What are Considered Fraudulent Telemarketing Operations in the TSR?

What are Considered Fraudulent Telemarketing Operations in the TSR?

Several distinct practices occur in fraudulent telemarketing operations. The TSR takes specific aim at these practices.

Disclosing or Receiving Unencrypted Account Numbers for Consideration

Along with the provisions on express verifiable authorization and unauthorized billing, another provision is designed to ensure that consumers are not charged without their consent. Basically, the TSR makes it illegal to disclose or receive unencrypted account numbers for consideration, unless the disclosure or receipt is to process a payment for a transaction the consumer has consented to after receiving all necessary disclosures and other protections the TSR provides. Other than processing a transaction to which the consumer has consented, there is no legitimate purpose for disclosing or receiving a consumer’s unencrypted account number. Because of the likelihood that people illicitly trading in unencrypted account numbers will misuse the information by placing unauthorized charges against consumers’ accounts, this practice is deemed abusive and is prohibited under the TSR.

The term “unencrypted” means not only complete, visible account numbers, whether provided in lists or singly, but also encrypted information with a key to decrypt. “Consideration” can take a variety of forms, all of which are aimed at compensating the provider of the account number information. Forms of consideration include cash or other forms of payment for the list up front or after the sale, and payment of a percentage of each “sale” made using the account numbers, among others.

 

Payment Restrictions on Sales of Credit Repair Services

Credit repair services promise consumers with a bad credit history that they can remove negative information from, or otherwise improve, a consumer’s credit history, credit record or credit rating, regardless of whether the information is accurate.

The TSR prohibits sellers and telemarketers from requesting or receiving payment for credit repair services before two events occur:

  • One, the time frame during which the seller has promised services will be provided must have expired. Sellers can represent the time frame for the delivery of the services either orally or in writing, including in the contract for the services. If there’s a discrepancy between the various representations by the credit repair seller, the longest time frame represented determines when payment may be requested or received.

  • Two, the seller must provide the consumer with evidence that the improvement promised in the consumer’s credit record has been achieved. The evidence must be a consumer report from a consumer reporting agency, issued more than six months after the results were achieved. Nothing in the TSR affects the requirement in the Fair Credit Reporting Act (FCRA) that a consumer report may be obtained only for a specific permissible purpose.

This prohibition is directed at the deceptive marketing and sale of bogus credit repair services; it is not directed at the non-deceptive telemarketing of secured credit cards or legitimate credit monitoring services. No one can permanently remove or “erase” negative entries on a consumer’s credit report if the information is accurate and current. Deceptive credit repair services may be able to cause negative credit information to disappear from a consumer’s credit report temporarily by flooding a credit bureau with letters disputing the accuracy of the negative entries. But once the credit bureau verifies with creditors that the negative items are accurate, they will reappear on a consumer’s credit report and stay there for up to seven years and, in the case of a bankruptcy, for 10 years. If an item is inaccurate, incomplete, or more than seven or 10 years old, consumers can remove or correct the information themselves at no charge if they follow the dispute procedures in the FCRA. Consumers do not need the services of a third party to correct an inaccurate or out-of-date credit report. No one can do anything to “repair” a bad credit report that is accurate and up to date.

 

Payment Restrictions on Sales of Recovery Services

So-called “recovery services” target consumers who have already been victimized by fraud. In these operations, a deceptive telemarketer calls a consumer who has lost money or failed to receive a promised prize in a previous scam. The recovery room telemarketer falsely promises to recover the lost money or the promised prize, in exchange for a fee paid in advance. But even after the fee is paid, the services promised are not provided. Typically, the consumer never hears from the telemarketer again.

The TSR prohibits any recovery service from asking for or accepting payment for any goods or services claiming to help a consumer recover funds paid in a previous transaction — or to recover anything of value promised to a consumer in a previous transaction — until seven business days after the funds or other items recovered are delivered to the consumer. It doesn’t matter whether the previous transaction was a telemarketing transaction or a transaction that took place in other media, like online.

The TSR’s restriction on when recovery rooms can ask for and accept payment does not apply to services provided by licensed attorneys.

This prohibition does not cover debt collection services. In fact, debt collection services are not covered by the TSR in general, because they are not “conducted to induce the purchase of goods or services” — a prerequisite for TSR coverage as dictated by the TSR’s definition of “telemarketing.” Debt collectors must comply with the FTC’s Fair Debt Collection Practices Act (FDCPA).

 

Payment Restrictions on Sales of Advance-Fee Loans

In advance-fee loan schemes, a telemarketer, in exchange for a fee paid in advance, promises to get a loan or a credit card for a consumer or represents a high likelihood of success in getting or arranging a loan or other extension of credit for a consumer, regardless of the consumer’s credit history or credit record. After the consumer pays the fee, he or she typically doesn’t receive the promised loan or other extension of credit. Advance-fee loans generally are marketed to consumers who have bad credit histories or difficulty getting credit for other reasons. The Rule prohibits sellers and telemarketers who guarantee or represent a high likelihood of success in obtaining or arranging a loan or other extension of credit from asking for or accepting payment until a consumer gets the extension of credit promised.

