average debt 
reduction for those consumers who obtained settlements was 
approximately 45.5% of the original debt amount in 2008, and 49.4% 
of the original debt amount in 2009. TASC (Mar. 15, 2010) at 3.
---------------------------------------------------------------------------

    Other debt settlement providers similarly argued that, on average, 
consumers who complete debt settlement plans pay lower monthly payment 
amounts and lower amounts overall than consumers who complete 
DMPs.\253\ Where consumers actually obtain debt settlements, this may 
be true, but the comparison fails to examine fully the costs and 
benefits of each type of program with respect to consumers who fail to 
complete them. As described above, DMPs offer more certainty than debt 
settlement, provide a reprieve from collection efforts, and result in 
decreasing debt balances with every payment.
---------------------------------------------------------------------------

    \253\ As an example, a debt settlement provider calculated that 
a consumer with $39,000 in credit card debt could settle that debt 
for $30,038 in less than five years by making monthly payments of 
about $500, given specific assumptions set forth in the comment; by 
comparison, the same consumer on a DMP would have to pay $775 per 
month and total payments of $51,150. The stated assumptions were: 
(i) a 60 month program, (ii) no interest rate adjustments by 
creditors (that is, the interest rate stays at 24.9%), (iii) the 
consumer obtained a 40% debt reduction ``on current balance,'' and 
(iv) the following fee structure: first two months payments of 
$34.95 per month, plus 25% of the savings amount negotiated. DMB 
(Oct. 29, 2009) at 3 nn. 7 & 11. Putting aside the question of 
whether the provider's assumptions were unbiased and realistic, it 
appears that the provider may not have followed its own assumptions 
in doing its calculations. Specifically, the assumptions included an 
interest rate on the debt of 24.9% that continues to accrue 
throughout the program, as would typically be the case. With that 
assumption, however, the calculation for the debt settlement plan 
yields a monthly payment of $1,650 with a total payment over 60 
months of over $96,800, substantially more costly than the DMP. The 
Commission asked the commenter whether it had assumed that interest 
and fees stopped accruing for a consumer enrolled in debt 
settlement, but the commenter did not respond to that question. DMB 
(Feb. 12, 2010) at 8. Alternatively, the commenter actually may have 
assumed a 40% debt reduction from the balance at the time of 
enrollment, not on the ``current balance,'' which presumably would 
be the balance at the time of settlement.
---------------------------------------------------------------------------

    Several debt settlement commenters also argued that their programs 
help

[[Page 48477]]

consumers avoid bankruptcy, which, they assert, has consequences that 
are worse for consumers.\254\ One commenter submitted a research paper 
stating that debt settlement may result in a better credit rating for 
the consumer than would bankruptcy.\255\ Even if that were true, 
however, the relative benefits and costs of bankruptcy and debt 
settlement cannot be gauged on the basis of a single characteristic. In 
particular, if a consumer files for bankruptcy, creditors must cease 
collection efforts.\256\
---------------------------------------------------------------------------

    \254\ USOBA (Oct. 20, 2009) at 23-24; Palmiero (employee of 
Century Negotiations, Inc.) at 1; CSA at 3; JH (Jan. 12, 2010) at 1; 
Weinstein (Oct. 26, 2009) at 8 (see attached Weinstein paper at 7).
    \255\ JH (Oct. 24, 2009) at 47-54. In fact, the report 
acknowledges that, because the algorithms used in determining a 
consumer's credit score are proprietary, the author cannot really 
determine how debt settlement - or bankruptcy - would affect a 
consumer's credit score.
    \256\ Filing bankruptcy stays collection efforts, including on 
delinquent mortgage accounts.
---------------------------------------------------------------------------

    USOBA argued that completion rates for debt settlement are better 
than for bankruptcy.\257\ Although many consumers do not complete 
Chapter 13 bankruptcy plans,\258\ there are many reasons for this that 
are unique to bankruptcy proceedings and are not indicative of a 
``failure.'' In some instances, a Chapter 13 bankruptcy is converted to 
a Chapter 7; in other cases, the debtor might not be eligible for a 
discharge because of previous discharge or misconduct, or the debtor 
could have filed a Chapter 13 bankruptcy simply to decelerate and cure 
a mortgage default without intending to seek a discharge of other 
debts.
---------------------------------------------------------------------------

    \257\ USOBA (Oct. 26, 2009) at 28; see also Franklin at 19. 
Relying on the preliminary TASC study discussed in footnote 194, 
USOBA stated that the purported debt settlement completion rate of 
45% to 50% exceeds the completion rates for both Chapter 13 
bankruptcy (stated to be 33%) and credit counseling programs (stated 
to be 21%). USOBA (Oct. 26, 2009) at 28. In fact, the revised TASC 
data suggest much lower completion rates for debt settlement than 
are stated in TASC's ``preliminary'' study submitted in connection 
with the workshop - an average of 24.6% rather than 45% to 50%. TASC 
(Oct. 26, 2009) at 10.
    \258\ Scott F. Norberg & Andrew J. Velkey, Debtor Discharge and 
Creditor Repayment in Chapter 13, 39 Creighton L. Rev. 473, 505 & 
n.70 (2006) (``The overall discharge rate for the debtors in the 
seven districts covered by the Project was exactly the oft-repeated 
statistic of one-third.''); Gordon Bermant & Ed Flynn, Measuring 
Projected Performance in Chapter 13: Comparisons Across the States, 
19 Am. Bankr. Inst. J. 22, 22 & 34-35 (July-Aug. 2000); Henry E. 
Hildebrand, III, Administering Chapter 13--At What Price?, 13 Am. 
Bankr. Inst. J. 16, 16 (July-Aug. 1994).
---------------------------------------------------------------------------

    In short, the relative costs and benefits of debt settlement 
programs and bankruptcy cannot be generalized. Whether one or the other 
option is best depends entirely on the individual consumer's 
circumstances, and, most importantly, whether the consumer has 
sufficient assets to fund settlements.
c. Point 3: Numerous Debt Settlement Companies Will Go Out of Business
    Representatives and members of the debt settlement industry argued 
that many providers will go out of business if the FTC imposes an 
advance fee ban.\259\ The trade association USOBA submitted a survey of 
its members who reported that the following would occur if an advance 
fee ban were imposed:
---------------------------------------------------------------------------

    \259\ SDS (Oct. 7, 2009) at 2-3; MD (Oct. 26, 2009) at 25; RADR 
at 1; Orion (Oct. 1, 2009) at 2; CDS at 1; D&A at 2; see also ULC at 
6; CSA at 10 (stating generally that the advance fee ban ``could put 
a legitimate company out of business''); FDR (Oct. 26, 2009) at 16-
17; Hunter at 1; MP at 3; CCC at 1 (for-profit credit counseling 
company would go out of business if the Commission promulgates the 
advance fee ban). One debt settlement company said that no other 
businesses can afford to operate by accepting payment ``only after 
the customer has received and agrees to be satisfied with that 
service.'' JH (Oct. 24, 2009) at 6 (emphasis in original).
---------------------------------------------------------------------------

     84% would ``almost certainly'' or ``likely'' have to shut 
down their operations;
     95% would ``certainly'' or ``likely'' lay off employees; 
and
     85% would stop offering debt settlement services to new 
and existing customers.\260\
---------------------------------------------------------------------------

    \260\ USOBA (Oct. 26, 2009) at 20.
---------------------------------------------------------------------------

    The Commission concludes that this survey is not reliable and is of 
little probative value. USOBA did not provide the number of its members 
or their employees who responded to the survey, what proportion of the 
industry they comprise, or whether they were in any sense a 
representative sample.\261\ The survey elicited self-reported, 
conclusory, and possibly self-serving statements of opinion without any 
evidence to support those opinions, such as data on the financial 
impact of a ban. Furthermore, it appears that the survey respondents 
were reacting to a complete advance fee ban, without the option of 
requiring consumers to place funds in a dedicated bank account until 
services are performed and receiving appropriate fees from the account 
as each debt is settled, as the Final Rule permits.
---------------------------------------------------------------------------

    \261\ Cf. infra note 576.
---------------------------------------------------------------------------

    The trade association TASC submitted a cash flow analysis, 
presumably based on its members' historical experience, that purports 
to show that it would take 49 months for a provider to break even under 
an advance fee model.\262\ The Commission finds this analysis 
unpersuasive for at least three reasons.
---------------------------------------------------------------------------

    \262\ TASC (July 1, 2010) at 1-2. Specifically, TASC states that 
its model shows that the cumulative breakeven (which is the point at 
which the net of all losses as compared to gains in the prior months 
turns from negative to positive) occurs at 49 months if, where 
settlements involve multiple payments, providers collect their fee 
for each settlement after the first installment payment. See id. 
n.3. Providers may do so under the Final Rule and, thus, this is the 
applicable cumulative breakeven point in the TASC model. TASC also 
reports that, if providers cannot collect their fees until the last 
installment payment is received, the cumulative breakeven would not 
occur until month 74. However, as noted, the Final Rule imposes no 
such restriction, so this cumulative breakeven point is 
inapplicable.
---------------------------------------------------------------------------

    First, TASC assumes that providers will find it profitable to 
continue to follow the same marketing strategy that many of them follow 
today. Many debt settlement providers currently incur significant costs 
to acquire customers through general audience advertising, even though 
a large portion of the consumers drawn in by the advertisements are 
unsuitable for the program and subsequently drop out. For example, 
TASC's analysis assumes that sales, general, and administrative 
expenses (``SG&A'') and ``support'' expenses total $1,326 per consumer 
in the first two months. It is not clear exactly what costs are 
included in these expense figures, but they appear to be based on an 
extensive advertising campaign of the kind that many debt settlement 
providers employ under the existing business model. Although the impact 
of the advance fee ban in the rule cannot be predicted with precision, 
one reasonable outcome could be that providers will have to improve the 
cost-effectiveness of their customer acquisition strategies by more 
narrowly tailoring them to the segment of the population that may be 
suitable for debt settlement services, rather than to the general 
population. In a competitive market, those providers that are more 
efficient in targeting their advertising to consumers who are most 
likely to enroll and stay in the programs will spend less on 
advertising and, thus, be able to make a profit sooner.
    Second, the predicted break even point in TASC's analysis also 
depends crucially on what is assumed about the dropout rate and the 
amount of the contingency fee. With a lower dropout rate or a higher 
contingency fee, the break even point occurs earlier.\263\ In fact, 
dropout rates are likely to decrease once the advance fee ban is in 
place because, among other reasons, providers will have the incentive 
to carefully screen borrowers before enrolling them.\264\
---------------------------------------------------------------------------

    \263\ For instance, the provider's cash flow would change 
significantly if it increased the fee amount to 40% of savings or 
experienced a 3% dropout rate in each of the first three months 
instead of a 6% dropout rate.
    \264\ CU (July 1, 2010) at 4; ACCORD (Feb. 5, 2010) at 3 (``the 
more the fee structure is weighted toward the settlement fee, the 
higher the completion rate.'').
---------------------------------------------------------------------------

    Finally, the model assumes that the provider is a new entrant that 
does not have any cash flow from existing

[[Page 48478]]

customers. The model does not show what the impact of the advance fee 
ban would be on existing companies. Presumably, an existing company 
would already have significant monthly revenue associated with its 
current customers, and therefore would have a more favorable cumulative 
cash flow than a new entrant.
    More generally, there is little reliable evidence in the record to 
substantiate the concerns raised by debt settlement providers about 
their future viability. Certainly, under an advance fee ban, providers 
would have to capitalize their businesses, at least initially, until 
they began settling debts and collecting their fees. After that initial 
period, however, providers presumably could fund their ongoing 
operations with the earnings from prior transactions.\265\ This is not 
an unusual business model; for example, many professionals, such as 
realtors, obtain payment only after they have completed their services 
to the client.\266\ These professionals often must expend considerable 
time and resources to perform those services. One debt settlement 
company commenter stated that, in its experience, using a business 
model that does not rely on advance fees is feasible for well-managed 
and well-capitalized firms,\267\ and other commenters agreed.\268\ 
Thus, the Commission is not persuaded that an advance fee ban would 
make it infeasible for legitimate debt settlement providers to operate 
their businesses.
---------------------------------------------------------------------------

    \265\ In addition to funding ongoing operating expenses, 
providers may have to fund debt payments if they borrowed money to 
pay costs before they began collecting their fees.
    \266\ See ACCORD (Noonan), Tr. at 21.
    \267\ FCS (Oct. 27, 2009) at 4.
    \268\ ACCORD (Oct. 9, 2009) at 1; CareOne at 5; Summary of 
Communications (June 30, 2010) at 1 (assistant state attorney 
general stated that some companies that do not charge advance fees 
are doing business in North Carolina); see also Terry Savage, Debt 
Manager Put to the Test, Chicago Sun Times, June 28, 2010, available 
at (http://www.suntimes.com/business/2439574,terry-savage-debt-manager-062810.article) (discussing provider that collects a 
relatively small amount of 3% of the original debt owed over the 
first two months and 15% of the original debt owed when a successful 
settlement is obtained; the consumer gets a 1% refund for completing 
the program).
---------------------------------------------------------------------------

d. Point 4: Debt Settlement Companies Incur Significant Costs in 
Providing Pre-Settlement Services
    Related to the financial viability questions discussed in the 
previous section, many commenters addressed the issue of the types and 
quantity of services that debt settlement providers must perform, and 
the costs they must finance, before settling a debt. Industry 
commenters asserted that they provide substantial services and incur 
significant costs well before obtaining settlements and need advance 
fees to pay for those services. Several commenters stated that debt 
settlement is labor-intensive and that a substantial amount of a debt 
settlement company's work occurs before the first settlement is 
finalized.\269\ For example, a large debt settlement company stated 
that it employs approximately 500 people, 150 of whom are responsible 
for communicating with consumers, compared to 130 who are responsible 
for negotiating with creditors.\270\ Another debt settlement provider 
stated that the vast majority of its expenses are incurred within the 
first 12 months of the program to attain new customers and provide 
customer service.\271\
---------------------------------------------------------------------------

    \269\ CDS at 1; Figliuolo at 5; ART at 1; Orion (Oct. 1, 2009) 
at 2; Franklin at 24-25; MD (Mar. 22, 2010) at 4-6; see also ULC at 
5. However, in investigations by state attorneys general, debt 
settlement companies have not demonstrated any justification for 
advance fees based on the effort required to set up an account. NAAG 
(Oct. 23, 2009) at 10.
    \270\ FDR (Oct. 26, 2009) at 6.
    \271\ According to this commenter, the expenses include 
personnel costs for the following employees: the representative who 
explains all of the options to the customer, a second representative 
who reviews the program a final time with the customer, the 
processors who handle the paperwork and help establish the account, 
the assigned negotiator who reviews the accounts and formulates a 
plan, and the representatives who conduct a 30 to 60 minute 
``Welcome Call'' and bi-weekly coaching calls thereafter. CDS at 1. 
CDS did not provide any breakdown of the cost by individual service.
---------------------------------------------------------------------------

    Several commenters provided estimates of debt settlement providers' 
pre-settlement costs. A researcher estimated that a provider's average 
administrative cost to enroll a consumer is $112.53.\272\ A provider 
estimated that the combined cost to acquire a customer and engage in 
required administrative work to set up the account ranges from $715 to 
$1,365, depending on the advertising and marketing media used.\273\ 
According to this commenter, in order to properly service a customer on 
an ongoing basis, the provider must handle basic customer inquiries, 
input data entry changes to the customer's file, provide assistance on 
creditor harassment concerns, call customers to assist them in 
fulfilling their commitment to the program, handle calls involving 
emotionally distraught customers, and provide access to an attorney 
network to advise about possible violations of the FDCPA.\274\ The 
commenter estimated that $50 per month would cover these services.\275\ 
The commenter also pointed to the significant costs involved in 
negotiating settlements, stating that it may make as many as 50 phone 
calls to negotiate with a single creditor.\276\ Another provider 
submitted an analysis showing that 22% of its expenses were dedicated 
to the intake of new customers. These expenses included marketing, 
payroll, office and related occupancy expenses, other general and 
administrative expenses, professional fees, depreciation, and 
taxes.\277\
---------------------------------------------------------------------------

    \272\ This amount is comprised of $59.45 for processing the 
enrollment paperwork, $16.05 for the Welcome Packet, and $37.02 for 
three compliance calls. NWS (Oct. 22, 2009) at 11 (see attached 
Walji paper at 11).
    \273\ ART at 1.
    \274\ Id.
    \275\ Id.
    \276\ Id. at 2; see also CSA at 8 (``The settlement of one 
account with one creditor may require more than 30, 40, or 50 phone 
calls.'').
    \277\ Confidential Comment at 10.
---------------------------------------------------------------------------

    The comments indicate that a large percentage of the pre-settlement 
costs incurred by providers is for marketing and other customer 
acquisition efforts.\278\ One provider estimated that marketing costs 
range from $500 to $1,200 per customer.\279\ A researcher stated that 
average marketing costs per customer at the company he studied were 
$987.50.\280\ Overall, the record shows that advertising and marketing 
constitute the largest portion - and in many cases a substantial 
majority - of upfront costs for debt settlement providers.
---------------------------------------------------------------------------

    \278\ USDR (Oct. 20, 2009) at 11; CRN at 2 (60% to 70% of fees 
support the sales side of the business); CDS at 1; TASC, Study on 
the Debt Settlement Industry 4 (2007) (``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.'').
    \279\ Orion (Oct. 1, 2009) at 2.
    \280\ NWS (Oct. 22, 2009) at 10 (see attached Walji paper at 
10); see also CRN (Bovee), Tr. at 28 (lead generators receiving 
commissions of more than 25% of revenue).
---------------------------------------------------------------------------

    Some industry commenters also claimed that they provide services to 
customers other than settling debt.\281\ One provider asserted that it 
provides education and support to consumers well before any debt 
settlements are finalized.\282\ USOBA asserted that its

[[Page 48479]]

members offer budgeting advice, financial literacy information, 
emotional support, and education on debtor rights.\283\ In a survey 
commissioned by USOBA, 86% of employees of debt settlement companies 
reported that they provide value or service to consumers other than 
settling debt, and 72% stated that they talk to consumers every day as 
part of their job.\284\
---------------------------------------------------------------------------

    \281\ Summary of Communications (June 14, 2010) at 1 (industry 
groups stated that providers conduct a budget analysis of each 
consumer to determine ``fit'' with the debt settlement model and 
provide budgeting advice and educational information about 
consumers' rights with respect to debt collection calls and 
harassment).
    \282\ SDS (Oct. 7, 2009) at 2. It also asserted that it speaks 
with 30 potential customers (that it does not accept) for every one 
it accepts and spends at least 45 minutes with each of these 
consumers providing free advice. Id. at 3.
    \283\ USOBA (Oct. 26, 2009) at 30, 33. Industry groups also 
argued that if the Commission imposes an advance fee ban, the 
companies that provide customers with extensive counseling, 
coaching, and assistance during the period in which they accumulate 
sufficient savings to enter into debt settlements will be at a 
competitive disadvantage compared to companies that do not provide 
these additional services. Id. at 34; Summary of Communications 
(June 14, 2010) at 1. The Commission believes, however, that 
companies will have incentives to provide customers with counseling 
and other assistance so that they stay in the program and receive 
settlements, at which time the provider will get paid.
    \284\ USOBA (Oct. 26, 2009) at 31; see also Palmiero (employee 
of Century Negotiations, Inc.) at 1 (``I hear the tears of relief 
that someone is available to listen as well as offer options and 
solutions to the concerns as they arise.''). As discussed above, the 
USOBA survey consists of self-reported and potentially self-serving 
responses from an unspecified sampling of employees of an undefined 
sampling of providers. Thus, the Commission does not accord this 
survey significant weight.
---------------------------------------------------------------------------

    Based on the above and other evidence in the record, the Commission 
has reached the following conclusions about the cost issues:
     Debt settlement providers must perform certain tasks prior 
to settling their customers' debts, ranging from customer acquisition 
to recordkeeping to customer support. These tasks entail costs.\285\
---------------------------------------------------------------------------

    \285\ FDR (Oct. 26, 2009) at 6; CDS at 1; NWS (Oct. 22, 2009) at 
11 (see attached Walji paper at 11); ART at 1.
---------------------------------------------------------------------------

     In most cases, the largest component of pre-settlement 
costs that providers incur is for customer acquisition, i.e., 
advertising and marketing.\286\
---------------------------------------------------------------------------

    \286\ USDR (Oct. 20, 2009) at 10-11; CRN at 2; CDS at 1; MD AG 
(Sakamoto-Wengel), Tr. at 105 (``And in complaints and the 
investigations that we have had, at the state level, what we have 
found is that rather than the trained counselors . . . a lot of the 
people that are hired as counselors are really salespeople, without 
counseling experience, without financial experience, but they're 
there to sell a product.''); TASC, Study on the Debt Settlement 
Industry 4 (2007).
---------------------------------------------------------------------------

     Some providers may offer ancillary services such as 
education and financial advice, but there is no reliable evidence in 
the record to establish how many providers offer these services, how 
extensive they are, or what they cost.\287\
---------------------------------------------------------------------------

    \287\ See TASC (Oct. 26, 2009) at 18; USOBA (Oct. 26, 2009) at 
30.
---------------------------------------------------------------------------

     The types and amounts of services providers perform and 
the costs of performing them appear to vary widely. Frequently, the 
nonmarketing costs are relatively small.\288\
---------------------------------------------------------------------------

    \288\ CDS at 1; NWS (Oct. 22, 2009) at 11 (see attached Walji 
paper at 11); ART at 1.
---------------------------------------------------------------------------

    Even accepting the commenters' cost estimates at face value, the 
record does not support the assertions by some industry members that 
initial costs are so substantial that they could not operate without 
collecting their fees in advance. Charging large advance fees is not 
the only business model in the debt settlement industry. Several 
providers use payment schedules that are less front-loaded and entail 
payments over a longer term, require no advance fees at all, or tie 
payments to successful outcomes for consumers.\289\ The record shows 
that these business models are feasible and that at least some debt 
settlement providers have adopted such models successfully.
---------------------------------------------------------------------------

    \289\ FDR (Oct. 26, 2009) at 14 (fees are collected over the 
first 18 months or longer of the program); JH (Jan. 12, 2010) at 4 
(entire first payment is collected as a fee; the remainder is 
collected in installments over one-half of the program); Hunter at 3 
(``[I]t is becoming more common for companies to charge a one-time, 
flat enrollment fee and prorate the remaining percentage of the fee 
over at least half the life of the program.''); CRN (Jan. 21, 2010) 
at 4 (company charges an ``initial membership fee'' of $495 and, for 
consumers seeking additional assistance, $100.00 per account, a $50 
monthly membership fee, and 15% of savings for any debt settled); 
FCS (Oct. 27, 2009) at 1 (``FCS has two program types, a blended fee 
approach and a settlement fee-only approach. The Debt Negotiation 
Company is a registered trade name of Financial Consulting Services. 
It offers only The Simple Plan, the settlement fee-only program.''); 
see also ACCORD (Feb. 25, 2010) at 2-3 (``ACCORD supports the 
collection of a fee after a creditor agrees to a negotiated 
settlement amount and when the consumer transmits the funds to the 
creditor'').
---------------------------------------------------------------------------

    As noted, the bulk of the upfront costs that providers incur are 
for advertising and customer acquisition, which are within the control 
of the provider and do not confer any direct benefit on consumers. To a 
large extent, providers have funded their marketing efforts with money 
forfeited by consumers who enrolled in these programs as a result of 
that marketing, paid large advance fees, and then dropped out, because 
they were financially unsuitable to be in a debt settlement program in 
the first place. The Commission has concluded that the interests of 
providers in obtaining advance fees primarily to fund their marketing 
efforts is outweighed by the likelihood of substantial injury to many 
of these financially-distressed consumers from paying hundreds or 
thousands of dollars without obtaining a commensurate benefit, or any 
benefit at all.
e. Point 5: Advance Fees Are Necessary to Ensure that Companies Get 
Paid and Consumers Fulfill Their Obligations
    Industry commenters also contended that charging fees in advance is 
needed to protect them against the risks of nonpayment by consumers 
after delivery of the services.\290\ One commenter stated that 
relegating the debt settlement provider to the position of other 
unsecured creditors would hinder its ability to service its 
customers.\291\
---------------------------------------------------------------------------

    \290\ See, e.g., Patel at 1; Orion (Oct. 1, 2009) at 2; Loeb at 
6-7; CSA at 9.
    \291\ RADR at 1.
---------------------------------------------------------------------------

    The risk of nonpayment may be significant given the precarious 
financial situation of consumers who enroll in debt relief programs. 
Accordingly, the Final Rule permits debt relief providers to require 
consumers to make payments into a dedicated bank account, assuming 
certain conditions are satisfied, from which the consumer can pay the 
provider's fee as each of the consumer's debts is settled. The specific 
operation of this provision of the Final Rule is explained in Section 
III.C.5.c. below.
    Other commenters expressed concern that, under an advance fee ban, 
consumers could avoid having to pay the provider by refusing reasonable 
settlement offers, failing to save money, or otherwise taking actions 
to prevent settlements.\292\ Although this may be theoretically 
possible, most consumers would have an incentive to agree to reasonable 
settlement offers. In any event, providers can take these risks into 
account in their screening procedures and pricing policies.\293\
---------------------------------------------------------------------------

    \292\ CSA at 9; D&A at 2.
    \293\ Other service providers who charge upon delivery of 
results experience the same risk. For example, realtors may spend 
considerable time and money unsuccessfully trying to sell a client's 
home and never get paid for those efforts.
---------------------------------------------------------------------------

f. Point 6: The Advance Fee Ban Violates the First Amendment
    An industry association argued that an advance fee ban would run 
afoul of the First Amendment.\294\ The association stated that the ban 
targets protected speech, preventing debt relief providers from 
receiving fees for speaking to their customers and providing 
educational, coaching, and counseling information.\295\
---------------------------------------------------------------------------

    \294\ USOBA (Oct. 26, 2009) at 43-47.
    \295\ Id. at 43 (``advice or legal assistance'' is communication 
entitled to full First Amendment protection, especially because 
information regarding statutory rights is ``vital''). It is worth 
noting that this ``communication'' portion of the service is a 
relatively minor part of a commercial transaction.

---------------------------------------------------------------------------

[[Page 48480]]

    The Commission concludes that the advance fee ban adopted here is 
permitted under the First Amendment. The advance fee ban does not 
restrain advertising, educational services, or other forms of 
communications, but is simply a restriction on the timing of payment. 
In denying a similar challenge to an advance fee ban in the TSR for 
certain offers of credit, a federal court found that it merely 
regulated ``when payment may be collected'' and did not impair the sale 
of educational materials produced by the company.\296\
---------------------------------------------------------------------------

    \296\ In re Nat'l Credit Mgmt. Group, 21 F. Supp. 2d 424, 457 
(D.N.J. 1998). USOBA's comment in this proceeding criticized the 
court's reasoning and instead cited to a case invalidating fee 
regulations applicable to for-profit companies soliciting money on 
behalf of nonprofit charities. USOBA (Oct. 26, 2009) at 44 (citing 
Riley v. Nat'l Fed'n of the Blind, Inc., 487 U.S. 781, 789 n.5 
(1988)). USOBA ignored the distinction, however, between the 
established speech interests at stake when charitable solicitations 
are at issue (see Riley, 487 U.S. at 788) as opposed to what is 
entirely commercial speech relating to the sale of debt relief 
services. See Bd. of Trs v. Fox, 492 U.S. 469, 474-75 (1989) (where 
speech proposing a commercial transaction touched on educational 
subjects, such speech was not converted into educational speech).
---------------------------------------------------------------------------

    Even assuming the advance fee ban were a restriction on speech, it 
would be scrutinized under the commercial speech test. Commercial 
speech is communication related solely to the economic interests of the 
speakers, in this case for-profit debt relief companies.\297\ The First 
Amendment accords a lesser degree of protection to commercial speech 
than to other constitutionally guaranteed expression.\298\ In Central 
Hudson, the Supreme Court established an analytical framework for 
determining the constitutionality of a regulation of commercial speech 
that is not false or misleading, and does not otherwise involve illegal 
activity.\299\ Under that framework, the regulation (1) must serve a 
substantial governmental interest; (2) must directly advance that 
interest; and (3) may extend only as far as the interest it serves - 
that is, it must be ``narrowly tailored to achieve the desired 
objective.''\300\ In explaining the framework, the Court has said that 
the fit between the restriction's purpose and the means chosen to 
accomplish it must be ``reasonable'' but ``not necessarily the least 
restrictive means'' available to achieve the desired objective.\301\
---------------------------------------------------------------------------

    \297\ Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n, 447 
U.S. 557, 561 (1980).
    \298\ Fox, 492 U.S. at 475; Fla. Bar v. Went for It, 515 U.S. 
618, 623 (1995).
    \299\ Cent. Hudson, 447 U.S. 557.
    \300\ Id. at 566.
    \301\ Fox, 492 U.S. at 480.
---------------------------------------------------------------------------

    The advance fee ban in the Final Rule comports with this test. 
First, preventing abusive sales practices is a substantial governmental 
interest.\302\ Hundreds of thousands of financially distressed 
consumers have lost large sums of money to debt relief providers 
engaged in such practices.\303\ Second, the advance fee ban directly 
advances this interest by protecting consumers from paying fees for 
services that are not rendered as promised. Thus, it will prevent the 
substantial harm, described in detail in this SBP, that arises when 
consumers pay in advance for debt relief services.\304\ Finally, the 
advance fee ban is narrowly tailored to protect consumers from abuse, 
while nonetheless permitting legitimate firms to receive timely payment 
for services they provide to consumers. Without the carefully crafted 
advance fee ban adopted here, vulnerable consumers who enroll in debt 
settlement programs must pay hundreds or thousands of dollars in fees 
months or years before they receive any benefit from those payments, if 
they ever receive a benefit at all. This constitutes substantial 
consumer injury. As discussed below, therefore, charging an advance fee 
for debt settlement services is an abusive practice.\305\ The modified 
advance fee ban, crafted to be no broader than absolutely necessary to 
remedy the identified significant consumer harm, will stop that 
abuse.\306\ In addition, the advance fee ban provides enforcement 
authorities an efficient and essential law enforcement tool to ensure 
that practices in this burgeoning industry do not continue to harm 
consumers.\307\ Accordingly, the advance fee ban, even if it is 
considered a regulation of ``speech,'' is an appropriate restriction 
under the First Amendment.
---------------------------------------------------------------------------

    \302\ See Edenfield v. Fane, 507 U.S. 761, 768-69 (1993) 
(``[T]here is no question that [the government's] interest in 
ensuring the accuracy of commercial information in the marketplace 
is substantial.''); FTC v. Mainstream Mktg. Servs., Inc., 345 F.3d 
850, 854 (10th Cir. 2003); see also TSR Amended Rule; 68 FR at 4635 
n.669 (``In some instances, the `do-not-call' registry provisions 
will also serve another substantial governmental interest--
prevention of fraud and abuse, as in cases where elderly consumers 
are signed up on the registry to protect them from exploitative or 
fraudulent telemarketers.'').
    \303\ GAO Testimony, supra note 50, at 21 (``We identified 
allegations of fraud, deception and other questionable activities 
that involve hundreds of thousands of consumers.'').
    \304\ Infra Section III.C.3.a.
    \305\ Infra Section III.C.3.
    \306\ CFA at 10 (``[D]esperate consumers will tend to focus most 
on the representations made in the advertisements about how these 
services can relieve them of their debt worries. We see the required 
disclosures and prohibited misrepresentations as good complements 
to, but not substitutes for, the proposed ban on advance fees.''); 
CareOne at 4 (the advance fee ban ``is likely to have the greatest 
impact.''); Summary of Communications (June 24, 2010) at 1 (state 
attorney general representatives said that an advance fee ban is the 
most important provision in the FTC's proposed rule and is necessary 
to stop abusive practices of debt relief companies). Disclosures are 
often of limited benefit in inoculating consumers from being 
deceived. See, e.g., FTC, Letter to Jennifer L. Johnson, Secretary, 
FRB, in response to a request for public comments regarding the 
``Home Equity Lending Market,'' Docket No. OP-1253, Sept. 14, 2006, 
available at (http://www.ftc.gov/os/2006/09/docketop-1253commentfedreservehomeeqlenditextv.pdf).
    The TSR prohibits the collection of advance fees by purveyors of 
credit repair services, money recovery services, and guaranteed 
loans or other extensions of credit even though the Rule also bans 
deceptive claims and requires disclosures in marketing those 
products and services. See TSR, 16 CFR 310.1.
    \307\ NAAG (Oct. 23, 2009) at 10.
---------------------------------------------------------------------------

g. Point 7: State Regulation Is Preferable to Federal Regulation
    Several commenters discussed whether the Commission should forgo 
federal regulation and leave regulation of the debt relief industry to 
state governments. USOBA argued that the Commission should not impose 
an advance fee ban because it would usurp state regulatory prerogatives 
and prevent states from experimenting with diverse approaches to fee 
regulation.\308\ On the other hand, several commenters asserted that 
FTC regulation was preferable to state regulation because (1) the FTC, 
with its regulatory expertise regarding advertising and telemarketing 
claims, is in a better position than state regulators to regulate debt 
relief firms, especially in that such marketing frequently crosses 
state lines;\309\ (2) state law enforcement activity is uneven;\310\ 
and (3) a state that finds a law violation can only protect and provide 
restitution to that state's residents, unless the company happens to 
reside within the enforcing state.\311\
---------------------------------------------------------------------------

    \308\ USOBA (Oct. 26, 2009) at 36; see also Weinstein (Oct. 26, 
2009) at 12 (see attached Weinstein paper at 11) (state regulation 
``is a better approach because it preserves the states' traditional 
prerogatives of overseeing the provision of financial services while 
establishing a flexible regulatory structure for an evolving 
industry'').
    \309\ ULC at 4.
    \310\ SOLS at 2.
    \311\ SBLS at 9-10.
---------------------------------------------------------------------------

    The Commission believes that state law enforcement agencies play a 
valuable role in enforcing state laws against deceptive or abusive debt 
relief providers. A number of states have enacted laws or regulations 
restricting industry members in various ways, including setting maximum 
fees and, in some cases, even banning certain debt relief services. The 
Commission agrees with the commenters who noted the advantages of a 
federal standard that is enforceable both by the FTC and the states, in 
particular the ability to obtain nationwide injunctive relief and 
consumer redress.\312\
---------------------------------------------------------------------------

    \312\ Where, as here, Congress has not totally foreclosed state 
regulation, a state statute is preempted if it conflicts with a 
federal statute. Ray v. Atl. Richfield Co., 435 U.S. 151, 158 
(1978). State laws are preempted only to the extent there is a 
conflict - compliance with both federal and state regulations is 
impossible or the state law is an obstacle to effectuating the 
purposes and objectives of Congress. Id. The Commission has 
emphasized that state laws can impose additional requirements as 
long as they do not directly conflict with the TSR. TSR Final Rule, 
60 FR at 43862-63; 16 CFR 310.7(b). State laws regulating debt 
relief services that contain fee caps permit, rather than mandate, 
that fees for debt relief services be collected before the promised 
services are provided. See supra note 86. As a result, there is no 
conflict with the Rule and no conflict preemption. Therefore, 
providers may not charge initial or monthly fees in advance of 
providing the services, even if state laws specifically authorize 
such fees.

