Court Ruling Upholds Business-Killing Telemarketing Rule

The Federal Trade Commission’s (FTC) Telemarketing Sales Rule (TSR) regulates telemarketing practices across all industries but singles out a few for special attention – all financial services related. They are debt relief, lost money recovery, loan brokering, and credit repair. In addition to conduct requirements specific to their industries, what all share in common under the rule is a ban on collection of advance fees before services solicited by means of telemarketing have been performed.

The most stringent of these bans is on providers of credit repair services, who even after they complete a service cannot get paid until they have “provided the [client] with documentation in the form of a consumer report from a consumer reporting agency demonstrating that the promised results have been achieved, such report having been issued more than six months after the results were achieved.”

This six-month delay in payment, coupled with the need to furnish proof of success, would seem to be at odds with the Credit Repair Organization Act (CROA), the federal statute that regulates all members of the credit repair industry, not just those who telemarket their services. While CROA also prohibits advance fees, it imposes no payment delay or success requirement, but states only that no fee may be collected “for the performance of any service which the credit repair organization has agreed to perform for any consumer before such service is fully performed.”

While the credit repair provisions of the TSR and CROA have been on the books for more than 20 years, the question of whether their advance fee bans conflict, and – if so – which one should control, has never been squarely addressed in a TSR enforcement action. That changed in September, in a case filed against Prime Market Holdings LLC (PMH) by the Consumer Financial Protection Bureau (CFPB), which jointly enforces consumer financial service regulations with the FTC. Charged by the CFPB with misrepresenting that it could remove virtually any negative information from a consumer’s credit report and substantially raise credit scores, and with charging set-up and monthly fees in violation of the TSR’s advance fee provision, PMH moved to dismiss the complaint.

It argued that the TSR ban conflicted with CROA because that law permits – and has been judicially construed to permit – a fee to be charged upon completion of “any service” in the course of the engagement, even if it is incremental – such as letter-drafting or telephone consultation – and even if an improvement in credit is ultimately not achieved. Thus, while a seller-telemarketer of credit repair can charge set-up and monthly fees upon completion of services under CROA, it cannot under the TSR. This, PMH claimed, was illogical and, if enforced, would drive it out of business.

Given this alleged conflict, PMH asserted that between the two schemes, CROA had to prevail because it was enacted after the TSR and because, as a statute with the specific purpose of regulating the credit repair industry, it trumps a previously promulgated general-purpose regulation such as the TSR. PMH also contended that the CFPB’s enforcement of the TSR advance-fee provision was inconsistent with the posture of the FTC, which, after developing the regulation, has never enforced it. It also argued that the TSR provision, requiring written verification of results six months after they were achieved, conflicted with California law, which requires credit repair services to be completed within six months from the date of contract. Enforcement of the TSR would thus force PMH to be in violation of a state law.

These arguments fell on deaf ears. First, the court found persuasive an earlier decision (Tennessee v. Lexington Law Firms) which held that even though CROA was specifically enacted to govern credit repair, there was no evidence that Congress intended for the telemarketing activities of credit repair companies not to be simultaneously regulated by the TSR. Second, because CROA applies to all credit repair agencies, it broadened and was supplementary to, rather than in conflict with, the TSR, which applies only to all telemarketers of credit repair services. Thus, as the court wrote, when a business is:

both a credit repair agency and a telemarketer, it is required to comply with both the CROA and the TSR. On the other hand, if a credit repair agency does not qualify as a telemarketer, then it need not comply with the TSR – only the CROA is applicable. Under the CROA, even if a credit repair agency is not a telemarketer, it may not collect payment for its services until the services are completed. If that credit repair agency is also a telemarketer, however, then it may not collect services until its services are completed and it has provided documentation to the consumer at least six months after the services are completed evidencing the agency’s efficacy. Thus, the two provisions may be complied with concurrently; they do not conflict.

Third, the court said that non-enforcement of the TSR advance-fee provision by the FTC was not a legal basis for dismissing the CFPB’s claim. Finally, it held that the TSR requirement to provide a consumer report demonstrating promised results six months after the fact did not conflict with California law because providing a consumer report was not one of the services it required to be performed within six months. In denying dismissal for these reasons, the court paid no heed to PMH’s claim that enforcement of the TSR’s six-month payment delay would drive it out of business, or consider whether there was any rationale for making it so much tougher for a credit repair seller-telemarketer to get paid than one that is only a seller.

While only a ruling on a pleading motion, the court’s decision and reasoning are the only judicial guidance available on the enforceability of the TSR advance-fee provision to those offering credit repair services. Unlike the FTC, the CFPB, which has proven to be a fierce regulator in its short history, seems more than willing to enforce the TSR advance-fee provision notwithstanding its arguable conflict with CROA and incompatibility with the basic cash flow needs of any law-abiding business. In anticipation of future CFPB TSR enforcement actions, credit repair companies may be well-advised to enroll clients through means other than telemarketing (i.e., online signups) if they wish to be certain of their right to timely payment for completed services – rather than having to wait six months even after getting a good result for their client.

Talking about Direct Response, FTC

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