- Credit Counseling and Debt Settlement Alert - From the Federal Agencies
- June 3, 2009 | Authors: Jeffrey S. Tenenbaum; Jonathan L. Pompan
- Law Firm: Venable LLP - Washington Office
This article is part of the May 2009 Credit Counseling and Debt Settlement Alert, which provides a broad survey of some recent notable legislative initiatives, federal and state regulatory actions, and other developments affecting providers of debt relief services—including financial counseling and education, debt management plans, and debt settlement.
From the Federal Agencies
Federal Trade Commission
Federal and State Law Enforcement Focus on Foreclosure Rescue and Loan Modification Companies
In April, the FTC, Department of Treasury, Department of Justice, Department Housing and Urban Development, several state attorneys general, and others announced a coordinated law enforcement and consumer education initiative as part of a federal and state crackdown on fraudulent foreclosure rescue and loan modification schemes.  The announcement coincided with the FTC’s release of warning letters to seventy-one companies for marketing potentially deceptive mortgage loan modification and foreclosure assistance programs. The FTC also released a list of more than twenty states that have already taken action on loan modification or foreclosure rescue scams.
FTC Testifies on Efforts to Combat Foreclosure Rescue and Loan Modification Scams; FTC to Use New Rulemaking Authority to Address Issue
On May 6, 2009, FTC representatives told the House Subcommittee on Housing and Community Opportunity that, with the rapid increase in mortgage delinquencies and foreclosures, the FTC has intensified its efforts to protect consumers from foreclosure rescue and loan modification scams.  According to an FTC press release announcing the testimony, the FTC has initiated eleven cases targeting mortgage foreclosure rescue and loan modification scams in the past year, and is actively engaged in several ongoing, non-public investigations. The FTC has described these defendants as often falsely appearing to be affiliated with nonprofit or government entities or otherwise endorsed by government officials.
Echoing statements made earlier this year in other hearings, the FTC noted its new rulemaking authority to prohibit unfair and deceptive practices with respect to mortgage loans under the Omnibus Appropriations Act of 2009. The Act, which directed the Commission to commence a rulemaking with respect to mortgage loans within ninety days of taking effect, allows the FTC to use relatively streamlined notice and comment rulemaking procedures. As part of this rulemaking, the Commission clearly intends to address unfair and deceptive acts and practices regarding mortgage loan modification and foreclosure rescue scams.
In its testimony, FTC representatives also recommended that Congress take certain steps to enhance the Commission’s consumer protection efforts, including:
- Authorizing the agency to employ notice and comment rulemaking procedures to establish rules pursuant to the FTC Act that prohibit unfair or deceptive acts and practices relating to all financial services;
- Authorizing the agency to obtain civil penalties for unfair or deceptive acts and practices relating to all financial services, and to bring suit in its own right in federal court to such penalties;
- Ensuring that the FTC is considered as Congress moves forward in determining how to modify federal oversight of consumer financial services; and
- Providing additional resources to the FTC to increase the scope of its law enforcement activities relating to financial services and to expand critical research on the efficacy of mortgage disclosures and other topics.
As a response to these recommendations, Congress is now considering H.R. 2309, a bill that would grant the FTC expedited rulemaking authority with respect to both credit counseling and debt settlement (see From the U.S. Congress).
FTC Delays Enforcement of the Red Flags Rule
On April 30, 2009, the Federal Trade Commission (FTC) announced a three-month delay in FTC enforcement of the “Red Flags Rule,” which was set to take effect on May 1.  The Red Flags Rule requires covered entities—creditors, financial institutions, and other institutions under the jurisdiction of the federal bank regulatory agencies and the National Credit Union Administration—to develop and implement identity theft programs designed to identify, detect, and respond to possible risks of identity theft.  Creditors and financial institutions under the jurisdiction of the FTC now have until August 1, 2009 to comply with the Rule.
Because application of the Red Flags Rule is risk-based—i.e., covered entities are only required to develop identity theft programs commensurate with the risk of identity theft entailed in their operations—compliance with the rule need not be burdensome.
Credit counseling and debt settlement organizations should evaluate whether they fall under the scope of the Rule and, if so, tailor an identity theft program to fit their particular business model. These organizations should also make regular assessments of their coverage under the Red Flags Rule and the evolving standards of consumer privacy protection.
Failure to establish a program by August 1 could open you up to administrative penalties of $3,500 per violation. There is no express private right of action and no criminal penalty under the Rule; however, the Rule’s underlying concepts may eventually become the expected standard from which state tort actions are measured.
FTC Offers Payoff Information to Consumers with Non-Bank Credit Cards
The FTC is providing a telephone number (1-888-600-4804) for consumers with non-bank cards to call for their estimated payoff information.  Information is available in both English and Spanish. The Commission also has posted a calculator on its website at http://www.ftc.gov/creditcardcalculator that provides the same information.
FTC Targets Claims Made Using the Disclaimers of Atypical Results Safe Harbor, Consumer Blogs, Celebrity and Expert Endorsements
At both the federal and state levels, there has been an increase in scrutiny of advertising claims related to credit counseling and debt settlement including several nonpublic investigations. The state attorneys general have alleged a wide variety of questionable practices, including false and unsubstantiated claims, deceptive trial offers with improper or unauthorized charges, falsely implied celebrity and expert endorsements, and fake consumer blogs.
The FTC has proposed revisions to its Endorsements and Testimonials Guides, to eliminate the safe harbor that allows advertisers to generally use truthful testimonials in conjunction with disclaimers of atypicality—e.g., “results will vary”—and to require advertisers to substantiate and disclose the representative, rather than atypical, performance of the product or service.  The current Guides allow advertisers to use truthful testimonials, even if the testimonial does not generally represent what consumers can expect when using the advertised product, if the advertiser (1) clearly and conspicuously discloses what the generally expected performance would be, or (2) discloses the limited applicability of the endorser’s experience to what consumers may generally expect to achieve.
