In the days and weeks since the Federal Trade Commission amended
the Telemarketing Sales Rule, 16 C.F.R. Parts 310.1-.9, adding
specific provisions to govern for-profit debt relief providers (the
"TSR Amendments"), there have been many discussions among
industry professionals about possible exceptions, or
"loopholes," to the TSR Amendments.
While we have counseled industry clients to utilize conservative,
well-substantiated marketing strategies and meaningful due
diligence, and have championed the use of a success fee model with
nominal monthly administrative fees, we have also voiced our
criticism of the FTC's method of regulating the debt relief
industry. See "
Hid[ing] Elephants in Mouseholes: the FTC's Unwarranted
Attempt to Regulate the Debt Relief-Services Industry Using
Rulemaking Authority Purportedly Granted by the Telemarketing And
Consumer Fraud and Abuse Prevention Act," Texas
Review of Law & Politics, Vol. 14, No. 2, 301-342.
The agency circumvented the rulemaking procedures that were
provided by Congress in the Magnuson-Moss Act and shoehorned
advance fee restrictions into the TSR using the more flexible
procedures offered by the Telemarketing and Consumer Fraud and
Abuse Prevention Act, 15 U.S.C. §§6101-6108 (the
"Telemarketing Act"). We expect that industry advocates
will challenge the amendments in court on the ironic grounds that
the FTC failed to comply with the law in its zealous efforts to
enforce its vision of what the law should be.
Unless a court grants an injunction staying the enforcement of the
new provisions before September 27 (October 27 for the advance fee
ban), the TSR Amendments will go into
effect and will apply to all for-profit debt relief providers
nationwide.
While we understand the desire of industry members to find enticing
"loopholes" that may exist in the TSR, these should be
viewed as potential traps for the companies that attempt to exploit
them. There is no doubt that these loopholes will soon be the
"test cases" for the FTC's TSR regulatory enforcement
efforts, and debt relief companies should be very wary about
pursuing marketing programs or business models based on such
"loopholes." For these reasons, we are cautioning
industry professionals to avoid jumping at the promise offered by a
loophole – that loop may turn out to be a noose.
The following are the more obvious exceptions to the TSR, all of
which are expressly set forth in the TSR itself:
1. Changing to a Non-Profit Business Model
The FTC readily admits that it is not authorized to regulate
non-profit entities. See TSR Final Rule, 75 FR 48458, fn.
11. Thus, there may be a temptation to circumvent the advance fee
restrictions by simply changing a business model from for-profit to
non-profit.
While the FTC lacks authority over
legitimate non-profit entities, the
agency has aggressively pursued companies that it determined were
"operating for their own profit or that of their
members," and thus fell outside the non-profit exemption in
the FTC Act. Id. at fn. 38.
In other words, simply changing a company's corporate structure
from for-profit to non-profit, without a corresponding change in
the company's overall objectives, revenue structure and
governance (that is, truly becoming a public benefit entity), will
not eliminate the company as a potential target of regulatory
enforcement. Rather, it is likely that the FTC will bring
regulatory challenges against some companies that transition from
for-profit to non-profit in the aftermath of the TSR
Amendments.
In July 2010, the First Circuit Court of Appeal held that a credit
counseling agency failed to meet the non-profit exemption of the
Credit Repair Organizations Act ("CROA"), 15 U.S.C.
§§ 1679-1679j, and was therefore liable to class action
plaintiffs for more than $256 million. Zimmerman v.
Puccio, No. 09-1416, __ F3d __ (1st Cir., July 27, 2010). In
order to meet CROA's non-profit exemption, the defendants had
to show not only that they were recognized by the Internal Revenue
Service as exempt from taxation under Section 503(c)(3), but also
that they actually operated as a qualified non-profit.
The court's opinion reflects some of the "red flags"
indicating that a "non-profit" may be acting as a
"for-profit":
A. The for-profit entity provides "services" to the
non-profit and receives most of the fees that are charged by the
non-profit to consumers.
B. Aggressive marketing campaign conducted by the non-profit.
C. Common governance between the non-profit and the for-profit
entities.
D. The for-profit and non-profit entities share offices, employees
and database accounts, etc.
E. Lack of board of directors overseeing the non-profit.
F. Minimal "non-profit" services offered by the
non-profit.
Examples of some of the regulatory actions against non-profit
entities include 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).
2. Intrastate Telephone Calls
The TSR specifically applies to "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," 16 C.F.R. 310.2(dd) (emphasis
added). Based on this language, some may be tempted to limit
telemarketing to "intrastate calls," which would not
cross state borders.
Such programs raise at least the following questions:
a. Would the TSR apply to "a plan, program, or
campaign" where a national debt settlement company fulfills
consumer transactions that are generated by multiple related or
unrelated marketing entities that perform solely
"intrastate" marketing? Such companies can certainly
anticipate that the FTC will argue that the TSR would apply to such
transactions based on a joint enterprise theory.
b. In an era where cellular telephones often serve as the primary
telephone numbers for consumers, and move freely throughout the
country and around the world, companies can no longer rely on area
code prefixes to determine the location of an inbound or outbound
call. Additional compliance procedures must be implemented to
confirm a consumer's location before an "intrastate"
telemarketing transaction can be completed.
3. The "Face-to-Face" Exemption
Face-to-face presentations are expressly exempted from the TSR.
