Debt settlement and other for-profit "debt relief" firms that sell their services over the phone will soon be barred from charging a fee before they settle or reduce a customer's credit card debt or other unsecured debt. The Federal Trade Commission last week issued amendments to the Telemarketing Sales Rule that go into effect later this year. The advance fee ban kicks in on Oct. 27, 2010, while all other provisions take effect on Sept. 27.
The final rule applies to "telemarketers of for-profit debt relief services, including credit counseling, debt settlement and debt negotiation services" as well as companies that falsely claim to be nonprofit, according to an FTC factsheet. Actual nonprofit firms aren't covered by the new rule.
The FTC stipulates that fees cannot be charged until:
- The firm successfully settles, reduces or gets the terms changed for at least one debt.
- There is a written agreement between the consumer and the creditor, such as a debt management plan, that the consumer has agreed to.
- The consumer has made at least one payment to the creditor on the new plan.
In the case of multiple debts in one relief plan, the fee for a single debt must be "in proportion to the total fee that would be charged if all of the debts had been settled." If the fees are tied to the percentage the consumer saves, the percentage must be the same for each balance.
Upfront disclosures required
Debt relief outfits will have to make four particular disclosures to consumers. They must inform consumers of the cost, how long it will take to see results, any potential consequences from using the service and where applicable, "key information about dedicated accounts."
The final rule allows debt relief companies to require customers to stash money for fees and payments in a "dedicated account" as long as five conditions are met:
- An insured financial institution maintains the account.
- The consumer owns the funds.
- The consumer can withdraw these funds without penalty at any time.
- The debt relief company doesn't control or have an affiliation with the financial institution.
- The debt relief firm doesn't exchange referral fees with the financial institution.
Beginning in September, debt relief companies will also be barred from making false claims about their services, including success rates or nonprofit status, and will be bound to the new TSR rule even if customers initiate the calls in response to debt relief ads.
Do you think the restrictions went far enough or too far?
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