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FTC permits escrow for debt settlement fees. What about credit repair?

  • Robert Sigman
  • 26th September, 2021
Credit Repair, Debt Settlement, TSR

The 2010 amendment to the Telemarketing Sales Rule (TSR) targeted the debt settlement industry.

In singling out an entire industry, some have drawn a parallel comparison to the Federal Trade Commission’s (FTC) rule-making in 1995 when it singled out the credit repair industry.

Quick history:

  • In 1995, the original TSR set forth rules on how credit repair companies may charge fees.
  • In 2010, the TSR amendment set forth rules on how debt settlement companies may charge fees.

The difference?

  • Credit repair fees are subject to a 6-month wait period.
  • Debt settlement fees can be charged “up front” through an escrow account.

The question becomes:

Did the FTC intend to modify the credit repair payment restriction and allow credit repair companies to adopt the debt-settlement-specific escrow arrangement?

Stated differently:

If debt settlement companies don’t have to wait 6 months to get paid, why do credit repair companies have to wait 6 months to get paid?

Or:

If debt settlement can just escrow their fees, why can’t credit repair companies do the same?

These questions aren’t entirely illogical. But, they may not enjoy a tremendous amount of legal support.

Let’s explore:

FTC rulemaking is specific and transparent.

The FTC creates and updates rules to prevent consumer harm.

The FTC is bound by and follows thorough rulemaking procedures.

The law requires that the FTC target particular, specific behavior with their rules.

the Act directed the Commission to issue a rule defining and prohibiting deceptive and abusive telemarketing acts or practices. In addition, the Act mandated that the FTC promulgate regulations addressing some specific practices, which the Act designated as “abusive.” (Emphasis added.)

75 FR 48458 (Aug. 10, 2010)

As an example of specificity, the “basis and purpose” document for the debt settlement amendment was 67 pages.

As such, it may be hazardous to assume that a rule designed for one industry may apply to another.

This is especially true if those industries are dissimilar.

Credit repair and debt settlement are dissimilar.

Debt settlement companies and credit repair companies operate differently.

It is reasonable to expect that they would be regulated differently.

This makes sense because those industries pose different risks to consumers and the practices in those industries require different restrictions.

The entire 2010 amendment was a debt-settlement-specific amendment.

As discussed in detail in this [Statement of Basis and Purpose], the Final Rule addresses deceptive and abusive practices of debt relief service providers… (Emphasis added.)

75 FR 48465 (Aug. 10, 2010)

In contrast, the FTC has not modified the credit repair provision of the TSR, ever.

The FTC evidently views credit repair and debt settlement as separate business models with distinguishable practices.

Credit repair fees remain restricted.

In the same amendment which gave an exception to an advance fee ban for debt settlement services, the FTC confirmed that certain services – credit repair among them – remain regulated by advance fee bans.

…the [TSR] prohibits…requesting or receiving any fee or consideration in advance of obtaining any credit repair services…

75 FR 48459 (Aug. 10, 2010)

The FTC made these comments in contrast to the new debt settlement payment provisions.

The FTC squarely addressed this:

…The Final Rule includes an advance fee ban, but in a form modified from…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. (Emphasis added.)

75 FR 48469 (Aug. 10, 2010)

Why debt settlement and not credit repair?

The FTC uses the “unfairness analysis” when evaluating proposed rules for regulating certain business practices or industries.

The FTC uses the following test to declare an act or practice abusive:

[The act] (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.

75 FR 48469 (Aug. 10, 2010), quoting 15 U.S.C. 45(n)

The FTC applied the same “unfairness analysis” to both credit repair (in 1995) and debt settlement (in 2010) and came up with different regulatory results.

That, alone, is the answer.

The FTC concluded that an advance fee ban for debt settlement was appropriate (just like credit repair) but ultimately allowed for an escrow (or “dedicated account”) process.

They did so primarily for two reasons:

  • They wanted funds available to pay the debt in the event something was settled or negotiated; this is a material, inherent part of the debt settlement service itself.
  • It was in the interest of the consumer to have those funds available.

Those reasons are not applicable to credit repair. To find a connection between credit repair and debt settlement provisions of the TSR is akin to seeking loopholes.

Escrow for transactions subject to the TSR may be illegal for both the credit repair company and the escrow provider.

To the extent we are talking about transactions of credit repair services subject to the TSR, the following may apply.

The escrow company, performing escrow services to the telemarketer of credit repair services, may be liable under the TSR as a “Seller.”

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.

16 CFR § 310.2 (dd)

This is fact-specific and depends on the business model of the escrow company.

Either way, the escrow company would undoutably be subject to liability under the TSR for substantially assisting the telemarketer of credit repair services.

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 §§ 310.3(a), (c) or (d), or § 310.4 of this Rule.

16 CFR § 310.3 (b)

This provision of the TSR is being waged against the credit repair industry, right now, in the Credit Repair Cloud case.

Unlike the debt settlement provision which permits escrow, there is no such exception for credit repair services.

Given the FTC’s and CFPB’s hard stance on the TSR, it is unlikely they’d entertain any argument to the contrary.

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