The FTC’s proposed revisions would also make clear that both advertisers and new media that promote advertised products (such as online reviews and blogs) could be held liable for false advertising claims, as well as for failing to disclose material connections to the advertisers involved.
Also of particular importance to the debt relief industries, affiliate-created blogs, review sites, and other web pages have proliferated in recent years, and have been filled with product claims, reviews, endorsements, and testimonials that increasingly drive consumer traffic to credit counseling and debt settlement services. When such web pages contain false or unsubstantiated claims (express or implied) or fail to disclose material connections with sellers, it is possible that affiliates and marketers could be held liable for deceptively driving sales and for any resulting consumer injury.
The FTC has consistently held that parties other than the advertiser may be liable for deceptive advertising if they played a role in the promotion. In fact, the FTC takes the position that a party may be responsible for any claims it makes that may be passed downstream to others: “It is [a] well settled law that the originator is liable if it passes on a false or misleading representation with knowledge or reason to expect that consumers may possibly be deceived as a result.” 
These proposed revisions to the Guides have not yet been approved and, if approved, will not have the force of law, but would be intended merely to guide advertisers in complying with Section 5 of the FTC Act. However, advertisers and marketers should take careful note of these new FTC principles, as noncompliance may draw the attention of FTC staff and be the basis for an investigation or law enforcement action.
Department of Housing and Urban Development
HUD on Outsourcing by Counseling Agencies
In April, the Department of Housing and Urban Development made a “special notice” to all approved housing counseling agencies that “agencies are prohibited from contracting out housing counseling services.”  The announcement explicitly stated that “contracting out to companies that assist with loan modification and/or refinancing” is prohibited. In addition, HUD reminded agencies that it “has previously advised all participating agencies that they may not charge the client fees for default/mortgage delinquency counseling.” The notice “advised that this includes activities that may be associated with default counseling, including loan modification and other loss mitigation counseling. HUD-participating housing counseling agencies also may not receive fees for client referrals from 3rd party loan modification, refinancing assistance, or marketing companies.”
The notice further stated: “If participating agencies are currently contracting out housing counseling services, and/or are charging clients for activities associated with default counseling, and/or are receiving fees for client referrals from 3rd party loan modification, refinancing assistance, or marketing research companies, they must immediately cease this practice in order to avoid termination from HUD’s housing counseling program and possibly other sanctions.”
Internal Revenue Service
Closing Agreement Guidance
The Internal Revenue Service (“IRS” or “Service”) has issued new guidance for tax-exempt organizations that may want to enter into a closing agreement to resolve tax liability issues with finality. The new guidance provides that an exempt organization may initiate a closing agreement by sending a letter to the appropriate area office. The letter must explain:
- Why a closing agreement is appropriate;
- The advantages to the organization and how the government will sustain no disadvantages;
- A detailed description of the method proposed for correcting non-compliant activities;
- A narrative description of the correction method, providing specific information to support the suggested method;
- How the taxpayer will achieve future compliance; and
- Proposed methodology to calculate any tax, interest, and penalty for the tax periods in question.
The IRS guidance states that the Service may enter into a closing agreement where “there appears to be an advantage in having the case permanently and conclusively closed,” or “where the taxpayer demonstrates good and sufficient reasons for desiring a closing agreement” and the IRS determines that the government will “sustain no disadvantage through consummation of such an agreement.” 
 Press Release, Federal Trade Commission, “Federal and State Agencies Crack Down on Mortgage Modification and Foreclosure Rescue Scams” (April 6, 2009) (available at http://www.ftc.gov/opa/2009/04/hud.shtm).
 “Foreclosure Rescue and Loan Modification Scams,” Legislative Solutions for Preventing Loan Modification and Foreclosure Rescue Fraud: Hearing Before the Subcomm. on Housing and Community Opportunity of the House Comm. on Financial Services, 111th Cong. (2009) (statement of Peggy Twohig, Associate Director, Division of Financial Practices, Bureau of Consumer Protection, Federal Trade Commission) (available at http://www.ftc.gov/os/2009/05/P064814foreclosuretescue.pdf).
 Press Release, Federal Trade Commission, “FTC Will Grant Three-Month Delay of Enforcement of ‘Red Flags’ Rule Requiring Creditors and Financial Institutions to Adopt Identity Theft Prevention Programs” (April 30, 3009) (available at http://www.ftc.gov/opa/2009/04/redflagsrule.shtm).
 See 16 C.F.R. § 681.2.
 Press Release, Federal Trade Commission, “FTC Offers Pay-off Information to Consumers with Non-bank Credit Cards” (April 16, 2009) (available at http://www.ftc.gov/opa/2009/04/nonbankcc.shtm).
 Press Release, “FTC Approved Federal Register Notice on Advertising Endorsements and Testimonials” (November 21, 2008) (available at http://www.ftc.gov/opa/2008/11/endorsements.shtm).
 Statement of FTC Chairman Pitofsky and Commissioners Anthony and Thompson, In re Shell Oil Company (1999).
 U.S. Department of Housing and Urban Development, “Special Notice to All HUD Approved Housing Counseling Agencies” (email to FHA mailing list) (Apr. 27, 2009).
 See Internal Revenue Manual 4.75.25, “Exempt Organizations Examination Procedures, Exempt Organizations Closing Agreements (last updated April 16, 2009) (available at http://www.irs.gov/charities/article/0,,id=202556,00.html).