This prohibition on advance fees for loans or other extensions of credit applies only if sellers and telemarketers guarantee or represent a high likelihood of success in obtaining or arranging for a loan or other extension of credit. Legitimate creditors may offer various extensions of credit through telemarketing and may require an application fee or appraisal fee in advance. There must be no guarantee or representation of a high likelihood that the consumer will obtain the extension of credit. This prohibition in the TSR does not apply to firm, “pre-approved” offers of credit by creditors who properly use a “pre-screened” list in accordance with the FTC staff commentary on the FCRA.

 

Payment Restrictions on Sales of Debt Relief Services

A debt relief service is a program that claims directly, or implies, that it can renegotiate, settle, or in some way change the terms of a person's debt to an unsecured creditor or debt collector. That includes reducing the balance, interest rates or fees a person owes. These services include debt settlement, debt negotiation, and credit counseling.

The TSR prohibits sellers and telemarketers from requesting or receiving payment for providing debt relief services until three requirements are met:

  • You must have renegotiated, settled, reduced or otherwise changed the terms of at least one of the customer’s debts.

  • Your customer must agree to the settlement agreement, debt management plan, or other result reached with the creditor due to your service. According to the TSR, the agreement from the creditor must be in writing, although your customer may agree to it orally. You can’t take your fee in advance by getting your customer to agree to a blanket “pre-approval” of any settlement you might be able to negotiate in the future.

  • Your customer must have made at least one payment to the creditor or debt collector as a result of the agreement you negotiated.

It’s illegal to front-load your fees. If your customer has multiple debts enrolled in your program and you’ve settled one of them, you may collect a portion of your full fee — as long as you also have completed the three required steps in connection with that debt. The TSR gives you two options for calculating your fee if your customer has enrolled multiple debts:

  • Proportional fee. According to the TSR, your fee must “bear the same proportional relationship to the total fee for renegotiating, settling, reducing, or altering the terms of the entire debt balance as the individual debt amount bears to the entire debt amount.” The “individual debt amount” and the “entire debt amount” refer to what your customer owed at the time she enrolled the debt in the service. So if you settle a proportion of a customer’s total debt enrolled with you, you may get that same proportion of your total fee.

  • Percentage of savings. If you base your fee on a percentage of what your customer saved as a result of your service (often called a contingency fee), the percentage you charge must be the same for each of a customer’s debts. Further, the amount saved must be based on the difference between the amount of debt enrolled in the program and the amount of money required to satisfy the debt.

Under the TSR, you may require your customers to set aside your fee and funds to pay debts in a dedicated account as long as:

  • the account is held at an insured financial institution;

  • the customer owns the funds (including any interest accrued), controls them, and can withdraw them at any time;

  • you don’t own or control the company administering the account or have any affiliation with it;

  • you don’t split fees with the company administering the account; and

  • the customer can stop working with you at any time without penalty. If the customer decides to end the relationship with you, you must return the money in the account to the customer within seven business days (minus any fees you’ve earned from the account in compliance with the TSR).

The independent company that administers the account may charge the customer a reasonable fee, but it may not transfer any of the customer’s funds to you — directly or indirectly — until you have renegotiated, settled, reduced, or otherwise changed the terms of at least one of your customer’s debts and met all the related requirements in the TSR.

It’s illegal to provide “substantial assistance” to another company if you know they’re violating the TSR, or if you remain deliberately ignorant of their actions. To avoid liability for facilitating violations of the TSR, companies that administer dedicated accounts should review the policies, procedures and operations of the debt relief providers to ensure they’re complying with the advance fee ban provision of the TSR, including the provision relating to dedicated accounts. As they continue to administer dedicated accounts, companies also should investigate consumer complaints and disputed payments. Some companies administering dedicated accounts may not be subject to the FTC’s jurisdiction, but laws enforced by other government agencies may apply to them.

 

Recordkeeping Requirements

The TSR requires most sellers and telemarketers to keep certain records that relate to their telemarketing activities. The Rule’s recordkeeping requirements do not apply to sellers and telemarketers of nondurable office and cleaning supplies. The following records must be maintained for two years from the date that the record is produced:

  • advertising and promotional materials

  • information about prize recipients

  • sales records

  • employee records

  • all verifiable authorizations or records of express informed consent or express agreement.

 

Advertising and Promotional Materials

Sellers and telemarketers must keep at least one specimen copy of all substantially different advertising, brochures, telemarketing scripts, and promotional materials. It’s not necessary to keep copies of documents that are virtually identical except for immaterial variations or minor alterations. Obviously, if no scripts or advertising or promotional materials are used in connection with the telemarketing activity, no materials need to be retained.

