A shakeout among debt-relief firms is likely as such companies restructure their operations to conform with new Federal Trade Commission rules that take effect this month, experts say.
The FTC in July announced the rules prohibiting for-profit companies that sell debt-relief services by telephone from collecting fees before they actually settle or reduce credit card and other unsecured debt. The final rules go into effect Oct. 27, a month after three other rules took effect related to debt-collection firms’ disclosures and promises.
“A lot of individual players in the debt-collections industry will be threatened by these new rules,” Michael Brauneis, director of regulatory risk in the Chicago office of Menlo Park, Calif.-based consulting firm Protiviti Inc., tells PaymentsSource. “The new rules will drive out fringe operators who promise to settle people’s debts, charge thousands of dollars upfront, and fail to come through, and many other operators will be forced to change their strategies.”
Smaller companies in general also likely will struggle to comply with some of the new regulations, Brauneis contends.
“There are some debt-collection firms that collect upfront fees that make a good effort to deliver on the services they promise; for those firms, it may become more difficult to capture profits under the new rules,” he says.
Smaller firms may face extra difficulties in revamping their business models, marketing materials and disclosures to comply with the rules, Brauneis says.
“For larger debt-collection firms with legal, compliance and [information-technology] staff, complying with the new FTC rules may not be as hard,” he says. “But it will be tougher for many of the mom-and-pop shops without mechanisms to produce new-business models or automate new customer-disclosure materials.”
The FTC’s final rules cover telemarketers representing for-profit debt-relief services, including credit-counseling, debt-settlement and debt-negotiation services.
Another provision within the FTC’s new rules could create an opportunity for banks serving the debt-collection industry, Brauneis says. The final rules going into effect this month enable debt-collection firms to require customers to set aside their fees and savings for payment to creditors in a “dedicated account” at an insured financial institution not connected to the debt-collection firm.
“Banks serving the debt-collection industry may be able to expand their offerings in the area of dedicated accounts for debt-relief customers, and I expect a few leaders may emerge in this area,” Brauneis says.
Although the FTC’s new rules apply only to for-profit debt-collection firms, regulators eventually may extend the new rules, especially those pertaining to disclosures, to nonprofit debt-relief firms, Brauneis warns. And regulators soon may begin to make more efforts to ensure that certain debt-relief firms are indeed nonprofit, he notes.
“Anyone in the nonprofit debt-relief sector who thinks they have dodged a bullet should be aware that we expect to see the for-profit rules extended across the industry to all stages of the process,” Brauneis says. “The line between for-profit and nonprofit debt-collection firms is sometimes hazy. And while many people assume nonprofit debt-relief or credit counseling is a charitable enterprise, in many cases there is no difference in their operations compared with for-profit firms, except for their business classification” with the Internal Revenue Service, he says.
The new rules affecting debt-relief disclosures and promises, which went into effect Sept. 27, require for-profit debt-relief firms to disclose how long it would take for consumers to see results, how much it would cost, the negative consequences that could result from using debt-relief services, and key information about dedicated bank accounts should they choose to require them.
The rules provide “extensive guidance” about evidence providers must have to make advertising claims about debt-relief services, including success rates, according to the FTC.
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