Threat to Debt – Part 2

Since the beginning of time, people have paid other people money to negotiate on their behalf. When that negotiating involves ones unsecured debt, it falls into the category of debt settlement. The industry, as it exists today, has been around for maybe 10 years, the last 6 years in particular have seen an explosion in the space. The economy enabled it, but so to did the evolution of the realization that a for-profit business could be run by handling these negotiations with little start-up capital. The goal of settlement is that with help, you could obtain a payoff amount for less than the full principal owed. The result might be a settlement of 60 cents on the dollar, depending on the fees charged and if results are achieved. In contrast, debt management plans have as the goal repaying 100 cents on the dollar possibly with concessions offered the consumer by the creditors.

On paper, debt settlement sounds like a great deal, but it’s been the execution of debt settlement that has caused the industry to come under intense scrutiny. There have been literally years and years of complaints about bad actors from consumers to the FTC, to state Attorney Generals offices, members of congress, not to mention day in and day out stories of abuse in the public. (All it takes is watching the U.S. Senate Committee on Commerce, Science, and Transportation’s recent hearing on "The Debt Settlement Industry: The Consumer’s Experience" to see just how vitriolic the attitudes toward the industry have become.) These complaints have led us to where we are today – on the precipice of sweeping overhaul of the space. These changes would pose a direct threat to the performance marketing industry that has benefited from working alongside these companies, connecting consumers at their request with information about which they have expressed an interest in learning.

The pending move towards regulatory change began in earnest almost a year ago, not with Congress, but the Federal Trade Commission (FTC). A friend of the Confi, Venable LLP attorney Jonathan Pompan, who practices in the advertising and marketing area wrote a piece for us last November titled, "Will The Debt Relief Vertical Survive?". The piece begins by describing a public forum held on November 4, 2009 by the FTC in order "to discuss proposed amendments to the Commission’s Telemarketing Sales Rule (‘TSR’)," changes specific to the debt relief services space.

It wasn’t until just recently, however, that we realized how significant the November 4, 2009 forum was, and that was because we didn’t understand enough about the FTC. By design the FTC is a regulatory body that does not often write industry specific rules; the monumental importance of the amended version of of the Telephone Sales Rule (TSR), due possibly within the next two months, would try to do just that, though. The new proposed amendments, as Jonathan wrote, "would prohibit charging or collecting fees from customers in advance of services being provided.". That is very much an industry specific rule, in addition to a laundry list of other issues regarding disclosures and practices that relate to selling over the phone by inbound and outbound telemarketing. 

The soon to be released amended TSR is but the first of many looming threats. When it comes out, though, any debt relief services rule as part of the TSR is sure to be legally challenged by the debt settlement industry claiming that the FTC has exceeded its authority. The industry will, in all likelihood, file a lawsuit in which they will demand an injunction be placed initially (delay the enacting of the rules) as well as seek dismissal of the new draconian rules. Call this threat-to-debt lead gen number one. Threat-to-debt two begins with the aforementioned (in Part 1) proposed bill in the Senate called Debt Settlement Consumer Protection Act (S. 3264) introduced by Senator Charles Schumer (D-NY), which he began working on mid last year. After getting a refresher civics lesson, we learn that 1000’s of bills are authored each year. The challenge, not surprisingly, comes in getting a proposal passed into law, which requires both chambers to vote on it and then the President to sign the bill into law. A Senator looking to get a bill passed will often seek to have the bill added on to an existing piece of legislation that is likely to pass. Most recently, that was the Senate’s Restoring American Financial Stability Act of 2010, S. 3217, known colloquially as the financial overhaul bill. The Debt Settlement Consumer Protection Act had thus become known as the Schumer-McCaskill Amendment, and it looked as though it would be added. But, then the rush to pass financial reform went into high gear, and almost overnight, all discussion on other amendments ended in order to maintain the bill’s momentum. From the debt industry came a sigh of relief. With the movement of financial overhaul from the Senate now into reconciliation with the House bill passed in December 2009, the debt settlement industry literally dodged a bullet at the last second. That was the cause of joy from one debt offer network.

Threat to debt lead gen number three is now in the House where the Debt Settlement Consumer Protection Act was introduced last week (H..R. 5387). When, or if, this proposal will be considered by the House is unknown. Threat to debt lead gen four lurks within the reform bill, just not in the form of an amendment but the likelihood that during reconciliation some new form of federal oversight will be created for the debt settlement industry either by enabling the FTC to do what it historically hasn’t had power to do (industry specific rule making abilities) or a new federal regulatory entity, i.e., the Consumer Financial Protection Bureau or Agency.

So, why does all this matter? If the FTC issues a new rule, a new law is enacted, or a new entity is granted permission to modify the fee structure of debt settlement companies, we will see the model’s financially viability for a large number of current lead buyers diminish. The more people who buy leads, the higher the average price per lead paid is. The higher the price per lead the more media that can be bought to generate leads. The more money per closed customer a buyer makes (fees!), the more leads they will want to buy, keeping the virtuous cycle going. Eliminate the fees, most notably any fee earned before the actual settlement occurs, and the buyer no longer makes as much per customer. They make less per customer, many go out of business because their overhead is too high. Those that don’t go out of business must pay less per lead. Lower lead prices, fewer buyers, and you have the vicious cycle that will see a crippling much like the decimation that happened to student lending lead generation. There are lessons here for all of us who count on specific industries as customers.

Yes, now is a "great time to run debt." They may not be around much longer in their current form. So just make sure you aren’t owed too much by the offer owner.

Editor would like to extend his appreciation to Jonathan Pompan, Esq. of the Washington, DC office of Venable LLP for his assistance in navigating the complex world of debt relief legislation and related advertising regulation. Jonathan can be contacted at jlpompan(at)Venable.com.