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[[Page 48481]]

h. Point 8: The TSR Is Not the Appropriate Vehicle for Regulating Debt 
Relief Services
    Some commenters argued that debt relief services should not be 
regulated through the TSR. One commenter stated that amending the TSR 
is not warranted ``merely because the industry uses telephones in its 
business.''\313\ It also stated that the FTC had brought all of its 
enforcement actions against debt relief companies under Section 5 of 
the FTC Act and, thus, that any rules should be promulgated under that 
section as well.\314\ This statement is incorrect. The Commission and 
other law enforcement agencies have investigated and charged a number 
of debt relief providers with violations of the Telemarketing Act and 
the TSR.\315\
---------------------------------------------------------------------------

    \313\ TASC (Oct. 26, 2009) at 3.
    \314\ Id. at 4. The FTC has the general authority to promulgate 
rules addressing unfair or deceptive practices under Section 18 of 
the FTC Act, 15 U.S.C. 57a. The Commission also enacts rules 
pursuant to specific Congressional mandates, as it did with the TSR.
    \315\ See FTC Case List, supra note 27. While the Commission has 
sued credit counselors and debt negotiators under the Telemarketing 
Act and the TSR, it has not specifically brought such actions 
against debt settlement providers. Nevertheless, some state law 
enforcement agencies have done so. See, e.g., Press Release, Florida 
Attorney General, Attorney General Announces Initiative to Clean Up 
Florida's Debt Relief Industry (Oct. 15, 2008), available at (http://myfloridalegal.com/newsrel.nsf/newsreleases/BD3AB29E6DDAF150852574E3004DFACD) (subpoenas served by Florida on 
debt settlement firms as part of a sweep to assess violations, among 
others, of Florida laws regulating telephone solicitations, 
telemarketing, credit counseling organizations, and credit service 
organizations); In re PDM Int'l (Assurance of Voluntary Compliance 
filed May 29, 2008) (case brought by the West Virginia Attorney 
General alleging, among other things, that defendant engaged in 
telemarketing sales without a business license or surety bond).
---------------------------------------------------------------------------

    Two commenters recommended that the FTC expand the scope of its 
proposed regulations to cover Internet and face-to-face 
transactions.\316\ A third commenter questioned whether issuing these 
rules as part of the TSR might encourage debt relief providers to 
switch to an entirely online business model.\317\
---------------------------------------------------------------------------

    \316\ ULC at 6; Orion (Oct. 1, 2009) at 1; see also GP (Oct. 22, 
2009) at 2.
    \317\ Loeb (Mallow), Tr. at 155-56 (acknowledging that he had 
not personally seen debt relief companies operating solely online, 
but some clients had told him that they were aware of companies 
conducting most, if not all, of their marketing online).
---------------------------------------------------------------------------

    The Commission has determined that regulation of the deceptive and 
abusive practices of debt relief providers can be accomplished 
appropriately through amendments to the TSR. The record shows that debt 
relief companies primarily sell their services through national 
telemarketing campaigns as defined in the TSR.\318\ Currently, 
prevalent forms of advertising (television, radio, Internet, and direct 
mail) instruct consumers to call a toll-free number for more 
information.\319\ Debt relief service providers then utilize 
telemarketing to conduct the full sales pitch and obtain consumers' 
consent to purchase their services.\320\ Thus, the Commission concludes 
that the abusive and deceptive practices in the debt relief services 
industry should be addressed through amendments to the TSR.
---------------------------------------------------------------------------

    \318\ CFA (Grant), Tr. at 157; NFCC (Binzel), Tr. at 157. 
Similarly, other industries regulated by the TSR, such as credit 
repair services, may market their services through other media in 
some cases, although the predominant business model at present 
relies on telemarketing.
    \319\ Supra note 52. As a result of the Final Rule in this 
proceeding, these calls are inbound calls covered by the TSR.
    \320\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM 
(D. Colo. filed Mar. 19, 2007)(Complaint, ]] 16-19); FTC Case List, 
supra note 27; CU (Hillebrand), Tr. at 183 (``We heard the TASC 
folks say four phone calls over two weeks to sign up the client, we 
heard the Freedom Debt folks in the prior panel say eight phone 
calls. Phone conversations, signing up the client, telemarketing and 
telephone communications are a big piece of how consumers get signed 
up.'').
    In addition, USOBA asserted that the Commission does not have 
authority to regulate fees through the Telemarketing Act, stating 
that the Telemarketing Act focuses on communications that are 
harmful because of their content, and those issues are distinct from 
concerns relating to payment or other parts of the commercial 
relationship. USOBA (Oct. 26, 2009) at 40-41. The Commission 
believes, however, that regulating the timing of fee collection 
constitutes a reasonable exercise of authority under the 
Telemarketing Act under these facts. See 16 CFR 310.4(a); Nat'l 
Credit Mgmt. Group, 21 F. Supp. at 457 (upholding advance fee ban on 
credit repair services).
---------------------------------------------------------------------------

i. Point 9: Very Few Debt Relief Companies Are Engaged in Abuse, and 
the Services Are Not ``Fundamentally Bogus''
    Industry representatives have argued that the Commission should not 
impose an advance fee ban because only a few ``bad actors'' have 
engaged in deceptive or abusive practices.\321\ To the contrary, the 
record in this proceeding - including the Commission's law enforcement 
experience,\322\ actions by state law enforcement agencies,\323\ 
consumer complaints,\324\ the public comments, and the GAO study - 
demonstrates that, in fact, debt relief providers commonly fail to 
produce the results they promise, causing substantial consumer 
injury.\325\ Indeed, the industry's own data show that most consumers 
who enroll in debt relief services covered by the Final Rule exit the 
program in worse financial condition than when they started.\326\
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    \321\ See, e.g., TASC (Apr. 30, 2010) at 2 (arguing that a 
possible advance fee ban would be ``predicated upon the experience, 
as described in the NPR, of a very few `bad actors' and a 
disproportionately small number of injured consumers.''); USOBA 
(Oct. 26, 2009) at 27; DRS (Sept. 29, 2009) at 1; DS at 12; Franklin 
at 23.
    \322\ See FTC Case List, supra note 27.
    \323\ See State Case List, supra note 27.
    \324\ See infra Section III.C.3.a.
    \325\ The GAO identified allegations of fraud, deception, and 
other questionable activities involving hundreds of thousands of 
consumers. GAO Testimony, supra note 50, at 21. Moreover, GAO's own 
survey of 20 debt settlement firms found that 17 of them were making 
highly dubious success rate and other claims. Id. at 9-21.
    \326\ See supra Sections III.C.1. & III.C.2.a.(1)-(2).
---------------------------------------------------------------------------

    Further, some commenters asserted that the Commission should not 
adopt the ban on advance fees because the services are not 
``fundamentally bogus,'' the phrase that the Commission used when 
promulgating the advance fee bans for credit repair services, recovery 
services, and offers of certain loans.\327\ Nothing in the Commission's 
statements suggests, however, that advance fee bans are legally 
permissible only when the services at issue are ``fundamentally 
bogus.'' The Telemarketing Act does not require that the Commission 
meet any standard other than ``abusive,'' and the Commission uses the 
unfairness test to determine which practices are abusive.\328\ Here, 
the Commission has determined that the practice of charging advance 
fees for debt relief services satisfies the unfairness standard based 
on the rulemaking record.
---------------------------------------------------------------------------

    \327\ CSA at 12; TASC (Oct. 26, 2009) at 16; Smith, Tr. at 263; 
see TSR Amended Rule, 68 FR at 4614.
    \328\ TSR Amended Rule, 68 FR at 4614.
---------------------------------------------------------------------------

j. Point 10: An Advance Fee Ban Will Not Establish the Proper 
Incentives for Debt Settlement Companies
    Certain commenters argued that an advance fee ban will only serve 
to motivate debt settlement providers to enroll as many consumers as 
possible, regardless of their suitability for a debt settlement 
program, in the hope that at least some will complete the program and 
pay the fees.\329\ There is no

[[Page 48482]]

evidence in the record to support this assertion. Given that enrolling 
and servicing consumers entails at least some costs, it is more likely 
that, under an advance fee ban, providers will be more discriminating 
in enrolling those consumers most likely to be successful and thus 
generate fees.\330\ This would represent an improvement over the 
predominant fee structure in place currently - in which providers get 
paid no matter how, or if, they perform - which provides little 
incentive for providers to expend the resources necessary to obtain 
settlements quickly or effectively.
---------------------------------------------------------------------------

    \329\ Summary of Communications (June 16, 2010) at 2.
    \330\ See ACCORD (Oct. 9, 2009) at 3 (``The debt settlement 
company will bear the risk that the consumer will not see the 
program through to the settlement of her debts.''); NAAG (Oct. 23, 
2009) at 9.
---------------------------------------------------------------------------

    Debt settlement industry representatives also stated that an 
advance fee ban would encourage employees of debt settlement companies, 
when negotiating with creditors or debt collectors, to accept the first 
offer extended, regardless of whether it is the best possible offer for 
the consumer.\331\ They further argued that banning advance fees would 
result in a power shift to the creditors and debt collectors, who would 
be able to offer less favorable settlements on the assumption that the 
debt settlement provider would take any settlement in order to get 
paid.\332\ Again, there is no evidence in the record to substantiate 
these predictions. Moreover, it is based on the unsupported assumption 
that it is the provider, rather than the consumer, who makes the 
decision on whether a particular settlement offer is acceptable and 
affordable. Creditors and debt collectors should still have substantial 
incentives to settle debts at amounts that consumers can afford.
---------------------------------------------------------------------------

    \331\ Summary of Communications (June 16, 2010) at 2.
    \332\ Id.
---------------------------------------------------------------------------

3. The Commission's Conclusion that Advance Fees for Debt Relief Meet 
the Test for Unfairness
    The Commission uses the unfairness test set forth in Section 5(n) 
of the FTC Act to determine whether an act or practice is ``abusive'' 
under the Telemarketing Act.\333\ An act or practice is unfair if: (1) 
it causes or is likely\334\ to cause substantial injury to consumers, 
(2) the injury is not outweighed by any countervailing benefits to 
consumers or competition, and (3) the injury is not reasonably 
avoidable by consumers. Based on the record in this proceeding, the 
Commission concludes that the collection of advance fees by debt relief 
services meets the unfairness test and, thus, is an abusive practice.
---------------------------------------------------------------------------

    \333\ TSR Amended Rule, 68 FR at 4614.
    \334\ Thus, the Commission need not demonstrate actual consumer 
injury, but only the likelihood of substantial injury. In this 
proceeding, however, there is sufficient evidence that the practice 
of collecting advance fees causes actual injury.
---------------------------------------------------------------------------

a. Advance Fees Charged by Debt Relief Services Cause or Are Likely to 
Cause Substantial Injury
    The record shows that collecting fees for debt relief services 
prior to delivering services causes or is likely to cause substantial 
injury to consumers. Consumers in the midst of financial distress 
suffer monetary harm - often in the hundreds or thousands of dollars - 
when, following sales pitches frequently characterized by high pressure 
and deception, they use their scarce funds to pay in advance for 
promised results that, in most cases, never materialize.\335\ Further, 
in the case of debt settlement as currently structured, providers often 
instruct or advise consumers to stop paying their creditors and begin 
paying the provider's fees instead.\336\ These consumers not only 
suffer direct monetary injury from the late charges and interest that 
accrue when creditors are not paid, but they also suffer lasting harm 
to their creditworthiness such that future efforts to obtain credit, 
insurance, or other benefits will become more difficult and more 
expensive.
---------------------------------------------------------------------------

    \335\ Supra Section III.C.2.a. 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; thus, a consumer with $20,000 in debt would pay between 
$2,800 and $3,600 for debt settlement services. Consumers 
complaining to the FTC have reported paying fees in very substantial 
amounts - often $2,500 to $11,000, depending on the company, the 
amount of the debt, and the length of time the consumer participated 
in the program.
    \336\ Supra note 73.
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    The Commission received many comments on the unfairness analysis in 
the NPRM. These comments are discussed in the following sections as 
they relate to consumer injury.
(1) Consumers are injured because they pay for services that are 
promised but not provided
    Many commenters supported the injury analysis in the NPRM, 
contending that most consumers who purchase debt relief services pay in 
advance for promised benefits they never receive.\337\ The Commission 
also has considered federal and state law enforcement actions, consumer 
complaints received by government and private organizations, and 
certain statewide data reported to the Colorado Attorney General. The 
evidence shows that the number of injured consumers is substantial. 
First, the FTC's cases have helped over 475,000 consumers who have been 
harmed by deceptive and abusive practices by debt relief 
companies.\338\ Moreover, with respect to debt settlement companies 
alone, federal and state law enforcement agencies have brought actions 
challenging the practices of dozens of companies with, in the 
aggregate, hundreds of thousands of customers.\339\ Twenty-nine states 
have brought at least 236 enforcement actions against debt relief 
companies.\340\ These cases consistently have alleged that the 
defendants employed deception in order to enroll consumers, and then 
did not produce the results they promised.\341\ As an example, the New 
York Attorney General filed cases against two debt settlement companies 
alleging that these entities had provided the represented services to 
only one percent and one-third of one percent (0.33%), respectively, of 
their customers.\342\ Undoubtedly, many more consumers have been 
injured by providers that have not been the subject of formal law 
enforcement action. Thus, the Commission has determined that debt 
relief companies engage in widespread deception, frequently fail to 
produce the results they promise, and have caused injury to a large 
number of consumers.
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    \337\ Supra Section III.C.1. (citing NAAG (Oct. 23, 2009) at 2-
5; MN AG at 1; CFA at 4; AFSA at 4).
    \338\ Debt Settlement: Fraudulent, Abusive, and Deceptive 
Practices Pose Risk to Consumers: Hearing on The Debt Settlement 
Industry: The Consumer's Experience Before the Sen. Comm. On 
Commerce, Science, & Transportation, 111\th\ Cong. (2010) (testimony 
of the Federal Trade Commission) at 2.
    \339\ GAO Testimony, supra note 50, at 21 (tallying customers of 
debt settlement companies subject to enforcement actions, not all 
types of debt relief companies); see FTC and State Case Lists, supra 
note 27; supra Section III.C.1.
    \340\ Supra Section III.C.1.
    \341\ NAAG (Oct. 23, 2009) at 2-5.
    \342\ Press Release, New York Attorney General, Attorney General 
Cuomo Sues Debt Settlement Companies for Deceiving and Harming 
Consumers (May 20, 2009), available at (http://www.oag.state.ny.us/media_center/2009/may/may19b_09.html). Similarly, in one FTC case, 
the Commission alleged that only 1.4% of consumers enrolled in the 
defendants' debt settlement plan obtained the results defendants 
promised. See FTC v. Nat'l Consumer Council, Inc., No. SACV04-0474 
CJC(JWJX) (C.D. Cal. filed Apr. 23, 2004) (calculating completion 
rates over a 40-month period without controlling for the time of 
enrollment).
---------------------------------------------------------------------------

    Second, a significant and growing number of consumers have filed 
complaints about debt relief companies. Complaints to the FTC about 
debt relief increased approximately 18% from 2008 to 2009, rising from 
1,073 to 1,263.\343\

[[Page 48483]]

NAAG reported that the number of complaints the states have received 
against debt relief companies, particularly debt settlement companies, 
has been rising and has more than doubled since 2007.\344\ Moreover, 
consumers have filed numerous complaints with the Better Business 
Bureaus (``BBB'') about debt settlement and debt negotiation 
companies.\345\ The BBB categorizes these companies as ``Inherently 
Problematic Businesses,'' indicating that it has fundamental concerns 
about the industry as a whole.\346\ In March 2009, the BBB reported 
that complaints against debt consolidation and negotiation companies 
had risen by almost 19% in 2008 over the previous year.\347\ Based on 
the complaints it had received, the BBB concluded that debt settlement 
and negotiation companies often charge substantial advance fees, make 
promises that cannot be fulfilled, mislead consumers about the impact 
of the services on their credit scores, and exaggerate the negative 
effects of bankruptcy to make their own services seem more 
appealing.\348\ The BBB also found that some customers of debt 
negotiation and debt settlement providers stopped communicating with 
their creditors only to find that the providers, even after accepting 
payment, never contacted their creditors.\349\
---------------------------------------------------------------------------

    \343\ Commission staff used the following method to analyze debt 
relief complaints in the Commission's Consumer Sentinel database. 
FTC staff identified all complaints coded under ``Debt Management/
Credit Counseling'' that were received directly by the Commission 
and limited those search results to only those complaints that 
included specified key words in the complaint comments field. Staff 
also excluded complaints with certain keywords that produced false 
hits, such as ``credit repair'' and ``foreclosure,'' as well as 
those that were coded as Do Not Call registry and Identity Theft 
complaints.
    In preparing the NPRM, FTC staff utilized the same method, 
reviewing a computer-generated sample of 100 debt relief complaints 
received between April 1, 2008, and March 31, 2009, that met the 
search criteria above. TSR Proposed Rule, 74 FR at 42001 n.166. In 
its comment, AADMO stated that the ``evidence in the record'' upon 
which the FTC based its proposed rule was flawed. Via a Freedom Of 
Information Act request, AADMO obtained all complaints coded under 
``Debt Management/Credit Counseling'' for January 1, 2008, through 
August 2009, and pointed out that many of the complaints in the 
Consumer Sentinel database were incorrectly designated as debt 
relief. AADMO at 2; see also CSA at 18. FTC staff did not merely 
rely on the Consumer Sentinel designations to determine the number 
and substance of relevant complaints, but substantially refined its 
analysis as described.
    \344\ NAAG (Oct. 23, 2009) at 4; NAAG (July 6, 2010) at 2 (``We 
previously commented that the number of consumer complaints the 
States have received against debt relief companies, particularly 
debt settlement companies, have consistently risen. This trend has 
continued.'').
    \345\ According to data provided to the GAO, the BBB has 
received thousands of complaints about debt settlement companies in 
recent years, with the number increasing from eight in 2004 to 
nearly 1,800 in 2009. GAO Testimony, supra note 50, at 12; see also 
Better Business Bureau, BBB on Differences Between Debt 
Consolidation, Debt Negotiation and Debt Elimination Plans, supra 
note 62; BBB at Attachment A. The BBB defines debt negotiation and 
debt settlement companies as those claiming to negotiate with 
creditors to lower the total amount of a consumer's debt in exchange 
for an upfront fee.
    \346\ NAAG (Oct. 23, 2009) at 4 n.5. According to information 
provided to the GAO, the BBB's rating system incorporates 
information known to the BBB and its experience with the industry 
under assessment. Companies can apply to be removed from the 
category by demonstrating they deliver what they promise, make 
certain disclosures to consumers, have adequate procedures for 
screening out customers who are not appropriate candidates for debt 
settlement, and that a majority of its customers successfully 
complete its program. No debt settlement firm had successfully 
demonstrated that it met these criteria as of March 2010. GAO 
Testimony, supra note 50, at 12-13; see also Candice Choi, Beware: 
Debt-Settlement Firms Often Promise More Than They Can Deliver, The 
Boston Globe, Nov. 6, 2009, available at (http://www.boston.com/business/personalfinance/articles/2009/11/06/beware_debt_settlement_firms_often_promise_more_than_they_can_deliver/
).
    \347\ Better Business Bureau, BBB on Differences Between Debt 
Consolidation, Debt Negotiation and Debt Elimination Plans, supra 
note 62.
    \348\ Better Business Bureau, Debt Settlement and Debt 
Negotiation: Buyer Beware, It's a Jungle Out There, May 21, 2009, 
available at (http://louisville.bbb.org/article/debt-settlement-and-debt-negotiation-buyer-beware-its-a-jungle-out-there-10569); see 
also Orion (Jan. 12, 2010) at 1-2 (acknowledging that, after contact 
from the BBB, it sought to eliminate systemic sales issues such as 
(1) selling a ``Client Service Agreement'' as an application; (2) 
guaranteeing or over-promising the product; (3) failing to fully 
disclose service fees; and (4) discussing only positive effects on 
consumer credit scores).
    \349\ Better Business Bureau, BBB on Differences Between Debt 
Consolidation, Debt Negotiation and Debt Elimination Plans, supra 
note 62.
---------------------------------------------------------------------------

    The Commission recognizes that consumer complaints do not 
constitute a statistically representative sample of the population of 
purchasers of debt relief services. At the same time, such complaints 
usually are the ``tip of the iceberg'' in terms of the actual levels of 
consumer dissatisfaction.\350\ In any event, the conclusion that 
collecting advance fees causes substantial consumer injury is not based 
on this body of evidence alone. The Commission has decades of 
experience in drawing inferences from the number and types of consumer 
complaints it receives. Complaint trends often are used for purposes of 
focusing law enforcement resources and identifying targets for 
prosecution. In this matter, the sheer number and consistency of the 
complaints received by the Commission and others, in the context of the 
Commission's overall Consumer Sentinel database, raise, at minimum, a 
strong inference of widespread consumer protection problems in the debt 
relief industry, including frequent misrepresentations and, ultimately, 
nonperformance, and that the collection of advance fees causes 
substantial injury to large numbers of consumers. Therefore, the 
Commission relies on the consumer complaint data as corroborative of 
the other types of evidence in the record.
---------------------------------------------------------------------------

    \350\ See, e.g., Dennis E. Garrett, The Frequency and 
Distribution of Better Business Bureau Complaints: An Analysis Based 
on Exchange Transactions, 17 Journal of Consumer Satisfaction, 
Dissatisfaction and Complaining Behavior 88, 90 (2004) (noting that 
only a small percentage of dissatisfied consumers complain to third-
party entities or agencies); Jeanne Hogarth et al., Problems with 
Credit Cards: An Exploration of Consumer Complaining Behaviors, 14 
Journal of Consumer Satisfaction, Dissatisfaction and Complaining 
Behavior 88, 98 (2001) (finding that only 7% of consumers having 
problems with their credit card company complained to third party 
entities or agencies).
---------------------------------------------------------------------------

    Finally, as part of its injury analysis, the Commission considered 
the evidence regarding consumer outcomes in the record. Debt 
negotiation companies, which often operate through robocalls offering 
purported interest rate reductions, did not provide any data at all. 
Consumers who accept these offers are confronted with advance fees of 
hundreds or thousands of dollars and typically do not receive any 
services beyond placement of a single call to a creditor or providing a 
document instructing the consumer to accelerate their debt 
payments.\351\
---------------------------------------------------------------------------

    \351\ NAAG (Oct. 23, 2009) at 3; CFA at 4, 8-10; SBLS at 4; QLS 
at 2; SOLS at 2; MN AG at 2 (``many debt relief services companies 
have no intention of delivering the services that they promise.''); 
see FTC and State Case Lists, supra note 27.
---------------------------------------------------------------------------

    Similarly, no member of the for-profit credit counseling industry 
submitted any kind of comprehensive data on the extent to which members 
of their industry provide the promised counseling services, or the 
extent to which they endeavor to screen out consumers for whom a DMP is 
unsuitable.\352\ In fact, statewide data from Colorado suggest that 
most consumers who start DMPs do not finish them. In its comment, the 
Colorado Attorney General submitted data collected directly from debt 
relief providers, as required by statute. Of Colorado consumers who had 
been on DMPs for two to three years, less than nine percent had 
completed them.\353\ The data do not distinguish between for-profit and 
nonprofit credit counseling providers, however.
---------------------------------------------------------------------------

    \352\ Supra note 195 (describing data from one for-profit credit 
counseling company about the number of consumers who called for 
counseling assistance and the number who enrolled in DMPs).
    \353\ Of the remaining consumers, 43.87% were categorized as 
still active, and 47.78% had dropped out of the program. CO AG at 4. 
The average program length was 40 months. Id.
---------------------------------------------------------------------------

    With respect to debt settlement, as described at length above, the 
data that industry members provided showed that

[[Page 48484]]

most consumers drop out of these programs before receiving benefits 
commensurate with the fees they pay at the outset.\354\ For example, 
the industry-sponsored TASC survey concluded that over 65% of consumers 
dropped out of the respondents' programs within the first three 
years.\355\ Based on the data collected by the Colorado Attorney 
General, of those consumers who had been in a debt settlement program 
for two to three years, barely 8% had completed their programs.\356\
---------------------------------------------------------------------------

    \354\ Supra Section III.C.2.a.
    \355\ Id.; infra III.C.2.a. The evidence shows that consumers 
generally dropped out before receiving savings commensurate with the 
fees, if they received any savings at all.
    \356\ Of the remaining consumers, 39% were categorized as still 
active, and 53% had dropped out of the program. CO AG at 5. The 
average program length was 32.3 months. Id. Debt settlement plans 
are typically 36 months in length. DSA/ADE at 8.
---------------------------------------------------------------------------

    Thus, consumers have suffered substantial injury by paying in 
advance for debt relief services that were promised but not provided.
(2) The amount and timing of front-loaded fees in the debt relief 
context cause significant injury
    The record demonstrates that collecting fees in advance of 
providing the represented services is the most common business model in 
the debt negotiation, for-profit credit counseling, and debt settlement 
industries.\357\ The record, including the Commission's law enforcement 
experience, further demonstrates that advance fees have been an 
integral part of the widespread deception and abuse in the debt 
settlement industry. In the context of debt relief transactions, 
advance fees create incentives for providers that fundamentally are at 
odds with the interests of consumers: (1) to enroll as many applicants 
as possible, without adequate regard to their suitability, (2) to 
deceive consumers about fundamental aspects of the program in order to 
entice them to enroll, and (3) to direct more resources to promotion 
and marketing rather than settling debts.\358\
---------------------------------------------------------------------------

    \357\ Supra Section I.C.; CFA at 9; CRN at 2; GAO Testimony, 
supra note 50, at 7 (discussing debt settlement); see also, e.g., 
FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. Wash. filed Mar. 
6, 2006) (alleging that consumers paid an advance fee of between 
$329 and $629 before any debt negotiation was attempted); FTC v. 
Integrated Credit Solutions, Inc., No. 06-806-SCB-TGW(M.D. Fla. 
filed May 2, 2006) (alleging that defendants charged between $99 and 
$499 as an initial fee for credit counseling services that were not, 
in fact, provided).
    \358\ See CU (July 1, 2010) at 4.
---------------------------------------------------------------------------

    Indeed, the advance fee requirement impedes the ultimate purpose of 
the service - helping consumers resolve their debts and restore their 
financial health.\359\ Debt settlement providers, for example, 
represent the settlement process as a way to pay off each unsecured 
debt with a one-time, lump sum payment as the consumer accumulates 
sufficient money to fund the settlement. Financially distressed 
consumers generally will find it difficult, if not impossible, to pay 
large advance fees while accumulating the necessary funds for a 
settlement and enduring extended creditor collection efforts.\360\ The 
practice of taking substantial advance fees makes it far more difficult 
for consumers to save the money necessary for settlements.\361\ In many 
cases, providers misrepresent or fail to disclose material aspects of 
their programs, causing consumers to make payments to the providers for 
several months, not realizing that most of the payments go towards 
fees, rather than settlement offers.\362\ Moreover, not paying 
creditors leads to late fees, penalties, impaired credit ratings, 
lawsuits and other negative consequences.\363\ Moreover, creditors may 
garnish consumers' wages, forcing consumers to abandon their debt 
relief programs.\364\ Charging advance fees thus impedes the goal of 
debt relief and contributes to consumers having to drop out of programs 
and forfeit the fees already paid.\365\
---------------------------------------------------------------------------

    \359\ See ULC at 5 (``The UDMSA drafting committee likewise 
recognized that debt settlement firms often charge excessive up-
front fees, to the detriment of consumers and to the viability of 
their efforts to avoid bankruptcy.'').
    \360\ SBLS at 2-4; CFA at 9; CareOne at 4.
    \361\ USDR (Oct. 20, 2009) at 5 (``The proposed Rule change 
would have the effect of allowing the consumer to save and settle 
debt faster since the predatory upfront fees charged by settlement 
companies would not be restricting of or burdensome to settlement 
activity.''); USDR (Johnson), Tr. at 188; see also CFA at 9.
    \362\ Summary of Communications (June 30, 2010) (teleconference 
with state attorneys general representatives); QLS at 4; see also, 
e.g., FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4) (D. 
Mass. filed Nov. 2, 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 in the thousands of dollars); FTC v. Debt-Set, No. 
1:07-cv-00558-RPM (D. Colo. filed Mar. 19, 2007) (alleging that, in 
numerous instances, defendants represented that there would be no 
upfront fees or costs for their debt settlement program, when in 
fact the defendants required consumers to pay an upfront fee of 
approximately 8% of the consumer's total unsecured debt); see also, 
e.g., Illinois v. SDS West Corp., No. 09CH368 (Cir. Ct. of 7th Jud. 
Dist., Sangamon Cty. filed May 4, 2009); Illinois v. Debt Relief 
USA, Inc., No. 09CH367 (Cir. Ct. of 7th Jud. Dist., Sangamon Cty. 
filed May 4, 2009); North Carolina v. Commercial Credit Counseling 
Servs., Inc., No. 06CV014762 (Sup. Ct. Wake Cty. filed Oct. 9, 
2006); North Carolina v. Cambridge Credit Counseling Corp., No. 
04CVS005155 (Sup. Ct. Wake Cty. filed Apr. 15, 2004); North Carolina 
v. Knight Credit Servs., Inc., No. 04CVS8345 (Sup. Ct. Cumberland 
Cty. filed Feb. 17, 2004).
    \363\ NAAG (Oct. 23, 2009) at 3; CFA at 4-5; QLS at 3; SBLS at 
3; SOLS at 1; see also USDR (Johnson), Tr. at 188. Notably, a 
banking trade group commented that an average of 63% of accounts 
known to be part of a debt settlement program ultimately are charged 
off, likely indicating that the consumer's credit score has 
suffered. See supra note 179. The comparable figure for accounts in 
a DMP was 16%. ABA at 4.
    \364\ SBLS at 2-4; CFA at 4; NFCC at 4, 6.
    \365\ QLS at 3; SBLS at 3.
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    Commenters also stated that in debt settlement programs, 
significant numbers of consumers drop out once they realize, contrary 
to many telemarketers' representations, that their initial payments are 
going to the provider's fees, not to pay off their debts.\366\ Once 
they drop out, these consumers often end up with higher debt balances 
than they had before, among other detrimental results, thereby 
suffering substantial injury.\367\ An organization of nonprofit credit 
counselors reported that, in most cases, after dropping out of a debt 
settlement service, the consumer's financial position has been so badly 
damaged that nonprofit CCAs are unable to provide assistance, and often 
bankruptcy is the consumer's only option.\368\ Similarly, legal 
services lawyers reported that low-income consumers often are more in 
debt with their original creditors when they leave the debt relief 
program than before they enrolled.\369\ In sum, debt settlement is a 
high-risk financial product that requires consumers simultaneously to 
pay significant fees, save hundreds or thousands of dollars for 
potential settlements, and meet other obligations such as mortgage 
payments. Failure leads to grave consequences - increased debt, 
impaired credit ratings, and lawsuits that result in judgments and wage 
garnishments.\370\
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    \366\ NAAG (Oct. 23, 2009) at 7; SOLS at 2.
    \367\ See, e.g., FTC v. Edge Solutions, Inc., No. CV-07-4087 
(E.D.N.Y. filed Sept. 28, 2007); see also FTC v. Debt-Set, Inc., No. 
07-558, Mem. Supp. Mot. T.R.O. at 16-19 (D. Colo. Mar. 20, 2007); 
FTC v. Express Consolidation, No. 06-cv-61851-WJZ, Pls. Mem. Law 
Supp. T.R.O. at 17 (S.D. Fla. Dec. 11, 2006); FTC v. Better Budget 
Fin. Servs., Inc., No. 04-12326 (WG4), Pls. Mem. Law Supp. T.R.O. at 
8-9 (D. Mass. filed Nov. 2, 2004); see also State Case List, supra 
note 27.
    \368\ AICCCA at 3.
    \369\ See, e.g., SOLS at 1.
    \370\ NAAG (Oct. 23, 2009) at 8 (``[C]onsumers may be led to 
believe debt settlement is a relatively risk free process with 
little or no negative consequences, when in fact consumers risk 
growing debt, deteriorating credit scores, collection actions, and 
lawsuits that may lead to judgments and wage garnishments.''); see 
NC AG Testimony, supra note 25, at 4 (``Three months of nonpayment 
and non-communication lead not only to increased debt, but also 
increased collection efforts and legal action.''); Haas Testimony, 
supra note 73, at 4 (``We joined the program on March 10, 2008. In 6 
months time we were about $13K behind from where we started.'').

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[[Page 48485]]

    Consumers drop out of debt relief programs for many reasons, but 
the record shows that providers' practice of charging substantial 
advance fees is a significant cause.\371\ The injury that results from 
consumers paying in advance for promised services that frequently do 
not materialize is substantial.
---------------------------------------------------------------------------

    \371\ Supra note 213 and accompanying text; SBLS at 2-4; CFA at 
9; CareOne at 4; QLS at 3.
---------------------------------------------------------------------------

(3) The context in which debt relief services are offered has 
contributed to the substantial injury
    The Commission concludes that several aspects of debt relief 
transactions have contributed to the substantial injury caused by 
advance fees in the debt relief context. First, debt relief services 
are directed to financially distressed consumers, who are particularly 
vulnerable to the providers' claims.\372\ The Commission has long 
recognized that sellers may exercise undue influence over highly 
susceptible classes of purchasers.\373\ For this reason, the TSR 
prohibits advance fees for credit repair services and certain loan 
offers, services that also target financially distressed 
consumers.\374\
---------------------------------------------------------------------------

    \372\ CFA at 10.
    \373\ Unfairness Policy Statement, supra note 162, at 1074.
    \374\ See 16 CFR 310.4(a).
---------------------------------------------------------------------------

    Second, debt relief services, as they are currently marketed, 
frequently take place in the context of high pressure sales tactics, 
contracts of adhesion, and deception. For example, many Commission 
cases have alleged that telemarketers of debt relief services have 
exhorted consumers to fill out the enrollment documents and return the 
papers as quickly as possible.\375\ Notably, these enrollment documents 
typically include a power of attorney form, which providers use to cut 
off communication between the consumers and their creditors or debt 
collectors.
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    \375\ FTC v. Debt-Set, Inc., No. 1:07-CV-00558-RPM (D. Colo. 
filed Mar. 19, 2007); FTC v. Better Budget Fin. Servs., Inc., No. 
04-12326 (WG4) (D. Mass. filed Nov. 2, 2004) (complaint alleging 
that ``[d]uring sales conversation, consumers are instructed to 
immediately stop making any payments to their unsecured 
creditors''); FTC v. Edge Solutions, Inc., No. CV-07-4087, Mem. 
Supp. Mot. T.R.O., Exs. PX-2 - PX-4 (E.D.N.Y. filed Oct. 1, 2007) 
(telemarketer pressuring FTC investigators to quickly sign and 
return written contracts - e.g., within 24 to 48 hours - and 
misrepresenting aspects of the debt relief program); FTC v. Debt 
Solutions, Inc., No. 06-0298 JLR, App. T.R.O. at 9-10 (W.D. Wash. 
filed Mar. 6, 2006) (in a debt negotiation case, alleging that the 
defendants' telemarketers ``aggressively push consumers to agree to 
scripted language, spoken very quickly, that either contradicts or 
omits material representations . . . made in their sales 
pitches.''); FTC v. Group One Networks, Inc., No. 8:09-cv-352-T-26-
MAP, Mem. Supp. Mot. T.R.O. at 9-10 (M.D. Fla. filed Feb. 27, 2009) 
(in a debt negotiation case, alleging that, in order to obtain 
consumers' consent to enroll, defendants play consumers a 
``difficult to understand pre-recorded verification [that] contains 
additional information that is not part of defendants' telemarketing 
sales pitch,'' including information on fees).
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    Third, as Congress recognized in enacting the Telemarketing Act, 
telemarketing calls are more susceptible to deception than face-to-face 
transactions because consumers do not have the opportunity to assess 
credibility or visual cues.\376\ Indeed, the record shows that there 
has been a high level of deception in the telemarketing of debt relief 
services. For example, in its investigation, the GAO found numerous 
instances of companies providing fraudulent or deceptive information in 
telemarketing sales calls, such as debt reduction guarantees or 
government affiliation claims.\377\ As described above, the Commission 
has charged 23 debt relief firms with deceptive practices in recent 
years, and the states have charged numerous additional firms with such 
violations.\378\ Thus, the manner in which debt relief services have 
been sold has impeded the free exercise of consumer decisionmaking. The 
Commission historically has viewed such an impediment as one of the 
hallmarks of an unfair practice.\379\
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    \376\ TSR Amended Rule, 68 FR at 4655.
    \377\ GAO Testimony, supra note 50, at 13.
    \378\ See FTC and State Case Lists, supra note 27.
    \379\ Unfairness Policy Statement, supra note 162, at 1074; In 
re Amrep, 102 F.T.C. 1362 (1983), aff'd, 768 F.2d 1171 (10\th\ Cir. 
1985) (``[A] 100% forfeiture clause, appearing in an adhesion 
contract for the sale of land, signed in an atmosphere of high 
pressure sales tactics, unequal bargaining power and deceptive 
misrepresentations, violated Section 5's proscription of unfair 
practices.''); In re Horizon Corp., 97 F.T.C. 464 (1981) (same); In 
re Sw. Sunsites, 105 F.T.C. 7, 340 (1985), aff'd, 785 F.2d 1431 (9th 
Cir. 1986) (``Respondents' practices resulted in substantial 
monetary injury to consumers, because they induced consumers to 
continue paying substantial amounts. . . through a variety of 
continuing misrepresentations.'').
---------------------------------------------------------------------------

    A final factor in the injury calculation with respect to this 
industry is that charging an advance fee requires consumers to bear the 
full risk of the transaction, when the seller is in a better position 
to assume that risk. Consumers often have limited means to evaluate 
whether they are good candidates for debt relief, and therefore, 
consumers rely on the sellers' claims. Providers frequently hold 
themselves out as experts in determining the right course of action for 
the indebted consumer.\380\ Moreover, only the provider knows the 
historic dropout rate for the service, as providers do not disclose 
their actual success rates. Thus, providers are better situated than 
individual consumers to know which consumers are likely to be able to 
complete the programs. The Commission long has held that consumers are 
injured by a system that forces them to bear the full risk and burden 
of sales-related abuses, particularly, as in this context, where the 
seller is in a better position to know and understand the risks.\381\
---------------------------------------------------------------------------

    \380\ See FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo., 
final order Apr. 11, 2008); FTC v. Nat'l Consumer Council, Inc., No. 
ACV04-0474CJC (JWJX) (C.D. Cal., final order Apr. 1, 2005). A debt 
settlement industry association stated that, based on its members' 
experiences, there are certain characteristics that make it more 
likely that a consumer will be able to achieve the benefits offered 
by a debt settlement program. TASC (Apr. 30, 2010) at 3; FDR 
(Linderman), Tr. at 96 (stating his company employs ``25 to 30 
people who do nothing more than analyze the information we receive 
from consumers regarding the appropriateness of the program for 
these consumers'').
    \381\ See Cooling Off Period For Door-to-Door Sales; Trade 
Regulations Rule and Statement of Basis and Purpose, 37 FR 22934, 
22947 (Oct. 26, 1972) (codified at 16 CFR 429); Preservation of 
Consumers' Claims and Defenses, Statement of Basis and Purpose, 40 
FR 53,506, 53,523 (Nov. 18, 1975) (codified at 16 CFR 433) (same); 
In re Orkin Exterminating, 108 F.T.C. at 263, 364 (``By raising the 
fees, Orkin unilaterally shifted the risk of inflation that it had 
assumed under the pre-1975 contracts to its pre-1975 customers.''); 
In re Thompson Medical Co., Inc., 104 F.T.C. 648 (1984) (noting that 
marketers must provide a high level of substantiation to support 
``claim[s] whose truth or falsity would be difficult or impossible 
for consumers to evaluate by themselves'').
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b. The Harm to Consumers Is Not Outweighed by Countervailing Benefits
    The second prong of the unfairness test recognizes that costs and 
benefits attach to most business practices, and it requires the 
Commission to determine whether the harm to consumers is outweighed by 
countervailing benefits to consumers or competition.\382\ In this 
proceeding, no debt negotiator provided any comments or evidence of 
countervailing benefits from advance fees. For-profit credit counselors 
provided only minimal evidence that they provide the promised 
services.\383\

