August 19, 2019

August 19, 2019

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Credit Repair Companies File Motion to Dismiss CFPB Lawsuit for Alleged Deceptive Marketing

A motion to dismiss has been filed by the group of credit repair companies sued by the CFPB in Utah federal district court for alleged violations of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA).  Rather than targeting the quality or effectiveness of the credit repair services actually provided by the defendants, the complaint targets the marketing methods allegedly used by the defendants to obtain referrals of consumers.

The primary focus of the Bureau’s complaint is the defendants’ alleged CFPA violations.  According to the complaint, to obtain referrals of consumers, the defendants relied on a network of “marketing affiliates” who primarily advertised consumer credit products or services.  The CFPB alleged that one of more of such affiliates did not actually offer or provide the advertised products or services but instead “offered illusory products or services to lure in consumers and market credit repair services.”  Specifically, the CFPB alleged that in an effort to generate payments from the defendants for leads, such affiliates falsely represented to consumers that they were required to use the defendants’ credit repair services in order to obtain the advertised credit products or services or that the credit repair services would enable them to obtain or create a high likelihood of obtaining the advertised credit products or services.

The CFPB alleged that the defendants participated in the affiliate’s deceptive conduct in violation of the CFPA despite having “actual knowledge of the misrepresentations, reckless indifference to the misrepresentations, or an awareness of the high probability of the misrepresentations along with an intentional avoidance of the truth.”  It also alleged that the defendants knowingly or recklessly provided substantial assistance to at least one affiliate that was a covered person or service provider under the CFPA by providing advice and content for the affiliate’s telemarketing scripts, advice regarding its website and other marketing vehicles, the means and mechanisms for live transfers of consumers between the affiliate and the defendants, and paying the affiliate for leads that resulted in the defendants’ sale of credit repair services.  With regard to the Bureau’s TSR claims, the Bureau alleged that the defendants violated the TSR by charging advance fees before providing consumers with a credit report showing that the promised results were achieved as required by the TSR, making false or misleading statements to induce a person to pay for goods or services, and facilitating TSR violations by its affiliate.

In their motion to dismiss, the defendants argue that the CFPB has not alleged that any of the defendants made misstatements so as to establish direct liability under the CFPA for deceptive acts or under the TSR for misleading statements and that, to establish the defendants’ direct liability, the CFPB is attempting to rely on alleged misrepresentations by third parties.  The defendants further argue that they cannot be indirectly liable for the alleged actions of third parties because there are no facts showing that the third parties acted as the defendants’ agents.  In addition, they argue that the CFPB’s claim that they substantially assisted the third parties’ alleged CFPA or TSR violations should be dismissed because the CFPB has not alleged any facts showing that the defendants were sufficiently aware of such alleged violations or how any of the defendants furthered the alleged violations.

The defendants also argue that the CFPB’s CFPA claims should be dismissed as to any alleged conduct that occurred more than three years before the CFPB’s complaint was filed and that the entire complaint should be dismissed for relying on “impermissible group pleading” that “elides or obscures which party” the CFPB alleges to have engaged in unlawful conduct.

Finally, the defendants argue that the complaint should be dismissed because the CFPB is unconstitutionally structured.  At the end of last month, Seila Law filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of the Ninth Circuit’s ruling that the CFPB’s single-director-removable-only-for-cause structure is constitutional.

With respect to the CFPB’s claim that the defendants violated the TSR by charging advance fees, the defendants claim that they did not engage in conduct that would trigger the advance fee prohibition and will seek summary judgment on that claim if the complaint otherwise survives dismissal.

Copyright © by Ballard Spahr LLP

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About this Author

Barbara S. Mishkin, Ballard Spahr, Philadelphia, Deceptive Practices Lawyer, Fair Debt Collection Practices Act, Gramm Leach Bliley
Of Counsel

Barbara Mishkin focuses on consumer compliance and banking law. The federal laws with which Ms. Mishkin has dealt extensively include the Truth in Lending Act, Equal Credit Opportunity Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, and Gramm-Leach-Bliley Act. She also has significant experience with state usury and lender licensing laws, as well as state laws prohibiting unfair and deceptive acts and practices.

American Bar Association, member, Consumer Financial Services Committee;...

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