On January 30, the CFPB issued a press release announcing that it had filed a lawsuit in a California district court against several debt relief law firms and individual attorneys. The CFPB alleged that the defendants offered debt relief services to consumers in violation of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA).
The defendants include two individual attorneys and three law firms. The individual attorneys and the entities are based in Orange County, California and Kansas City, Kansas. They offer debt relief services to consumers nationwide.
The CFPB’s complaint alleges that the debt relief attorneys and their firms operate “a debt relief scheme that collects exorbitant, illegal advance fees from vulnerable consumers suffering financial difficulties.” According to the complaint, the defendants “aligned themselves” with Morgan Drexen, a company the CFPB sued in 2013 for allegedly charging unlawful advance fees for debt relief services and engaging in deceptive acts and practices in violation of the CFPA. In June 2015, the court found that Morgan Drexen had violated the TSR and CFPA and issued a permanent injunction prohibiting Morgan Drexen from collecting any more money from customers and banned it from charging upfront fees for debt relief services. In March 2016, the court entered a final judgment ordering the company to pay $132.8 million in restitution and a civil money penalty of $40 million. Because Morgan Drexen had declared bankruptcy, the payment of the judgment was to occur through the bankruptcy process.
In the complaint filed on January 30, the CFPB alleges that the individual attorneys and law firms promised to help settle consumers’ debts and negotiate affordable repayments with consumers’ creditors and received “millions of dollars of unlawful fees” despite “often” failing to settle debts.
More specifically, the complaint alleges that the defendants required consumers to enter into two contracts in order to enroll in their debt relief program. The first contract was for debt settlement services, and the other for bankruptcy-related services. Consumers were required to make upfront payments for bankruptcy-related services. In reality, these payments were disguised upfront payments. The Bureau alleges that the two-contract debt relief model was designed to “disguise consumers’ payments of unlawful fees for debt relief services as payments for sham bankruptcy-related services that consumers neither wanted nor needed.”
The complaint also alleges that the defendants engaged in marketing practices that violated the TSR. The defendants’ commercials claimed that the attorneys could help consumers eliminate their debt, and explicitly stated that consumers would not incur advance fees prior to the settlement of any debt.
The complaint also alleges that the defendants violated the TSR by providing substantial assistance to Morgan Drexen in an attempt to “evade the requirements of the TSR.” The defendants did so while “knowingly or consciously avoiding knowing” that Morgan Drexen was engaged in practices that violated the TSR.
The CFPB is seeking various remedies including injunctive relief, restitution and civil money penalties.
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