[[Page 48486]]

The bulk of the comments and data submitted relating to the second 
prong of the unfairness test came from the debt settlement industry 
which essentially made two arguments.
---------------------------------------------------------------------------

    \382\ Unfairness Policy Statement, supra note 162, at 1073-74 
(``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 III, The FTC's Use of Unfairness Authority: Its Rise, Fall, 
and Resurrection, available at (http://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'').
    \383\ CareOne was the only for-profit provider that submitted 
data; it stated that: (1) over 700,000 consumers have called the 
company for counseling assistance; (2) over 225,000 customers 
enrolled in a DMP; (3) nearly 700,000 customer service calls have 
been made; (4) over nine million creditor payments were processed; 
(5) nearly $650 million in payments have moved from consumers to 
their creditors; and (6) fewer than 35 Better Business Bureau 
complaints were filed in the previous year on approximately 70,000 
new customers, and all had been successfully resolved. CareOne at 1-
2.
---------------------------------------------------------------------------

    First, members of the debt settlement industry commented that many 
consumers receive substantial benefits from debt settlement programs. 
In fact, as explained in Section III.C.2. above, the record shows that 
most consumers do not obtain a net benefit from debt settlement 
services. In any event, the Final Rule does not ban debt settlement 
services or restrict the amount of debt settlement company fees; it 
only bars collection of advance fees.\384\ There is no empirical 
evidence in the record that paying large advance fees has any benefits 
for consumers.\385\ Given the large percentage of consumers who drop 
out of debt settlement programs - in large part due to having to pay 
advance fees - the Commission concludes that any countervailing 
benefits to consumers that might possibly derive from paying advance 
fees is greatly outweighed by the substantial injury that practice 
causes.\386\
---------------------------------------------------------------------------

    \384\ In any event, as explained in Section III.C.2. above, the 
record shows that, in fact, most consumers do not obtain a net 
benefit from debt settlement services.
    \385\ According to one commenter, research indicates that 
consumers have higher success rates when they pay some fees upfront 
and thereby have a ```stake in the game.''' Loeb at 5-6. Another 
commenter expressed concern that without advance fees, consumers may 
be more likely to misrepresent their financial status to get into 
the program and to drop out because of a lack of commitment. DMB 
(Feb. 12, 2010) at 5. Neither of these commenters cited any 
empirical data demonstrating that consumers who pay upfront fees 
have higher success rates than those who do not. In any event, even 
if upfront fees strengthened consumers' commitment to the program, 
requiring consumers to put fees into a dedicated bank account likely 
would have the same effect.
    \386\ Supra Section III.C.2.a. Similarly, in considering the 
Holder In Due Course Rule, the Commission determined that readily 
available credit from a ```fly-by-night' salesperson who does not 
perform as promised does not benefit consumers.'' Preservation of 
Consumers' Claims and Defenses, Statement of Basis and Purpose, 40 
FR at 53,520.
---------------------------------------------------------------------------

    Second, several commenters, principally from the debt settlement 
industry, predicted that significant numbers of debt relief companies 
would be harmed or go out of business if the advance fee ban were 
implemented,\387\ because (1) they would not have the cash flow 
necessary to administer settlement plans and provide customer 
service;\388\ (2) they may not get paid for the services they rendered 
given their customers' already precarious financial condition;\389\ and 
(3) scam operators would ignore the advance fee ban, profiting at the 
expense of debt settlement companies that complied with the law.\390\ 
Other commenters posited that no new companies would enter the market, 
further injuring competition.\391\
---------------------------------------------------------------------------

    \387\ Supra Section III.C.2.c.
    \388\ Supra Section III.C.2.d. Moreover, a commenter argued that 
if existing providers' costs increase, they could be forced to 
increase the prices they charge consumers for their services in 
order to remain solvent. CSA at 9.
    \389\ Supra Section III.C.2.e.
    \390\ USOBA (Oct. 26, 2009) at 35; CSA at 10.
    \391\ CSA at 9; Able (Oct. 21, 2009) at 28; SDS (Oct. 7, 2009) 
at 3; CRN (Oct. 8, 2009) at 5; TASC (Young), Tr. at 186-87.
---------------------------------------------------------------------------

    Although the Commission cannot predict with precision what impact 
the advance fee ban will have on the debt relief industry, the 
Commission concludes, based on the record evidence, that any injury to 
competition resulting from the elimination of any companies unable to 
succeed under the modified advance fee prohibition adopted here would 
be outweighed by the benefits to consumers that would result from this 
provision. The record suggests that legitimate providers of debt relief 
services can operate their businesses without collecting advance 
fees.\392\ The record contains scant evidence about the costs debt 
relief providers typically incur prior to settling debt, and the 
estimated costs appear to vary widely.\393\ The large bulk of those 
costs, however, are for marketing and customer acquisition.\394\ As in 
many other lines of business, debt relief companies would have to 
capitalize their businesses adequately in order to fund their initial 
operations. Further, the record indicates that they could start 
recouping their expenses relatively quickly. Providers only need 
sufficient capitalization to operate until they begin receiving fees 
generated by performance of the promised services.\395\ The Final Rule 
allows providers to receive fees as they settle each debt.\396\ CCAs 
generally will be able to collect fees at the beginning of the DMP, 
after the consumer enrolls and makes at least one payment.\397\ With 
respect to debt settlement, if information submitted by commenters is 
accurate, providers often can start settling debts as early as five or 
six months into the program.\398\
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    \392\ Supra Section III.C.2.d.
    \393\ Id.
    \394\ Orion (Oct. 1, 2009) at 2 (marketing costs can be $500 to 
$1,200 per enrolled consumer); NWS at 10 (see attached Walji paper 
at 10) (marketing costs at one company averaged $987.50 per enrolled 
consumer).
    \395\ See infra Section III.C.5.a. 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.
    \396\ See infra Section III.C.5.a.
    \397\ Id.
    \398\ CRN (Bovee), Tr. at 28; see CSA at 6 (almost 78% percent 
of consumers receive at least one settlement offer in the first six 
months).
---------------------------------------------------------------------------

    The Commission acknowledges that the ban on advance fees will shift 
some of the transactional risk from the consumer to the provider. At 
present, however, consumers bear the full risk - they must pay hundreds 
or thousands of dollars with no assurance that they will ever receive 
any benefit in return.\399\ Moreover, the transaction inherently is one 
in which many consumers are doomed to fail, because they are already 
financially distressed and cannot afford to pay the large advance fees, 
make payments to creditors, and save enough money to fund settlements. 
The record in this proceeding bears this out - a large majority of 
consumers drop out of the program, in most cases before they receive 
savings commensurate with the fees and other costs they paid.\400\
---------------------------------------------------------------------------

    \399\ See WV AG (Googel), Tr. at 43; NC AG Testimony, supra note 
25, at 4 (``Consumers are taking a big risk, while interest charges 
mount and the debt settler's fees are being collected, that they 
will eventually get relief from all their debts,'' and the debt 
settlement company ``profits whether or not it accomplishes anything 
for its client.''). Consumers clearly are injured by a system that 
forces them to bear the full risk and burden of sales related 
abuses. See Cooling Off Period For Door-to-Door Sales; Trade 
Regulations Rule and Statement of Basis and Purpose, 37 FR 22934, 
22947 (Oct. 26, 1972).
    \400\ As discussed above, industry data show that at least 65% 
of consumers drop out of debt settlement programs. Supra Section 
III.C.2.a.1.
---------------------------------------------------------------------------

    In any event, the Final Rule substantially mitigates the provider's 
risk of nonpayment. As described in more detail below, providers will 
be able to require customers to make payments into a dedicated bank 
account. As each debt is settled, the consumer can pay the provider's 
fee from that account.\401\
---------------------------------------------------------------------------

    \401\ Infra Section III.C.5.c. Under the Final Rule, consumers 
will own the account and be permitted to recoup the money they paid 
into it if they terminate their enrollment. Thus, some consumers may 
drop out of the program before receiving any settlements, causing 
the provider to lose the value of its services up to that point. 
Providers can limit that risk, however, by more carefully screening 
prospective customers to ensure that they are financially suitable 
for the program and by obtaining settlements more quickly. There is 
no reason to believe that consumers would attempt to ``game'' the 
system by dropping out of the program and getting their money back 
before the provider obtains any settlements; since the purpose of 
enrolling in the first place is to obtain settlements, consumers 
would have no incentive to drop out prior to obtaining them. 
Moreover, to the extent that consumers must pay fees to the bank or 
other entity holding their accounts, they will stand to lose at 
least some money if they later quit the program and withdraw their 
money. Ultimately, the risk of nonpayment will have to be factored 
into providers' pricing decisions. This should lead to a more 
competitive market. Providers that do better screening and are more 
effective in obtaining settlements quickly should be able to 
minimize their losses from dropouts. Such firms may choose to lower 
their prices and gain a competitive advantage.

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[[Page 48487]]

    Given that most consumers who pay advance fees receive little, if 
any, benefit from the debt relief services covered by the Final Rule, 
any injury to individual providers resulting from the advance fee ban 
does not outweigh the consumer injury resulting from current fee 
practices.
c. Consumers Cannot Reasonably Avoid the Injury
    The third and final prong of the unfairness analysis precludes a 
finding of unfairness in cases where the substantial injury is one that 
consumers reasonably can avoid.\402\ The extent to which a consumer can 
reasonably avoid injury is determined in part by whether the consumer 
can make an informed choice. In this regard, the Unfairness Policy 
Statement explains that certain types of sales techniques may prevent 
consumers from effectively making their own decisions, and that 
corrective action may then become necessary.\403\ The Commission finds 
a practice unfair ``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.''\404\
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    \402\ 15 U.S.C. 45(n); see also Unfairness Policy Statement, 
supra note 162, at 1073.
    \403\ Unfairness Policy Statement, supra note 162, at 1074.
    \404\ Id.
---------------------------------------------------------------------------

    Consumers can reasonably avoid harm only if they understand the 
risk of injury from an act or practice.\405\ In the context of debt 
relief service fees, consumers can avoid the injury only if they 
understand the payment arrangement, and its implications, and are aware 
of the risks of paying in advance. Consumers are unlikely to know that 
the services do not benefit most consumers who enroll and that they are 
at significant risk of losing the large sums of money they pay in 
advance fees.\406\ This is especially true because of the widespread 
deception surrounding the marketing of debt relief services\407\ and 
because purchasers of debt relief services typically are in serious 
financial straits and are thus particularly vulnerable to the 
providers' glowing claims.\408\ Relying on the representations made in 
advertisements and in telemarketing calls, these vulnerable consumers 
have every reason to expect to receive the promised benefits from those 
who purport to be experts and have no way of knowing that, in fact, 
they are unlikely to receive those benefits, if they receive any 
benefits at all.\409\ Consumers are unaware that when they purchase 
debt relief services, they are at high risk of failure and the 
concomitant loss of hundreds or thousands of dollars that they can ill 
afford to lose.\410\ As described earlier, debt relief programs with 
large advance fees force consumers in financial distress to do what 
most of them cannot do: simultaneously pay the provider, save for 
settlements, and meet other obligations such as mortgage payments.
---------------------------------------------------------------------------

    \405\ See id.; In re Orkin Exterminating Co., 108 F.T.C. 263, 
366-67 (1986), aff'd, 849 F.2d 1354 (11th Cir. 1988); In re Int'l 
Harvester, 104 F.T.C. 949, 1066 (1984).
    \406\ CFA at 10; SOLS at 3 (advertisements lack specific 
disclosures; subsequent disclosures are buried in fine print 
contracts).
    \407\ See In re Sw. Sunsites, 105 F.T.C. 7, 81-93 (1985) 
(holding that land sale companies engaged in an unfair practice by 
continuing to collect payments on land sales contracts, and refusing 
to make refunds, for consumers who agreed to purchase land based on 
deceptive representations made by the companies), aff'd, 785 F.2d 
1431 (9th Cir. 1986).
    \408\ As the Commission has noted with respect to another group 
of vulnerable consumers desperate for a solution to their woes - 
individuals trying to lose weight - ``the promises of weight loss 
without dieting are the Siren's call, and advertising that heralds 
unrestrained consumption while muting the inevitable need for 
temperance if not abstinence simply does not pass muster.'' In re 
Porter & Dietsch, Inc., 90 F.T.C. 770, 865 (1977), aff'd, 605 F.2d 
294, 297 (7th Cir. 1979) (approving FTC order with ``minor 
exceptions'').
    \409\ See supra Sections I.C.2. & III.C.2.; CFA at 10; CCCS CNY 
at 1; QLS at 2.
    \410\ Having paid in advance and having not received a refund, 
the only remaining recourse consumers would have for a nonperforming 
debt relief service provider is to file a lawsuit for breach of 
contract, hardly a viable option for financially distressed 
consumers. Orkin, 108 F.T.C. at 379-80 (Oliver, Chmn., concurring) 
(suing for breach of contract is not a reasonable means for 
consumers to avoid injury). The cost of litigating makes it 
impossible or impractical for many consumers to seek legal recourse. 
Many consumers who are in financial distress may not even be aware 
that filing an action against the provider for breach of contract is 
available as an alternative. Therefore, the possibility of taking 
legal action does not sufficiently mitigate the harm to consumers 
from paying an advance fee.
---------------------------------------------------------------------------

    Moreover, consumers typically cannot mitigate their harm by seeking 
a refund. Debt relief providers often advertise generous refund 
policies, but frequently consumers lose much of their money.\411\
---------------------------------------------------------------------------

    \411\ MN AG at 2 (attaching complaints in cases against Priority 
Direct Marketing, Inc., Clear Financial Solutions, and Moneyworks, 
LLC); see, e.g., FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 
GAF JTLx (C.D. Cal. filed Feb. 3, 2004) (defendants advertised 
money-back guarantees, yet allegedly refused to honor them); New 
York v. Credit Solutions, No. 401225 (N.Y. Sup. Ct. N.Y. Cty. 2009 
filed May 19, 2009); QLS at 3; CFA at 5, 9; WV AG (Googel), Tr. at 
84. Moreover, a requirement that debt relief services honor refund 
requests is not sufficient to address this harm because obtaining a 
refund has a cost to consumers. FTC v. Think Achievement Corp., 312 
F.3d 259, 261 (7th Cir. 2002) (``This might be a tenable argument if 
obtaining a refund were costless, but of course it is not. It is a 
bother. No one would buy something knowing that it was worthless and 
that therefore he would have to get a refund of the purchase 
price.'').
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d. Public Policy Concerning Advance Fees
    The Commission's unfairness analysis permits it to consider 
established public policies in determining whether an act or practice 
is unfair, although those policies cannot be the primary basis for that 
determination.\412\ In this regard, nearly all states have adopted laws 
that regulate the provision of some or all debt relief services. In 
fact, six of these laws ban receiving any payment as a for-profit debt 
settlement company.\413\ Consistent with these statutes and its law 
enforcement experience, NAAG filed comments strongly advocating that 
the Commission issue a rule prohibiting the charging of advance fees 
for debt relief services.\414\ These state laws provide further support 
for the Commission's finding that this practice is unfair.
---------------------------------------------------------------------------

    \412\ 15 U.S.C. 45(n).
    \413\ La. Rev. Stat. Sec.  14:331; N.D. Cen. Code Sec.  13-06-
02; Wyo. Stat. Ann. Sec.  33-14-102; Mass. Gen. Laws Ann. Ch. 180 
Sec.  4A; N.J. Stat. Ann. Sec.  17:16G-2; Haw. Rev. Stat. Ann. Sec.  
446-2.
    \414\ NAAG (Oct. 23, 2009) at 1.
---------------------------------------------------------------------------

    Accordingly, the Commission concludes that the practice of charging 
advance fees is an abusive practice under the Telemarketing Act because 
it meets the statutory test for unfairness - it causes or is likely to 
cause substantial injury to consumers that is not outweighed by 
countervailing benefits to consumers or competition and is not 
reasonably avoidable.
4. Recommendations to Restrict Other Abusive Practices
    A number of commenters proposed additional remedial provisions, as 
discussed below. The Commission declines to adopt these additional 
remedies in the Final Rule.
a. Suitability Analysis
    A coalition of consumer groups and other commenters recommended 
that the Commission require providers to employ a suitability or 
screening analysis of prospective customers to ensure that only those 
who meet the financial requirements to successfully complete the 
offered debt relief program

[[Page 48488]]

are permitted to enroll.\415\ Several commenters asserted that 
providers' failure to do such analyses contributes to consumers' 
inability to stay in the program, and thus to the injury they suffer 
when they drop out.\416\
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    \415\ See CFA at 21 (``[D]ebt relief providers should be 
required to conduct an individual financial analysis for all 
potential customers to determine whether the service is suitable for 
and will provide a tangible net benefit to them before enrolling 
them.''); CareOne at 7 (``Providers should be required to . . . 
attest to and document the suitability of the service sold to the 
consumer.''); TASC (Apr. 30, 2010) at 1-2; see also RDRI (Manning), 
Tr. at 220-21.
    \416\ See NAAG (Oct. 23, 2009) at 2 (``The primary consumer 
protection problem areas that have given rise to the States' action 
include . . . lack of screening and analysis to determine 
suitability of debt relief programs for individual debtors.''); 
CareOne at 7 (``One of the greatest concerns about abuse of 
consumers in the debt relief industry relates to whether consumers 
are appropriately placed into plans that represent the most suitable 
approach for addressing their debt problems.''); MP at 2 (``The 
reality is that the majority of consumers being enrolled into 
traditional debt settlement programs are not suitable candidates for 
this strategy.''); NACCA (Keiser), Tr. at 66 (``I think one problem 
might be is too many people might be getting into programs that 
aren't appropriate for them that they cannot afford, and that's 
where you hear the horror stories.''); WV AG (Googel), Tr. at 84 
(``[T]he classic complaint that I think most states have received is 
consumers who have paid thousands and thousands of dollars up front, 
who probably weren't even suitable candidates for debt 
settlement.''). But see, e.g., TASC (Housser), Tr. at 224 (``I do 
want to point out that we think we do a pretty good job and TASC 
members think they do a pretty good job of suitability analysis of 
consumers''); FDR (Linderman), Tr. at 95 (arguing that ``we take the 
time to do a thorough suitability analysis'').
---------------------------------------------------------------------------

    The Commission has concluded that it is unnecessary at this time to 
institute explicit suitability requirements in the Final Rule. The 
existing provisions of the Final Rule should provide incentives for 
providers to screen out consumers who cannot afford both to save funds 
for settlement and to pay the provider's fee, because if a consumer 
cannot do both and drops out before settling or otherwise resolving any 
debts, the provider cannot collect its fees.\417\ Certainly the 
Commission regards it as a best practice to implement screening 
procedures to maximize the likelihood that enrollees will have the 
wherewithal to complete and benefit from a service. The Commission will 
continue to monitor the industry to ensure that debt relief providers 
establish and maintain reasonable policies and procedures to screen 
prospective customers for suitability. If it finds that significant 
numbers of providers continue to enroll consumers who are unsuitable 
for their programs, the Commission may consider further amendments to 
the TSR to solve the problem.
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    \417\ Final Rule, Sec.  310.4(a)(5). See, e.g., ACCORD (Noonan), 
Tr. at 275-76 (``[I]f you have a ban on advance fees . . . no one 
will have an incentive to have a high drop-out rate, they won't be 
paid for those clients. . . . [E]veryone will continue to have an 
incentive, as we do now, to do a proper suitability study, because 
we won't want unsuitable people in our plans.''); WV AG (Googel), 
Tr. at 222 (``[O]ne of the best ways to require or to bring about a 
suitability analysis, without even specifically requiring it, would 
be the advance fee ban, because then there would be that, you know, 
meeting of interest, it would be in everybody's interest to do 
it.''); CRN (Bovee), Tr. at 120; CU (July 1, 2010) at 4.
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b. Right of Rescission or Refund Provision
    Several commenters also recommended that the Final Rule grant 
consumers a right to rescind their contracts within a certain period of 
time and receive a refund of fees paid to debt relief providers.\418\ 
They argue that such a requirement would provide consumers with more 
time to assess whether the service is beneficial for them and also 
discourage providers from enrolling consumers who are unlikely to 
benefit from their services. The Commission also considered whether 
requiring providers to give consumers refunds for a certain period of 
time would mitigate any harm consumers suffered from advance fees.
---------------------------------------------------------------------------

    \418\ See, e.g., CFA at 19; CFA (Grant), Tr. at 209; NFCC at 13; 
CRN at 7; TASC (Apr. 30, 2010) at 6-7.
---------------------------------------------------------------------------

    The Commission concludes that the modified advance fee restrictions 
in Sec.  310.4(a)(5) adequately address these concerns. A consumer who 
receives no benefit from a program will not be required to pay a fee 
and can simply terminate the program. Because any funds that the 
consumer pays into a dedicated bank account remain the property of the 
consumer until the debts are settled, enabling the consumer to cancel 
the program and recoup his money, the advance fee ban effectively 
provides a right of rescission and refund. Moreover, a rescission or 
refund right on its own leaves significant risk with consumers that the 
provider will not respond to a request for rescission or refund, or it 
will be out of business before providing the contract rescission or 
refund.\419\ Finally, if a refund right only lasts until the consumer 
receives the first settlement, the company would have the incentive to 
settle a small debt very quickly in order to extinguish the refund 
right, which does not provide a substantial benefit to the 
consumer.\420\
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    \419\ Summary of Communications (June 16, 2010) (meeting with 
consumer groups); see supra note 411.
    \420\ Summary of Communications (June 16, 2010) at 1 (meeting 
with consumer groups).
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c. Fee Caps
    Industry representatives also have argued that, instead of 
prohibiting advance fees, the Final Rule should set limits or caps on 
such fees similar to those currently imposed by many states.\421\ The 
Commission declines to set fee limits in this proceeding. While the 
Commission concludes that the collection of advance fees by debt relief 
providers is an abusive practice, it does not believe that the 
Telemarketing Act authorizes the Commission to regulate the amount of 
fees a provider charges, absent some other type of deceptive or abusive 
conduct that interferes with a competitive market.\422\ In general, 
fee-setting is best done by a competitive market, and the Commission's 
role is to remove obstacles to consumers making the informed choices 
that are necessary to a properly functioning market. The provisions of 
the Final Rule, including the narrowly tailored ban on advance fees, 
are designed to ensure that the debt relief market functions properly 
and to eliminate the risk that consumers will pay thousands of dollars 
and receive little or nothing in return.\423\ In any event, the 
Commission believes that any decision to set fees is made more 
appropriately by legislative bodies, as several states have done with 
respect to debt relief services.\424\
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    \421\ See, e.g., TASC (Apr. 30, 2010) at 1-2, 7-9. Additionally, 
TASC recommended that the Commission mandate that companies spread 
their collection of fees over a specified period of months. This fee 
structure, however, allows providers to collect fees regardless of 
whether they have achieved results and therefore suffers from the 
flaws discussed in this subsection and results in the abuse 
described in Section III.C.3. See SOLS at 2 (recommending fee caps 
in addition to an advance fee ban).
    \422\ The purpose of the FTC's unfairness doctrine is not to 
permit the Commission to obtain better bargains for consumers than 
they can obtain in the marketplace. Am. Fin. Servs. Ass'n v. FTC, 
767 F.2d 957, 964 (D.C. Cir. 1985). Instead, it is to prohibit acts 
and practices that may unreasonably create or take advantage of an 
obstacle to the ability of consumers to make informed choices. See 
id. at 976.
    \423\ Simply capping the fees might reduce the amount of 
consumer injury, but, so long as consumers are induced to pay some 
amount of money for services that may never be rendered, would not 
eliminate the injury.
    \424\ Moreover, any federally established maximum advance fee 
might well become the de facto actual fee for debt relief services. 
F. M. Scherer, Industrial Market Structure and Economic Performance 
190-93, 204 (1980); F.M. Scherer, Focal Point Pricing and Conscious 
Parallelism, in Competition Policy, Domestic and International, 89-
97 (2000). Further, fee caps can quickly become obsolete, as changes 
in market conditions and technologies render the fixed maximum fee 
too low (e.g., if the costs of providing the service rise) or too 
high (e.g., if new technology lowers the cost of providing the 
service or if market participants would compete on price absent 
regulation). U.S. v. Trenton Potteries Co., 273 U.S. 392, 397 (1927) 
(``The reasonable price fixed today may through economic and 
business changes become the unreasonable price of tomorrow.'').

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[[Page 48489]]

5. The Advance Fee Ban - Final Rule Amendment
    The amended Rule Sec.  310.4(a)(5)(i) would prohibit:
    (i) Requesting or receiving payment of any fee or consideration for 
any debt relief service until and unless:
    (A) the seller or telemarketer has renegotiated, settled, reduced, 
or otherwise altered the terms of at least one debt pursuant to a 
settlement agreement, debt management plan, or other such valid 
contractual agreement executed by the customer;
    (B) the customer has made at least one payment pursuant to that 
settlement agreement, debt management plan, or other valid contractual 
agreement between the customer and the creditor or debt collector; and
    (C) to the extent that debts enrolled in a service are 
renegotiated, settled, reduced, or otherwise altered individually, the 
fee or consideration either:
    (1) bears the same proportional relationship to the total fee for 
renegotiating, settling, reducing, or altering the terms of the entire 
debt balance as the individual debt amount bears to the entire debt 
amount. The individual debt amount and the entire debt amount are those 
owed at the time the debt was enrolled in the service; or
    (2) is a percentage of the amount saved as a result of the 
renegotiation, settlement, reduction, or alteration. The percentage 
charged cannot change from one individual debt to another. The amount 
saved is the difference between the amount owed at the time the debt 
was enrolled in the service and the amount actually paid to satisfy the 
debt.\425\
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    \425\ The provisions currently contained in Sec. Sec.  
310.4(a)(5)-310.4(a)(7) will be renumbered to accommodate the new 
Sec.  310.4(a)(5) and will shift to Sec. Sec.  310.4(a)(6)-
310.4(a)(8), respectively.
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    The Final Rule places no restriction on the amount of fees that 
providers can charge or mandate a formula for calculating fees,\426\ 
but does establish rules about when they can collect them. In short, 
the Rule prohibits providers from charging any fee in advance of 
providing the debt relief services. If the provider settles, 
renegotiates, reduces, or alters debts sequentially, it may collect 
part of its fee after each individual settlement or other alteration. 
Four issues arising from this provision merit further discussion: the 
contractual agreement, fee requirements, bank account practices, and 
effective date.
---------------------------------------------------------------------------

    \426\ The Final Rule does require providers to clearly and 
prominently disclose their fees. 16 CFR 310.3(a)(1).
---------------------------------------------------------------------------

a. The Contractual Agreement
    The Final Rule specifies that, in order to collect a fee, providers 
must have obtained a settlement or other alteration of a debt, pursuant 
to a settlement agreement, DMP, or other valid contractual agreement 
between the consumer and the creditor or debt collector that is 
executed by the customer. The provider may obtain an oral or written 
execution of the agreement in order to allow providers to proceed 
efficiently. The consumer must execute the specific agreement, however; 
a contract signed at the outset specifying, for example, that any offer 
that involves the payment of a certain amount will be deemed acceptable 
to the consumer is not sufficient to comply with the Rule.\427\ 
Moreover, the provider may not rely on authority obtained through a 
power of attorney to execute the contract on the consumer's behalf. The 
requirement that consumers execute the agreements is necessary to 
ensure that the offers are legitimate, final, and acceptable to the 
consumers.\428\ The Rule further specifies that the provider cannot 
collect its fee until the consumer makes at least one payment to the 
creditor or debt collector to resolve the debt. This provision, which 
was not included in the proposed rule but was recommended by 
commenters, will help ensure that the consumer has the necessary funds 
to satisfy the offer.\429\
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    \427\ See CFA at 17.
    \428\ Commenters supported such a requirement. See CFA at 15-16; 
SOLS at 2.
    \429\ FCS (Oct. 27, 2009) at 4 (``If a company is permitted to 
collect its fee after merely negotiating a settlement, but before 
the creditor receives payment from the consumer, consumers may find 
themselves paying fees regardless of their ability to meet the 
settlement payment obligations to their creditors. This provision 
should be changed to allow the debt settlement company to collect 
its fee only when the consumer's payment is sent to the 
creditor.''); ACCORD (Oct. 9, 2009) at 2.
---------------------------------------------------------------------------

    In order to collect its fee, the provider must have documentation 
evidencing the debt resolution, as specified by Sec.  310.4(a)(5)(i)(A) 
of the Final Rule.\430\ Different types of debt relief services may 
generate different types of documentation. With regard to debt 
negotiation, an executed contract showing that a creditor has agreed to 
the concession (e.g., a lower interest rate for a particular credit 
card), along with evidence that the consumer has made at least one 
payment under the new terms, would suffice. For a DMP, the CCA must 
provide a debt management plan containing the altered terms and 
executed by the customer that is binding on all applicable creditors. 
The CCA also must have evidence that the consumer has made the first 
payment to the CCA for distribution to creditors.\431\ In the case of 
debt settlement, the provider must obtain documentation showing that 
the account at issue has been successfully settled and at least one 
payment has been made toward the settlement, before receiving the fee 
for that debt.\432\ Examples of such documentation include a letter or 
receipt from the creditor or debt collector stating that the debt has 
been satisfied, or a payment has been made toward satisfaction and the 
amount of the payment received.\433\ Once the consumer executes the 
agreement, the debt relief entity may collect the fee associated with 
the individual debt and need not wait until all debts have been settled 
or otherwise altered.
---------------------------------------------------------------------------

    \430\ 16 CFR 310.4(a)(5)(i)(A) (``the seller or telemarketer has 
renegotiated, settled, reduced, or otherwise altered the terms of at 
least one debt pursuant to a settlement agreement, debt management 
plan, or other such valid contractual agreement executed by the 
customer'') (emphasis added). See AFSA at 10 (``It is appropriate to 
require provision of documents proving that a debt has, in fact, 
been renegotiated, settled, reduced or otherwise altered.''); 
Weinstein (Oct. 26, 2009) at 8 (see attached Weinstein paper at 7) 
(``When a consumer and a creditor reach a mutual agreement, the debt 
settlement company provides a written agreement to the consumer and 
assists with arranging the consumer's payment to the creditor.'').
    \431\ CCAs renegotiate all of the consumer's eligible debts at 
one time, and creditors generally grant concessions immediately upon 
enrolling consumers in the DMP. GP (Mar. 5, 2010) at 1. Thus, CCAs 
do not renegotiate debts individually, and Final Rule Sec.  
310.4(a)(5)(i)(C) does not apply to them. CCAs commonly charge 
consumers not only an initial set-up fee, but also periodic (usually 
monthly) fees throughout the consumer's enrollment in the DMP. Laws 
in most states cap these fees. Final Rule Sec.  310.4(a)(5) 
prohibits CCAs from charging a set-up or other fee before the 
consumer has enrolled in a DMP and made the first payment, but it 
would not prevent the CCA from collecting subsequent periodic fees 
for servicing the account.
    \432\ The ``at least one payment'' provision applies 
specifically to the case of bona fide installment settlements, in 
which a creditor or debt collector contracts to accept the 
settlement amount in installments over time. If the creditor or debt 
collector requires a single payment to satisfy the debt, the 
provider cannot divide the settlement into separate parts and 
collect its fees upon a payment from the consumer that only 
partially satisfies the debt. The Commission will monitor fee 
practices relating to installment settlements to ensure that 
providers are not manipulating settlement offers to collect their 
fee to the detriment of consumers.
    \433\ See CRN (Jan. 12, 2010) at 7 (``All creditors and their 
assignees provide documentation of settlement and/or payment 
agreements.''). A letter containing an offer to settle by itself 
does not meet the Rule's requirements, but may be one part of the 
necessary documentation. Some commenters stated that some creditors 
or debt collectors may not provide a document confirming that the 
payment has been accepted and the debt has been satisfied. MD (Oct. 
26, 2009) at 53 (some collection agents refuse to provide 
documentation that clearly establishes the debt has been 
extinguished); ART at 2 (some creditors do not provide timely 
documentation).