 

Information about Prize Recipients

The TSR requires sellers and telemarketers to maintain the name and last known address of each prize recipient, as well as the prize awarded, for all prizes represented to be worth at least $25. The value of a prize is determined by what you directly state or imply to a consumer. If you represent to a consumer — directly or by implication — that a prize is worth $25 or more, you must keep records about the prize recipients, even if the actual value of the prize is less than $25. On the other hand, when there are no direct or implied representations about the value of a prize, you must keep records for prizes that cost you $25 or more to purchase.

 

Sales Records

The TSR requires sellers and telemarketers to maintain the following information about your sales:

  • the name and last known address of each customer;

  • the goods or services purchased;

  • the date the goods or services were shipped or provided; and

  • the amount the customer paid for the goods or services.

Only records relating to actual sales need to be maintained; you are not required to keep records of all customer contacts when customers do not make a purchase.

 

Consumer credit products: For offers of consumer credit products subject to the TILA and Regulation Z, compliance with the recordkeeping requirements under those regulations is sufficient for compliance with the TSR recordkeeping requirement.

 

Magazine sales: For the sale of magazines through a fulfillment house — where sellers and telemarketers do not know or have control over the dates of shipment — you may comply with the requirement to keep a record of the shipment date by keeping a record of the date the order was placed with the fulfillment house or the date that the service is to begin.

 

Employee Records

Sellers and telemarketers must keep employee records for all current and former employees directly involved in telephone sales. These records include the name (and any fictitious name used), the last known home address and telephone number, and the job title(s) of each employee. If fictitious names are used by employees, the TSR requires that each fictitious name be traceable to a specific employee. Businesses must maintain up-to-date information on current employees and last-known information on former employees. Sellers and telemarketers are not required to update information on former employees. In addition, records of individuals not directly involved in telephone sales do not have to be kept for purposes of the TSR. Nevertheless, information like this may be required under other state or federal laws.

 

Verifiable Authorizations or Records of Express Informed Consent or Express Agreement

When the method of payment is not a credit card (subject to the protections of TILA and Regulation Z), or a debit card (subject to the protections of the EFTA and Regulation E), sellers and telemarketers must obtain a consumer’s express verifiable authorization before causing billing information to be submitted for payment. The TSR requires you to maintain a record of all verifiable authorizations that must be provided or received under the TSR. This requirement does not apply to conventional checks, written, signed, and mailed to you by the consumer, or to certain other methods, listed in the section on express verifiable authorization.

Sellers and telemarketers should retain records of the verifiable authorization for each transaction, in any form, manner, or format consistent with the methods of authorization permitted under the TSR. For example, if you obtain a written authorization from the consumer, a copy of it must be maintained; if authorization is by audio recording, a copy of the recording must be maintained. While the recording may be retained in any format, it must include all the information that must be disclosed to the consumer, as well as the consumer’s oral authorization. If a consumer gives written confirmation, you must maintain all the information provided in the confirmation.

For records of express informed consent and express agreement (required by the unauthorized billing provision of the TSR [Section 310.4(a)(6)] and the National Do Not Call Registry provision [Section 310.4(b)(1)(iii)(B)(i)]), you must create and maintain records of consent and agreement for each required transaction, and keep them in much the same way you keep such records in the ordinary course of business.

 

Maintaining Records

The TSR is not intended to impose any new recordkeeping procedures on sellers and telemarketers. You may maintain the records in any manner, format or place that you keep such records in the ordinary course of business, including in electronic storage, on microfiche or on paper.

 

Who Must Keep Records?

Sellers and telemarketers do not have to keep duplicative records if they have a written agreement allocating responsibility for complying with the recordkeeping requirements. Without a written agreement between the parties, or if the written agreement is unclear as to who must maintain the required records, telemarketers must keep employee records, while sellers must keep the advertising and promotional materials, information on prize recipients, sales records, and verifiable authorizations. In the event of dissolution or termination of the business of a seller or telemarketer, the principal of the business must maintain all records of the business. In the event of a sale, assignment, or other change in ownership of the seller or telemarketer’s business, the successor business must maintain the records.

 

Does the TSR require that other information be maintained concerning the verifiable authorizations? No, but it is sound policy for sellers and telemarketers who use the written confirmation method of authorization for non-debit and credit card payments to maintain records showing that the confirmation was sent to the customer before the customer’s billing information was submitted for payment. In addition, you may want to keep records of any refunds you provide to consumers who claim that the written confirmation was inaccurate. If law enforcement authorities get consumer complaints about unauthorized billing, they may ask the seller or telemarketer to produce the information to show that the TSR requirements were followed.

 

For more information, see here:  https://www.ftc.gov/tips-advice/business-center/guidance/complying-telemarketing-sales-rule

 

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