New FTC Regulations Protect Consumers from Debt Relief Companies
September and October 2010 Changes Will Prohibit Advance Fees and Misrepresentations
August 4, 2010 – The Federal Trade Commission recently announced amendments to the Telemarketing Sales Rule which will prohibit for-profit companies that sell debt relief serves over the phone from collecting any advanced fees prior to settling or reducing debt. These new regulations offer consumers additional protections when trying to reduce credit card or other unsecured debt.
This year, BBB has processed over 2,600 complaints nationwide against debt relief companies, which include credit counseling, debt settlement and debt negotiation services. Generally, consumers allege companies in these industries may charge large advance fees, fail to reduce debts, or misrepresent their services.
On October 27, 2010, for-profit debt relief companies who make telemarketing calls, or are called by a consumer in response to debt relief advertising, are prohibited from collecting advance fees for their services. Companies can only charge their customers after:
1. There is a written agreement between the consumer and their creditor;
2. The company successfully renegotiates, settles, reduces or otherwise changes the terms of at least one of the consumer’s debts;
3. The consumer makes at least one payment to their creditor after the successful negotiation or settlement.
In addition, on September 27, 2010, three other Telemarketing Sales Rule provisions will take effect. These provisions will:
· Require companies to disclose to consumers how long it will take to see results, how much their service costs and any negative consequences that could occur;
· Prohibit companies from misrepresenting their success rate or claiming they are non-profit;
· Extend the Telemarketing Sales Rule to cover calls consumers make to these companies in response to advertising.
The FTC also set aside guidelines for dedicated accounts, which many debt relief companies previously required their customers to pay into while they negotiated or settled their debt. Under the new regulations, these companies can only require dedicated accounts if:
1. The account is maintained at an insured financial institution;
2. The consumer owns the funds, including interest;
3. The consumer can withdraw the funds at any time without penalty;
4. The financial institution has no affiliation with the debt relief company;
5. The financial institution does not exchange referral fees to the debt relief company.
The FTC has created a guide for debt relief companies to help them comply with the new regulations. Before seeking help from a debt relief company, BBB recommends consumers:
· Research the company with BBB - Find out how many complaints it has received, how the firm responded to complaints and whether there are any government actions or lawsuits against the company.
· Contact lenders first – Try to work out an agreement directly with creditors before enlisting outside help. This can be done for free.
· Seek help from a non-profit credit counseling center – Credit counseling centers can provide guidance for little or no cost. Visit www.nfcc.org for the location of the nearest center.