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[[Page 48490]]

b. Fee Requirements
    The purpose of the advance fee ban could be thwarted if debt 
settlement providers collect a disproportionately large percentage, or 
even the entire amount, of the fee after settling a single debt. The 
Final Rule addresses this concern: in situations in which providers 
settle debts individually over time, the fee collected by the provider 
must bear the same proportional relationship to the total fee as the 
individual debt bears to the entire debt amount. Further, the Final 
Rule requires that, in calculating this proportion, the provider must 
use the amount of the individual debt and the entire debt at the time 
the consumer enrolls in the program (i.e., before any interest or 
creditor fees have accrued).\434\
---------------------------------------------------------------------------

    \434\ In other words, if the amount of the debt that is settled 
is one-third of the entire debt amount enrolled in the program, the 
provider can collect one-third of its total fee.
    For the purposes of calculating a proportional fee, the provider 
must include as part of the entire debt amount any additional debts 
that the consumer enters into the program after the original date of 
enrollment. Further, the provider must use the amount of the 
additional individual debt at the time the consumer entered that 
debt into the program. For example, suppose that a consumer enrolls 
in a debt settlement program with a total of two $10,000 debts - 
totaling $20,000. Six months after enrolling in the program, the 
consumer places one additional debt with a balance of $10,000 into 
the program. Under Sec.  310.4(a)(5)(ii)(C)(1), the consumer's 
entire debt amount is now $30,000. Thus, if the provider settles any 
one of the consumer's three debts, it may only collect one-third of 
its total fee ($10,000 divided by $30,000).
---------------------------------------------------------------------------

    Alternatively, the provider can collect a percentage of savings 
achieved.\435\ In that case, the fee for each debt settled or otherwise 
altered must be an unchanging percentage of the amount saved as a 
result of the service.\436\ The amount saved must be based on the 
difference between the amount of debt at the time the consumer enrolls 
in the program and the amount of money required to satisfy the debt. 
Using either fee structure, the fee or consideration must be accurately 
disclosed in compliance with Sec.  310.3(a)(1)(i).\437\
---------------------------------------------------------------------------

    \435\ This alternative can be used when the provider uses a 
contingency-based fee model.
    \436\ This requirement explicitly prevents providers from front-
loading the fee by collecting a disproportionately large percentage 
of savings for any debts settled early in the program.
    \437\ 16 CFR 310.3(a)(1)(i).
---------------------------------------------------------------------------

    Two commenters recommended that the Commission require that the 
amount of the provider's fee be based on the percentage of savings 
realized by the consumer.\438\ As stated earlier, the Final Rule does 
not set fee maximums or dictate a formula for calculating fees but 
simply governs when the fees can be collected. The provisions of the 
Final Rule, including the required disclosures, prohibitions on 
misrepresentations, and advance fee ban, should spur price competition 
in the market.\439\
---------------------------------------------------------------------------

    \438\ CareOne at 5; FCS (Oct. 27, 2009) at 4 (``We also urge the 
Commission to consider requiring fee structures that are based on 
the savings the company negotiates for the consumer. . . . Allowing 
companies to collect flat fees (even fees that are capped, as some 
states provide) disconnects the amount of the fee from the value the 
consumer receives. In contrast, success-based fees ensure the fee is 
proportionate to the benefit and still allow debt settlement 
companies to compete on price.''). Several companies use a 
contingency fee model, charging consumers a specific percentage of 
savings that they obtain. CRN (Jan. 21, 2010) at 4 (15% of savings); 
FCS (Oct. 27, 2009) at 2; ACCORD (Oct. 9, 2009) at 2-3; TBDR at 1; 
see also SBLS at 4. One commenter raised concerns whether assessing 
fees based on settlement activity would lead to the best outcomes 
for consumers. FDR (Oct. 26, 2009) at 15-16 (``Where fees are based 
exclusively on settlement activity or on the timing of achieving 
settlements, the debt settlement services provider has an incentive 
to complete settlements with the creditor and on the account that 
creates the most revenue.'').
    \439\ See USDR (Oct. 20, 2009) at 2.
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c. Dedicated Bank Accounts
    In the NPRM, the Commission stated that it did not intend the 
proposed rule to prohibit consumers from using dedicated bank accounts, 
and it requested comments on this issue.\440\ In response, some 
commenters expressed views, assuming the Final Rule included an advance 
fee ban, on whether the Rule should permit consumers, or allow 
providers to require consumers, to put funds into a dedicated bank 
account until the services are delivered. A coalition of consumer 
groups stated that an advance fee ban should allow consumers to use 
legitimate bank accounts that they control.\441\ An industry member 
stated that allowing providers to require consumers to set money aside 
in a dedicated bank account is ``absolutely necessary'' to ensure that 
the money available is adequate to cover the settlement amount and the 
provider's fee.\442\ Additionally, a municipal consumer protection 
agency stated that dedicated bank accounts would ensure that a debt 
settlement company could collect its fees once it has settled a 
consumer's debt.\443\
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    \440\ TSR Proposed Rule, 74 FR 41988, 42017 (Aug. 19, 2009).
    \441\ CFA at 17; CFA (Plunkett), Tr. at 141.
    \442\ CRN (Bovee), Tr. at 142 (stating that his company does not 
use escrow accounts and has outstanding uncollected fees of more 
than $100,000).
    \443\ NYC DCA at 2.
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    Section 310.4(a)(5)(ii) of the Rule permits debt relief providers 
to require consumers to place funds designated for the company's fees 
and for payment to the consumer's creditors or debt collectors in a 
dedicated bank account, provided certain conditions are met. Once a 
settlement agreement is executed and the payment (or first payment, in 
the case of an installment agreement) is made, the provider may require 
that the appropriate fee payment be sent from the account to the 
company. This provision will assure providers that, once they settle a 
consumer's debt, they will receive the appropriate fee.
    To ensure that consumers are protected, the Final Rule specifies 
five conditions that the provider must meet if it wishes to require the 
consumer to set aside funds for its fee and for payment to creditors or 
debt collectors in a dedicated bank account.\444\ First, the account 
must be located at an insured financial institution.\445\ Second, all 
funds in the account must remain the property of the consumer, and, if 
the money is held in an interest-bearing account, all interest that 
accrues must be paid to the consumer.\446\ Third, the agent holding the 
funds must be independent - that is, not under the control of or 
affiliated with the debt relief provider.\447\ Fourth, to further 
ensure that the account provider is truly independent, the debt relief 
provider may not give or accept any money or other compensation in 
exchange for referrals of business involving the debt relief 
service.\448\ The Commission intends this provision to be read broadly 
to prohibit all fee splitting between the entity or entities 
administering the

[[Page 48491]]

account and the debt relief service provider.
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    \444\ If a provider is going to require a dedicated bank 
account, it may not require the use of a dedicated bank account 
solely to set aside funds for the provider's fees.
    \445\ This requirement does not prevent an intermediary that is 
not an insured financial institution from providing services in 
connection with the account as well. For example, GCS and Noteworld 
Servicing Center provide account management and transaction 
processing services relating to special purpose bank accounts that 
clients of debt settlement companies use. See GCS at 1. If such an 
intermediary is used, the bank and the nonbank both are ``entities 
administering the account'' under the Final Rule.
    \446\ See Summary of Communications (June 24, 2010) at 2 (state 
attorney general representative stated that consumers could be 
injured if they were not able to use money in the accounts for 
living expenses if necessary; a second state attorney general 
representative stated that if providers own the accounts, the money 
could be subject to claims by the company's creditors); Summary of 
Communications (July 9, 2010) at 1 (consumer group representative 
stated that the consumer should have control over the account, and 
it should be in the consumer's name).
    \447\ See Summary of Communications (June 24, 2010) at 2 (a 
state attorney general representative described risks of service 
provider collusion with fraudulent companies).
    \448\ See Summary of Communications (June 24, 2010) at 2 (a 
state attorney general representative stated that the rule should 
ensure that debt settlement companies do not split fees with the 
account providers or charge unreasonable fees for the accounts).
---------------------------------------------------------------------------

    Fifth and finally, the provider must allow the consumer to withdraw 
from the debt relief service at any time without penalty; thus, the 
provider may not charge a termination fee or similar fee. The provider 
also must ensure that the consumer receives, within seven business days 
of the consumer's request, all funds in the account, less any money 
that the provider has earned in fees in compliance with the Rule's 
provisions, as a result of having settled a debt prior to the 
consumer's withdrawal from the program.\449\ Therefore, the Rule allows 
the consumer to cancel the program and recoup the money in the account 
at any time to ensure that the consumer does not pay in advance for 
services that are not performed.
---------------------------------------------------------------------------

    \449\ See Summary of Communications (July 9, 2010) at 1 
(consumer group representative stated that the consumer should be 
able to withdraw all funds from the account at any time).
---------------------------------------------------------------------------

    Moreover, the Commission's law enforcement cases show that there is 
a risk that providers will utilize funds in consumers' accounts for 
their own purposes.\450\ Thus, the Rule includes five specific 
safeguards discussed in this section to guard against such illegal 
activity.\451\
---------------------------------------------------------------------------

    \450\ See, e.g., FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 
ABC (Ex) (C.D. Cal. filed Aug. 19, 2002) (alleging that defendants 
regularly withdrew money from consumers' trust accounts to pay their 
operating expenses); FTC v. Edge Solutions, Inc., No. CV-07-4087, 
First Interim Report of Temporary Receiver at 3 (E.D.N.Y. Oct. 23, 
2007) (noting that ``customer funds in the amount of $601,520 were 
missing from the receivership defendants' accounts and unaccounted 
for by the receivership defendants''); see also GAO Testimony, supra 
note 50, at 27 (discussing a case study in which the U.S. Department 
of Justice prosecuted a debt settlement company for using funds in 
customer escrow accounts to cover overdrafts from the defendant's 
operating account and make payments to his wife).
    \451\ The safeguards appear to be consistent with the practices 
of many industry members. For example, a service provider stated 
that it is an independent firm and the ``special purpose'' or 
dedicated bank accounts that its system manages are owned and 
controlled by consumers. GCS at 1-2.
---------------------------------------------------------------------------

    The Rule does not prohibit an independent entity that holds or 
administers a dedicated bank account meeting the above criteria from 
charging the consumer directly for the account. However, the Commission 
will be monitoring practices related to these fees, and it may take 
further action, if needed, to address any deceptive or abusive fee 
practices in connection with the accounts.
d. Effective Date
    The advance fee ban provision, Sec.  310.4(a)(5) of the Final Rule, 
takes effect on October 27, 2010. The Commission is allowing debt 
relief providers an additional month after the effective date of the 
other provisions of the Rule, because compliance with the advance fee 
ban may entail adjustments to many providers' operations. The Final 
Rule does not apply retroactively; thus, the advance fee ban does not 
apply to contracts with consumers executed prior to the effective date.

D. Section 310.3: Deceptive Telemarketing Acts or Practices

    The Final Rule mandates four debt relief-specific disclosures, 
which complement the existing, generally applicable disclosures 
currently in the TSR.\452\ The Final Rule requires debt relief service 
providers to disclose, clearly and conspicuously, before the consumer 
consents to pay: (1) the amount of time necessary to achieve the 
represented results; (2) the amount of savings needed before the 
settlement of a debt; (3) if the debt relief program includes advice or 
instruction to consumers not to make timely payments to creditors, that 
the program may affect the consumer's creditworthiness, result in 
collection efforts, and increase the amount the consumer owes due to 
late fees and interest; and (4) if the debt relief provider requests or 
requires the customer to place funds in a dedicated bank account at an 
insured financial institution, that the customer owns the funds held in 
the account and may withdraw from the debt relief service at any time 
without penalty, and receive all funds in the account. Together, these 
disclosure requirements will ensure that consumers have the material 
information they need to make an informed decision about whether to 
enroll in a debt relief program.
---------------------------------------------------------------------------

    \452\ Pursuant to the pre-existing TSR, in an outbound telephone 
call or an internal or external upsell, sellers and telemarketers of 
debt relief services must 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; and (3) the nature 
of the goods or services being offered. 16 CFR 310.4(d). They must 
also, in any telephone sales call, disclose cost and certain other 
material information before consumers pay. 16 CFR 310.3(a)(1). As 
discussed in Section III.D.2., the Commission received very few 
comments addressing these disclosures.
---------------------------------------------------------------------------

    Section 310.3(a)(1)(viii) of the proposed rule contained three 
other debt relief-specific disclosures. After consideration of the 
record, the Commission has decided to delete those disclosures:
     that creditors may pursue collection efforts pending the 
completion of the debt relief service (proposed Section 
310.3(a)(1)(viii)(D)), which has been combined with another required 
disclosure;
     that any savings from the debt relief program may be 
taxable income (proposed Section 310.3(a)(1)(viii)(F)); and
     that not all creditors will accept a reduction in the 
amount owed (proposed Sec.  310.3(a)(1)(viii)(c)).
    The Final Rule also modifies the preamble to the general disclosure 
requirements in Sec.  310.3(a)(1) to clarify that sellers or 
telemarketers must make disclosures before a consumer consents to pay 
for the goods or services offered.
    This section discusses: (1) the debt relief-specific disclosure 
obligations added as a result of this proceeding, (2) the disclosures 
in the proposed rule that were not adopted in the Final Rule, (3) the 
general disclosure obligations under the TSR, (4) the timing of the 
required disclosures, and (5) additional disclosures that commenters 
recommended, but which the Commission did not adopt in the Final Rule.
1. Amendments to Section 310.3(a)(1): Debt Relief-Specific Disclosure 
Obligations
    In assessing the six new disclosures in the proposed rule, the 
Commission considered whether omitting the information would cause 
consumers to be misled, the need for those disclosures, and their 
likely effectiveness. The Commission applies its deception standard in 
determining the legal basis for disclosures: an act or practice is 
deceptive if (1) there is a representation or omission of information 
that is likely to mislead consumers acting reasonably under the 
circumstances; and (2) that representation is material to 
consumers.\453\ Injury is likely if inaccurate or omitted information 
is material.\454\ A claim is deceptive if it either misrepresents or 
omits a material fact such that reasonable consumers are likely to be 
misled.\455\ Application of

[[Page 48492]]

this analysis leads the Commission to conclude that each of the four 
items of information that the provisions adopted herein require to be 
disclosed are material and that, absent disclosure of these items of 
information, consumers seeking debt relief draw reasonable but 
incorrect conclusions about the benefit of purchasing such service, and 
are therefore likely to be misled. Thus, failure to disclose any of 
these four items of information is a deceptive practice.
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    \453\ Federal Trade Commission Policy Statement on Deception, 
appended to In re Cliffdale Assocs., 103 F.T.C. 110, 174-83 (1984) 
(``Deception Policy Statement''); see also FTC v. Tashman, 318 F.3d 
1273, 1277 (11th Cir. 2003); FTC v. Gill, 265 F.3d 944, 950 (9th 
Cir. 2001).
    \454\ Deception Policy Statement, supra note 453, at 171.
    \455\ FTC v. Simeon Mgmt. Corp., 532 F.2d 708, 716 (9th Cir. 
1976); FTC v. Pharmtech Research, Inc., 576 F. Supp. 294, 300 
(D.D.C. 1983).
    In some circumstances, silence also may be deceptive. Silence 
associated with the appearance of a particular product, the 
circumstances of a specific transaction, or ordinary consumer 
expectations represents that the product is reasonably fit for its 
intended purpose. Deception Policy Statement, supra note 453, at 
170. For example, in connection with the sale of a car, consumers 
assume in the absence of other information that the car can go fast 
enough for ordinary use on a freeway. If the car cannot, the 
seller's silence on this point may have been deceptive.
---------------------------------------------------------------------------

a. Need for Debt Relief-Specific Disclosures
    Commenters generally supported the proposed rule's approach of 
requiring debt relief-specific disclosures in connection with the 
telemarketing of debt relief services or programs. NAAG supported the 
proposed disclosures, stating that although they alone might not be 
sufficient to curb abusive conduct by debt relief providers, consumers 
are entitled to the basic information that the proposed disclosures 
provide.\456\ A coalition of 19 consumer advocacy groups ``strongly'' 
supported the proposed disclosures, noting that they will ensure that 
consumers understand how debt relief services work and whether the 
program will satisfy their needs.\457\
---------------------------------------------------------------------------

    \456\ NAAG (Oct. 23, 2009) at 11.
    \457\ CFA at 2-3, 20; see also MN AG at 2.
---------------------------------------------------------------------------

    Most debt relief providers also supported the proposed 
disclosures.\458\ One debt relief industry trade association 
recommended that the Rule require ``full and complete disclosure'' to 
consumers of the risks of debt settlement before a consumer enters a 
plan, noting that the FTC's proposed new disclosures were similar to 
the model disclosures contained in trade association guidelines.\459\ 
Individual debt relief providers expressed support for the proposed 
disclosures because consumers who fully understand all aspects of a 
debt relief program are more likely to complete it successfully,\460\ 
and because the disclosures would make it more difficult for fraudulent 
companies to operate.\461\
---------------------------------------------------------------------------

    \458\ FCS (Oct. 29, 2009) at 3; Able (Oct. 21, 2009) at 30; 
CareOne at 4; CSA at 1; DS at 18; DMB (Oct. 29, 2009) at 5; DSA/ADE 
at 1-2.
    \459\ TASC (Oct. 26, 2009) at 15. TASC, however, objected to the 
proposed disclosures on the ground that they were targeted primarily 
to the risks of debt settlement and did not inform consumers 
adequately of the risks of nonprofit credit counseling and 
bankruptcy. Id. As explained above, the FTC does not have 
jurisdiction to regulate the activities of bona fide nonprofit 
credit counselors. Moreover, the Commission believes that the 
revised debt relief-specific disclosures in the Final Rule 
adequately address the most harmful conduct by debt relief 
providers, including debt settlement providers, for-profit credit 
counselors, and debt negotiators.
    \460\ FCS (Oct. 29, 2009) at 3.
    \461\ CSA at 1.
---------------------------------------------------------------------------

    A comment submitted by an association of credit counseling agencies 
also supported the proposed disclosures for debt relief services.\462\ 
An individual nonprofit CCA commented that the proposed disclosures are 
necessary to ensure that consumers understand that some of the money 
they pay to the provider goes towards the provider's fees rather than 
to pay creditors.\463\
---------------------------------------------------------------------------

    \462\ AICCCA at 2; see also CCCS CNY at 2 (full disclosures will 
give consumers accurate information on which they can base their 
financial decisions and possibly help consumers put money they would 
have spent on debt relief toward more pressing bills).
    \463\ GP (Oct. 22, 2009) at 1.
---------------------------------------------------------------------------

b. Debt Relief-Specific Disclosures
    As explained in the NPRM and in Section I above, consumers often do 
not understand the mechanics of debt relief, making them more 
susceptible to deception.\464\ The debt relief-specific disclosures are 
intended to ensure that consumers have accurate information, thereby 
enabling them to make informed purchasing decisions and that they are 
not misled by the omission of key information. As modified in the Final 
Rule and discussed herein, Sec.  310.3(a)(1) explicitly mandates that 
all of the required disclosures be made ``[b]efore a customer consents 
to pay for goods or services offered.'' Language added to the existing 
Footnote 1 of the Rule clarifies that the provider must make the 
required disclosures before the consumer enrolls in an offered 
program.\465\
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    \464\ TSR Proposed Rule, 74 FR at 42001.
    \465\ 16 CFR 310.3(a)(1) & n.1.
---------------------------------------------------------------------------

    After review and analysis of the record, the Commission has adopted 
three of the six proposed disclosures in the Final Rule, having 
determined that the remaining three are duplicative or likely to 
detract from the efficacy of the required disclosures. It also has 
adopted one additional disclosure regarding the use of dedicated bank 
accounts.
    The next three sections discuss the four disclosures adopted in the 
Final Rule.
(1) Sections 310.3(a)(1)(viii)(A) and (B)
    The proposed rule would have required telemarketers of debt relief 
services to make the following disclosures:
     the amount of time necessary to achieve the represented 
results and, if the service entails making settlement offers\466\ to 
customers' creditors, the specific time by which the provider will make 
a bona fide settlement offer to each creditor or debt collector;\467\ 
and
---------------------------------------------------------------------------

    \466\ A settlement offer is an offer to extinguish an unsecured 
debt for less than what the debtor owes the creditor or debt 
collector. See Weinstein (Oct. 26, 2009) at 6 (see attached 
Weinstein paper at 5).
    \467\ TSR Proposed Rule, 74 FR at 42019. In so doing, the 
provider would have to disclose the fact that negotiations will not 
take place with all creditors simultaneously but rather 
sequentially, if such is the case. The record supports disclosure of 
this information because consumers may not understand the amount of 
time necessary to achieve the represented results or that there may 
be prerequisites to obtaining debt relief. See CFA (Grant), Tr. at 
175.
---------------------------------------------------------------------------

     to the extent that the service may include a settlement 
offer to any 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 the provider will make a bona fide settlement 
offer to each creditor or debt collector.\468\
---------------------------------------------------------------------------

    \468\ TSR Proposed Rule, 74 FR at 42019.
---------------------------------------------------------------------------

    These disclosures were designed to prevent deception by ensuring 
that consumers understand the time and monetary commitment necessary 
for the plan to succeed, and thus the risks involved in enrolling in a 
debt relief program in which the provider may not begin to negotiate 
relief for months or even years.
    The Commission received several comments on these two disclosures. 
Several commenters and forum participants recommended modifying the 
disclosures to allow estimates or projections of the time for program 
completion and the amount a consumer would have to save.\469\ One 
industry trade association explained that it likely would be impossible 
for a provider to state with certainty the time by which it will 
achieve settlements or the amount of money the consumer would have to 
accumulate before the provider made a settlement offer.\470\ Similarly, 
a debt relief provider objected to the time disclosure in proposed 
Sec.  310.3(a)(1)(viii)(A) because it failed to account for market 
conditions that are ``beyond anyone's range of knowledge other than a 
best guess.''\471\ Other commenters echoed these views.\472\
---------------------------------------------------------------------------

    \469\ Loeb (Mallow), Tr. at 204; TASC (Housser), Tr. at 202; CFA 
(Grant), Tr. at 207; USOBA (Oct. 26, 2009) at 15-17; FCS (Oct. 29, 
2009) at 3.
    \470\ USOBA (Oct. 26, 2009) at 15-16; see also FCS (Oct. 29, 
2009) at 3; DS at 19 (``the exact amount a given creditor will 
settle a debt account for and the precise time the same will be 
accomplished varies.'').
    \471\ Able (Oct. 21, 2009) at 26.
    \472\ FCS (Oct. 29, 2009) at 3 (``We support these disclosures, 
in principle, but recommend revision to the extent they would 
require a company to determine in advance the timing and order in 
which each specific debt will be settled. Creditors vary in their 
willingness to make concessions, and their position often changes 
with time. Debt settlement firms must have the latitude to make the 
most favorable settlements for a client, and this requires 
flexibility to determine the order and timing of settlements.''); 
see CRN (Oct. 8, 2009) at 6 (``Amounts and terms of settlement 
fluctuate and are hard to predict, so setting a predetermined time 
or amount of settlement might prevent debt relief providers from 
getting consumers the best settlement as quickly as possible. Such a 
result could occur if a creditor unexpectedly makes a settlement 
offer to a consumer that, if accepted, would disrupt the previously 
disclosed schedule of time and amount of settlement for the other 
enrolled debts.''); MD (Oct. 26, 2009) at 29-30.
    One provider objected to the money accumulation proposed 
disclosure (Sec.  310.3(a)(1)(viii)(B)) because programs that allow 
for payments over time do not require accumulation of the entire 
amount needed to settle the debt. Able (Oct. 21, 2009) at 26. The 
Commission believes that the disclosure is warranted even if the 
consumer only has to accumulate a lesser amount, since that amount 
still may be substantial, especially for consumers who are in 
financial distress.

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[[Page 48493]]

    Based on the record, the Commission has determined to require these 
two disclosures, but is clarifying that providers may make a good faith 
estimate of the necessary time and money commitments entailed in the 
service. Providers must have a reasonable basis to support their 
estimates. With respect to the paragraph (A) disclosure, the provider's 
estimate of the amount of time necessary to achieve the represented 
results should be based on the type of program or service offered, the 
consumer's particular debts, and available historical data regarding 
similarly-situated consumers' experiences with creditors. With respect 
to the paragraph (B) disclosure, the provider should base its estimate 
on its historical experience and other information indicating the 
threshold amount of money that, if offered to the particular creditor, 
is reasonably likely to result in a successful settlement that is 
consistent with results represented by the provider.\473\ Providers 
should keep consumers informed throughout the duration of the program 
of any changes in creditor policies that may impact the projected time 
or amount of money needed before completion.
---------------------------------------------------------------------------

    \473\ Thus, if a debt settlement provider expects that a 
creditor will make an initial settlement offer for 95% of the debt 
owed, but it knows that consumers historically settle debts with 
that creditor for 60% after a certain amount of time has passed, 
compliance with this provision requires disclosure of the estimated 
time it would take and the amount of money the consumer would have 
to accumulate before the 60% settlement offer is obtained.
---------------------------------------------------------------------------

    The Final Rule makes two modifications to the language of the 
proposed rule to accomplish this clarification. Paragraph (A) in the 
proposed rule would have required disclosure of ``the specific time by 
which the debt relief service provider will make a bona fide settlement 
offer.'' The Final Rule deletes the word ``specific,'' which could have 
been read to require a time certain rather than a good faith 
estimate.\474\ Paragraph (B) in the proposed rule required disclosure 
of ``the specific amount of money or the percentage of each outstanding 
debt that the customer must accumulate before the debt relief service 
provider will make a bona fide settlement offer.'' Like the revision of 
paragraph (A), the Final Rule deletes the word ``specific,'' which 
could have been read to require a disclosure with certainty of the 
amount of money or percentage of debt, rather than a good faith 
estimate. As modified, these provisions will help ensure that consumers 
are not deceived and have the information they need to make informed 
decisions, while recognizing that certain information may only be 
estimated at the time disclosure is required.
---------------------------------------------------------------------------

    \474\ The other disclosures required in subsections (A) and (B) 
do not use the term ``specific.''
---------------------------------------------------------------------------

(2) Section 310.3(a)(1)(viii)(C)
    Section 310.3(a)(1)(viii)(C) of the Final Rule adopts the proposed 
rule's requirement that debt relief providers whose programs entail 
consumers not making timely payments to creditors disclose that the 
program may affect the consumer's creditworthiness; may result in 
continued collection efforts, including lawsuits; and may increase the 
amount the consumer owes due to late fees and interest.\475\ The 
adverse consequences of not paying creditors would be highly material 
to reasonable consumers in deciding whether to purchase the service or, 
if they do purchase it, whether to stop paying creditors. This 
disclosure is especially important in the debt settlement context where 
many consumers must choose between paying their creditors or saving 
funds for possible settlements.\476\
---------------------------------------------------------------------------

    \475\ TSR Proposed Rule, 74 FR at 49019. In the proposed rule, 
this was Sec.  310.3(a)(1)(viii)(E).
    \476\ See CFA at 9.
---------------------------------------------------------------------------

    Debt settlement providers often encourage consumers to stop paying 
creditors, or consumers stop on their own because they simply cannot 
afford simultaneously to make monthly payments to their creditors, set 
aside funds for settlements, and pay fees to the debt settlement 
company.\477\ The record shows, however, that consumers' credit ratings 
are harmed, often substantially, as a result of not making payments to 
creditors.\478\ Lower credit scores raise the cost of obtaining credit 
- or make it more difficult to obtain it at all.\479\ Another serious 
and negative consequence that may result from a consumer's decision to 
enter a debt relief plan in which he or she stops paying creditors is 
the accrual of late fees or interest on the accounts, which can 
significantly increase the consumer's ultimate obligation.\480\ 
Finally, if a consumer stops making payments, his likelihood of being 
sued by creditors will increase. Indeed, even while a consumer is 
enrolled in a debt relief program, creditors and debt collectors may 
continue to make collection calls pending resolution of the consumer's 
debts and may proceed with lawsuits and subsequent enforcement of any 
judgments, such as through garnishment of wages.\481\ Disclosure of 
these potentially serious negative consequences is necessary to prevent 
deception and the consumer injury that arises from consumers enrolling 
in debt relief plans and ceasing to pay creditors.\482\
---------------------------------------------------------------------------

    \477\ TSR Proposed Rule, 74 FR at 41995. See WV AG (Googel), Tr. 
at 44-45.
    \478\ See AFSA at 2; CFA at 18; CFA (Plunkett), Workshop 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 typically is the most 
important factor used to determine a consumer's FICO score), 
available at (http://www.myfico.com/Downloads/Files/myFICO_UYFS_Booklet.pdf); see also TSR Proposed Rule, 74 FR at 42002.
    \479\ In addition, as frequently noted by the Commission, a 
consumer's credit score can impact the availability and/or terms of 
a wide variety of benefits, including loans, employment, rental 
property, and insurance. See, e.g., FTC, Need Credit or Insurance? 
Your Credit Score Helps Determine What You'll Pay, available at 
(http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm).
    \480\ The Credit CARD Act of 2009 sets some limits on the fees 
and penalties that credit card companies can charge delinquent 
consumers. Pub. L. No. 111-24, Sec.  511(a)(1)&(2), 123 Stat. 1734 
(May 22, 2009). That Act, however, does not prohibit default fees 
and thus does not diminish the importance of this disclosure.
    \481\ Third party collectors are governed by the FDCPA. 15 
U.S.C. 1692a(6), 1692c. Creditors collecting their own debts are not 
subject to the FDCPA, but are subject to Section 5 of the FTC Act.
    \482\ TSR Proposed Rule, 74 FR at 49002; see JH (Oct. 24, 2009) 
at 6.
---------------------------------------------------------------------------

    The Commission received comments both supporting and opposing this 
proposed disclosure. The American Bankers Association filed a comment 
in support, arguing that the disclosure will help consumers understand 
the increased risks to their creditworthiness if they stop 
communicating with their creditors.\483\ TASC also voiced support, but 
expressed concern that the disclosure was linked primarily to debt 
settlement programs. TASC therefore recommended that the Commission 
require bankruptcy providers to make the same disclosure about the 
effect of

[[Page 48494]]

nonpayment on creditworthiness.\484\ The Commission notes that 
bankruptcy providers who are telemarketers of debt relief services 
would be subject to the TSR. Thus they would be required to make the 
TSR's disclosures unless they have a face-to-face meeting with the 
client.\485\ Moreover, consumers seeking to file bankruptcy must 
participate in pre-filing credit counseling with a certified credit 
counselor.\486\ These credit counselors generally inform consumers that 
bankruptcy negatively impacts their credit rating, remains on their 
credit report for ten years, and may make obtaining credit in the 
future more difficult and expensive.
---------------------------------------------------------------------------

    \483\ ABA at 4.
    \484\ TASC (Oct. 26, 2009) at 15.
    \485\ See 16 CFR 310.6(b)(3) (exempting ``[t]elephone 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)'').
    \486\ 11 U.S.C. 109(h); AICCCA at 1.
---------------------------------------------------------------------------

    The Final Rule requires these disclosures to be made only ``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.'' In general, DMPs do not rely upon the customer 
failing to make timely payments to creditors or debt collectors. Thus, 
this disclosure typically will not apply to debt relief providers 
offering DMPs.
    One debt relief provider objected to the required disclosures on 
the basis of a ``pilot survey'' it conducted of its customers that 
purported to show that the customers' FICO scores were higher at 
completion of the program than at enrollment. Thus, it argued, the 
creditworthiness disclosure would be inaccurate.\487\ The survey, 
however, only included 12 consumers, and the comment provided no 
information indicating that these consumers were representative of the 
universe of consumers enrolled in the program.\488\ Moreover, the 
survey only measured FICO scores at enrollment and completion, 
providing no information regarding whether consumers' scores 
deteriorated during the time that they were enrolled in the debt 
settlement program and, in many cases, not paying their creditors. For 
these reasons, the Commission does not consider the survey to be 
reliable or probative.
---------------------------------------------------------------------------

    \487\ MD (Oct. 26, 2009) at 30.
    \488\ Id.; MD (Mar. 22, 2010) at E-2.
---------------------------------------------------------------------------

    The Commission addressed in the NPRM some of the concerns with this 
disclosure that were raised by the comments. Specifically, one debt 
relief provider objected to the disclosure because it relates to 
actions taken by creditors against consumers that are not directly 
caused by the consumer's enrollment in the debt relief program.\489\ In 
the NPRM, the Commission acknowledged that some consumers considering 
debt relief already have stopped making payments and may be subject to 
late fees or other charges regardless of whether they enroll in the 
program.\490\ The record shows, however, that in a significant number 
of instances, consumers are induced by the provider's instructions not 
to make payments that they otherwise would have made.\491\ This is 
particularly true for debt settlement services.\492\ Moreover, even as 
to those consumers who already have ceased paying their creditors, the 
provider's instruction may persuade them not to resume payments. A 
disclosure about the adverse consequences of not paying creditors is 
therefore highly material to many consumers' purchase or use decisions. 
For these reasons, the Final Rule includes Sec.  310.3(a)(1)(viii)(C) 
as proposed.
---------------------------------------------------------------------------

    \489\ See Able (Oct. 21, 2009) at 26. The commenter noted, 
however, that his company currently makes this disclosure to 
consumers.
    \490\ TSR Proposed Rule, 74 FR at 42002.
    \491\ The stop-payment instruction is especially persuasive in 
those instances when the provider misrepresents or obscures the fact 
that some or all of the consumer's payments to the provider are 
going towards its fees, rather than the consumer's debts. See SBLS 
at 4; FTC v. Debt-Set, 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.''); Illinois v. SDS West Corp., No. 09CH368 (Cir. Ct. of 7th 
Jud. Dist., Sangamon Cty. 2009); Illinois v. Debt Relief USA, Inc., 
No. 09CH367 (Cir. Ct. of 7th Jud. Dist., Sangamon Cty. 2009); North 
Carolina v. Knight Credit Servs., Inc. (Sup. Ct. Wake Cty. 2004).
    \492\ Supra note 73.
---------------------------------------------------------------------------

(3) New Section 310.3(a)(1)(viii)(D)
    Section 310.3(a)(1)(viii)(D) of the Final Rule imposes an 
additional disclosure requirement on debt relief providers who request 
or require the customer to place money for its fee and for payment to 
customers' creditors or debt collectors, in a dedicated bank account at 
an insured financial institution. These providers must disclose that 
the consumer owns the funds held in the account and may withdraw from 
the debt relief service at any time without penalty and receive all 
funds currently in the account. This information would be highly 
material to reasonable consumers in deciding whether to enroll in the 
service; the right to cancel and receive a refund is a key right for 
consumers under the rule, but it is only meaningful if consumers know 
that they have the right.\493\
---------------------------------------------------------------------------

    \493\ See Summary of Communications (June 16, 2010) at 2 
(meeting with consumer groups).
---------------------------------------------------------------------------

2. Proposed Disclosures Not Adopted in the Final Rule
    After reviewing the record, and as explained below, the Commission 
has decided not to adopt in the Final Rule three of the disclosures 
included in the proposed rule, because they are largely duplicative or 
likely to detract from the efficacy of the required disclosures. The 
omitted disclosures are: (1) that not all creditors will accept a 
reduction in the amount of debt owed; (2) that creditors may pursue 
collection efforts pending the completion of the debt relief services; 
and (3) that any savings from the debt relief program may be taxable 
income.
a. Proposed Section 310.3(a)(1)(viii)(C)
    Section 310.3(a)(1)(viii)(C) of the proposed rule would have 
required 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 debt 
collector.''\494\ USOBA supported this disclosure, stating it is one of 
the disclosures that USOBA encourages its members to make.\495\ Some 
creditors refuse to work with third-party debt relief providers in 
certain situations, or not all,\496\ and many consumers may not realize 
this is the case. It is difficult to predict with certainty, however, 
the circumstances under which a particular creditor will or will not be 
willing to negotiate the debt with a third party.\497\ In fact, even 
those creditors that claim not to work with debt relief providers may 
do so in certain situations.\498\ One commenter explained that, while 
some creditors

[[Page 48495]]

might refuse to negotiate a debt balance in the early stages of 
delinquency, rarely would they continue to do so as the account becomes 
increasingly delinquent. This is the case because the creditor 
typically collects more from negotiation with a debt relief program 
than through other alternatives.\499\ One debt relief provider 
commented that it is very rare that an account cannot be negotiated, 
especially after the creditor charges off the debt and sells it to a 
debt buyer who, in turn, initiates its own collection efforts.\500\
---------------------------------------------------------------------------

    \494\ TSR Proposed Rule, 74 FR at 42019.
    \495\ USOBA (Oct. 26, 2009) at 14.
    \496\ TSR Proposed Rule, 74 FR at 42002; see, e.g., CFA 
(Plunkett), Workshop 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 (http://www.insidearm.com/go/arm-news/debt-settlement-companies-largely-ignored-by-banks).
    \497\ MD (Oct. 26, 2009) at 30; FCS (Oct. 29, 2009) at 3; ABA at 
2; CRN at 6; CFA (Grant), Tr. at 175.
    \498\ See USOBA (Ansbach), Tr. at 75-76 (``[O]ne of our largest 
members had a financial institution [that allegedly does not work 
with debt settlement companies] call up and say, we would like to 
scrub our financial data against yours and offered [settlements of] 
cents on the dollar.'').
    \499\ Able (Oct. 21, 2009) at 26.
    \500\ CRN at 6.
---------------------------------------------------------------------------

    In sum, the record indicates that many creditors and debt 
collectors settle at least some debts for some consumers, and creditor 
policies and practice may change depending on the length and severity 
of the delinquency, other features of the debt, or external factors 
such as the creditor's need for liquidity.\501\ Accordingly, the 
usefulness of a general disclosure about the fact that not all 
creditors will negotiate debts would vary from case to case. In 
addition, eliminating this disclosure from the Final Rule reduces the 
amount of information consumers must absorb, thus making the remaining 
disclosures more effective, and lessens the burden on industry.\502\ 
Moreover, the Final Rule prohibits any misrepresentation by a debt 
relief provider relating to whether creditors or debt collectors will 
modify a debt.\503\ For these reasons, the Commission has decided not 
to adopt proposed Sec.  310.3(a)(1)(viii)(C)).
---------------------------------------------------------------------------

    \501\ USOBA (Ansbach), Tr. at 75-76.
    \502\ Consumer research shows that consumers' ability to process 
information and make rational choices may be impaired if the 
quantity of the information is too great. See generally, Byung-Kwan 
Lee & Wei-Na Lee, The Effect of Information Overload on Consumer 
Choice Quality in an On-Line Environment, 21(3) Psychology & 
Marketing 159, 177 (Mar. 2004); Yu-Chen Chen et al., The Effects of 
Information Overload on Consumers' Subjective State Towards Buying 
Decision in the Internet Shopping Environment, 8(1) Electronic 
Commerce Research and Applications 48 (2009).
    \503\ 16 CFR 310.3(a)(2)(x).
---------------------------------------------------------------------------

b. Proposed Section 310.3(a)(1)(viii)(D)
    Proposed Sec.  310.3(a)(1)(viii)(D) would have required debt relief 
providers to disclose ``that pending completion of the represented debt 
relief services, the customer's creditors or debt collectors may pursue 
collection efforts, including initiation of lawsuits.''\504\ This 
information could be valuable to consumers considering whether to 
purchase the service and whether to stop paying their creditors.\505\ 
However, another of the proposed disclosures - that, if applicable, the 
customer may be sued by creditors or debt collectors - essentially 
makes the same point: enrollment in a debt relief program does not 
prevent creditors and collectors from continuing to pursue the debtor. 
Thus, the Commission has decided not to adopt proposed Sec.  
310.3(a)(1)(viii)(D).\506\
---------------------------------------------------------------------------

    \504\ Id. at 42019.
    \505\ See AFSA at 2; ABA at 4; TASC (Oct. 26, 2009) at 15.
    \506\ TSR Proposed Rule, 74 FR at 49019. Some commenters 
suggested additional disclosures related to lawsuits, e.g. that the 
longer a consumer is enrolled in a debt relief program the more 
likely the consumer is to be sued and possibly have wages or bank 
accounts garnished. CRN at 6; MN LA at 1. The Commission believes 
that the disclosure in Section 310.3(a)(1)(viii)(C) is adequate to 
inform consumers of the most common risks involved in debt relief, 
such as the possibility of continuing collection efforts and 
lawsuits.
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c. Proposed Section 310.3(a)(1)(viii)(F)
    Proposed Sec.  310.3(a)(1)(viii)(F) would have required that a 
telemarketer of debt relief services disclose ``that savings a customer 
realizes from use of a debt relief service may be taxable 
income.''\507\ It is likely that many consumers do not understand this 
fact, which would limit the financial benefits of the service.\508\ 
This provision generated only a small number of comments. According to 
one commenter, several of his clients claimed that they would not have 
enrolled in the debt relief program if they had been aware of the tax 
consequences.\509\ Consumer advocates also supported this 
disclosure.\510\
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    \507\ TSR Proposed Rule, 74 FR at 42019.
    \508\ IRS, Publication 525 - Taxable and Nontaxable Income 19-20 
(Feb. 19, 2009) (``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 (http://www.irs.gov/pub/irs-pdf/p525.pdf).
    \509\ RDRI at 5.
    \510\ CFA at 20. See CU (Hillebrand), Tr. at 165-66; see also 
DSUSA (Craven), Workshop 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.''); AMCA (Franklin), 
Workshop 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.'').
---------------------------------------------------------------------------

    Other commenters objected to this proposed disclosure. One asserted 
that the information is not relevant to all consumers, such as those 
who are insolvent before or at the time of the forgiveness of 
debt.\511\ NACCA commented that this disclosure is not accurate for 
consumers who enroll in a DMP, which generally does not involve debt 
forgiveness and thus would not result in a tax liability.\512\
---------------------------------------------------------------------------

    \511\ Able (Oct. 21, 2009) at 26; see also Franklin at 22 (``a 
large portion of debt settlement clients are not actually 
solvent''); IRS, Publication 525 - Taxable and Nontaxable Income 20 
(Feb. 19, 2009) (``Do not include a canceled debt in your gross 
income . . . [if] the debt is cancelled when you are insolvent.''), 
available at (http://www.irs.gov/pub/irs-pdf/p525.pdf).
    \512\ NACCA at 3.
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    After reviewing the record, the Commission has decided not to adopt 
proposed Sec.  310.3(a)(1)(viii)(F) as part of the Final Rule. As noted 
by some of the commenters, in many cases this disclosure might not be 
accurate. Further, as is true with the other two proposed disclosures 
that are omitted from the Final Rule, this disclosure would add 
verbiage and complexity to the information consumers receive, and 
thereby potentially diminish the effectiveness of the more important 
disclosures.\513\
---------------------------------------------------------------------------

    \513\ The Commission encourages debt relief providers to advise 
consumers about the tax consequences in those cases where such 
consequences are likely to exist.
---------------------------------------------------------------------------

3. Application of Section 310.3(a)(1) to Debt Relief Services: General 
Disclosure Obligations
    Under the Final Rule, debt relief service providers that promote 
their services through inbound or outbound telemarketing are subject 
both to the debt relief-specific disclosure requirements and the 
existing disclosure and other provisions of the TSR. Consumer advocacy 
groups noted the importance of applying the TSR's pre-existing 
disclosure requirements to the telemarketing of debt relief 
services.\514\ Three of those pre-existing disclosures would provide 
critical information for consumers in the context of debt relief 
services: the total cost of the services; material restrictions, 
limitations, or conditions on purchasing, receiving, or using the 
services; and the seller's refund policy.\515\
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    \514\ CFA at 20.
    \515\ See 16 CFR 310.3(a)(1)(i)-(iii).
---------------------------------------------------------------------------

    Forum participants agreed that a total cost disclosure is important 
in the sale of debt relief services. This is especially true for debt 
settlement plans, for which the costs are often substantial and 
complex.\516\ Similarly, in the sale of debt management plans, 
disclosure of total costs is crucial to ensure that consumers are not 
misled about the amount of those costs.\517\
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    \516\ 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. Using this formula, 
a consumer with $20,000 in debt would pay between $2,800 and $3,600 
for debt settlement services. See USOBA (Keehnen), Tr. at 209.
    \517\ See JH (Jan. 12, 2010) at 2. In the FTC cases brought 
against sham nonprofit credit counselors, consumers allegedly were 
misled not only as to the total costs, but also that the fees were 
``voluntary contributions'' used to offset the operating expenses of 
the allegedly nonprofit service provider. See, e.g., FTC v. 
AmeriDebt, Inc., No. PJM 03-3317 (D. Md. filed Nov. 19, 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 defendants allegedly retained each 
consumer's first monthly payment as a fee without notice to the 
consumer.).

