In Search of Exceptions to the FTC's Amended Telemarketing Sales Rule - Don't Put Your Neck in a Loophole!

In the days and weeks since the Federal Trade Commission amended the Telemarketing Sales Rule, 16 C.F.R. Parts 310.1-.9, adding specific provisions to govern for-profit debt relief providers (the "TSR Amendments"), there have been many discussions among industry professionals about possible exceptions, or "loopholes," to the TSR Amendments. While we have counseled industry clients to utilize conservative, well-substantiated marketing strategies and meaningful due diligence, and have championed the use of a success fee model with nominal monthly administrative fees, we have also voiced our criticism of the FTC's method of regulating the debt relief industry. See " Hid[ing] Elephants in Mouseholes: the FTC's Unwarranted Attempt to Regulate the Debt Relief-Services Industry Using Rulemaking Authority Purportedly Granted by the Telemarketing And Consumer Fraud and Abuse Prevention Act," Texas Review of Law & Politics, Vol. 14, No. 2, 301-342. The agency circumvented the rulemaking procedures that were provided by Congress in the Magnuson-Moss Act and shoehorned advance fee restrictions into the TSR using the more flexible procedures offered by the Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. §§6101-6108 (the "Telemarketing Act"). We expect that industry advocates will challenge the amendments in court on the ironic grounds that the FTC failed to comply with the law in its zealous efforts to enforce its vision of what the law should be. Unless a court grants an injunction staying the enforcement of the new provisions before September 27 (October 27 for the advance fee ban), the TSR Amendments will go into effect and will apply to all for-profit debt relief providers nationwide. While we understand the desire of industry members to find enticing "loopholes" that may exist in the TSR, these should be viewed as potential traps for the companies that attempt to exploit them. There is no doubt that these loopholes will soon be the "test cases" for the FTC's TSR regulatory enforcement efforts, and debt relief companies should be very wary about pursuing marketing programs or business models based on such "loopholes." For these reasons, we are cautioning industry professionals to avoid jumping at the promise offered by a loophole – that loop may turn out to be a noose.

The following are the more obvious exceptions to the TSR, all of which are expressly set forth in the TSR itself:

  1. Changing to a Non-Profit Business Model

    The FTC readily admits that it is not authorized to regulate non-profit entities. See TSR Final Rule, 75 FR 48458, fn. 11. Thus, there may be a temptation to circumvent the advance fee restrictions by simply changing a business model from for-profit to non-profit. While the FTC lacks authority over legitimate non-profit entities, the agency has aggressively pursued companies that it determined were "operating for their own profit or that of their members," and thus fell outside the non-profit exemption in the FTC Act. Id. at fn. 38. In...

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