Thursday, July 29, 2010

FTC hands a consumers a huge victory

In a big victory for consumers, the Federal Trade Commission on Thursday approved new telemarketing rules that would prohibit debt-relief firms who use telephone sales from charging clients advance fees.

"Banning advance fees is huge because currently many debt settlement firms seem to have a business plan based on the notion of charging incredibly high fees but doing no work. That means vulnerable consumers are subsidizing this lucrative industry," said MCRC Executive Director Marceline White. "With advance fees, they basically take the money and run. By the time the consumers figure out that the so-called debt-relief company isn't actually helping them, those fees have already been paid and are nearly impossible to recoup."

The FTC ruling also requires better disclosure about what consumers can reasonably expect from the debt-relief firms, and it sets guidelines for dealing with the "dedicated accounts" in which consumers save their money in hopes of one day paying off their creditors. To read the FTC's release on the ruling, click here.

MCRC and one dozen other local and national consumer groups had urged FTC officials to tighten the rules that govern debt settlement telemarketing calls. To read their letter, click here.

Debt settlement is a system that promises to reduce and pay off consumers' debts, but instead often leaves them in worse shape than before. Many debt settlement companies collect huge upfront fees, encourage consumers to stop paying their creditors, and typically perform no real service but still walk away with thousands of dollars in profit. The consumer is left with less money, a worse credit score, angrier creditors, and dwindling options. Consumer complaints to the Maryland Attorney General's Office about debt settlement firms have risen 144 percent over the past three years.

MCRC strongly supported legislation in the Maryland General Assembly last session (HB392 and SB701) that would have: limited the advance fees that debt settlement firms could charge; required the firms to actually reduce a consumer's debt before collecting the bulk of their fees; and limited the amount that firms could charge. Lawmakers put aside making a decision on the reforms and instead voted to create a working group to study the issue, to which MCRC was named.

"This ruling by the FTC shows that debt settlement needs to be reformed," White said. "While this development is extremely positive, there is more that can and should be done at the state level to protect Marylanders."

To read MCRC's report, Debt Settlement in Maryland: Compounding Problems, Deepening Debt, or the executive summary, click here.

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