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[[Page 48496]]

    Several forum participants stated that at least some debt service 
providers currently disclose costs to consumers even when they are not 
required to do so.\518\ Often, however, fee disclosures made in the 
telemarketing call are contradicted by the written contract.\519\ Many 
providers say little, if anything, about fees or misrepresent the 
amount and/or timing of fee payments.\520\ Broadcast advertisements and 
websites offering debt relief services typically are silent as well 
about how much a consumer must pay for the advertised service.\521\ The 
complexity of the fee structure used by many debt relief providers 
exacerbates the potential for consumer confusion or deception.\522\ As 
a result, consumers often enroll in programs under a false impression 
or are confused about what they have to pay or when they have to pay 
it. Bringing inbound calls within the coverage of Sec.  310.3(a)(1) 
will help to diminish this problem. Furthermore, while Sec.  
310.3(a)(1) only requires disclosure of the total fee, the failure to 
clearly and conspicuously disclose material payment terms, such as the 
fees for individual settlements, may mislead consumers and thus 
constitutes a deceptive practice prohibited by Section 5 of the FTC 
Act.
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    \518\ See USOBA (Keehnen), Tr. at 209.
    \519\ See, e.g., FTC v. Connelly, No. SA CV 06-701 DOC (RNBx), 
Opp. to FTC Mot. Summ. J. at 12 (C.D. Cal. filed Aug. 3, 2006) 
(alleging that defendant failed to disclose to consumers that they 
would have to pay 45% of their total program fees upfront, before 
any payments would be made to the consumer's creditors; 
telemarketing claims contradicted by subsequent written 
disclosures). Even if true, subsequent disclosures generally are not 
sufficient to correct misrepresentations made in the initial 
communications. Resort Car Rental Sys., Inc. v. FTC, 518 F.2d 962, 
964 (9th Cir. 1975) (citing Exposition Press, Inc. v. FTC, 295 F.2d 
869 (2d Cir. 1961), cert. denied, 370 U.S. 917, 82 S.Ct. 1554, 8 
L.Ed.2d 497; Carter Products, Inc. v. FTC, 186 F.2d 821 (7th Cir. 
1951)); Deception Policy Statement, supra note 453, at 182; 
Removatron Int'l Corp. v. FTC, 884 F.2d 1489, 1497 (1st Cir. 1989) 
(advertisement was deceptive despite written qualification); FTC v. 
Gill, 71 F. Supp. 2d 1030, 1044 (C.D. Cal. 1999) (advertisement was 
deceptive even though a disclaimer in a written contract later 
signed by consumers contained accurate, non-deceptive information).
    \520\ Supra notes 79, 362; see also Loeb (Mallow), Tr. at 206.
    \521\ As noted above, supra note 223, FTC staff found that only 
14 of 100 debt settlement websites reviewed disclosed the specific 
fees that a consumer will have to pay upon enrollment in the 
service. An additional 34 out of the 100 websites mentioned fees but 
did not provide specific fee amounts.
    \522\ The Commission previously has explained compliance 
obligations when marketing installment contracts, some of which are 
particularly applicable to debt relief services. Specifically, in an 
earlier amendment to the TSR, 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). The Commission went 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).
---------------------------------------------------------------------------

    In addition to fees, Sec.  310.3(a)(1)(ii) of the TSR requires 
providers to disclose ``[a]ll material restrictions, limitations, or 
conditions to purchase, receive, or use the goods or services that are 
the subject of the sales offer.''\523\ Two common conditions that 
commenters suggested should be disclosed are (1) the consumer must have 
a minimum amount of debt to be eligible,\524\ and (2) the debt relief 
services will extend only to unsecured debt, if that is the case.\525\ 
The Commission believes both of these conditions are material and must 
be disclosed under the TSR.
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    \523\ 16 CFR 310.3(a)(1)(ii).
    \524\ DMB (Oct. 29, 2009) at 5-6.
    \525\ See MN LA (Elwood), Tr. at 251. Another commenter proposed 
modifying Sec.  310.3(a)(1)(ii) to require that only ``reasonable'' 
material restrictions be disclosed. Able (Oct. 21, 2009) at 25. The 
definition of materiality - ``likely to affect a person's choice of, 
or conduct regarding, goods or services'' - is a well established 
limiting principle codified in the Commission's Deception Policy 
Statement, supra note 453; see also TSR Final Rule, 60 FR at 43845 
(citing In re Thompson Med. Co., 104 F.T.C. 648 (1984), aff'd, 791 
F.2d 189 (D.C. Cir. 1986), cert. denied, 479 U.S. 1086 (1987)). The 
Commission declines to change it in this Rule.
---------------------------------------------------------------------------

    Section 310.3(a)(1)(iii) of the TSR requires that if the seller has 
a policy of not making refunds, cancellations, exchanges, or 
repurchases, it must disclose this policy to consumers.\526\ Further, 
if the seller or telemarketer makes a representation about a refund 
policy, it must state all material terms and conditions of the policy. 
Application of this provision to providers of debt relief services is 
important in light of the record evidence that many consumers either 
are not apprised that refunds are available or are misled about key 
limitations and conditions of the refund policy.\527\
---------------------------------------------------------------------------

    \526\ 16 CFR 310.3(a)(1)(iii). This requirement reflects the 
Commission's determination that a seller's unwillingness to provide 
refunds is a material term about which a consumer must be informed 
before paying for goods or services.
    \527\ See WV AG (Googel), Tr. at 84; CFA at 9; see also, e.g., 
FTC v. Select Pers. Mgmt., Inc., No. 07-CV-0529 (N.D. Ill. Am. 
Compl. filed Aug. 18, 2007); FTC v. Connelly, No. SA CV 06-701 DOC 
(RNBx) (C.D. Cal. Am. Compl. filed Nov. 27, 2006); FTC v. Debt 
Solutions, Inc., No. 06-0298 JLR (W.D. Wash. filed Mar. 6, 2006); 
FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 GAF JTLx (C.D. 
Cal. filed Feb. 3, 2004); FTC v. Debt Mgmt. Found. Servs., No. 04-
1674-T-17-MSS (M.D. Fla. filed July 20, 2004).
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4. Timing of Required Disclosures
    The TSR specifies the point in the transaction at which disclosures 
must be made. The pre-existing TSR required all disclosures to be made 
``[b]efore a customer pays for goods or services offered.''\528\ The 
proposed rule would have modified this language by adding the phrase 
``and before any services are rendered.'' In the Final Rule, the 
Commission has determined to modify the TSR language in a different 
manner from the proposed rule. Specifically, Sec.  310.3(a)(1) of the 
Final Rule now provides that all required disclosures must be made 
``[b]efore a customer consents to pay.'' This formulation more closely 
comports with the Commission's intent in the original language to 
trigger the disclosure requirement before any agreement is executed, 
when the information is most useful, rather than only after the 
consumer has made a payment on that agreement.\529\ Moreover, the 
phrase ``consents to pay'' encompasses the conduct that the Commission 
has previously identified as triggering the disclosure requirement 
under the pre-existing TSR.\530\ Under the Final Rule, the disclosures 
must be made before any act or communication that signifies the 
consumer's consent to pay, such as sending full or partial payment; 
providing credit card, bank account or other billing information, 
stating agreement to a transaction, or invoking an electronic process 
used to electronically sign an agreement. This change applies to all 
disclosures required by the TSR, and not just those

[[Page 48497]]

specific to debt relief services. In the case of debt relief services, 
a footnote added to the Final Rule clarifies that the provider must 
make the required disclosures before the consumer enrolls in an offered 
program. Thus, debt relief providers must make the disclosures at the 
time the provider is marketing the service and before the consumer 
signs an enrollment contract or otherwise agrees to enroll, and not at 
the time the consumer executes a debt relief agreement pursuant to the 
advance fee ban provision.
---------------------------------------------------------------------------

    \528\ 16 CFR 310.3(a)(1).
    \529\ In the SBP to its TSR amendments in 2003, the Commission 
interpreted the original TSR language to mean that telemarketers 
must make required disclosures ``[b]efore a seller or telemarketer 
obtains a consumer's consent to purchase, or persuades a consumer to 
send any full or partial payment,'' i.e., before the agreement is 
executed. TSR Amended Rule, 68 FR at 4599 (citing the original 
Rule's TSR Compliance Guide); see also Loeb (Mallow), Tr. at 212-13 
(``the FTC law of [when a company must make disclosures under the 
TSR] is pretty clear, it has to be prior to contracting.''); CFA at 
20.
    \530\ See TSR; Final Amended Rule, 68 FR at 4599 (disclosures 
must be made ``[b]efore a seller or telemarketer obtains a 
consumer's consent to purchase, or persuades a consumer to send any 
full or partial payment'').
---------------------------------------------------------------------------

5. Recommended Additional Changes to the Disclosure Provisions Not 
Adopted in the Final Rule
    Commenters and forum participants recommended several additional 
modifications to the proposed disclosures that the Commission has 
decided not to adopt. First, several consumer advocates proposed that 
the Final Rule require debt relief providers to disclose their dropout 
rate, i.e., the percentage of consumers who enroll in a program but 
drop out before completing it.\531\ The Commission agrees that the 
dropout rate of a particular program is likely to be valuable 
information for consumers considering enrollment in that program. The 
Commission has concluded, however, that requiring disclosure of dropout 
rates is unnecessary and would be difficult to implement. As discussed 
in detail in Section III.E.b, providers making savings claims must use 
a calculation that takes into account all of the provider's customers, 
including those who dropped out, in order for the claim to be truthful 
and non-deceptive. In addition, there is no single defined way to 
calculate a dropout rate, and any disclosure requirement would have to 
be very prescriptive in specifying the formula the provider would have 
to use to calculate the rate, including all of the different variables 
that must be factored in.\532\
---------------------------------------------------------------------------

    \531\ See NACCA (Keiser), Tr. at 217-18; CU (Hillebrand), Tr. at 
218-19; QLS at 5; see also CFA (Grant), Tr. at 218 (a dropout rate 
is very important, especially if success claims are permitted and 
there is no advance fee ban in place).
    \532\ Among other things, the rule would have to identify the 
conditions under which a consumer would be considered to have 
dropped out, e.g., at what point the consumer would be deemed to 
have completed, or not completed, the program. This could be a 
difficult determination in that many debt relief services involve 
payments - and services - that take place over time. Thus, for 
example, if a consumer terminates a debt settlement program after 
80% of his debts were settled, should he be considered a dropout? 
The rule also would have to account for new entrants into the market 
that would lack data on which to calculate a drop out rate. Without 
standardization of all of these factors, consumers could not compare 
the dropout rates of different providers.
---------------------------------------------------------------------------

    Second, a commenter recommended that the Rule require that 
disclosures be in writing to allow consumers additional time to 
consider their decision, rather than immediately enrolling in a program 
over the phone.\533\ Two forum participants, on the other hand, 
recommended against requiring written disclosures, asserting that they 
would come too late in the consumer's decision- making process\534\ and 
noting that consumers often sign documents with written disclosures 
they do not understand.\535\
---------------------------------------------------------------------------

    \533\ CRN at 5; see NACCA at 2.
    \534\ See CU (Hillebrand), Tr. at 211.
    \535\ See SBLS (Tyler), Tr. at 214.
---------------------------------------------------------------------------

    The Final Rule does not specify the precise manner or mode in which 
disclosures must be made.\536\ The Commission has determined that it is 
unnecessary to require that disclosures be in writing, but notes that 
they must be made in a ``clear and conspicuous'' manner, prior to the 
time that the consumer enrolls in the service.\537\ The Commission 
concludes that these requirements, in conjunction with the advance fee 
ban, will be adequate to protect consumers of debt relief services from 
deceptive or abusive practices.
---------------------------------------------------------------------------

    \536\ As stated earlier, after-the-fact written disclosures do 
not cure deceptive claims made earlier in the transaction. See supra 
note 519.
    \537\ 16 CFR 310.3(a)(1). If the provider markets to consumers 
in a language other than English, the disclosures must be provided 
in the language the provider is using for the marketing, in order to 
meet the clear and conspicuous requirement. See 16 CFR 14.9 (foreign 
language disclosures in advertising); 16 CFR 308.3(a)(1) (foreign 
language disclosures under Pay Per Call Rule); 16 CFR 429.1(a) 
(foreign language disclosure of right to cancel door-to-door sales); 
16 CFR 455.5 (Spanish language version of FTC's used car 
disclosures); 16 CFR 610.4(a)(3)(ii) (foreign language disclosures 
in marketing free credit reports).
---------------------------------------------------------------------------

    Commenters and forum participants recommended that the Commission 
adopt a variety of additional disclosures, including, among others: (1) 
identifying contact and other background information about the 
provider;\538\ (2) a list of the consumer's debts to be included in the 
program;\539\ (3) a statement that ``other debt relief options may be 
more appropriate for the consumer;'' \540\ (4) a statement that 
consumers will not achieve settlement results until they have 
accumulated sufficient funds;\541\ (5) a notice to consumers when they 
are collecting funds for debt settlements at a rate more accelerated 
than a pro rata arrangement;\542\ (6) the percentages of clients who 
complete the program after 39 months and who file for bankruptcy after 
paying fees to a debt relief provider;\543\ (7) the percentage of 
settlements consummated after charge off;\544\ (8) annual retention 
rates;\545\ (9) the length of time the provider has been 
operating;\546\ and (10) the number of complaints and lawsuits filed 
against the company over the prior three years.\547\ The Commission has 
declined to adopt any of these additional disclosures. The disclosures 
required in the Final Rule will provide consumers with the most 
important material information they need to avoid deception and make 
well-informed choices. Adding more disclosures would risk overshadowing 
more important information and place a potentially unnecessary burden 
on providers.
---------------------------------------------------------------------------

    \538\ NFCC at 10-11, RDRI at 6.
    \539\ NFCC at 10-11.
    \540\ CareOne at 7; see also NFCC at 14.
    \541\ MD (Oct. 26, 2009) at 33, 35.
    \542\ NACCA at 3-4.
    \543\ RDRI at 6.
    \544\ Id.
    \545\ Id.
    \546\ Id.
    \547\ Id.
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6. Effective Date
    This provision will be effective September 27, 2010. The Commission 
expects prompt compliance with this provision, as it ensures that 
consumers receive basic information about the advertised services.

E. Sections 310.3(a)(2) & 310.3(a)(4): Misrepresentations

    The Final Rule supplements the existing TSR prohibitions against 
misrepresentations with a provision specifically intended to target 
deceptive practices by debt relief service providers.\548\ As stated 
above, an act or practice is deceptive if: (1) there is a 
representation or omission of information that is likely to mislead 
consumers acting reasonably under the circumstances; and (2) that 
representation or omission is material to consumers.\549\
---------------------------------------------------------------------------

    \548\ The Final Rule does not change any of the existing TSR 
prohibitions on misrepresentations.
    \549\ Deception Policy Statement, supra note 453, at 174-83.
---------------------------------------------------------------------------

    The new provision prohibits sellers or telemarketers of debt relief 
services from making misrepresentations regarding any material aspect 
of any debt relief service and provides several illustrative examples, 
including misrepresentations of:
     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

[[Page 48498]]

the customer must accumulate before the provider will initiate attempts 
with the customer's creditors or debt collectors or make a bona fide 
offer to negotiate, settle, or modify the terms of the customer's debt;
     the effect of the service on a customer's 
creditworthiness;
     the effect of the service on the collection efforts of the 
customer's creditors or debt collectors;
     the percentage or number of customers who attain the 
represented results; and
     whether a service is offered or provided by a nonprofit 
entity.
    This provision is largely unchanged from proposed Sec.  
310.3(a)(2)(x) of the proposed rule.\550\
---------------------------------------------------------------------------

    \550\ The final provision contains only four minor revisions. 
First, it corrects two typographical errors by inserting the words 
``or'' and ``the'' into the prohibition against misrepresenting 
``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 
or debt collectors to negotiate, settle, or modify the terms of the 
customer's debt.'' (emphasis added). For consistency purposes, the 
Final Rule also replaces the word ``consumer's''' with the word 
``customer's'' in the prohibition against misrepresenting ``the 
effect of the service on collection efforts of the customer's 
creditors or debt collectors.'' (emphasis added). ``Customer'' is 
defined in Section 310.2(l) of the TSR and used throughout the 
Rule.''
    Finally, the Commission added the phrase ``or make a bona fide 
offer'' to clarify that the misrepresentation provision prohibits 
misrepresentations about the amount that the customer must 
accumulate before the provider initiates attempts to settle the debt 
and/or about the amount that a customer must accumulate before the 
provider makes a bona fide settlement offer or other offer to 
renegotiate, settle, or modify the terms of the customer's debt.
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    In this Section of the SBP, the Commission discusses the amended 
TSR's prohibitions against misrepresentations and their applicability 
to debt relief services. Specifically, it provides an analysis of new 
Sec.  310.3(a)(2)(x) of the Final Rule and the public comments received 
on the proposed version of this provision. It also provides further 
detail on the requirements for making truthful and substantiated 
savings claims under the amended Rule. Finally, this section explains 
how the existing provisions of Sec. Sec.  310.3(a)(2) and 310.4(a)(4) 
of the TSR - those that predate, and were unaltered by, this rulemaking 
- would apply to inbound telemarketing of debt relief services.
1. Public Comments on Proposed Section 310.3(a)(2)(x)
    As described above, Sec.  310.3(a)(2)(x) adds several debt relief-
specific examples of misrepresentations that are prohibited by the TSR. 
The vast majority of commenters who addressed this provision in the 
proposed rule, including representatives of the debt relief industry, 
strongly supported it.\551\ Additionally, participants in the public 
forum voiced general support for the proposal.\552\ All but two of the 
comments that recommended changes to Sec.  310.2(a)(2)(x) focused on 
relatively minor revisions; these comments are discussed, as 
applicable, in the analysis of the Final Rule below.
---------------------------------------------------------------------------

    \551\ See, e.g., TASC (Oct. 26, 2009) at 16; USOBA (Oct. 26, 
2009) at 17-18; Orion (Oct. 1, 2009) at 1; CareOne at 4; AICCCA at 
5; CFA at 3, 20; NAAG (Oct. 23, 2009) at 11; AFSA at 9 (``Each 
specified misrepresentation is sufficiently widespread to justify 
inclusion in the Rule.'').
    \552\ See, e.g., CSA (Witte), Tr. at 65; USOBA (Ansbach), Tr. at 
108 (``[The] Commission has got two things down, that I think are 
widely supported, the disclosures and misrepresentations.'').
---------------------------------------------------------------------------

    Two debt relief service providers opposed this provision, arguing 
that it is wholly unjustified because material misrepresentations are 
not widespread in the debt relief industry.\553\ As detailed in this 
SBP and the NPRM, however, the record demonstrates that the 
misrepresentations banned by Sec.  310.3(a)(2)(x) are common in this 
industry.\554\
---------------------------------------------------------------------------

    \553\ See MD (Oct. 26, 2009) at 37-38; Able (Oct. 21, 2009) at 
30.
    \554\ See TSR Proposed Rule, 74 FR at 41991-41997.
---------------------------------------------------------------------------

    Some commenters recommended that the Commission add additional 
examples of prohibited misrepresentations to Sec.  310.3(a)(2)(x).\555\ 
The examples included in Sec.  310.3(a)(2)(x) are common 
misrepresentations observed in FTC and state law enforcement actions. 
The Commission reiterates that these examples are not intended to be an 
exhaustive list and that this provision encompasses any material 
misrepresentation made in connection with any debt relief service.
---------------------------------------------------------------------------

    \555\ See, e.g., NACCA at 4 (recommending that the Commission 
specifically prohibit misrepresentations concerning whether any 
savings may be taxable income and the use of lead generators).
---------------------------------------------------------------------------

2. Final Section 310.3(a)(2)(x)
a. Claims Other Than Savings Claims
    Section 310.3(a)(2)(x), which is added to Sec.  310.3(a)(2) of the 
TSR as a result of this rulemaking, prohibits material 
misrepresentations specifically related to the sale of debt relief 
services.\556\ The new provision lists several illustrative examples of 
prohibited misrepresentations. Although the examples already may be 
covered by the existing provisions of Sec. Sec.  310.3(a)(2) and 
310.3(a)(4), including them explicitly provides additional guidance to 
debt relief providers of their obligations to ensure that their claims 
are true and substantiated.\557\
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    \556\ See Deception Policy Statement, supra note 453, at 174-83.
    \557\ NAAG concurred that the practices prohibited under Section 
310(a)(2)(x) are likely already prohibited by the FTC Act and state 
unfair and deceptive trade practices statutes, but agreed that 
codifying them under the TSR will clarify the law and debt relief 
providers' obligations. NAAG (Oct. 23, 2009) at 11; see also CFA at 
3 (stating that Section 310.3(a)(2)(x) ``provides greater clarity to 
debt relief service providers regarding the types of claims that the 
FTC will consider to be deceptive'').
---------------------------------------------------------------------------

    With respect to the individual examples, Sec.  310.3(a)(2)(x) first 
prohibits 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 or debt 
collectors or make a bona fide offer to negotiate, settle, or modify 
the terms of the customer's debt.'' As set forth in detail above in the 
discussion of Sec.  310.3(a)(1)(viii), consumers often have little 
understanding of the mechanics of the debt relief process. According to 
commenters, including those representing the industry, it usually takes 
many months, if not years, for a provider, if it is even able to do so, 
to achieve final resolution of all of a consumer's debts.\558\ This is 
information that certainly would influence a reasonable consumer's 
purchasing decisions. Often, however, telemarketers of these services 
tell consumers that results can be achieved more quickly.\559\ Further, 
in the context of debt settlement, providers may deceive consumers 
about how their monthly payments are being used, suggesting that the 
funds are being accumulated for settlements when, in fact, some or all 
of them go towards the provider's fees.\560\ It is difficult to imagine 
information

[[Page 48499]]

more critically material to a consumer in financial distress.
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    \558\ See, e.g., CRN (Bovee), Tr. at 28; SBLS (Tyler), Tr. at 
162; ACCORD (Oct. 9, 2009) at 2; CFA at 4.
    \559\ See, e.g., FTC v. JPM Accelerated Servs., Inc., No. 09-CV-
2021 (M.D. Fla. Am. Compl. filed Jan. 19, 2010) (alleging that 
defendant misrepresented that consumers could pay off debt three to 
five times faster without increasing monthly payments); FTC v. Econ. 
Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga. filed Nov. 30, 2009) 
(same); FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill. 
filed Nov. 30, 2009) (alleging that defendants misrepresented that 
consumers could pay off debts three to five times faster); FTC v. 
Debt Solutions, Inc., No. 06-0298 JLR (W.D. Wash. filed Mar. 6, 
2006); FTC v. Integrated Credit Solutions, No. 06-806-SCB-TGW (M.D. 
Fla. filed May 2, 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. filed Nov. 2, 2004)(alleging defendant told consumers it 
could shorten period of time to pay off debts).
    \560\ See supra notes 519-20.
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    A second provision of Sec.  310.3(a)(2)(x) prohibits 
misrepresentations regarding ``the effect of the service on a 
customer's creditworthiness.'' As described earlier in this SBP, 
representations on this topic are highly material to consumers for whom 
lower credit scores will impair their ability to get credit, insurance, 
or other benefits in the future.
    Third, Sec.  310.3(a)(2)(x) prohibits a telemarketer from making 
misrepresentations about the ``effect of the service on collection 
efforts of the consumer's creditors or debt collectors.'' This 
provision will ensure that providers do not misrepresent that they can 
stop creditors or debt collectors from contacting or attempting to 
collect from consumers, a practice in which a significant number of 
providers have engaged.\561\ Again, this is highly material information 
that consumers need to make an informed purchaser's decision.
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    \561\ A coalition of consumer groups, in their written comments, 
urged the Commission also to bar debt relief services from: (1) 
instructing or advising consumers to stop making payments directly 
to their creditors; (2) instructing or advising consumers to stop 
communicating directly with their creditors; or (3) re-routing 
consumers' bills so that creditors send them to the debt relief 
service. See CFA at 2, 18. The Commission believes that the 
disclosure requirements in Sec.  310.3(a)(1)(viii)(C) of the Final 
Rule, along with the prohibition against material 
misrepresentations, are sufficient to protect consumers.
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    Fourth, Sec.  310.3(a)(2)(x) prohibits misrepresentations relating 
to ``the percentage of customers who attain the represented results.'' 
As discussed above, debt relief providers covered by the Rule commonly 
make success rate claims in their advertising and telemarketing.\562\ 
These claims are highly material to consumers' purchase decisions. Yet 
a large percentage of customers of these providers do not obtain the 
results promised.\563\ In fact, it appears that well over half of 
consumers who enroll in these programs drop out before they have 
completed them.\564\
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    \562\ In its review of 100 debt settlement websites, supra note 
50, FTC staff found that 86% of the 100 debt settlement websites 
reviewed represented that the provider could achieve a specific 
level of reduction in the amount of debt owed. Again, such claims 
are highly material.
    \563\ Data from the debt settlement industry support this 
assertion. See supra Section III.C.2.a; see also FTC Case List, 
supra note 27.
    \564\ Supra Section III.C.2.a.1.
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    Fifth, Sec.  310.3(a)(2)(x) prohibits misrepresentations about 
``whether a service is offered or provided by a nonprofit 
entity.''\565\ Such claims are material because they lend credibility 
and trustworthiness to the entity making them. The Commission has 
brought several law enforcement actions against entities that 
masqueraded as nonprofits when, in fact, they operated for the profit 
of their principals.\566\ This problem was particularly common in the 
credit counseling industry before the IRS took action to scrutinize 
and, where appropriate, decertify Sec.  501(c)(3) CCAs.
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    \565\ This prohibition applies only to misrepresentations; thus, 
it does not prevent a bona fide nonprofit entity from claiming that 
it is a nonprofit. See, e.g., FECA (Oct. 26, 2009) at 10 (requesting 
that the Commission clarify the scope of Sec.  310.3(a)(2)(x) 
regarding the prohibition against misrepresenting nonprofit status).
    \566\ Supra Section I.C.1.
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b. Savings Claims
    The sixth example of a misrepresentation barred by Sec.  
310.3(a)(2)(x) relates to claims about ``the amount of money or the 
percentage of the debt amount that a customer may save by using such 
service.'' Below, the Commission explains in some detail the nature of 
these misrepresentations and how providers can make non-deceptive 
claims.
    A pivotal claim made in most debt relief advertising and 
telemarketing pitches is that the offered plan can save the consumer 
money, either by lowering monthly payments or by eliminating debt 
altogether through substantially reduced, lump sum settlements. Many of 
these claims are very specific, promising, for example, settlements for 
40% to 60% of the debt owed.\567\ In many cases, however, these highly 
material claims are false or misleading.\568\ In particular, the record 
shows that many debt settlement providers have made specific and 
unqualified claims about the savings enrollees will receive that 
greatly exaggerate or misrepresent what consumers are likely to 
experience.\569\
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    \567\ See, e.g., FTC v. Credit Restoration Brokers, LLC, 2:10-
cv-00030-CEH-SPC (M.D. Fla. filed Jan. 19, 2010) (promising to 
settle consumers' debts for between 30 cents to 50 cents on the 
dollar); FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo. filed Mar. 
19, 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. Am. Compl. filed Nov. 27, 2006) (promising to reduce 
overall amount owed by up to 40% to 60%); FTC v. Nat'l Consumer 
Council, Inc., No. SACV04-0474 CJC (JWJX) (C.D. Cal. filed Apr. 23, 
2004); FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4) 
(D. Mass. filed Nov. 2, 2004) (promising to reduce consumers' debts 
by up to 50% to 70%); FTC v. Innovative Sys. Tech., Inc., No. CV04-
0728 GAF JTLx (C.D. Cal. filed Feb. 3, 2004) (representing it could 
save consumers up to 70% of debt owed); FTC v. Jubilee Fin. Servs., 
Inc., No. 02-6468 ABC (Ex) (C.D. Cal. filed Aug. 19, 2002) 
(promising to reduce debts by up to 60%); see also, e.g., FTC v. 
Advanced Mgmt. Servs. NW, LLC, No. 10-148-LRS (E.D. Wash. filed May 
10, 2010) (promising to save consumers $2,500 or more); FTC v. JPM 
Accelerated Servs., Inc., No. 09-CV-2021 (M.D. Fla. Am. Compl. filed 
Jan. 19, 2010) (promising to save consumers $2,500 or more); FTC v. 
Econ. Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga. filed Nov. 30, 
2009) (promising to save consumers $4,000); FTC v. 2145183 Ontario, 
Inc., No. 09-CV-7423 (N.D. Ill. filed Nov. 30, 2009) (promising to 
save consumers $2,500 or more); FTC v. Express Consolidation, No. 
06-cv-61851-WJZ (S.D. Fla. Am. Compl. filed Mar. 21, 2007); U.S. v. 
Credit Found. of Am., No. CV 06-3654 ABC(VBKx) (C.D. Cal. filed June 
13, 2006); FTC v. Debt Mgmt. Found. Servs., Inc., No. 04-1674-T-17-
MSS (M.D. Fla. filed July 20, 2004); FTC v. Integrated Credit 
Solutions, No. 06-806-SCB-TGW (M.D. Fla. filed May 2, 2006); see 
also, e.g., Florida v. CSA - Credit Solutions of Am., Inc., No. 09-
CA-026438 (Fl. Cir. Ct. - 13th filed Oct. 2009) (alleging that 
defendant represented that it could reduce consumers debts by 50% or 
60% within 12 to 36 months); Press Release, Illinois Attorney 
General, Attorney General Madigan Sues Two Debt Settlement Firms 
(May 4, 2009) (alleging that defendant represented to consumers that 
it could reduce their credit card debt by 40% to 60% and that 
consumers would be debt free in as little as 36 months), available 
at (http://www.illinoisattorneygeneral.gov/pressroom/2009_05/20090504.pdf); California v. Freedom Debt Relief, No. CIV477991 
(Super. Ct. San Mateo Cty., consent judgment Oct. 30, 2008) 
(defendant allegedly represented that it could reduce consumers' 
debt by 40 to 60% and make consumers debt-free).
    \568\ See supra note 567;see also, e.g., NAAG (Oct. 23, 2009) at 
2 (``The primary consumer protection problem areas that have given 
rise to the States' actions include . . . unsubstantiated claims of 
consumer savings.''); CU (Hillebrand), Tr. at 164-65 (``I think when 
you say consumers get 50 cents on the dollar is I'm going to save 50 
cents on the dollar for all of my debt, and that does not account 
for tax consequences, does not account for the very serious impact 
of the unsettled debt . . . [and] it does not account for the fact 
that many of those consumers are going to finish without settling 
all of their debt.''); NFCC at 3; SBLS at 2-5.
    \569\ Id.
---------------------------------------------------------------------------

    Based on the record, the Commission has identified four fundamental 
deficiencies in the data that debt relief providers often use to 
support their savings claims. All of these deficiencies inflate the 
savings consumers are likely to obtain.
    First, as described above, many providers calculate savings without 
accounting for the additional debt and costs consumers incur as a 
result of interest, late fees, and other charges imposed by the 
creditor(s) or debt collector(s) during the course of the program.\570\ 
Second, providers often omit the fees consumers pay to the provider 
from their calculations of the savings.\571\ By ignoring the creditor 
and provider-associated costs, the claims overstate the amount 
consumers actually save. Third, providers frequently exclude from their 
calculation of savings those consumers who dropped out or were 
otherwise unable to complete the program, and fourth, providers 
frequently exclude individual accounts that were not settled 
successfully.\572\ Thus, the savings claimed by the provider

[[Page 48500]]

represent only those of the successful cases, and not of consumers 
generally.\573\
---------------------------------------------------------------------------