Section 310.6(b)(3) exempts "[t]elephone calls in which the
sale of goods or services ... is not completed, and payment or
authorization of payment is not required, until after a
face-to-face sales ... presentation by the seller
..."
The face-to-face exemption clearly provides that the following
requirements must be met:
a. The sale of the goods or services cannot be completed until
after the face-to-face presentation has occurred.
b. There can be no required payment or authorization of payment
until after the face-to-face presentation has occurred.
However, several issues arise in connection with this
exemption.
First, the TSR's wording fails to address the question of what
kind of presentation is sufficient to satisfy the face-to-face
exemption. The FTC website states that: "The key to the
face-to-face exemption is the direct and personal contact between
the buyer and seller. The goal of the Rule is to protect consumers
against deceptive or abusive practices that can arise when a
consumer has no direct contact with an invisible and anonymous
seller other than the telephone sales call. A face-to-face meeting
provides the consumer with more information about — and
direct contact with — the seller, and helps limit
potential problems the Rule is designed to remedy."
See FTC, Complying with the Telemarketing Sales
Rule. It is likely that the meaning of "direct and
personal contact" will be decided by the courts after
extensive and protracted litigation with the FTC.
It should be noted that the face-to-face exemption also covers sales that begin with a face-to-face presentation and are later completed in a telephone call. The distinction is between a "face-to-face contact between the buyer and seller" and "those of telemarketing that are completed without face-to-face contact between buyer and seller," TSR Final Rule, 60 FR at 43860.
Second, making a face-to-face presentation at a consumer's
home or away from the seller's place of business may trigger
the obligation to comply with state and/or federal home
solicitation rules and "cooling off" rules. See,
i.e., FTC's Cooling Off Rule (16 C.F.R. Part 429). These
rules need to be understood and complied with in connection with
any face-to-face presentation.
4. "Internet Only" Transactions
In the Final Rule, the FTC acknowledged the possibility that the
TSR Amendments would not reach transactions conducted solely over
the Internet without the benefit of any interstate telephone
communications. However, the agency apparently recognized that its
rulemaking authority under the Telemarketing Act does not extend to
the Internet.
Companies that consider an "Internet only" strategy must
recognize that the FTC continues to wield a broad range of
enforcement powers under Section 5 of the FTC Act, which directs
the agency to prevent "unfair or deceptive acts or
practices," including those that occur on the Internet.
Where the FTC has aggressively pursued enforcement actions against
Internet marketers in the past, it can be expected that it will
continue to do so in the future. To the extent the TSR Amendments
demonstrate and support the FTC's view that charging debt
settlement fees before delivering services is an
"abusive" practice, there is every reason to believe that
the agency will pursue Section 5 violations against
"Internet" only debt relief marketers that attempt to
charge fees in advance of settling consumers' debts.
5. "Attorney Model" Transactions
In discussions in the Final Rule and a guide for debt relief
businesses, the FTC has addressed the applicability of the new
rules to attorneys. The agency selected examples when the TSR
Amendments would not apply to lawyers, such as where the
attorney's telemarketing was limited solely to
intrastate calls and/or where the
attorney conducted aface-to-face
presentation before entering into a transaction with
the prospective client (exceptions that apply to all debt relief
providers).
Notwithstanding the language used by the Commission, implicit in
the FTC's "guidance" is a clear indication of the
agency's view that the TSR Amendments apply to attorneys and
law firms that provide debt relief representation to clients. As
such, companies that work with attorneys must understand clearly
that, apart from other potential issues that may arise in
relationships between debt settlement companies and attorneys, the
FTC's position will likely be that such relationships will not
exempt or otherwise protect such companies from compliance with the
requirements of the TSR.
Before pursuing any potential exceptions, exemptions or other
"loopholes" to the TSR Amendments, it is important to
recognize that the FTC will scrutinize such efforts very closely
and will likely focus its early regulatory enforcement efforts on
these issues.
Consider the Benefits of a Settlement-Based Fee Model
While the way the FTC has gone about amending the TSR to reach
debt relief companies is subject to serious question, the change
the FTC is trying to make to industry-wide practices, though
draconian, may ultimately benefit rather than burden the industry.
Industry participants should carefully consider a business model
that complies with the advance fee ban. Economic modeling and
firsthand reports by some companies that have tried
settlement-based fee models indicate that benefits include higher
conversions, lower marketing costs, higher retention, earlier
settlements and improved consumer satisfaction (translating into
lower regulatory and legal complaint rates). In addition, rather
than creating a portfolio of accounts that must be serviced over
time, even after upfront fees have stopped coming in, the
settlement-based fee model may help companies build a portfolio of
future revenue events, increasing the company's value and
eliminating the need to continue to generate new clients to remain
profitable.
Rather than changing business models, which will be perceived as
chasing after "loopholes," we encourage companies to
explore compliance with the TSR Amendments to see if the burdens
truly outweigh the potential benefits. Given the infancy of the TSR
Amendments, there are no clear answers dictating how companies
should respond to the changes forced by the TSR. But that does not
mean that strict compliance is not necessarily the wrong answer or
that it is bad for business. If companies could comply with the TSR
Amendments and provide empirical data
that such compliance leads to greater consumer satisfaction and
success, the industry could use the TSR Amendments and its
compliance therewith to challenge state provisions that bar debt
relief programs outright or curtail industry viability by mandating
unreasonably low fee caps.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.