“Clearly and Prominently: “Consumer Debt Settlement Disclosures in the Wake of CFPB v. Freedom Debt Relief | Hudson Cook, LLP

The debt settlement industry has received some “regulation by enforcement” following a settlement of the lawsuit filed by the Consumer Financial Protection Bureau (“CFPB”) against Freedom Debt Relief, LLC (“FDR”) ).[1] The lawsuit raised four counts: two of deception under the Financial Consumer Protection Act of 2010 (“Dodd-Frank”),[2] one for a violation of the Telemarketing Sales Rule (“TSR”),[3] and one under the “abusive” authority created by Dodd-Frank.[4] The two deception claims stem from an alleged failure to disclose that certain creditors would not negotiate with FDR and a misrepresentation regarding when FDR would charge a fee for its services.[5] TSR’s claim alleged that the agreement with the debt settlement client did not clearly and prominently state that the client could cancel the agreement and be entitled to a refund, less any fees collected.[6] The final claim, the abusive claim, alleged that FDR “abusively” required consumers to negotiate their own debts.[7] The CFPB asserted that FDR’s practice of occasionally obtaining consumer involvement in the settlement process and then collecting its fees when the consumer assists or obtains settlement is an unfair and deceptive business practice because it deprives consumers of the “market profit”. “The CFPB argued that the consumer expects the fees paid to FDR to be in return for FDR performing the settlement work and, where the consumer is involved, there should be no fees. Consumer involvement allegedly arose as a result of FDR’s failure to disclose that there are certain creditors who allegedly will not negotiate with the company.

The parties settled the lawsuit on July 9, 2019.[8] In addition to financial and other relief, FDR has agreed to several substantive provisions that require the attention of all debt settlement companies.

Prohibition of deceptive practices

FDR may not misrepresent, or assist others to misrepresent, either expressed or implied, any of the following:

  • whether a current creditor will negotiate settlement of its debt directly with FDR;
  • FDR’s current ability to negotiate or settle any listed debt; and
  • the circumstances under which FDR charges a fee.

Prohibition on charging fees for “non-payment related results”

A “non-settlement outcome” means an outcome involving a listed debt that does not include settlement with the creditor but which FDR considers resolution. The Joint Stipulated Judgment prohibits FDR from seeking or receiving fees, or assisting others to seek or receive fees, in consideration for or in connection with a non-settlement outcome.

Disclosures Required for Settlement Accounts

The FDR must, prior to listing, clearly and conspicuously, as defined in the TSR,[9] disclose to each consumer that if they opt out of FDR’s debt relief program, the consumer is entitled to receive all funds in the settlement account other than funds earned by FDR.

Required Disclosures Regarding Consumer Participation in Settlements

FRD has agreed to “clearly and prominently” disclose to consumers prior to enrollment in a debt settlement plan:

  • that in some cases, FDR may request that the consumer negotiate directly with the lender; and
  • that if FDR requests that the Consumer negotiate directly with the Creditor, the Consumer may decline to negotiate with the Creditor and either request that FDR continue to attempt to negotiate a settlement of the Listed Debt with the Creditor, or withdraw the Listed Debt without charge or penalty at any time before it is settled.

This section of the Joint Judgment did not refer to Accompanied Settlements, although the Joint Judgment defines coaching for the purposes of the compliance waiver. “Coach” or “coaching” means any instruction, guidance or advice to consumers provided by FDR in connection with consumers’ direct negotiations with creditors.

In the FDR regulations, “clearly and conspicuously” means:

  • in text-based communications (for example, printed publications or words displayed on the screen of an electronic device), the disclosure must be of a point or pixel size, location and format sufficiently perceptible so that a ordinary consumer can read and understand it on all screen sizes, printed in contrast with the background on which they appear;
  • in communications delivered orally or by audible means (eg, radio or audio streaming), the disclosure must be provided in sufficient volume and cadence for an ordinary consumer to hear and understand;
  • in communications delivered by video means (e.g., television or streaming video), the disclosure must be in writing in a form consistent with point 1 above, and must appear on screen for a sufficient length of time so that an ordinary consumer can read and understand it;
  • in communications made through interactive media such as the Internet, online services and software, disclosure must be unavoidable (which is not the case if the consumer must take an action – such as clicking on a link hypertext or hover over an icon – to see it) and presented in a form that complies with paragraph (a), and remain on screen for a sufficient time for a consumer to read and understand it; and where scrolling is necessary to view the disclosure, text or visual cues must be present to encourage consumers to scroll to view the disclosure, and the disclosure must be unavoidable, i.e. consumers do not must not be able to continue a transaction (eg, click forward) without scrolling through the disclosure;
  • in communications that contain both audio and visual portions, the disclosure must be presented simultaneously in the audio and visual portions of the communication; and
  • in all cases, the disclosure must be presented before the consumer incurs any financial obligation, in understandable language and syntax, and without anything contrary to, inconsistent with, or mitigating the disclosures used in any communication with the consumer.

“Clearly and prominently” exceeds the “clearly and conspicuously” standard we typically see in other consumer financial protection laws, although the CFPB and the Federal Trade Commission have negotiated this disclosure standard in other regulations.[10] The standard is also mentioned but not defined in federal regulations in connection with environmental marketing claims.[11] Additionally, a number of states use this standard – again, without defining it – as part of insurance disclosures.[12] Debt settlement companies would be advised to read FDR’s rules carefully to ensure that its framed settlement disclosures meet this standard.

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[1] Consumer Financial Protection Bureau v Freedom Debt Relief, LLC and Andrew HousserCase No. 3:17-cv-06484 (ND Cal. November 8, 2017).

[2] 12 USC 5531, 5536(a), 5564, 5565.

[3] 16 CFR Part 310, see also the Telemarketing and Prevention of Consumer Fraud and Abuse Act, 15 USC 6102(c), 6105(d).

[4] 12 USC 5531, 5536(a), 5564, 5565.

[5] Consumer Financial Protection Bureau v Freedom Debt Relief, LLC and Andrew HousserCase No. 3:17-cv-06484 (ND Cal. November 8, 2017), at page 9, paragraphs 42-51 and page 11, paragraphs 52-59.

[6] Identifier.at page 14, paragraphs 72 to 83.

[7] Identifier.at page 12, paragraphs 60 to 71.

[8] Joint Stipulation for Entry of Stipulated Final Judgment and Order (ND Ca. July 9, 2019). Housser was fired with prejudice to the trial.

[9] 16 CFR § 310.3.

[10] See, for example, the CFPB press release, “Bureau of Consumer Financial Protection Settles with Santander Consumer USA Inc.” (November 20, 2018), available at https://www.consumerfinance.gov/about-us/newsroom/bureau-consumer-financial-protection-settles-santander-consumer-usa-inc/. The FTC requested this standard in a diet pill lawsuit ( FTC v USA Pharmacal Sales Inc.FTC File No., 012-3099 (MD Fla. July 1, 2003), available at https://www.ftc.gov/sites/default/files/documents/cases/2003/07/usapharmacalstip.pdf) and a lawsuit against a computer software company ( In Compuserve, Inc.FTC File No. 962-3096 (1997), available at https://www.ftc.gov/system/files/documents/cases/970501compuseragree.pdf.

[11] 16 CFR § 260.7.

[12] North Carolina (NC Stat. §?58-60-100) and Oregon (Or. Admin. Code 836-051-0036).

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