    \570\ Supra Section III.C.2.a.(3).
    \571\ Id.
    \572\ See id.
    \573\ An advertiser cannot substantiate a claim based only on 
supportive data, while ignoring the countervailing data. See, e.g., 
In re Kroger Co., 98 F.T.C. 639 (1979) (initial decision), aff'd, 98 
F.T.C. at 721 (1981); FTC, Dietary Supplements: An Advertising Guide 
for Industry (1994) (``Advertisers should consider all relevant 
research relating to the claimed benefit of their supplement and 
should not focus only on research that supports the effect, while 
discounting research that does not.''), available at (http://www.ftc.gov/bcp/edu/pubs/business/adv/bus09.shtm).
    Nonetheless, broadcast advertisements and websites for debt 
settlement services routinely imply that these services can obtain 
the represented savings for the typical consumer who enrolls in the 
program. See supra note 567; see also, e.g., FTC v. Edge Solutions, 
Inc., No. CV-07-4087, Mem. Supp. Mot. T.R.O. at 7, 11 (E.D.N.Y. 
Sept. 28, 2007) (alleging that although defendants promised they 
could settle consumers' debts for 50% to 60% of the amount owed, 
they often settled just a single debt and ``allow[ed] other debts to 
languish''); FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 
(WG4), Mem. Supp. Mot. T.R.O. at 8 (D. Mass. filed Nov. 2, 2004) 
(alleging that ``defendants' program does not result in a 50% 
savings on their debt, as promised by defendants . . . [because] 
[m]any consumers find that defendants settle some of their accounts 
but not others . . . [and some] consumers see none of their accounts 
settled'').
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    To comply with Sec.  310.3(a)(2)(x), providers' representations, 
including those promising specific savings or other results, must be 
truthful, and the provider must have a reasonable basis to substantiate 
the claims.\574\ When a debt relief service provider represents that it 
will save consumers a certain amount or reduce the debts by a certain 
percentage, it also represents, by implication, that this savings claim 
is supported by competent and reliable, methodologically sound evidence 
showing that consumers generally who enroll in the program will obtain 
the advertised results.\575\ When a debt relief service makes only 
general savings claims (e.g., ``we will help you reduce your debts''), 
without specifying a percentage or amount of debt reduction, these 
claims are likely to convey that consumers can expect to achieve a 
result that will be beneficial to them, and that the benefit will be 
substantial.\576\ Generally, savings claims should reflect the 
experiences of the provider's past customers\577\ and must account for 
several key pieces of information.\578\ Below, the Commission provides 
additional guidance on the proper methodology for doing this historical 
experience analysis.\579\
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    \574\ It is an unfair and deceptive practice to make an express 
or implied objective claim without a reasonable basis supporting it. 
See, e.g., FTC v. Pantron I Corp., 33 F.2d 1088, 1096 (9th Cir. 
1994); Removatron Int'l Corp., 111 F.T.C. 206, 296-99 (1988), aff'd, 
884 F.2d 1489 (1st Cir. 1989); In re Thompson Med. Co., 104 F.T.C. 
648, 813 (1984), aff'd, 791 F.2d 189 (D.C. Cir. 1986), cert. denied, 
479 U.S. 1086 (1987); see also generally 1984 Policy Statement 
Regarding Advertising Substantiation, appended to Thompson Med. Co., 
104 F.T.C. at 813 (``Advertising Substantiation Policy Statement''); 
see also Amended Franchise Rule, 16 CFR 436.5(s), 436.9(c); Amended 
Franchise Rule Statement of Basis and Purpose, 72 FR 15444, 15449 
(Mar. 30, 2007).
    If the advertisement expressly or impliedly represents that it 
is based on a particular level of support (e.g., ``tests prove''), 
the advertiser must possess at least that support. See 1984 Policy 
Statement Regarding Advertising Substantiation, appended to Thompson 
Medical Co., 104 F.T.C. at 813; Removatron Int'l, 111 F.T.C. at 297. 
If no specific level of support is stated, the necessary level of 
substantiation is determined by consideration of certain factors, 
including the type of claim, consequences of a false claim, and the 
amount of substantiation that experts in the field believe is 
reasonable. Id. Generally speaking, claims must be supported by 
competent and reliable evidence. The reasonable basis test is an 
objective standard; an advertiser's good faith belief that its claim 
is substantiated is insufficient. See, e.g., FTC v. World Travel 
Vacation Brokers, Inc., 861 F.2d 1020, 1029 (7th Cir. 1988); FTC v. 
U.S. Sales Corp., 785 F. Supp. 737 (N.D. Ill. 1992). Similarly, the 
existence of some satisfied customers does not constitute a 
reasonable basis. See, e.g., FTC v. SlimAmerica, Inc., 77 F. Supp. 
2d 1263, 1274 (S.D. Fla. 1999); In re Brake Guard Products, 125 
F.T.C. 138, 244-45 (1998).
    \575\ It is deceptive to make unqualified performance claims 
that are only true for some consumers, because consumers are likely 
to interpret such claims to apply to the typical consumer. 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); Chrysler Corp. v. FTC, 561 F.2d 357, 363 (D.C. 
Cir. 1977); In re Ford Motor Co., 87 F.T.C. 756, 778, aff'd in part 
and remanded in part, 87 F.T.C. 792 (1976); In re J. B. Williams 
Co., 68 F.T.C. 481, 539 (1965), aff'd as modified, 381 F.2d 884 (6th 
Cir. 1967); FTC v. Feil, 285 F.2d 879, 885-87 & n.19 (9th Cir. 
1960); cf. Guides Concerning the Use of Endorsements and 
Testimonials in Advertising, 16 CFR 255.2 (``An advertisement 
containing an endorsement relating the experience of one or more 
consumers on a central or key attribute of the product or service 
also will likely be interpreted as representing that the endorser's 
experience is representative of what consumers will generally 
achieve with the advertised product or service . . . .''); In re 
Cliffdale Assocs., 103 F.T.C. 110, 171-73 (1984); Porter & Dietsch, 
Inc. v. FTC, 605 F.2d 294, 302-03 (7th Cir. 1979).
    \576\ An efficacy claim conveys to consumers that the result or 
benefit will be meaningful and not de minimis. See P. Lorillard Co. 
v. FTC, 186 F.2d 52, 57 (4th Cir. 1950) (challenging advertising 
that claimed that the cigarette was lowest in nicotine, tar, and 
resins in part because the difference was insignificant); In re Sun 
Co., 115 F.T.C. 560 (1992) (consent order) (alleging that 
advertising for high octane gasoline represented that it would 
provide superior power ``that would be significant to consumers''); 
Guides for the Use of Environmental Marketing Claims,16 CFR 260.6(c) 
(1998) (``Marketers should avoid implications of significant 
environmental benefits if the benefit is in fact negligible.''); FTC 
Enforcement Policy Statement on Food Advertising, 59 FR 28388, 28395 
& n.96 (June 1, 1994), available at (http://www.ftc.gov/bcp/policystmt/ad-food.shtm) (``The Commission shares FDA's view that 
health claims should not be asserted for foods that do not 
significantly contribute to the claimed benefit. A claim about the 
benefit of a product carries with it the implication that the 
benefit is significant.'').
    \577\ Although providers may use samples of their historical 
data to substantiate savings claims, these samples must be 
representative of the entire relevant population of past customers. 
Providers using samples must, among other things, employ appropriate 
sampling techniques, proper statistical analysis, and safeguards for 
reducing bias and random error. Providers may not cherry-pick 
specific categories of consumers or exclude others in order to 
inflate the savings. See, e.g., Kroger, 98 F.T.C. at 741-46 (1981) 
(claims based on sampling were deceptive because certain categories 
were systematically excluded and because the advertiser failed to 
ensure that individuals who selected the sample were unbiased); FTC 
v. Litton Indus., Inc., 97 F.T.C. 1, 70-72 (1981) (claims touting 
superiority of microwave oven were deceptive because the advertiser 
based them on a biased survey of ``Litton-authorized'' service 
agencies), enforced as modified, 676 F.2d 364 (9th Cir. 1982); 
Bristol Myers v. FTC, 185 F.2d 58 (1950) (holding advertisements to 
be deceptive where they claimed that dentists used one brand of 
toothpaste ``2 to 1 over any other [brand]'' when, in fact, the vast 
majority of dentists surveyed offered no response). Additionally, 
the relationship between past experience and anticipated future 
results must be an ``apples-to-apples'' comparison. If there have 
been material changes to the program that could affect the 
applicability of historical experience to future results, any claims 
must account for the likely effect of those changes. See Amended 
Franchise Rule, 16 CFR 437.5(s)(3)(ii).
    \578\ Providers should maintain historical data about their 
business activities sufficient to meet the substantiation 
requirements detailed in this Section. See, e.g., USDR (Johnson), 
Tr. at 168-170 (``I'll speak specifically to my company, why we make 
a general claim, is on the 40 to 60 reduction is because 
historically our numbers for five years reflect that this is the 
results that we get for the consumers.'').
    Providers should be cautious in purporting to qualify their 
savings claims to make sure that the qualifications are effectively 
communicated to consumers. For example, phrases such as ``up to'' or 
``as much as'' (e.g., ``up to 60% savings'') likely convey to 
consumers that the product or service will consistently produce 
results in the range of the stated percentage or amount. See, e.g., 
In re Automotive Breakthrough Sciences, Inc., 126 F.T.C. 229, 301 
(1998).
    \579\ In written comments and at the public forum, consumer 
groups, noting that debt settlement companies often fail to 
substantiate savings claims properly, urged the Commission to ban 
outright any representations regarding savings amounts or rates, or, 
alternatively, to require that the provider's historical data 
demonstrate that it achieved the represented result for 80% of its 
past customers. See CFA at 18-19; CFA (Grant), Tr. at 173 (``[W]e 
think that any success claims are inherently misleading, and would 
like to see them prohibited.''); see also CRN (Oct. 8, 2009) at 8. 
Although the record shows that false or unsubstantiated savings 
claims for debt relief services are common, the Commission does not 
believe that savings claims are inherently deceptive and thus 
concludes that they should not be prohibited outright. See Milavetz, 
Gallop & Milavetz, P.A. v. US, 176 L. Ed. 2d 79 (2010) (restrictions 
on nonmisleading commercial speech require a higher level of 
scrutiny under the First Amendment than restrictions on misleading 
speech); Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 
(1985) (same); Cent. Hudson Gas & Elec. Corp. v. Public Serv. 
Comm'n, 447 U.S. 557 (1980). The Commission is confident that the 
prohibition in the Final Rule on misrepresentations will be 
sufficient to address the problem of false or unsubstantiated 
savings claims without inadvertently stopping truthful claims that 
may be valuable to consumers.
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    First, savings claims must be calculated based on the amount of 
debt

[[Page 48501]]

owed at the time of enrollment, rather than the amount at the time of 
settlement, in order to account for (a) increases in debt levels from 
creditor fees or interest charges that accrue during the period of the 
program, and (b) fees the consumer pays to the provider. The following 
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example illustrates this principle:

 A consumer enrolls a single $10,000 debt with a debt settlement 
provider. However, between the time the consumer enrolls the debt and 
the time the debt is settled, the amount owed grows to $13,000 because 
of accrued interest and late fees. In addition, the consumer must pay 
the settlement provider a fee of $2,000. The provider settles the debt 
for $6,000, so that the total amount paid by the consumer is $8,000 
($6,000 paid to settle the debt plus $2,000 in fees). The provider can 
claim a savings rate of 20%.

    Second, in making savings claims, a provider must take into account 
the experiences of all of its past customers, including those who 
dropped out or otherwise failed to complete the program. The following 
example illustrates this principle:

 A debt settlement provider has ten customers, each of whom has $10,000 
in debt enrolled in the program, for a total of $100,000 in unpaid 
debt. Five of those customers complete the program, each of whom saves 
$2,000, for a total savings of $10,000. The remaining five customers 
drop out of the program before making any settlements, and thus save 
nothing. In total, the customers have saved $10,000 out of the 
aggregate $100,000 enrolled in the program. The provider can claim a 
savings rate of 10%.

    Third, in making savings claims, a provider must include all of the 
debts enrolled by each consumer in the program. The provider may not 
exclude debts that it has failed to settle - including those associated 
with consumers who dropped out of the program - from its calculation of 
the average savings percentage or amount of its consumers' debt 
reduction. The following example illustrates this principle:

 A debt settlement provider has ten customers, each of whom has two 
$1,000 debts enrolled in the program, for a total of 20 debts and 
$20,000 in enrolled debt. The provider settles a single debt for each 
of the ten customers for $800 per debt. The company fails to settle the 
remaining debt for each of the ten customers. In total, the customers 
have saved $2,000 out of the aggregate $20,000 enrolled in the program. 
The provider can claim a savings rate of 10%.
3. Existing TSR Provisions Prohibiting Deceptive Representations and 
Misleading Statements
    In addition to Sec.  310(a)(2)(x) of the TSR, which has been added 
as a result of this rulemaking, the existing Sec. Sec.  310.3(a)(2) and 
310.3(a)(4) will now apply to inbound or outbound telemarketing of debt 
relief services.\580\ These provisions prohibit misrepresentations of 
the following information, much of which providers misrepresent in the 
telemarketing of debt relief services:
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    \580\ In fact, all of the TSR provisions will now cover this 
industry, including, e.g., the provision prohibiting assisting and 
facilitating another engaged in TSR violations, Sec.  310.3(b), the 
prohibition on the use of threats or intimidating or profane 
language, Sec.  310.4(a)(1), and the recordkeeping requirements, 
Sec.  310.5.
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     total costs to purchase, receive, or use, and the quantity 
of, any goods or services that are the subject of the offer.\581\ This 
provision parallels the required disclosure of total costs contained in 
TSR Sec.  310.3(a)(1)(i).
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    \581\ Sec.  310.3(a)(2)(i).Some providers request consumers' 
billing information during the sales call or pressure consumers to 
return payment authorization forms and signed contracts as quickly 
as possible following the call. See, e.g., FTC v. Debt-Set, No. 
1:07-cv-00558-RPM (D. Colo. filed Mar. 19, 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' telemarketers 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.''). The existing TSR 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 Sec. Sec.  
310.3(a)(3), 310.4(a)(6). The amended Rule applies these existing 
requirements to inbound debt relief telemarketing calls as well.
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     material restrictions, limitations, or conditions to 
purchase, receive, or use the offered goods or services.\582\ This 
provision, too, has a parallel required disclosure in TSR Sec.  
310.3(a)(1)(ii).
---------------------------------------------------------------------------

    \582\ Sec.  310.3(a)(2)(ii).
---------------------------------------------------------------------------

     any material aspect of the performance, efficacy, nature, 
or central characteristics of the offered goods or services.\583\
---------------------------------------------------------------------------

    \583\ Sec.  310.3(a)(2)(iii).
---------------------------------------------------------------------------

     any material aspect of the nature or terms of the seller's 
refund, cancellation, exchange, or repurchase policies.\584\ The 
parallel disclosure requirement is in Sec.  310.3(a)(1)(iii) of the 
TSR.
---------------------------------------------------------------------------

    \584\ Sec.  310.3(a)(2)(iv).
---------------------------------------------------------------------------

     the seller's or telemarketer's affiliation with, or 
endorsement or sponsorship by, any person or government entity.\585\
---------------------------------------------------------------------------

    \585\ Sec.  310.3(a)(2)(vii). In several FTC law enforcement 
actions, debt negotiation companies falsely represented that they 
were affiliated with consumers' creditors. See, e.g., FTC v. Group 
One Networks, Inc., No. 8:09-cv-352-T-26-MAP (M.D. Fla. Am. Compl. 
filed Apr. 14, 2009); FTC v. Select Pers. Mgmt., Inc., No. 07-CV-
0529 (N.D. Ill. Am. Compl. filed Aug. 18, 2007). In other cases, 
especially with the rise of government economic assistance programs, 
providers have misrepresented their affiliation with the government 
or bona fide nonprofits. See, e.g., FTC v. Dominant Leads, LLC, No. 
1:10-cv-00997 (D.D.C. filed June 15, 2010); Minnesota v. Priority 
Direct Marketing, No. 62-CV-09-10416 (Ramsey Cty., Minn. filed Sept. 
21, 2009) (alleging that debt negotiator misrepresented that it was 
affiliated with the President's stimulus plan); cf., e.g., FTC v. 
Washington Data Res., Inc., No. 8:08-CV-02309-SDM (M.D. Fla. filed 
Nov. 12, 2009) (alleging that defendants falsely represented that 
they were affiliated with the United States government); FTC v. 
Cantkier, No. 1:09-cv- 00894 (D.D.C. filed July 10, 2009) (alleging 
defendants placed advertisements on Internet search engines that 
refer consumers to websites that deceptively appear to be affiliated 
with government loan modification programs).
---------------------------------------------------------------------------

     any other statements to induce any person to pay for goods 
or services.\586\
---------------------------------------------------------------------------

    \586\ Sec.  310.3(a)(4). The FTC has brought cases against debt 
relief providers alleging violations of Sec.  310.3(a)(4) for 
misleading statements made in connection with outbound 
telemarketing, including statements that the entity (a) will obtain 
a favorable settlement of the consumer's debt promptly or in a 
specific period of time (see, e.g., FTC v. Nat'l Consumer Council, 
No. SACV04-0474 CJC (JWJX) (C.D. Cal. filed Apr. 23, 2004)); (b) 
will stop or lessen creditors' collection efforts against the 
consumer (see, e.g., id.; FTC v. Group One Networks, Inc., No. 8:09-
cv-352-T-26-MAP (M.D. Fla. Am. Compl. filed Apr. 14, 2009)); and (c) 
will secure concessions, such as interest rate reductions, by 
specific amounts or percentages (see, e.g., FTC v. Debt Mgmt. Found. 
Servs., Inc., No. 04-1674-T-17-MSS (M.D. Fla. filed July 20, 2004)).
---------------------------------------------------------------------------

F. Section 310.6: Exemptions

    Section 310.6 sets forth the Rule's exemptions. In determining 
which exemptions to grant, the Commission considered 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; (3) whether the 
conduct at issue is suitable for 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.\587\
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    \587\ TSR Final Rule, 60 FR at 43859; see also TSR Amended Rule 
2008, 73 FR 51188 (discussing the Commission's legal authority to 
exempt certain calls or callers from the TSR).
---------------------------------------------------------------------------

    The TSR generally exempts inbound calls placed by consumers in 
response

[[Page 48502]]

to direct mail or general media advertising.\588\ The Final Rule in 
this proceeding, consistent with the proposed rule, carves out inbound 
calls made to debt relief services from that exemption.\589\ As a 
result, virtually all debt relief telemarketing transactions are now 
subject to the TSR.\590\
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    \588\ See Sec.  310.6(b)(5) & (6).
    \589\ The Commission previously had created certain carve-outs 
to the general exemption for inbound calls made as part of the sale 
of products or services that have been the subject of significant 
fraudulent or deceptive telemarketing activity, such as 
advertisements relating to investment opportunities and certain 
business opportunities. Id.
    \590\ Outbound calls to solicit the purchase of debt relief 
services are already subject to the TSR, including the provisions of 
Sec.  310.3. The Final Rule continues to exempt telemarketing of 
debt relief services from compliance with most provisions of the 
Rule where the sale is not completed, and payment or authorization 
of payment is not required, until after a face-to-face sales 
presentation.
---------------------------------------------------------------------------

    Most commenters supported covering inbound calls made to debt 
relief providers.\591\ On the other hand, one debt relief provider 
opposed it, arguing that not all debt relief providers harm 
consumers.\592\
---------------------------------------------------------------------------

    \591\ See CFA at 20-21;Orion (Oct. 1, 2009) at 1.
    \592\ Able (Oct. 21, 2009) at 29.
---------------------------------------------------------------------------

    The Commission's decision to include inbound debt relief calls is 
based on its law enforcement experience and the record in this 
proceeding and is consistent with the existing TSR provisions covering 
inbound calls related to investment opportunities, certain business 
opportunities, credit card loss protection plans, credit repair 
services, recovery services, and certain advance fee loans.\593\ Like 
debt relief services, each of those services frequently has been 
marketed through deceptive telemarketing campaigns that capitalize on 
mass media or general advertising to entice their victims to place an 
inbound telemarketing call. The modification to the exemptions will 
ensure that sellers and telemarketers who market debt relief are 
required to abide by the Rule regardless of the medium used to 
advertise their services.
---------------------------------------------------------------------------

    \593\ Each of these categories is carved out from the exemptions 
for inbound calls made in response to both general media and direct 
mail advertising. Inbound prize promotion calls are carved out only 
from the direct mail exemption.
---------------------------------------------------------------------------

    This provision will be effective September 27, 2010.\594\
---------------------------------------------------------------------------

    \594\ In addition, in three subsections of the Exemptions 
section, the Commission has also made minor, non-substantive 
amendments to Sec. Sec.  310.6(b)(2), (5), & (6) to reflect the fact 
that the Commission has issued Disclosure Requirements and 
Prohibitions Concerning Business Opportunities, 16 CFR 437 (the 
``Business Opportunity Rule''). Prior to its issuance, this conduct 
was addressed by 16 CFR 436 (the Franchise Rule) and, therefore, the 
TSR previously cited only to the latter. Accordingly, Sec. Sec.  
310.6(b)(2), (5), and (6) have been amended to expressly cite both 
the Franchise Rule and the now-separate Business Opportunity Rule.
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G. Section 310.5: Recordkeeping

    Section 310.5 of the TSR describes the types of records sellers or 
telemarketers must keep and the time period for retention.\595\ 
Although the provisions of this section remain unchanged by these 
amendments, the operation of the amendments will result in some 
providers of debt relief services being subject to this provision of 
the TSR for the first time. Very few comments were received on the 
recordkeeping requirements. One commenter stated that it did not make 
sense to limit the recordkeeping requirement to 24 months, when 36 to 
60 months is typically required for most debt relief customers to 
become debt free.\596\ This commenter also questioned whether the 
requirement would reduce abuses and provide sufficiently useful data 
for law enforcement or regulatory purposes.\597\ The FTC's law 
enforcement experience demonstrates that recordkeeping requirements are 
critical for enabling the agency to ensure compliance. The TSR has long 
imposed a 24-month retention period, and the Commission does not see a 
compelling reason to alter it for debt relief providers. To the extent 
that providers make claims that rely on historical data for 
substantiation, however, they must retain all material used to support 
the claims.
---------------------------------------------------------------------------

    \595\ 16 CFR 310.5. 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.
    \596\ MD (Oct. 26, 2009) at 54.
    \597\ Id.
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    This provision will be effective September 27, 2010.

IV. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (``PRA''), as 
amended,\598\ the Commission is seeking Office of Management and Budget 
(``OMB'') approval of the Final Rule amendments to the TSR under OMB 
Control No. 3084-0097. The disclosure and recordkeeping requirements 
under the amendments to the TSR discussed above constitute 
``collections of information'' for purposes of the PRA.\599\
---------------------------------------------------------------------------

    \598\ 44 U.S.C. 3501-3521.
    \599\ See 5 CFR 1320.3(c).
---------------------------------------------------------------------------

    Upon publication of the NPRM, the FTC submitted the proposed rule 
and a Supporting Statement to OMB. In response, OMB filed a comment 
indicating that it was withholding approval pending: (1) discussion in 
the preamble to the Final Rule of how the Commission has maximized the 
practical utility of the collection of information and minimized the 
related burden, and (2) the FTC's examination of the public comments in 
response to the NPRM. The remainder of this section covers those 
considerations and provides a revised PRA analysis, factoring in 
relevant public comments and the Commission's resulting or self-
initiated changes to the proposed rule.

A. Practical Utility

    According to OMB regulations, practical utility means the 
usefulness of information to or for an agency.\600\ The Commission has 
maximized the practical utility of the debt relief amendments contained 
in the Final Rule. The Final Rule requires specific new disclosures in 
the sale of a ``debt relief service,'' as that term is defined in Sec.  
310.2(m). The disclosures will provide consumers critical information 
before they enroll in a debt relief service. In addition, new 
respondents will be subject to the existing provisions of the TSR, 
including its general sales disclosures and recordkeeping 
provisions.\601\ The required disclosures are necessary to inform 
consumers of important information about the debt relief services being 
offered. Commenters overwhelmingly supported the disclosures.\602\ 
Moreover, the Commission has removed three of the previously proposed 
disclosures in order to avoid cluttering the most meaningful material 
information for consumers and to enhance the comprehensibility of the 
fewer

[[Page 48503]]

remaining disclosures. Finally, the recordkeeping requirements are 
necessary to facilitate law enforcement by ensuring that debt relief 
service providers retain records demonstrating their compliance with 
the Rule.\603\
---------------------------------------------------------------------------

    \600\ 5 CFR 1320.3(l). In determining whether information will 
have ``practical utility,'' OMB will consider ``whether the agency 
demonstrates actual timely use for the information either to carry 
out its functions or make it available to third-parties or the 
public, either directly or by means of a third-party or public 
posting, notification, labeling, or similar disclosure requirement, 
for the use of persons who have an interest in entities or 
transactions over which the agency has jurisdiction.'' Id.
    \601\ See 16 CFR 310.3(a)(1); 16 CFR 310.5. (These provisions 
have previously been reviewed and cleared by the OMB under the 
above-noted control number.) Accordingly, as a result of the 
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.
    \602\ See, e.g., NAAG (Oct. 23, 2009) at 11; CFA at 2-3, 20; MN 
AG at 2; FCS at 3; Able (Oct. 21, 2009) at 30; CareOne at 4; CSA at 
1; DS at 18; DMB at 5; DSA/ADE at 1-2; FCS at 3. In fact, many 
commenters recommended additional disclosures. Supra Section 
III.D.5. The Commission added one additional disclosure that is 
critical to consumers' understanding of the services.
    \603\ Although the Commission received very few comments 
addressing the recordkeeping requirements, one debt settlement 
company stated that the recordkeeping requirements may impose a 
minor cost but should not substantively affect the business. Able 
(Oct. 21, 2009) at 32.
---------------------------------------------------------------------------

    Thus, the Final Rule will have significant practical utility.

B. Explanation of Burden Estimates Under the Final Rule

    The PRA burden of the Final Rule's requirements will depend on 
various factors, including the number of covered firms and the 
percentage of such firms that conduct inbound or outbound 
telemarketing. The definition of ``debt relief service'' in the Rule 
includes debt settlement companies, for-profit credit counselors, and 
debt negotiation companies. As before in the NPRM PRA analysis, staff 
estimates that 2,000 entities will be covered by the Commission's Final 
Rule.\604\ This includes existing entities already subject to the TSR 
for which there would be new recordkeeping or disclosure requirements 
(``existing respondents''), as well as existing entities that newly 
will be subject to the TSR (``new respondents'').\605\ Staff arrived at 
this estimate by using available figures obtained through research and 
from industry sources of information about the number of debt 
settlement companies\606\ and the number of for-profit credit 
counselors.\607\ 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 amended Rule, including debt negotiation companies, for 
which no reliable external estimates are available. No comments 
provided specific information about the number of entities.\608\ Thus, 
the FTC retains these estimates without modification.
---------------------------------------------------------------------------

    \604\ To err in favor of over inclusiveness, staff assumes that 
every entity that sells debt relief services does so using 
telemarketing.
    \605\ 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). 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 Sec.  310.3(a)(1) of the Rule. See 16 CFR 310.6(b)(6) (providing 
an exemption for ``[t]elephone calls initiated 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 . . . .'').
    \606\ See David Streitfeld, 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''); 
Weinstein (Oct. 26, 2009) at 9 (see attached Weinstein paper at 8) 
(stating, without attribution, that ``some 2,000 firms market 
themselves as providing `debt settlement services,'''); Jane 
Birnbaum, 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 Workshop Comment 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.
    \607\ According to industry sources consulted by Commission 
staff, there are believed to be fewer than 200 for-profit credit 
counseling firms operating in the United States.
    \608\ One commenter estimated that it manages between 6% to 8% 
of all debt currently enrolled in debt settlement programs. FDR 
(Oct. 26, 2009) at 5 n.7. In response to a follow-up question by FTC 
staff, however, it stated that the statistic was a ``good faith 
estimate based on our awareness of the industry'' but did not 
elaborate further. FDR (Jan. 14, 2010) at 5.
---------------------------------------------------------------------------

    The Commission received two comments questioning the staff's 
estimate that the proposed disclosures could be provided in 20 seconds. 
Specifically, NACCA questioned whether it was realistic that the 
proposed disclosures could be provided in 20 seconds.\609\ Moreover, a 
debt settlement company stated that it provides consumers with 16 
mandatory disclaimers and an additional six disclosures (if 
applicable), and it estimated that reading those disclaimers and 
allowing the consumer to respond to the disclosures requires 
approximately four and a half minutes.\610\
---------------------------------------------------------------------------

    \609\ NACCA at 2 (``We find it difficult to believe that the 
required information can be conveyed in 20 seconds or, if it can be 
conveyed in 20 seconds, that a consumer who is already distressed 
can fully understand the information being conveyed.'').
    \610\ MD (Oct. 26, 2009) at 21. This equates to about 12.3 
seconds per disclosure.
---------------------------------------------------------------------------

    The FTC's revised disclosure estimates, detailed below, consider 
commenters' input while excluding time estimates for disclosures made 
independently of the amended Rule. In addition, although the FTC 
recognizes that certain entities may require more than the projected 
time regarding the above-noted tasks, the estimates presented below are 
intended as an approximate average of incremental burden incurred 
across all businesses.
Burden Statement:
Estimated Additional Annual Hours Burden: 43,375 hours
    As explained below, the estimated annual burden for recordkeeping 
attributable to the Rule amendments, averaged over a prospective three-
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, the PRA burden will decline in 
succeeding years as they will then have in place such systems. The 
estimated burden for the disclosures that the Rule requires, including 
the new disclosures relating to debt relief services, is 13,489 hours 
for all affected industry members, the same estimate used for the 
proposed rule. Thus, the total PRA burden is 43,375 hours.
1. Number of Respondents
    Based on its estimate that 2,000 entities sell debt relief 
services, and on the assumption 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 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 because their 
respective PRA burdens will differ.
    Staff is not aware 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 
Direct Marketing Association (``DMA''), 21% of all direct marketing in 
2007 was by inbound telemarketing and 20% was by outbound 
telemarketing.\611\ 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)).
---------------------------------------------------------------------------

    \611\ See DMA Statistical Fact Book 1, 17(30\th\ ed. 2008) 
(``DMA Statistical Fact Book'').
---------------------------------------------------------------------------

    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 have been thus far largely 
exempt from the

[[Page 48504]]

Rule's current requirements.\612\ 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.\613\ 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.
---------------------------------------------------------------------------

    \612\ 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.
    \613\ 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.\614\ 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 adopted debt relief disclosures in 
amended Rule Sec.  310.3(a)(1)(viii).
---------------------------------------------------------------------------

    \614\ 16 CFR 310.6(b)(6).
---------------------------------------------------------------------------

2. Recordkeeping Hours
    Staff estimates that in the first year following promulgation of 
the Final 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.\615\ The recordkeeping burden for these 
entities in the first year following the 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.\616\ 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 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 current clearance for the TSR under OMB Control No. 3084-
0097.\617\
---------------------------------------------------------------------------

    \615\ See, e.g., Agency Information Collection Activities, 74 FR 
at 25542; Agency Information Collection Activities, 71 FR at 28699.
    \616\ Id.
    \617\ 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.\618\
---------------------------------------------------------------------------

    \618\ Id.
---------------------------------------------------------------------------

3. Disclosure Hours
    Industry comments stated 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.\619\ To the extent this is so, the time and financial 
resources needed to comply with disclosure requirements do not 
constitute ``burden.''\620\ The Commission also streamlined the 
disclosures required in the final Rule by eliminating three of the 
disclosures initially proposed. 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% of telemarketing calls even absent the Rule.\621\
---------------------------------------------------------------------------

    \619\ See, e.g., MD (Oct. 26, 2009) at 21 & 35-37; TASC (Oct. 
26, 2009) at 5, 14-15; Franklin at 19-20; see also Agency 
Information Collection Activities, 74 FR at 25542.
    \620\ 16 CFR 1320.3(b)(2).
    \621\ 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% 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.\622\ 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.
---------------------------------------------------------------------------

    \622\ 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.
---------------------------------------------------------------------------

    The PRA analysis in the NPRM focused on the number of U.S. 
households having credit cards (91.1 million) as a base for further 
calculations. One commenter noted that both individuals and couples 
within a household may file for bankruptcy relief, and a large 
proportion of households include more than two adults.\623\ In 
response, FTC staff has refocused its analysis on an estimated number 
of adult (ages 18 and over) decision makers within each household. With 
that as the revised base, staff then applies the additional 
calculations and assumptions presented below to project an estimated 
number of consumers who will receive and place a call for debt relief 
services in a given year.
---------------------------------------------------------------------------

    \623\ RDRI at 2.
---------------------------------------------------------------------------

    Based on U.S. Census Bureau data,\624\ FTC staff estimates that 
there are 162,769,000 decision making units. This estimate is based on 
the assumptions that couples constitute a single decision making unit, 
as are single (widowed, divorced, separated, never married) adults 
within each household. Using households as a proxy for individual 
decision makers in applying again the previously stated percentage of 
households (78%) that had one or more credit cards at the end of 
2008,\625\ staff

[[Page 48505]]

further estimates that 126,959,820 consumers have one or more credit 
cards. This figure, in turn, is then multiplied by the most recently 
available Federal Reserve Board data regarding the delinquency rate for 
credit cards. The Federal Reserve Board reported that the delinquency 
rate for credit cards was 6.58% in the third quarter of 2009.\626\ 
Multiplying this delinquency rate by the estimated number of consumers 
having one or more credit cards - 126,959,820 - results in an estimate 
of 8,353,956 consumers with delinquent accounts. As before, staff 
assumes that each of these consumers will receive and place a call for 
debt relief services in a given year.
---------------------------------------------------------------------------

    \624\ U.S. Census Bureau, Current Population Survey, 2008 Annual 
Social and Economic Supplement, Internet Release Date: January 2009.
    \625\ See Ben Woolsey and Matt Schulz, Credit card statistics, 
industry facts, debt statistics, available at (http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php.)
    \626\ FRB, Federal Reserve Statistical Release: Charge Offs and 
Delinquency Rates on Loans and Leases at Commercial Banks, available 
at (http://www.federalreserve.gov/releases/chargeoff/delallsa.htm) 
(reporting a 6.58% delinquency rate for credit cards for the third 
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, 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 78.8% of direct marketing is done by 
general media methods\627\ and that 21.2% of direct marketing is done 
by direct mail.\628\ Applying these percentages to the above-noted 
estimate of 8,353,956 inbound debt relief calls translates to 6,582,917 
calls resulting from general media advertising and 1,771,039 calls 
arising from direct mail. Staff then estimated that 1/3 of inbound 
direct mail debt relief calls, or 590,346 such calls, are currently 
exempt from the TSR because they are in response to direct mail 
advertising that makes the requisite Sec.  310.3(a)(1) disclosures. The 
remaining 2/3, or 1,180,692 inbound direct mail calls, are non-exempt.
---------------------------------------------------------------------------

    \627\ Id.
    \628\ DMA Statistical Fact Book at 17.
---------------------------------------------------------------------------

a. Existing Respondents' Disclosure Burden
    As discussed above, the amended Rule includes a new provision, 
Sec.  310.3(a)(1)(viii), which includes four disclosures specific to 
providers of debt relief services; moreover, the Commission eliminated 
three disclosures set forth in the proposed rule. Staff estimates that 
reciting these disclosures in each sales call pertaining to debt relief 
services will take 10 seconds.\629\
---------------------------------------------------------------------------

    \629\ This estimate considers commenters' input while excluding 
the time pertaining to disclosures that are not invoked by the 
amended Rule.
---------------------------------------------------------------------------

    For outbound calls, the disclosure burden for existing entities 
from the new debt relief disclosures is 4,112 hours (5,921,500 outbound 
calls involving debt relief x 10 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 
Sec.  310.3(a)(1) disclosures - will only entail the incremental PRA 
burden resulting from the new debt relief disclosures. As noted above, 
this totals 1,180,692 such calls each year. The associated disclosure 
burden for these calls would be 820 hours (1,180,692 non-exempt direct 
mail inbound calls x 10 seconds for debt relief disclosures x 25% 
burden from TSR).
    Thus, the total disclosure burden under the amended Rule for all 
existing respondents is 4,932 hours (4,112 hours for entities 
conducting outbound calls + 820 hours for entities conducting inbound, 
non-exempt telemarketing).
b. 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 Sec.  310.3(a)(1)(viii), but also for the existing 
general disclosures for which such entities will newly be 
responsible.\630\
---------------------------------------------------------------------------

    \630\ See Agency Information Collection Activities, 74 FR at 
25542.
---------------------------------------------------------------------------

    As noted above, inbound calls responding to debt relief services 
advertised in general media are currently exempt from the Rule.\631\ 
The disclosure burden for these calls would be 18 seconds each (8 
seconds for existing Sec.  310.3(a)(1) disclosures + 10 seconds for 
debt relief disclosures). Applying this unit measure to the estimated 
6,582,917 inbound debt relief calls arising from general media 
advertising, the cumulative disclosure burden is 8,229 hours per year 
(6,582,917 inbound debt relief calls in response to general media 
advertising x 18 seconds x 25% burden from TSR).
---------------------------------------------------------------------------

    \631\ 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 Sec.  310.3(a)(1) disclosures are made), is 328 hours per 
year (590,346 exempt inbound direct mail calls x 8 seconds x 25% burden 
from TSR).
    Thus, the total disclosure burden attributable to the Final Rule is 
13,489 hours (4,932 + 8,229 + 328).
Estimated Annual Labor Cost: $945,361
Estimated Annual Non-Labor Cost: $58,753
4. Recordkeeping Labor and Non-Labor Costs
a. Labor Costs
    Assuming a cumulative burden of 100 hours in Year 1 (of a 
prospective three-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 $26/hour,\632\ 
labor costs would approximate $2,285,400 in the first year of 
compliance for new respondents.\633\ 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 labor costs for recordkeeping associated with the 
Final Rule, averaged over a prospective three-year clearance period, is 
$770,004.
---------------------------------------------------------------------------

    \632\ 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 2008, U.S. Department of Labor released August 2009, Bulletin 
2720, Table 3 (``Full-time civilian workers,'' mean and median 
hourly wages), available at (http://www.bls.gov/ncs/ncswage2008.htm#Wage_Tables).
    \633\ As discussed above, existing respondents should already 
have compliant recordkeeping systems and thus are not included in 
this calculation.
---------------------------------------------------------------------------

b. 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

[[Page 48506]]

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 Final 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.
5. Disclosure Labor and Non-Labor Costs
a. Labor Costs
    The estimated annual labor cost for disclosures under the Final 
Rule is $175,357. This total is the product of applying an assumed 
hourly wage rate of $13.00\634\ to the earlier stated estimate of 
13,489 hours pertaining to general and specific disclosures in initial 
outbound and inbound calls.
---------------------------------------------------------------------------

    \634\ 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 2008, U.S. 
Department of Labor released August 2009, Bulletin 2720, Table 3 
(``Full-time civilian workers,'' mean and median hourly wages), 
available at (http://www.bls.gov/ncs/ncswage2008.htm#Wage_Tables).
---------------------------------------------------------------------------

b. Non-Labor Costs
    Estimated outbound disclosure hours (4,112) per above multiplied by 
an estimated commercial calling rate of 6 cents per minute ($3.60 per 
hour) equals $14,803 in telephone-related costs.\635\
---------------------------------------------------------------------------

    \635\ Staff believes that remaining non-labor costs would 
largely be incurred by affected entities, regardless, in the 
ordinary course of business and/or marginally exceed such costs.
---------------------------------------------------------------------------

V. Regulatory Analysis and Regulatory Flexibility Act Requirements

    The Regulatory Flexibility Act of 1980 (``RFA'') \636\ requires a 
description and analysis of proposed and final Rules that will have a 
significant economic impact on a substantial number of small 
entities.\637\ The RFA requires an agency to provide an Initial 
Regulatory Flexibility Analysis (``IRFA'') \638\ with the proposed rule 
and a Final Regulatory Flexibility Analysis (``FRFA'') \639\ 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.\640\
---------------------------------------------------------------------------

    \636\ 5 U.S.C. 601-612.
    \637\ 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).
    \638\ 5 U.S.C. 603.
    \639\ 5 U.S.C. 604.
    \640\ 5 U.S.C. 605.
---------------------------------------------------------------------------

    As of the date of the NPRM, the Commission did not have sufficient 
empirical data regarding the debt relief industry to determine whether 
the proposed amendments to the Rule would impact a substantial number 
of small entities as defined in the RFA.\641\ It was 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 decided 
to publish an IRFA pursuant to the RFA and to request public comment on 
the impact on small businesses of its proposed amended Rule.
---------------------------------------------------------------------------

    \641\ 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 
Workshop Comment 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.'').
---------------------------------------------------------------------------

    In response to questions in the NPRM, the Commission did not 
receive any comprehensive empirical data regarding the revenues of debt 
relief companies or the impact on small businesses of the amended Rule. 
A trade association stated that a significant number of companies that 
would be harmed by the advance fee ban were small businesses.\642\ One 
commenter asserted that there are tens of thousands of sole 
practitioners engaged in financial consulting services that may fall 
under the Rule's definition of debt relief services.\643\ It does not 
appear, though, that the commenter considered that many sole 
practitioners would not fall within the Rule's ambit because they meet 
face-to-face with their customers.\644\ The commenter also opined that 
the rule would subject small businesses to frivolous lawsuits that 
could jeopardize their businesses.\645\ However, the commenter neither 
provided support for the statement nor asserted that the impact would 
be more significant on small businesses than large businesses.\646\
---------------------------------------------------------------------------

    \642\ USOBA (Oct. 26, 2009) at 20 (``95% of USOBA members would 
`certainly' or `likely' be forced to lay off employees if the 
advance fee ban were adopted [note that 72% of these USOBA members 
were `small businesses' (firms of 25 people or less)]'').
    \643\ Able (Oct. 21, 2009) at 28.
    \644\ See 16 CFR 310.6(b)(3).
    \645\ Able (Oct. 21, 2009) at 28.
    \646\ Two other debt settlement companies stated that many small 
business entities would not be able to enter the market due to 
significant investment and overhead costs and extended break-even 
time. SDS (Oct. 7, 2009) at 3; CRN (Oct. 8, 2009) at 5. Again, the 
commenters did not provide support for the assertions and did not 
explain why small businesses would fare differently than large 
businesses in this regard.
---------------------------------------------------------------------------

A. Need for and Objectives of the Rule

    The objective of the amended Rule is to curb deceptive and abusive 
practices occurring in the telemarketing of debt relief services. As 
described in Sections II and III, above, the amendments are intended to 
address consumer protection concerns regarding telemarketing of debt 
relief services and are based on evidence in the record that deceptive 
and abusive acts are common in telemarketing of debt relief services to 
consumers.

B. Significant Issues Raised by Public Comment, Summary of the Agency's 
Assessment of These Issues, and Changes, If Any, Made in Response to 
Such Comments

    As discussed in Section III above, commenters raised limited 
concerns about the burden of the proposed disclosures.\647\ However, 
commenters raised more significant concerns about the potential costs 
and burdens of the advance fee ban, as discussed in Sections III.C.2.c-
e. Many of the commenters did not focus specifically on the costs faced 
by small businesses relative to those that would be borne by other 
firms.\648\ Rather, they argued that the costs to be borne by all firms 
- including small firms - would be

[[Page 48507]]

excessive. As discussed in detail above, two debt settlement trade 
associations and many debt settlement companies argued that numerous 
companies would go out of business if the FTC imposes an advance fee 
ban.\649\ A trade association submitted a survey of its members 
reporting: (1) 84% would ``almost certainly'' or ``likely'' have to 
shut down if an advance fee ban were enacted; (2) 95% would 
``certainly'' or ``likely'' lay off employees under an advance fee ban; 
and (3) 85% would stop offering debt settlement services to new and 
existing consumers.\650\ These survey results, however, are not 
persuasive, as the commenter did not provide basic information about 
survey respondents and methodology. Moreover, the survey elicited self-
reported statements but did not verify the responses' accuracy in any 
way. Individual debt settlement company commenters similarly asserted 
that they would go out of business if the Commission imposed an advance 
fee ban.\651\ These statements, however, did not have adequate support. 
Moreover, the Final Rule permits debt relief providers to require 
consumers to place funds for provider fees and payments to creditors or 
debt collectors in a dedicated bank account, provided certain 
conditions are met. This provision will assure providers that, once 
they settle a consumer's debt, they will receive the appropriate fee.
---------------------------------------------------------------------------

    \647\ With respect to the disclosures, NACCA questioned whether 
it was realistic that the proposed disclosures could be provided in 
20 seconds. NACCA at 2. Moreover, a debt settlement company stated 
that it provides consumers with 16 mandatory disclaimers, and an 
additional 6 disclosures if applicable - it estimates that reading 
the disclaimers, and allowing the consumer to assent to the 
disclosures, requires approximately four and a half minutes. MD 
(Oct. 26, 2009) at 21.
    \648\ One commenter stated that, as a ``smaller operation,'' it 
would not be able to front employees salaries, as well as account 
set-up and maintenance costs, but did not provide any data to 
support these assertions or support the assertion that small 
companies would have a harder time than large companies in 
capitalizing expenses. See RADR at 1.
    \649\ Supra Section III.C.2.c.
    \650\ USOBA (Oct. 26, 2009) at 20.
    \651\ SDS at 2; MD (Oct. 26, 2009) at 25; RADR at 1; Orion (Oct. 
1, 2009) at 2; CDS at 1; D&A at 2; see also ULC at 6; CSA at 10 
(stating generally that the advance fee ban ``could put a legitimate 
company out of business''); FDR (Oct. 26, 2009) at 16-17; CCC at 1 
(a for-profit credit counseling company stated that it would go out 
of business if the Commission promulgates the advance fee ban).
---------------------------------------------------------------------------

C. Description and Estimate of the Number of Small Entities Subject to 
the Final Rule or Explanation Why No Estimate Is Available

    The amendments to the Rule will affect providers 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.''\652\ Staff estimates that the amended Rule will apply 
to approximately 2,000 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 not aware of published 
data that reports annual revenue figures for debt relief service 
providers.\653\ Further, the Commission's requests for information 
about the number and size of debt settlement companies yielded 
virtually no information.\654\ Based on the absence of available data, 
the Commission believes that a precise estimate of the number of small 
entities that fall under the amendment is not currently feasible.
---------------------------------------------------------------------------

    \652\ 16 CFR 310.2(cc) (in the proposed amended Rule, this 
definition is renumbered as Sec.  310.2(dd)).
    \653\ 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 TechnicalServices (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 (http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf/).
    \654\ See Able Workshop Comment at 6 (there are a ``thousand 
plus or minus companies whose business activities are related to 
debt settlement'').
---------------------------------------------------------------------------

D. Description of the Projected Reporting, Recordkeeping, and Other 
Compliance Requirements of the Rule, Including an Estimate of the 
Classes of Small Entities Which Will Be Subject to the Rule and the 
Type of Professional Skills That Will Be Necessary to Comply

    The Final Rule imposes disclosure and recordkeeping burden within 
the meaning of the PRA. 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 Final Rule requires 
specific disclosures in telemarketing of debt relief services, and it 
would subject inbound debt relief service telemarketing to the Rule's 
requirements, including the existing disclosure and recordkeeping 
provisions.\655\ In addition, the Final Rule prohibits a seller or 
telemarketer of debt relief services from requesting or receiving a fee 
in advance of providing the offered services.\656\
---------------------------------------------------------------------------

    \655\ See Rule Sec.  310.3(a)(1)(viii).
    \656\ See Rule Sec.  310.4(a)(5).
---------------------------------------------------------------------------

    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.

E. Steps the Agency Has Taken to Minimize any Significant Economic 
Impact on Small Entities, Consistent with the Stated Objectives of the 
Applicable Statutes

    In drafting the amended Rule, the Commission has made every effort 
to avoid unduly burdensome requirements for entities. The Commission 
believes that the amendments - including the new disclosures for debt 
relief services, prohibited misrepresentations, and the advance fee ban 
- are necessary in order to protect consumers considering the purchase 
of debt relief services. Similarly, the Commission is extending the 
coverage of the existing provisions of the Rule to inbound 
telemarketing of debt relief services. This amendment is designed to 
ensure that in telemarketing transactions to sell debt relief services, 
consumers receive the benefit of the Rule's protections. For each of 
these amendments, the Commission has attempted to tailor the provision 
to the concerns evidenced by the record to date. In fact, in 
determining the Final Rule's requirements, the FTC reduced the number 
of debt relief-specific disclosures from six initially proposed in the 
NPRM to four in order to reduce the burden on business, including small 
entities. On balance, the Commission believes that the benefits to 
consumers of each of the Rule's requirements outweigh the costs to 
industry of implementation.
    The Commission considered, but decided against, providing an 
exemption for small entities in the amended Rule. The protections 
afforded to consumers from the amendments are equally important 
regardless of the size of the debt relief service provider with whom 
they transact. Indeed, small debt relief service providers have no 
unique attributes that would warrant exempting them from provisions, 
such as the required 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 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 
amendments to set performance standards, which establish the objective 
results that must be achieved by

[[Page 48508]]

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. Moreover, the Rule's disclosure requirements are 
format-neutral; sellers and telemarketers may make the disclosures in 
writing or orally, as long as they are clear and conspicuous.\657\ In 
sum, the agency has worked to minimize any significant economic impact 
on small entities.
---------------------------------------------------------------------------

    \657\ If the disclosures are made in writing, they are 
considered clear and conspicuous ``only if they are sent close 
enough in time to the call so that the consumer associates the call 
with the written disclosures.'' FTC, Complying With the 
Telemarketing Sales Rule (May 2009), available at (http://www.ftc.gov/bcp/edu/pubs/business/marketing/bus27.shtm).

                                              List of Commenters and Short-Names/Acronyms Cited in the SBP
                                                               TSR Debt Relief Final Rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
        Short-name/Acronyms                                                               Commenter
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allen                               Charles Allen
Arnold & Porter                     Arnold & Porter on behalf of National Consumer Council
ART                                 A.R. Trust Services, Inc.
Able                                Able Debt Settlement, Inc.
ACA                                 ACA International
ACCORD                              American Coalition of Companies Organized to Reduce Debt
AFSA                                American Financial Services Association
AICCCA                              Association of Independent Consumer Credit Counseling Agencies
AADMO                               American Association of Debt Management Organizations
ABA                                 American Bankers Association
AMCA                                American Credit Alliance
Atkins                              Anthony Atkins
BBB                                 Better Business Bureau of the Southland
Briesch                             Richard Briesch
Brodie                              Jessica Brodie
CDS                                 Tim Harris, on behalf of CDS
CCC                                 Edward McTaggart, on behalf of CCC
Cambridge                           Cambridge Credit Counseling Corp.
Clement                             Bryan Scott Clement
CRN                                 Consumer Recovery Network
CareOne                             Care One Services
Centricity                          Centricity, Inc.
Cheney                              Gabriel Cheney
CO AG                               Office of the Colorado Attorney General
CCCS CNY                            Consumer Credit Counseling Service of Central New York
CFA                                 Consumer Federation of America, Consumers Union, Consumer Action, National Consumer Law Center, Center for
                                     Responsible Lending, National Association of Consumer Advocates, National Consumers League, US Public Interest
                                     Research Group, Privacy Rights Clearinghouse, Arizona Consumers Council, Chicago Consumer Coalition, Consumer
                                     Assistance Council, Community Reinvestment Association of North Carolina, Consumer Federation of the Southeast,
                                     Grass Roots Organizing, Jacksonville Area Legal Aid, Inc., Maryland Consumer Rights Coalition, Mid-Minnesota Legal
                                     Assistance, and Virginia Citizens Consumer Council
CU                                  Consumer's Union
CSA                                 Morrison & Foerster, LLP on behalf of Credit Solutions of America
D&A                                 Davis & Associates
Davis                               Robert Davis, engaged by AADMO
Debthelper                          Debthelper
DRS                                 Debt Remedy Solutions
DS                                  Debt Shield, Inc.
DSUSA                               Debt Settlement USA
DMB                                 DMB Financial, LLC
DSA/ADE                             Debt Settlement America, Inc. and American Debt Exchange, Inc.
FCS                                 Financial Consulting Services, LLC
FECA                                Financial Education and Counseling Alliance
Figliuolo                           Michael Figliuolo
FSR                                 Financial Services Roundtable
FDR                                 Freedom Debt Relief, LLC
Franklin                            Franklin Debt Relief
Garner                              Garner
GCS                                 Global Client Solutions, LLC
Gecha                               Gecha
Greenfield                          Professor Michael Greenfield
GP                                  GreenPath, Inc.
Hargrove                            Jason Hargrove
Hinksor                             Eric Hinksor
Ho                                  Andy Ho
Houghton                            Rebecca Houghton
Hunter                              Hunter Business Solutions
JH                                  J. Haas Group
Kaiser                              Karen Kaiser

[[Page 48509]]

 
Loeb                                Loeb & Loeb, LLC
MP                                  Manchester Publishing Company, Inc.
McInnis                             Saundra McInnis
MD                                  Morgan Drexen, Inc.
MD AG                               Office of the Maryland Attorney General
MN AG                               Office of the Minnesota Attorney General
MN LA                               Mid-Minnesota Legal Assistance
NACCA                               National Association of Consumer Credit Administrators
NAAG                                National Association of Attorneys General
Neal                                Erin Neal
NYC DCA                             N.Y.C. Dept. of Consumer Affairs
NFCC                                National Foundation for Credit Counseling
NWS                                 Nationwide Support Services, Inc.
Orion                               Orion Processing, LLC
Palmiero                            Diane Palmiero, on behalf of Century Negotiations, Inc.
Paquette                            Barbara Paquette
Patel                               David Patel
Pratt                               Vincent Pratt
QSS                                 Quality Survey Services
QLS                                 Queens Legal Services
RDRI                                Responsible Debt Relief Institute
RADR                                Rise Above Debt Relief
SBLS                                South Brooklyn Legal Services
Seigle                              John Seigle
Silverman                           Jeffrey Silverman
SOLS                                Southeastern Ohio Legal Services
SDS                                 Superior Debt Services
Smith                               Andrew Smith
Taillie                             Alex Taillie
TASC                                The Association of Settlement Companies
TBDR                                Two Bridge Debt Resolutions
ULC                                 Uniform Law Commission/National Conference of Commissioners on Uniform State Laws
USOBA                               United States Organizations for Bankruptcy Alternatives
USDR                                US Debt Resolve, Inc.
Weinstein                           Bernard Weinstein
Wheat                               Sharon Wheat
WV AG                               Office of the West Virginia Attorney General
--------------------------------------------------------------------------------------------------------------------------------------------------------

List of FTC Law Enforcement Actions Against Debt Relief Companies

    1. FTC v. Dominant Leads, LLC, No. 1:10-cv-00997 (D.D.C. filed June 
15, 2010) (debt settlement)
    2. FTC v. Asia Pacific Telecom, Inc., No. 10 C 3168 (N.D. Ill. 
filed May 24, 2010) (debt negotiation)
    3. FTC v. Advanced Mgmt. Servs. NW, LLC, No. 10-148-LRS (E.D. Wash. 
filed May 10, 2010) (debt negotiation)
    4. FTC v. Credit Restoration Brokers, LLC, No. 2:10-cv-0030-CEH-SPC 
(M.D. Fla. filed Jan. 19, 2010) (debt settlement and credit repair)
    5. FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill., 
preliminary injunction issued Dec. 17, 2009) (debt negotiation)
    6. FTC v. Econ. Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga., 
preliminary injunction issued Dec. 14, 2009) (debt negotiation)
    7. FTC v. JPM Accelerated Servs., Inc., No. 09-CV-2021 (M.D. Fla., 
preliminary injunction issued Dec. 31, 2009) (debt negotiation)
    8. FTC v. MCS Programs, LLC, No. 09-CV-5380 (W.D. Wash., final 
order July 19, 2010) (debt negotiation)
    9. FTC v. Group One Networks, Inc., No. 09-CV-00352 (M.D. Fla., 
preliminary injunction issued March 25, 2009) (debt negotiation)
    10. FTC v. Edge Solutions, Inc., No. CV 07-4087-JG-AKT (E.D.N.Y., 
final order Aug. 29, 2008) (debt settlement)
    11. FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo., final order 
Apr. 11, 2008) (debt settlement)
    12. FTC v. Select Pers. Mgmt., Inc., No. 07-CV-0529 (N.D. Ill., 
final order May 15, 2009) (debt negotiation)
    13. FTC v. Express Consolidation, No. 0:06-CV-61851-WJZ (S.D. Fla., 
final order May 5, 2007) (credit counseling)
    14. FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal., final 
order Oct. 2, 2008) (debt settlement)
    15. United States v. Credit Found. of Am., No. CV06-3654 ABC (VBKx) 
(C.D. Cal., final order June 16, 2006) (credit counseling)
    16. FTC v. Integrated Credit Solutions, Inc., No. 8:06-CV-00806-
SCB-TGW (M.D. Fla., final order Oct. 16, 2006) (credit counseling)
    17. FTC v. Debt Solutions, Inc., No. CV06-0298 (W.D. Wash., final 
order June 18, 2007) (debt negotiation)
    18. FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC(Ex) (C.D. 
Cal., final order Dec. 12, 2004) (debt settlement)
    19. FTC v. Nat'l Consumer Council, Inc., No. ACV04-0474CJC (JWJX) 
(C.D. Cal., final order Apr. 1, 2005) (credit counseling and debt 
settlement)
    20. FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4) (D. 
Mass., final order Mar. 28, 2005) (debt settlement)
    21. FTC v. Debt Mgmt. Found. Servs., Inc., No. 8:04-CV-1674-T-17MSS 
(M.D. Fla., final order Mar. 30, 2005) (credit counseling)
    22. FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 (C.D. Cal., 
final order July 13, 2005) (debt settlement)
    23. FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md., final order 
May 17, 2006) (credit counseling)

[[Page 48510]]

List of State Law Enforcement Actions Against Debt Relief Companies

Debt Settlement

Attorney General Actions

    1. Alabama v. Allegro Law LLC, No. 2:09cv729 (M.D. Ala. 2009). 
Press Release, Alabama Attorney General, A.G. King and Securities 
Commission Sue Prattville Companies Operating Alleged National Debt 
Settlement Scheme (July 10, 2009), available at (http://www.ago.state.al.us/news_template.cfm?Newsfile=www.ago.alabama.gov/news/07102009.htm)
    2. California v. Freedom Debt Relief, No. CIV477991 (Cal. Super. 
Ct. San Mateo County 2008). Consent Judgment, Stipulation for Entry of 
Consent Judgment, and Complaint, available at (http://www.corp.ca.gov/ENF/pdf/f/FDR.pdf)
    3. In re Clearone Advantage, LLC (Colo. 2009). Press Release, 
Colorado Attorney General, Eleven Companies Settle with the State Under 
New Debt-Management and Credit Counseling Regulations (Mar. 12, 2009), 
available at (http://www.coloradoattorneygeneral.gov/press/news/2009/03/12/eleven_companies_settle_state_under_new_debt_management_and_credit_counseling_)
    4. In re Credit Answers, LLC (Colo. 2009). Press Release, supra 
item 3.
    5. In re Debt Relief of Am. (Colo. 2009). Press Release, supra item 
3.
    6. In re Fin. Freedom Res., Inc. (Colo. 2009). Press Release, supra 
item 3.
    7. In re Freedom Debt Relief (Colo. 2009). Press Release, supra 
item 3.
    8. In re New Beginnings Debt Settlement, LLC (Colo. 2009). Press 
Release, supra item3.
    9. In re New Life Debt Relief Corp. (Colo. 2009). Press Release, 
supra item 3.
    10. In re PDL Assistance, Inc. (Colo. 2009). Press Release, supra 
item 3.
    11. In re Pemper Cos., Inc. (Colo. 2009). Press Release, supra 
item3.
    12. Colorado v. ADA Tampa Bay, Inc. dba Am. Debt Arbitration, FGL 
Clearwater, Inc. dba Am. Debt Arbitration, and Glenn P. Stewart (Colo. 
2010).
    13. Florida v. Hess Kennedy Chartered LLC, No. 08007686 (Fla. Cir. 
Ct. - 17th 2008). Complaint, available at (http://myfloridalegal.com/
webfiles.nsf/WF/MRAY-7C2GSH/$file/HessComplaint.pdf)
    14. Florida v. New Leaf Assocs., LLC, No. 05-4612-CI-20 (Fla. Cir. 
Ct. - 6th 2008). Complaint, available at (http://myfloridalegal.com/
webfiles.nsf/wf/mray-6e3juf/$file/newleafcomplaint.pdf)
    15. Florida v. Hacker, (Fla. Cir. Ct. - 4th 2008). Complaint, 
available at (http://myfloridalegal.com/webfiles.nsf/WF/MRAY-7C2GRC/
$file/HackerandCaparellaComplaint.pdf)
    16. Florida v. Ryan Boyd, No. 16-2008-CA-002909 (Fla. Cir. Ct. - 
4th 2008). Press Release, Florida Attorney General, Two Duval County 
Debt Negotiation Companies Sued for Alleged Deceptions (Mar. 5, 2008), 
available at (http://myfloridalegal.com/__852562220065EE67.nsf/0/1E9B7637235FE16C85257403005C595F?Open&Highlight=0,ryan,boyd)
    17. Florida v. Credit Solutions of Am., Inc., No. 09-CA-026438 
(Fla. Cir. Ct. - 13th 2009). Complaint, available at (http://
myfloridalegal.com/webfiles.nsf/WF/KGRG-7WYJAU/$file/CSAcomplaint.pdf)
    18. Florida v. Nationwide Asset Servs., Inc., et al. (Fla. Cir. Ct. 
- 6th 2009). Complaint, available at (http://myfloridalegal.com/
webfiles.nsf/WF/KGRG-7WYJCD/$file/ADAcomplaint.pdf)
    19. In re Christian Crossroads. Notice of Active Public Consumer-
Related Investigation, Florida Attorney General, available at (http://myfloridalegal.com/85256309005085AB.nsf/0/3BEE2927780BC9468525765D0044C534?Open&Highlight=0,christian,crossroads)
    20. In re Clear Fin. Solutions. Notice of Active Public Consumer-
Related Investigation, Florida Attorney General, available at (http://myfloridalegal.com/__85256309005085AB.nsf/0/C0634690070A696285257585005670EB?Open&Highlight=0,clear,financial)
    21. In re Clearview Credit, Inc. Notice of Active Public Consumer-
Related Investigation, Florida Attorney General, available at (http://myfloridalegal.com/__85256309005085AB.nsf/0/7FAE8CB0EA0BCE5F852575BD0066D4BD?Open&Highlight=0,clearview,credit)
    22. In re Debt Settlement USA. Notice of Active Public Consumer-
Related Investigation, Florida Attorney General, available at (http://myfloridalegal.com/__85256309005085AB.nsf/0/21B6A5099EFC61FE852576A500751189?Open&Highlight=0,debt,services)
    23. In re Emergency Debt Relief, Inc. Press Release, Florida 
Attorney General, Crist Reaches $230,000 Settlement with Debt Relief 
Company (Fla. Apr. 27, 2006), available at (http://myfloridalegal.com/__852562220065EE67.nsf/0/EA12BA531A5B606A8525715D00602067?Open&Highlight=0,emergency,debt)
    24. In re Genesis Capital Mgmt., Inc. Notice of Active Public 
Consumer-Related Investigation, Florida Attorney General, available at 
(http://myfloridalegal.com/85256309005085AB.nsf/0/ACF49525909A2F3585257632005F0071?Open&Highlight=0,genesis)
    25. In re M & J Life Mgmt. Notice of Active Public Consumer-Related 
Investigation, Florida Attorney General, available at (http://myfloridalegal.com/__85256309005085AB.nsf/0/A2F454A33AEC8213852574DA0066174E?Open&Highlight=0,life,management)
    26. In re Sapphire Mktg. Notice of Active Public Consumer-Related 
Investigation, Florida Attorney General, available at (http://myfloridalegal.com/__85256309005085AB.nsf/0/CF68D500F2C776FD85257633004B8AE6?Open&Highlight=0,sapphire)
    27. Illinois v. SDS West Corp., No. 09CH368 (Ill. Cir. Ct. - 7th 
2009). Press Release, Illinois Attorney General, Attorney General 
Madigan Sues Two Debt Settlement Firms (May 4, 2009), available at 
(http://www.illinoisattorneygeneral.gov/pressroom/2009_05/20090504.pdf)
    28. Illinois v. Debt Relief USA, Inc., No. 09CH367 (Ill. Cir. Ct. - 
7th 2009). Press Release, supra item 27.
    29. Illinois v. Clear Your Debt, LLC, No. 2010CH00167 (Ill. Cir. 
Ct. - 7th 2010). Press Release, Illinois Attorney General, Madigan Sues 
Four Debt Settlement Firms to Stop Abusive, Deceptive Practices (Feb. 
10, 2010), available at (http://www.ag.state.il.us/pressroom/2010_02/20100210.html)
    30. Illinois v. Endebt Solutions, LLC, d/b/a DebtOne Fin., No. 
2010CH00165 (Ill. Cir. Ct. - 7th 2010). Press Release, supra item 29.
    31. Illinois v. Debt Consultants of Am., Inc., No. 2010CH00168 
(Ill. Cir. Ct. - 7th 2010). Press Release, supra item 29.
    32. Illinois v. Am. Debt Arbitration et al., No. 2010CH00166 (Ill. 
Cir. Ct. - 7th 2010). Press Release, supra item 29.
    33. Indiana v. Debt Settlement Amer., Inc., No. 87C01-1002-PL-068 
(Ind. Cir. Ct. Warrick County 2010).
    34. Kansas v. Philip Manger, Robert Lock, Jr. and CCDN, LLC dba 
Credit Collection Def. Network (Kan. 2010).
    35. Kansas v. Blue Harbor Fin., No. 10C10 (Kan. Dist. Ct. Shawnee 
County 2010).

[[Page 48511]]

    36. Kansas v. Equity First Fin., No. 09C1878 (Kan. Dist. Ct. 
Shawnee County 2009).
    37. Maine v. Credit Solutions of America, No. BCD-WB-CV-10-02. (Me. 
Super. Ct. 2009). Complaint, available at (http://www.maine.gov/ag/news/cases_of_interest.shtml)
    38. Maryland Attorney General v. Law Offices of Richard A. Brennan, 
No. 10-C-08-00503-OC (Md. Cir. Ct. Frederick County 2007). Press 
Release, Maryland Attorney General, Attorney General Settles with 
Companies Selling Debt Repayment Services (Oct. 19, 2007), available at 
(http://www.oag.state.md.us/Press/2007/101907.htm)
    39. Minnesota v. Am. Debt Settlement Solutions, Inc., No. 70-CV-10-
4478 (Minn. Dist. Ct. - 1\st\ 2010). Complaint, Minnesota Attorney 
General comment (Feb. 23, 2010), available at (http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00332.pdf)
    40. Minnesota v. Debt Rx USA, LLC (Minn. Dist. Ct. - 4th 2010). 
Complaint, supra item 39.
    41. Minnesota v. FH Fin. Serv., Inc. (Minn. Dist. Ct. - 6th 2010). 
Complaint, supra item 39.
    42. Minnesota v. Morgan Drexen (Minn. Dist. Ct. - 4th 2010). 
Complaint, supra item 39.
    43. Minnesota v. Pathway Fin. Mgmt., Inc. (Minn. Dist. Ct. - 4th 
2010). Complaint, supra item 39.
    44. Minnesota v. State Capital Fin., Inc., No. 34-CV-10-117 (Minn. 
Dist. Ct. - 8th 2010). Complaint, supra item 39.
    45. Missouri v. Credit Solutions of Am., No. 0922-CC02228 (Mo. Cir. 
Ct. St. Louis 2009). Press Release, Missouri Attorney General, Attorney 
General Koster Files Suit to Stop Company from Falsely Promising 
Credit-Card Debt Help (June 2, 2009), available at (http://ago.mo.gov/newsreleases/2009/AG_Koster_Suit_Against_Credit_Solutions)
    46. Missouri v. Credit Repair and Counseling Specialists, LLC, No. 
1031-CV03404 (Mo. Cir. Ct. Green County 2010). Press Release, Missouri 
Attorney General, Attorney General Koster Warns, ``No Quick Fix'' (Mar. 
9, 2010), available at (http://ago.mo.gov/newsreleases/2010/Consumer_protection_week_scam_of_the_day_alert_credit_repair/)
    47. New York v. Credit Solutions of Am., Inc., No. 401225/2009 
(N.Y. Sup. Ct. New York County 2009). Press Release, New York Attorney 
General, Attorney General Cuomo Sues Debt Settlement companies for 
Deceiving and Harming Consumers (May 19, 2009), available at (http://www.ag.ny.gov/media_center/2009/may/may19b_09.html)
    48. New York v. Nationwide Asset Servs., Inc., No. 5710/2009 (N.Y. 
Sup. Ct. Erie County 2009). Press Release, supra item 47.
    49. North Carolina v. Daly & Sinnott Law Ctr., PLLC d/b/a The Law 
Ctrs. for Consumer Prot., et al., No. 01CV013603 (N.C. Super. Ct. Wake 
County 2002). Press release, North Carolina Attorney General, Debt 
Relief Company to Return Money to Consumers, Announces A.G. Cooper 
(Jan. 11, 2005), available at (http://www.ncdoj.gov/News-and-Alerts/News-Releases-and-Advisories/Press-Releases/Debt-relief-company-to-return-money-to-consumers,-.aspx)
    50. North Carolina v. Knight Credit Servs., Inc., et al., No. 
04CVS8345 (N.C. Super Ct. Cumberland County 2004).
    51. North Carolina v. Commercial Credit Counseling Servs., Inc. d/
b/a Corporate Turnaround, No. 06CV14672 (N.C. Super. Ct. Wake County 
2006).
    52. North Carolina v. Hess Kennedy Chartered, LLC, No. 08CV2310 
(N.C. Super. Ct. Wake County 2008). Press Release, North Carolina 
Attorney General, Debt Relief Firms Ordered to Stop Taking Money in NC, 
Says A.G. (Feb. 15, 2008), available at (http://www.ncdoj.gov/News-and-Alerts/News-Releases-and-Advisories/Press-Releases/Debt-relief-firms-ordered-to-stop-taking-money-in-.aspx)
    53. In re Morgan Drexen (N.C. 2009)
    54. In re Credit Solutions of America (Or. 2010). Press Release, 
Oregon Attorney General, Attorney General John Kroger Bans Nation's 
Largest Debt Settlement Company From Doing Business in Oregon (May 7, 
2010), available at (http://www.doj.state.or.us/releases/2010/rel050710.shtml)
    55. Texas v. Debt Relief USA, No. D-1-GV-09-001570 (Tex. Dist. Ct. 
- 53\rd\ Travis County 2009). Complaint, available at (http://www.oag.state.tx.us/newspubs/releases/2009/081809debtrelief_pop.pdf)
    56. Texas v. BC Credit Solution, LLC, et al. (Tex. Dist. Ct. Travis 
County 2009). Plaintiff's Original Petition, available at (http://www.oag.state.tx.us/newspubs/releases/2009/052009bccredit_pop.pdf)
    57. Texas v. FH1 Fin. Servs., Inc. d/b/a FH Fin. Serv. (Tex. Dist. 
Ct. Travis County 2009). Plaintiff's Original Petition, available at 
(http://www.oag.state.tx.us/newspubs/releases/2009/052009lhfinancial_pop.pdf)
    58. Texas v. Four Peaks Fin. Servs., LLC (Tex. Dist. Ct. Travis 
County 2009). Plaintiff's Original Petition, available at (http://www.oag.state.tx.us/newspubs/releases/2009/052009fourpeaks_pop.pdf)
    59. Texas v. HABR, LLC d/b/a Debtor Solution (Tex. Dist. Ct. Travis 
County 2009). Plaintiff's Original Petition, available at (http://www.oag.state.tx.us/newspubs/releases/2009/052009debtsolution_pop.pdf)
    60. Texas v. Credit Solutions of Am., Inc., No. D-1-GV-09-000417 
(Tex. Dist. Ct. - 261\st\ 2009). Plaintiff's Original Petition, 
available at (http://www.oag.state.tx.us/newspubs/releases/2009/032509csa_op.pdf)
    61. Texas v. DebtXS, L.P. (Tex. Dist. Ct. Travis County 2006). 
Press Release, Texas Attorney General, Attorney General Abbott Gets 
Debt Settlement Firm to Change Business Practices Harming Consumers 
(Sept. 11, 2006), available at (http://www.oag.state.tx.us/oagNews/release.php?id=1729)
    62. Vermont v. Daly and Sinnott Law Ctrs. (Vt. 2002). Press 
Release, Vermont Attorney General, Consumer Update: Daly and Sinnott 
``Law Centers for Consumer Protection'' (Jan. 27, 2003), available at 
(http://www.atg.state.vt.us/issues/consumer-protection/documents-and-resources/consumer-update-daly-and-sinnott-law-centers-for-consumer-protection.php)
    63. In re Boston Debt Solutions, LLC, No. 1302-09WNCV (Vt. Super. 
Ct. Washington County 2009). Press Release, Vermont Attorney General, 
Debt Adjuster Sanctioned for Violating Licensing and Consumer Laws 
(Mar. 9, 2009), available at (http://www.atg.state.vt.us/news/debt-adjuster-sanctioned-for-violating-licensing-and-consumer-laws.php); 
Assurance of Discontinuance, available at (http://www.atg.state.vt.us/assets/files/Boston%20Debt%20Solutions%202-26-09.pdf)
    64. In re Century Negotiations, Inc., No. 489-7-09WNCV (Vt. Super. 
Ct. Washington County 2009). Press Release, Vermont Attorney General, 
Debt Settlement Company Settles Consumer Claims (July 14, 2009), 
available at (http://www.atg.state.vt.us/news/debt-settlement-company-settles-consumer-claims3.php); Assurance of Discontinuance, available 
at (http://www.atg.state.vt.us/assets/files/Century%20Negotiations%20-%207-2-09.pdf)
    65. In re Clear Your Debt, LLC, No. 56-1-10WNCV (Vt. Super. Ct. 
Washington County 2009) (Joint action by Attorney General and State 
Regulator). Press Release, Vermont Attorney General, Debt Settlement 
Company Settles Consumer Claims (July 23, 2009), available at (http://www.atg.state.vt.us/news/debt-settlement-company-settles-consumer-claims1.php); Assurance of Discontinuance, available at (http://
www.atg.state.vt.us/assets/files/

[[Page 48512]]

Debt%20Settlement%20 America%20AOD%20-%202010-1-27.pdf)
    66. In re CreditAnswers LLC, No. 766-10-09WNCV (Vt. Super. Ct. 
Washington County 2009). Press Release, Vermont Attorney General, Two 
More Debt Settlement Companies Settle Consumer Claims (Oct. 13, 2009), 
available at (http://www.atg.state.vt.us/news/two-more-debt-settlement-companies-settle-consumer-claims.php); Assurance of Discontinuance, 
available at (http://www.atg.state.vt.us/assets/files/Credit%20Answers%20AOD.pdf)
    67. In re Liberty Banc Mortgage Group, Inc. dba Liberty Settlement 
Group, No. 767-10-09WNCV (Vt. Super. Ct. Washington County 2009). Press 
Release and Assurance of Discontinuance, supra item 66.
    68. In re Debt Remedy Solutions, LLC, No. 377-5-09WNCV (Vt. Super. 
Ct. Washington County 2009). Press Release, Vermont Attorney General, 
Debt Settlement Company Settles Consumer Claims (May 27, 2009), 
available at (http://www.atg.state.vt.us/news/debt-settlement-company-settles-consumer-claims2.php); Assurance of Discontinuance, available 
at (http://www.atg.state.vt.us/assets/files/Debt%20Remedy%20Solutions%20LLC.pdf)
    69. In re Debt Settlement USA, Inc., No. 867-11-09WNCV (Vt. Super. 
Ct. Washington County 2009). Press Release, Vermont Attorney General, 
Attorney General Settles Consumer Claims with Two More Debt Settlement 
Companies (Nov. 30, 2009), available at (http://www.atg.state.vt.us/news/attorney-general-settles-consumer-claims-with-two-more-debt-settlement-companies.php); Assurance of Discontinuance, available at 
(http://www.atg.state.vt.us/assets/files/Debt%20Settlement%20USA%20Inc%20AOD.pdf)
    70. In re Fin. Freedom of Am., Inc., No. 897-11-09WNCV (Vt. Super. 
Ct. Washington County 2009). Press Release and Assurance of 
Discontinuance, supra item 69.
    71. In re Credit Alliance Group, No. 172-3-10WNCV (Vt. Super. Ct. 
Washington County 2010). Assurance of Discontinuance, available at 
(http://www.atg.state.vt.us/assets/files/Credit%20Alliance%20Group%20AOD.pdf)
    72. In re Debt Settlement Am. (Vt. 2010). Press Release, Vermont 
Attorney General, Attorney General Settles Consumer Claims With Debt 
Settlement Company (Feb. 2, 2010), available at (http://www.atg.state.vt.us/news/attorney-general-settles-consumer-claims-with-debt-settlement-company.php); Assurance of Discontinuance, available at 
(http://www.atg.state.vt.us/assets/files/Debt%20Settlement%20America%20AOD%20-%202010-1-27.pdf)
    73. State ex rel. McGraw v. Able Debt Settlement, Inc. (W. Va. 
2009). Press Release, West Virginia Attorney General, Texas-based Debt 
Settlement Company, Able Debt Settlement, is Enjoined from Doing 
Business in West Virginia (May 15, 2009), available at (http://www.wvago.gov/press.cfm?ID=476&fx=more)
    74. State ex rel. McGraw v. Patriot Debt Solutions Corp., No. 07-
Misc.-309 (W. Va. Cir. Ct. Kanawha County 2007).
    75. State ex rel. McGraw v. Credit Collections Defense Network, No. 
09-Misc.-77 (W. Va. Cir. Ct. Kanawha County 2009). Press Release, West 
Virginia Attorney General, Illinois Attorney Enjoined from Continuing 
Debt Settlement Business Until He Complies with Attorney General's 
Investigation (Apr. 1, 2009), available at (http://www.wvago.gov/press.cfm?fx=more&ID=471)
    76. State ex rel. McGraw v. Hess Kennedy Chartered LLC, No. 07-
Misc.-454 (W. Va. Cir. Ct. Kanawha County 2008). Press Release, West 
Virginia Attorney General, Florida Attorneys Prevented From Continuing 
Debt Settlement Business in WV Until They Comply with Attorney 
General's Investigation (Dec. 21, 2007), available at (http://www.wvago.gov/press.cfm?ID=417&fx=more)
    77. State ex rel. McGraw v. Debt Mgmt. Credit Counseling Corp. (W. 
Va. 2006). Press Release, West Virginia Attorney General, McGraw 
Recovers Nearly $92,000 in Overages (Jan. 31, 2006), available at 
(http://www.wvago.gov/press.cfm?ID=62&fx=more)
    78. In re Excess Debt Solutions, LLC (W. Va. 2010).
    79. In re Am. Debt Solutions (W. Va. 2008).
    80. State ex rel. McGraw v. PDM Int'l, Inc. (W. Va. 2007). Press 
Release, West Virginia Attorney General, Attorney General Darrell 
McGraw Obtains $35,345.00 in Refunds for 38 West Virginia Consumers 
Misled by a Texas Debt Relief Company (Feb. 18, 2009), available at 
(http://www.wvago.gov/press.cfm?ID=465&fx=more)
    81. In re Accelerated Fin. Ctrs. (W. Va. 2010).
    82. In re Active Debt Solutions (W. Va. 2009).
    83. In re Elimidebt Mgmt. Servs. (W. Va. 2009).
    84. State ex rel. McGraw v. CCDN, LLC, No. 10-C-632 (W. Va. Cir. 
Ct. Kanawha County 2010). Press Release, West Virginia Attorney 
General, A.G. McGraw Sues to Stop CCDN's Deceptive Debt Settlement 
Business (Apr. 12, 2010), available at (http://www.wvago.gov/press.cfm?ID=521&fx=more)

State Regulator Actions

    1. In re Nationwide Asset Servs., Inc., (California Dep't of Corps. 
2005). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2005/Nationwide.pdf)
    2. In re First Am. Debt Relief (Adm'r of the Colo. Unif. Consumer 
Credit Code 2009).
    3. In re First Choice Fin. Solutions LLC (Adm'r of the Colo. Unif. 
Consumer Credit Code 2009).
    4. In re Franklin Debt Relief (Adm'r of the Colo. Unif. Consumer 
Credit Code 2009).
    5. In re Freedom Fin. Mgmt., Inc. (Adm'r of the Colo. Unif. 
Consumer Credit Code 2009).
    6. In re Interservice Fin. Solutions (Adm'r of the Colo. Unif. 
Consumer Credit Code 2009).
    7. In re Law Ctr. for Debt Settlement Servs. (Adm'r of the Colo. 
Unif. Consumer Credit Code 2009).
    8. In re Nationwide Asset Services, Inc. (Adm'r of the Colo. Unif. 
Consumer Credit Code 2009).
    9. In re Nationwide Support Servs., Inc. (Adm'r of the Colo. Unif. 
Consumer Credit Code 2009).
    10. In re Optimal Debt Solutions (Adm'r of the Colo. Unif. Consumer 
Credit Code 2009).
    11. In re Pacific Debt, Inc. (Adm'r of the Colo. Unif. Consumer 
Credit Code 2009).
    12. In re SDS West Corp. (Adm'r of the Colo. Unif. Consumer Credit 
Code 2010).
    13. In re Debt Regret, Inc. (Adm'r of the Colo. Unif. Consumer 
Credit Code 2009).
    14. In re SCK Solutions, LLC dba Family Debt Ctr. (Adm'r of the 
Colo. Unif. Consumer Credit Code 2009).
    15. In re Safeguard Credit Counseling Servs., Inc. (Adm'r of the 
Colo. Unif. Consumer Credit Code 2009).
    16. In re The Achievable Inc dba Achievable Fin. Solutions (Adm'r 
of the Colo. Unif. Consumer Credit Code 2009).
    17. In re Triumph Fin. Group, Inc (Adm'r of the Colo. Unif. 
Consumer Credit Code 2009).
    18. In re CSA-Credit Solutions of Am., LLC (Adm'r of the Colo. 
Unif. Consumer Credit Code 2010).

[[Page 48513]]

    19. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. 
Debt Relief of Am., No. 2005CV109801 (Ga. Super. Ct. Fulton County 
2005).
    20. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. 
Debt Remedy Solutions, LLC, No. 2008CV147250 (Ga. Super. Ct. Fulton 
County 2008).
    21. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. 
DebtXS, LP, No. 2007CV128094 (Ga. Super. Ct. Fulton County 2007).
    22. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. 
Brauer Law Offices, PLC., No. 10-1-0681-34 (Ga. Super. Ct. Cobb County 
2010).
    23. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. 
Bella Fin., Inc. d/b/a Debt-By-Debt Settlement Servs., No. 2010CV183079 
(Ga. Super. Ct. Fulton County 2010).
    24. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. 
Rescue Debt, Inc., No. 2006CV125866 (Ga. Super. Ct. Fulton County 
2006). Information, 2006 Accomplishments - Enforcement, available at 
(http://consumer.georgia.gov/00/article/0,2086,5426814_39039081_74269691,00.html)
    25. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. P & 
E Holdings, LLC, Greenwood Fin. Solutions, LLC & Eddie Zucker, No. 
2007CV137759 (Ga. Super. Ct. Fulton County 2007).
    26. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. 
Debt Relief USA, Inc., No. 2009CV166354 (Ga. Super. Ct. Fulton County 
2009). Press Release, Georgia Governor's Office of Consumer Affairs, 
Debt Relief USA to Pay Georgia Consumers Over $500,000 in Refunds (Mar. 
18, 2009), available at (http://consumer.georgia.gov/00/press/detail/0,2668,5426814_94800056_135944239,00.html)
    27. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. 
Jeremy Wright and Liberty Debt Mgmt., No. 2007CV130515 (Ga. Super. Ct. 
Fulton County 2007).
    28. South Carolina Dep't of Consumer Affairs v. Debt Relief of Am., 
LP, No. 06-ALJ-30-0671-CC (S.C. Admin. Law Ct. 2006). Information, 
available at (http://www.scconsumer.gov/licensing/credit_counseling/06-alj-30-0671-cc.htm)
    29. South Carolina Dep't of Consumer Affairs v. Credit Solutions, 
Inc, No. 07-ALJ-30-0518-IJ (S.C. Admin. Law Ct. 2009). Administrative 
Law Court Decision, available at (http://www.scalc.net/decisions.aspx?q=4&id=10745)
    30. In re Am. Credit Counselors, Inc. (S.C. Dep't of Consumer 
Affairs 2009).
    31. In re Am. Debt Found., Inc. (S.C. Dep't of Consumer Affairs 
2007).
    32. In re Am. Liberty Fin., Inc. (S.C. Dep't of Consumer Affairs 
2007).
    33. In re Debt Resolution Assocs., Inc. (S.C. Dep't of Consumer 
Affairs 2008).
    34. In re Debt Settlement USA, Inc. (S.C. Dep't of Consumer Affairs 
2008).
    35. In re Endebt Solutions, LLC dba DebtOne Fin. Solutions (S.C. 
Dep't of Consumer Affairs 2008).
    36. In re Freedom Fin. Mgmt., Inc. (S.C. Dep't of Consumer Affairs 
2010).
    37. In re NewPath Fin., Inc. (S.C. Dep't of Consumer Affairs 2010).
    38. In re Safeguard Credit Counseling Servs., Inc. (S.C. Dep't of 
Consumer Affairs 2009).
    39. In re U.S. Fin. Mgmt., Inc. (S.C. Dep't of Consumer Affairs 
2007).
    40. In re Allegro Law Firm, LLC and Keith Anderson Nelms (S.C. 
Dep't of Consumer Affairs 2009). Press Release, South Carolina Dep't of 
Consumer Affairs, SC Consumers May be Affected by Alabama Court Ruling 
(Nov. 6, 2009), available at (http://www.scconsumer.gov/press_releases/2009/09085.pdf)
    41. Lexington Law Firm v. South Carolina Dep't of Consumer Affairs, 
No. 06-ALJ-30-0935-CC (S.C. Admin. Law Ct. 2009). Press Release, South 
Carolina Dep't of Consumer Affairs, SC Supreme Court Rules in Favor of 
Consumer Affairs (May 14, 2009), available at (http://www.scconsumer.gov/press_releases/2009/09047.pdf)
    42. In re Credit First Fin. Solutions, LLC (Utah Dep't of Commerce 
2009).
    43. In re North 83 rd Debt Resolution, LLC (Wis. Dep't of Fin. 
Insts., Div. of Banking 2008). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/mb_2008/North83rdDebtResolutionLLC.pdf)

Publicly-Announced Investigations

New York Investigations

    Press Release, New York Attorney General, Attorney General Cuomo 
Announces Nationwide Investigation Into Debt Settlement Industry (May 
7, 2009), available at (http://www.ag.ny.gov/media_center/2009/may/may7a_09.html)
    1. Am. Debt Found. (2009).
    2. Am. Fin. Serv. (2009).
    3. Consumer Debt Solutions (2009).
    4. Credit Answers, LLC (2009).
    5. Debt Remedy Solutions (2009).
    6. Debt Settlement Am. (2009).
    7. Debt Settlement USA (2009).
    8. Debtmerica Relief (2009).
    9. DMB Fin., LLC (2009).
    10. Freedom Debt Relief (2009).
    11. New Era Debt Solutions (2009).
    12. New Horizons Debt Relief Inc. (2009).
    13. Preferred Fin. Servs., Inc. (2009).
    14. U.S. Fin. Mgmt. Inc. (d.b.a. My Debt Negotiation) (2009).
    15. Allegro Law Firm (2009).

Florida Investigations

    Press Release, Florida Attorney General, Attorney General Announces 
Initiative to Clean Up Florida's Debt Relief Industry (Oct. 15, 2008), 
available at (http://myfloridalegal.com/newsrel.nsf/newsreleases/BD3AB29E6DDAF150852574E3004DFACD 4DFACD)
    1. Fin. Freedom Resources, Inc. (2008).
    2. Specialized Funding (2008).
    3. Nodelay Enterprises, Inc. (2008).
    4. Equity First Fin. Corp. (2008).

Debt Negotiation

Attorney General Actions

    1. Colorado v. Nat'l Found. for Debt Mgmt., Inc. (Colo. 2009). 
Press Release, Colorado Attorney General, Eleven Companies Settle with 
the State Under New Debt-Management and Credit Counseling Regulation 
(Mar. 12, 2009), available at (http://www.coloradoattorneygeneral.gov/press/news/2009/03/12/eleven_companies_settle_state_under_new_debt_management_and_credit_counseling_)
    2. Florida v. IXE Accelerated Fin. Servs. (Fla. 2008). Press 
Release, Florida Attorney General, Attorney General Announces 
Initiative to Clean Up Florida's Debt Relief Industry (Oct. 15, 2008), 
available at (http://myfloridalegal.com/newsrel.nsf/newsreleases/BD3AB29E6DDAF150852574E3004DFACD 004DFACD)
    3. Kansas v. Genesis Capital Mgmt., Inc., No. 09C2012 (Kan. Dist. 
Ct. Shawnee County 2009).
    4. Minnesota v. Priority Direct Mktg., No. 62-CV-10416 (Minn. Dist. 
Ct. Ramsey County 2009). Press Release, Minnesota Attorney General, 
Attorney General Swanson Files Three Lawsuits Against companies 
Claiming to Help Consumers Lower Their Credit Card Interest Rates 
(Sept. 22, 2009), available at (http://www.ag.state.mn.us/consumer/pressrelease/090922ccinterestrates.asp)
    5. Minnesota v. Clear Fin. Solutions, No. 62-CV-10410 (Minn. Dist. 
Ct. Ramsey County 2009). Press Release, supra item 4.
    6. Minnesota v. Moneyworks, LLC, No. 62-CV-09-10411 (Minn. Dist. 
Ct. Ramsey

[[Page 48514]]

County 2009). Press Release, supra item 4.
    7. Minnesota v. One Source, Inc., No. 40-CV-135 (Minn. Dist. Ct. Le 
Sueur County 2010). Complaint, available at (http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00332.pdf)
    8. Washington v. Debt Solutions, Inc., No. CV06-0298 (W.D. Wash. 
2006). Complaint, available at (http://www.atg.wa.gov/uploadedFiles/Home/News/Press_Releases/2007/DSIcomplaint6-3-06.pdf)
    9. In re Clear Fin. Solutions (W. Va. 2009). Press Release, West 
Virginia Attorney General, Attorney General McGraw Announces WV Refunds 
of $214,000 in Debt Relief Companies Settlement (Jan. 13, 2010), 
available at (http://www.wvago.gov/press.cfm?ID=500&fx=more)

State Regulator Actions

    1. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. Am. 
Debt Negotiators, Inc., No. 2006CV123869 (Ga. Super. Ct. Fulton County 
2006). Information, 2006 Accomplishments - Enforcement, available at 
(http://consumer.georgia.gov/00/article/0,2086,5426814_39039081_74269691,00.html)
    2. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. Debt 
Freedom, Inc. and Joshua Autenreith, No. 2008CV158957 (Ga. Super. Ct. 
Fulton County 2008).
    3. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. 
Smart Credit Mgmt. Group, Inc., No. 2007CV134220 (Ga. Super. Ct. Fulton 
County 2007).
    4. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. 
Consumer Credit Counseling Found., No. 2006CV120087 (Ga. Super. Ct. 
Fulton County 2006).

Credit Counseling

Attorney General Actions

    1. Connecticut v. J.K. Harris Fin. Recovery Sys., LLC (Conn. 2006). 
Press Release, Connecticut Attorney General, Attorney General Sues J.K. 
Harris for Deceptive Mailings Offering Help With Nonexistent Court 
Cases (Feb. 11, 2004), available at (http://www.ct.gov/ag/cwp/view.asp?A=1779&Q=284302)
    2. Illinois v. Cambridge Credit Counseling Corp. (Ill. 2007). Press 
Release, Illinois Attorney General, Attorney General Madigan Continues 
Crackdown on Debt Settlement Industry (Sept. 30, 2009), available at 
(http://www.ag.state.il.us/pressroom/2009_09/20090930.html)
    3. Illinois v. AmeriDebt, Inc. (Ill. 2005). Press Release, supra 
item 2.
    4. In re Michael Kiefer (Md. 2005). Press Release, Maryland 
Attorney General, Attorney General's Office Settles with Former Officer 
of Debtworks (Sept. 19, 2005), available at (http://www.oag.state.md.us/press/2005/091905.htm)
    5. In re Ballenger Group, LLC, (Md. 2005). Press Release, Maryland 
Attorney General, Attorney General's Office Settles with Debt 
Management Servicer (Mar. 22, 2005), available at (http://www.oag.state.md.us/Press/2005/032205.htm)
    6. In re Debtscape, Inc. (Md. 2005). Press Release, Maryland 
Attorney General, Attorney General's Office Settles with Credit 
Counseling Agency (Oct. 12, 2005), available at (http://www.oag.state.md.us/press/2005/101205.htm)
    7. In re Fin. Freedom Int'l (Md. 2005). Press Release, Maryland 
Attorney General, Attorney General's Office Settles with Credit 
Counseling Agency that Targeted Spanish Speakers (Nov. 22, 2005), 
available at (http://www.oag.state.md.us/Press/2005/112205a.htm)
    8. Massachusetts v. Cambridge Credit Counseling Corp., No. 2004-
01436-F (Mass. Super. Ct. 2004).
    9. Minnesota v. AmeriDebt, Inc. (Minn. 2003).
    10. Missouri ex rel. Nixon v. AmeriDebt, Inc. (Mo. 2003).
    11. New Jersey v. United Credit Adjusters, No. MON-C-158-08 (N.J. 
Super. Ct. Monmouth County 2008). Final Consent Judgment, available at 
(http://www.nj.gov/oag/newsreleases09/pr20090730b-UnitedCreditAdjusters-FinalConsentJudgment.pdf)
    12. North Carolina v. Cambridge Credit Counseling Corp., No. 
04CVS005155 (N.C. Super. Ct. Wake County 2004).
    13. Texas v. AmeriDebt, Inc. (Tex. 2003). Press Release, Texas 
Attorney General, Attorney General Abbot Files Suit Against Non-Profit 
Credit Counseling Service (Nov. 19, 2003), available at (http://www.oag.state.tx.us/oagNews/release.php?id=284)
    14. State ex rel. McGraw v. Cambridge Credit Counseling Corp. (W. 
Va. 2006). Press Release, West Virginia Attorney General, Attorney 
General Secures Settlement Agreement with Cambridge (May 25, 2006), 
available at (http://www.wvago.gov/press.cfm?ID=35&fx=more)
    15. State ex rel. McGraw v. Family Credit Counseling Corp. (W. Va. 
2009). Press Release, West Virginia Attorney General, Attorney General 
McGraw Sues James R. Armstrong, Jr. And His Web of Florida Shell 
Companies over Fraudulent Credit Counseling Scheme (May 8, 2009), 
available at (http://www.wvago.gov/press.cfm?fx=more&ID=475)
    16. State ex rel. McGraw v. Help Ministries dba Debt Free (W. Va. 
2006). Press Release, West Virginia Attorney General, Attorney General 
McGraw Secures Settlement With Debt Free (Sept. 13, 2006), available at 
(http://www.wvago.gov/press.cfm?ID=83&fx=more)

State Regulator Actions

    1. California Dep't of Corps. v. Express Consolidation, Inc., 
Department of Corporations No. 943-0122 (Cal. 2008). Statement of 
Issues, available at (http://www.corp.ca.gov/ENF/pdf/e/ExpressConsolidation_si.pdf)
    2. In re Money Mgmt. by Mail, Inc. (California Dep't of Corps. 
2005). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2005/MoneyManagement.pdf)
    3. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. Debt 
Mgmt. Credit Counseling Corp. (Ga. 2005). Information, 2005 
Accomplishments - Enforcement, available at (http://consumer.georgia.gov/00/article/0,2086,5426814_39039081_49161506,00.html)
    4. Georgia, Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. Fin. 
Freedom Resources, Inc., No. 2007-RCCV-781 (Ga. Super. Ct. Richmond 
County 2008).
    5. South Carolina Dep't of Consumer Affairs v. Vision Fin. Mgmt., 
LLC and Nelzarie Wynn, No. 08-ALJ-30-0043-IJ (S.C. Admin. Law Ct. 
2008). Administrative Law Court Decision, available at (http://www.scalc.net/decisions.aspx?q=4&id=11007)

Failure to Register

Attorney General Actions

    1. In re Century Negotiations, Inc. (Colo. 2009). Press Release, 
Colorado Attorney General, Eleven Companies Settle With the State Under 
New Debt-Management and Credit Counseling Regulations (Mar. 12, 2009), 
available at (http://www.coloradoattorneygeneral.gov/press/news/2009/03/12/eleven_companies_settle_state_under_new_debt_management_and_credit_counseling_)
    2. Delaware v. Freedom Debt Relief, LLC (Del. 2009). Press Release, 
Delaware Attorney General, Consumer Protection Unit Acts to Safeguard 
Delawareans in Debt (Sept. 28, 2009), available at (http://
attorneygeneral.delaware.gov/media/releases/2009/Consumer%20Protection 
%20Unit%20acts%20to %20safeguard%20

[[Page 48515]]

Delawareans%20 in%20debt.pdf)
    3. Idaho v. Debt Relief USA, Inc. (Idaho 2008). Press Release, 
Idaho Department of Finance, Department of Finance Reaches Agreements 
with Out-of-State Debt Settlement Companies (Sept. 19, 2008), available 
at (http://finance.idaho.gov/PR/2008/GSpressRelDebtStlmntCoSettlements9-08.pdf)
    4. Idaho v. DMB Fin. (Idaho 2008). Press Release, supra item 3.
    5. Idaho v. Debt Settlement USA, Inc. (Idaho 2008). Press Release, 
supra item 3.
    6. Idaho v. Credit Solutions of Am., Inc. (Idaho 2008). Press 
Release, Idaho Department of Finance, Idaho Department of Finance 
Settles with Credit Solutions of America (Jan. 15, 2008), available at 
(http://spokane.bbb.org/article/idaho-department-of-finance-settles-with-credit-solutions-ofamerica-inc-3086)
    7. New Hampshire v. Debt Relief USA, et al., Banking Department No. 
08-361 (N.H. 2008). Order of License Denial, available at (http://www.nh.gov/banking/Order08_361DebtReliefUSA_DO.pdf)
    8. In re Help With Debt, LLC and David A. Gelinas (N.H. 2007) . 
Cease and Desist Order, available at (http://www.nh.gov/banking/Order07_047HelpWithDebt_CD.pdf)
    9. In re Peoples First Fin. (Utah Dep't of Commerce, 2009).
    10. In re Consumer Law Ctr. (Utah Dep't of Commerce, 2008).
    11. In re Associated Tax Relief, Inc. (Utah Dep't of Commerce, 
2009).
    12. In re Liberty Am., LLC (Utah Dep't of Commerce, 2009).
    13. In re Reliance Debt Relief, LLC (Utah Dep't of Commerce, 2009).
    14. State ex rel. McGraw v. Debt Relief of Am. LLP (W. Va. 2007). 
Press Release, West Virginia Attorney General, Attorney General McGraw 
Reaches Settlement with Four Debt Relief Companies for 366 Consumers 
(May 16, 2007), available at (http://www.wvago.gov/press.cfm?ID=343&fx=more)
    15. State ex rel. McGraw v. Fidelity Debt Consultants, Inc. (W. Va. 
2007). Press Release, supra item 14.
    16. State ex rel. McGraw v. David Huffman d/b/a Freedom Group (W. 
Va. 2007) . Press Release, supra item 14.
    17. State ex rel. McGraw v. New Horizons Debt Relief (W. Va. 2007) 
. Press Release, supra item 14.
    18. State ex rel. McGraw v. Consumer Credit Counseling of Am., Inc. 
(W. Va. 2008). Press Release, West Virginia Attorney General, Attorney 
General McGraw Reaches Agreement with Three More ``Debt Settlement'' 
Companies; Refunds of $375K to 141 WV Consumers (Sept. 3, 2008), 
available at (http://www.wvago.gov/press.cfm?fx=more&ID=446)
    19. In re Debt Relief USA Inc. (W. Va. 2008). Press Release, supra 
item 18.
    20. In re Acushield Fin. Servs. (W. Va. 2008). Press Release, supra 
item 18.

State Regulator Actions

    1. In re AmeriDebt, Inc. (Cal. Dep't of Corps. 2002). Desist and 
Refrain Order, available at (http://www.corp.ca.gov/enf/pdf/2002/ameridebt.pdf)
    2. In re Blue Chip Fin. Network, Inc. (Cal. Dep't of Corps. 2009). 
Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2009/BlueChip_dr.pdf)
    3. In re AAA Fin. Servs., Neo Fin. Servs. (Cal. Dep't of Corps. 
2003). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2003/neo.pdf)
    4. In re Boris Isaacson d/b/a Debt Payment Club (Cal. Dep't of 
Corps. 2002). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2002/debt.pdf)
    5. In re Brite Start Consulting Corp. (Cal. Dep't of Corps. 2004). 
Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2004/BriteStartConsultingCorp.pdf)
    6. In re Brandon Gutman, Ann Gutman, William Troy, Credit 
Counseling Express, Inc. (Cal. Dep't of Corps. 2004). Desist and 
Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2004/CreditCounselingExpressInc.pdf)
    7. In re DebtWorks, Inc. and The Ballenger Group, LLC (Cal. Dep't 
of Corps. 2004). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2004/Debtworks.pdf)
    8. In re Edward J. Silva d/b/a Credit Xpress and Creditxpress (Cal. 
Dep't of Corps. 2005). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2005/creditxpress.pdf)
    9. In re Harbour Credit Counseling Servs., Inc. (California Dep't 
of Corps. 2002). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2002/harbour.pdf)
    10. In re InCharge Inst. of Am., Inc. (Cal. Dep't of Corps. 2002). 
Consent Order, available at (http://www.corp.ca.gov/ENF/pdf/2002/inchargeconsentorder.pdf)
    11. In re MyVesta.org, Inc. (Cal. Dep't of Corps. 2002). Desist and 
Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2002/myvesta.pdf)
    12. In re Innovative Sys. Tech., Inc. (Cal. Dep't of Corps. 2002). 
Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2002/briggs.pdf)
    13. In re Nat'l Consumer Council, Inc. (Cal. Dep't of Corps. 2004). 
Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2004/NationalConsumerCouncilInc.pdf)
    14. In re Positive Return, Inc. (Cal. Dep't of Corps. 2004). Desist 
and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2004/Positive.pdf)
    15. California Dep't of Corps. v. U.S. Fin. Mgmt., No. D052320 
(Cal. App. & Sup. Ct. - 4 2008). Petition for Order, available at 
(http://www.corp.ca.gov/ENF/pdf/u/usfinman-petition.pdf)
    16. In re The Consumer Protection Law Ctr. (Cal. Dep't of Corps. 
2009). Amended Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2009/Mezey_adr.pdf)
    17. In re Acu-Shield (Cal. Dep't of Corps. 2008). Desist and 
Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2008/AcuShieldFin_dr.pdf)
    18. In re Am. Debt Negotiation & Settlement, LLC (Cal. Dep't of 
Corps. 2008). Desist and Refrain Order, available at (http://www.corp.ca.gov/ENF/pdf/2008/ADNS_dr.pdf)
    19. In re Am. Debt Mgmt. Servs., Inc., No. DFP EU 2007-120 (Md. 
Comm'r of Fin. Regulation 2007). Final Order to Cease and Desist, 
available at (http://www.dllr.state.md.us/finance/consumers/pdf/eandamdebtmgmt.pdf)
    20. In re North Seattle Cmty. College Found. d/b/a AFS Credit 
Counseling (N.H. Banking Dep't 2007). Consent Agreement, available at 
(http://www.nh.gov/banking/Order06_072NorthSeattleCCFound_CA.pdf)
    21. In re Freedom Fin. Network LLC (R.I. Dep't of Bus. Regulation 
2009). Consent Order, available at (http://www.dbr.ri.gov/documents/decisions/BK-Freedom_Financial-Consent_Order.pdf)
    22. In re 6:10 Services dba Debt-Free Am. (R.I. Dep't of Bus. 
Regulation 2008). Order Revoking License, available at (http://www.dbr.ri.gov/documents/decisions/BK-Order-Debt-Free.pdf)
    23. In re ClearPoint Fin. Solutions fka Consumer Credit Counseling 
Servs. of Am., Inc. dba Credit Counselors of Rhode Island (R.I. Dep't 
of Bus. Regulation 2006).
    24. In re CRS Fin. Servs., Inc. (R.I. Dep't of Bus. Regulation 
2009). Order to Cease and Desist, available at (http://www.dbr.ri.gov/documents/decisions/BK-CRS-Order_Cease-Desist.pdf)
    25. In re Lighthouse Credit Found., Inc. (R.I. Dep't of Bus. 
Regulation 2008).
    26. In re Debt Consolidation Co., Inc. (R.I. Dep't of Bus. 
Regulation 2009).

[[Page 48516]]

Order to Cease and Desist, available at (http://www.dbr.ri.gov/documents/decisions/BK-CRS-Order_Cease-Desist.pdf)
    27. In re Debt Mgmt. Credit Counseling Corp. (R.I. Dep't of Bus. 
Regulation 2007).
    28. In re Consumer Credit Counseling Serv. of Southern New England, 
Inc. (R.I. Dep't of Bus. Regulation 2009).
    29. In re Credit Solutions of Am., Inc. (S.C. Dep't of Consumer 
Affairs 2007).
    30. South Carolina Dep't of Consumer Affairs v. Rescue Debt, Inc., 
No. 06-ALJ-30-0645-IJ (S.C. Admin. Law Ct. 2006). Administrative Law 
Court Decision, available at (http://www.scalc.net/decisions.aspx?q=4&id=6934)
    31. In re Discount Debt Solutions, Inc. (S.C. Dep't of Consumer 
Affairs 2009).
    32. In re United Savings Ctr., Inc. dba Mutual Consol. Savings 
(S.C. Dep't of Consumer Affairs 2008).
    33. In re Freedom Fin. Network, LLC (S.C. Dep't of Consumer Affairs 
2007).
    34. In re MyDebtRelief.com, LP (S.C. Dep't of Consumer Affairs 
2008).
    35. In re Able Debt Settlement (Wisc. Dep't of Fin. Insts., Dep't 
of Banking 2008). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/lfs_2008/AbleDebtSettlementInc.pdf)
    36. In re Debt Settlement of Am. (Wisc. Dep't of Fin. Insts., Dep't 
of Banking 2008). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/lfs_2008/DebtSettlementAmerica.pdf)
    37. In re The Debt Settlement Co. (Wisc. Dep't of Fin. Insts., 
Dep't of Banking 2008). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/lfs_2008/TheDebtSettlementCompany.pdf)
    38. In re Global Econ. Corp. (Wisc. Dep't of Fin. Insts., Dep't of 
Banking 2008). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/lfs_2008/TheDebtSettlementCompany.pdf)
    39. In re Nat'l Legal Debt Ctrs. (Wisc. Dep't of Fin. Insts., Dep't 
of Banking 2007). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/mb_2007/NationalLegalDebtCenters.pdf)
    40. In re Debt Relief Network, Inc. (Wisc. Dep't of Fin. Insts., 
Dep't of Banking 2007). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/mb_2007/DebtReliefNetworkInc.pdf)
    41. In re Fin. Freedom Through Negotiations (Wisc. Dep't of Fin. 
Insts., Dep't of Banking 2007). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/mb_2007/FinancialFreedom.pdf)
    42. Wisconsin, Dep't of Fin. Insts., Dep't of Banking v. Eruditio 
Debt Mgmt. Corp. (Wisc. 2007). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/mb_2007/EruditioDebtManagementCorp.pdf)
    43. Wisconsin, Dep't of Fin. Insts., Dep't of Banking v. Worldwide 
Fin. Servs., Inc. (Wisc. 2007). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/mb_2007/WorldwideFinancialServicesInc.pdf)
    44. In re Credit Solutions of Am. (Wisc. Dep't of Fin. Insts., 
Dep't of Banking 2009). Order, available at (http://www.wdfi.org/_resources/indexed/site/newsroom/admin_orders/lfs_2007/CreditSolutionsAmerica.pdf)\658\
---------------------------------------------------------------------------

    \658\ In addition to the state cases provided in this List, the 
Commission is aware of 10 additional matters submitted by NAAG in a 
supplemental comment dated July 6, 2010: In re United Debt Svcs., 
LLC (W. Va. 2010); West Virginia v. Nat'l Credit Solutions (W. Va. 
2010); West Virginia v. Sherman Enters., LC dba Nationwide Credit 
Solutions, GSV Ltd., and Glen S. Vondielingen (W. Va. 2009); Joseph 
B. Doyle, Adm'r, Fair Bus. Practices Act v. Solve Debts, Inc., No. 
2009-CV-1777490 (Ga. 2009); Joseph B. Doyle, Adm'r, Fair Bus. 
Practices Act v. The Credit Exch. Corp., No. 2009-CV-179467 (Ga. 
2009); Joseph B. Doyle, Adm'r, Fair Bus. Practices Act v. Beacon 
Debt Settlement, Inc., No. 2010-CV-185216 (Ga. 2010); Joseph B. 
Doyle, Adm'r, Fair Bus. Practices Act v. Johnson Law Group (Ga. 
2010).
---------------------------------------------------------------------------

VI. Final Amendments

List of Subjects in 16 CFR part 310

    Telemarketing, Trade practices.

0
For the reasons discussed in the preamble, the Federal Trade Commission 
revises 16 CFR part 310 to read as follows:

TELEMARKETING SALES RULE 16 CFR PART 310

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

    Authority: 15 U.S.C. 6101-6108.
    Source: 68 FR 4669, Jan. 29, 2003, unless otherwise noted.


Sec.  310.1  Scope of regulations in 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 program or 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 person and 
one or more unsecured creditors or debt collectors, including, but not 
limited to, a reduction in the

[[Page 48517]]

balance, interest rate, or fees owed by a person 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 
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 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. 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 consents to pay \659\ for goods or services 
offered, failing to disclose truthfully, in a clear and conspicuous 
manner, the following material information:
---------------------------------------------------------------------------

    \659\ 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. In the case of debt relief services, the 
seller or telemarketer must make the disclosures required by Sec.  
310.3(a)(1) before the consumer enrolls in an offered program.
---------------------------------------------------------------------------

    (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; 
\660\
---------------------------------------------------------------------------

    \660\ 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, or repurchases, 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,

[[Page 48518]]

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;
    (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 service may include a settlement 
offer to any of the customer's creditors or debt collectors, the time 
by which the debt relief service provider will make a bona fide 
settlement offer to each of them;
    (B) to the extent that the service may include a settlement offer 
to any 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 the debt relief service provider will make a bona 
fide settlement offer to each of them;
    (C) to the extent that any aspect of the debt relief service relies 
upon or results in the customer's failure to make timely payments to 
creditors or debt collectors, that the use of the debt relief service 
will likely adversely affect the customer's creditworthiness, may 
result in the customer being subject to collections or sued by 
creditors or debt collectors, and may increase the amount of money the 
customer owes due to the accrual of fees and interest; and
    (D) to the extent that the debt relief service requests or requires 
the customer to place funds in an account at an insured financial 
institution, that the customer owns the funds held in the account, the 
customer may withdraw from the debt relief service at any time without 
penalty, and, if the customer withdraws, the customer must receive all 
funds in the account, other than funds earned by the debt relief 
service in compliance with Sec.  310.4(a)(5)(i)(A) through (C).
    (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 or debt collectors or make a 
bona fide offer to negotiate, settle, or modify the terms of the 
customer's debt; the effect of the service on a customer's 
creditworthiness; the effect of the service on collection efforts of 
the customer'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,\661\ or a debit card subject to the 
protections of the Electronic Fund Transfer Act and Regulation E.\662\ 
Such authorization shall be deemed verifiable if any of the following 
means is employed:
---------------------------------------------------------------------------

    \661\ Truth in Lending Act, 15 U.S.C. 1601 et seq., and 
Regulation Z, 12 CFR part 226.
    \662\ 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;\663\
---------------------------------------------------------------------------

    \663\ 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;

[[Page 48519]]

    (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 
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) (i) Requesting or receiving payment of any fee or consideration 
for any debt relief service until and unless:
    (A) the seller or telemarketer has renegotiated, settled, reduced, 
or otherwise altered the terms of at least one debt pursuant to a 
settlement agreement, debt management plan, or other such valid 
contractual agreement executed by the customer;
    (B) the customer has made at least one payment pursuant to that 
settlement agreement, debt management plan, or other valid contractual 
agreement between the customer and the creditor or debt collector; and
    (C) to the extent that debts enrolled in a service are 
renegotiated, settled, reduced, or otherwise altered individually, the 
fee or consideration either:
    (1) bears the same proportional relationship to the total fee for 
renegotiating, settling, reducing, or altering the terms of the entire 
debt balance as the individual debt amount bears to the entire debt 
amount. The individual debt amount and the entire debt amount are those 
owed at the time the debt was enrolled in the service; or
    (2) is a percentage of the amount saved as a result of the 
renegotiation, settlement, reduction, or alteration. The percentage 
charged cannot change from one individual debt to another. The amount 
saved is the difference between the amount owed at the time the debt 
was enrolled in the service and the amount actually paid to satisfy the 
debt.
    (ii) Nothing in Sec.  310.4(a)(5)(i) prohibits requesting or 
requiring the customer to place funds in an account to be used for the 
debt relief provider's fees and for payments to creditors or debt 
collectors in connection with the renegotiation, settlement, reduction, 
or other alteration of the terms of payment or other terms of a debt, 
provided that:
    (A) the funds are held in an account at an insured financial 
institution;

[[Page 48520]]

    (B) the customer owns the funds held in the account and is paid 
accrued interest on the account, if any;
    (C) the entity administering the account is not owned or controlled 
by, or in any way affiliated with, the debt relief service;
    (D) the entity administering the account does not give or accept 
any money or other compensation in exchange for referrals of business 
involving the debt relief service; and
    (E) the customer may withdraw from the debt relief service at any 
time without penalty, and must receive all funds in the account, other 
than funds earned by the debt relief service in compliance with Sec.  
310.4(a)(5)(i)(A) through (C), within seven (7) business days of the 
customer's request.
    (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
    (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\664\ of that person; or
---------------------------------------------------------------------------

    \664\ 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;\665\ 
and
---------------------------------------------------------------------------

    \665\ 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:

[[Page 48521]]

    (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);
    (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\666\; and
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    \666\ 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

[[Page 48522]]

services were shipped or provided, and the amount paid by the customer 
for the goods or services;\667\
---------------------------------------------------------------------------

    \667\ 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:
    (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 Opportunity 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 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 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

[[Page 48523]]

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 
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, Commissioner Rosch dissenting.
Donald S. Clark,
Secretary.
[FR Doc. 2010-19412 Filed 8-9-10: 8:45 am]
BILLING CODE 6750-01-S