May 22, 2022

Volume XII, Number 142

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May 20, 2022

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No Relief in Sight: CFPB and FTC Continue to Take Action Against Debt Settlement Companies

On April 29, the CFPB filed a proposed order in federal court seeking final judgment against three California-based defendants for engaging in unlawful fee-charging practices and deceptive telemarketing. According to the complaint, the defendants, a student loan debt relief business and a general debt-settlement company, along with their owner and CEO charged illegal upfront fees and deceived customers into paying for debt relief services in violation of the Consumer Financial Protection Act (CFPA) and Telemarking Sales Rule (TSR).  The CFPB alleges that defendants wrongfully charged more than 9,000 consumers with federal student-loan debt a total of approximately $10.5 million in illegal upfront fees, and used deceptive sales tactics to lure consumers into signing up for certain debt-relief services.  If approved by the court, defendants would be banned from performing debt relief and settlement activities.  The CEO would also be require to pay a civil monetary penalty of $30,000.

On May 11, the CFPB a fined a Tennessee-based debt-relief payment processor more than $11 million in consumer redress and civil money penalties to address UDAAP allegations, and banned the company from operating in the payment-processing and account management industry.  According to the CFPB, the payment processors violated the TSR and CFPA by substantially assisting student-loan and traditional debt-relief companies in unlawfully requesting and accepting advance fees for debt-relief services, misrepresenting their payment-processing actions to consumers, and unfairly disbursing unearned fees for debt-relief services even after consumers had canceled services.   The respondents agreed to repay consumers $8.7 million in unrefunded fees and pay an additional $3 million in penalties.  The respondents consented to an injunction involving an industry ban for one corporate respondent and the two individuals, remedial measures for the remaining corporate respondent.

On May 4, at the request of the FTC, a Florida federal court granted a temporary restraining order against a credit repair operation.  In its complaint against the credit repair scheme and its owners, the FTC alleged that the defendants engaged in deceptive tactics in violation of the FTC Act, the Credit Repair Organizations Act, the Business Repair Opportunity Rule, the TSR, and the COVID-19 Consumer Protection Act.   According to the FTC, since 2019, the company has been illegally charging thousands of dollars for credit repair services up front.  Throughout operations, the company encouraged consumers to invest pandemic related governmental benefits into the company. The company is also accused of engaging in a credit piggybacking scheme. It allowed consumers seeking to raise credit scores to be added as authorized users to a credit card account—belonging to someone with higher credit—in name only.  Finally, the defendants are said to have pitched their consumers the opportunity to resell their own unlawful credit repair services—consumers were told they could make “tens of thousands” each month.  The FTC asked the federal district court to halt the company’s illegal operations, appoint a receiver, and freeze the defendants’ assets. The court issued a temporary restraining order granting these requests.

Putting It Into Practice:  These enforcement action serves as a reminder for companies operating in the debt-relief and payment processing industries to monitor their compliance with federal telemarketing and other unfair and deceptive practices laws to ensure full and accurate disclosure of relevant information before signing consumers up for services and engaging third-party service providers (we have discussed the CFPB’s recent use of the CFPA and TSR in a prior blog posts here).  As a general matter, such companies should carefully consider their operations, policies, and procedures relative to advertising and marketing to consumers, including websites, telephone sales scripts, direct mail solicitations, emails, or other electronic communications, as well as screening for conflict of interest before engaging any third-party service providers.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 133
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About this Author

Moorari Shah Bankruptcy Lawyer Sheppard Mullin Law Firm
Partner

Moorari Shah is a partner in the Finance and Bankruptcy Practice Group in the firm's Los Angeles and San Francisco offices. 

Areas of Practice

Moorari combines deep in-house and law firm experience to deliver practical, business-minded legal advice. He represents banks, fintechs, mortgage companies, auto lenders, and other nonbank institutions in transactional, licensing, regulatory compliance, and government enforcement matters covering mergers and acquisitions, consumer and commercial lending, equipment finance and leasing, and supervisory examinations,...

213-617-4171
A.J. S. Dhaliwal Bankruptcy Attorney Sheppard Mullin Washington DC
Associate

A.J. is an associate in the Finance and Bankruptcy Practice Group in the firm's Washington, D.C. office. 

A.J. has over a decade of experience helping banks, non-bank financial institutions, and other companies providing financial products and services in a wide range of matters including government enforcement actions, civil litigation, regulatory examinations, and internal investigations.

With a diversified regulatory, compliance, and enforcement background, A.J. counsels financial institutions in matters involving...

202-747-2323
Associate

Pouneh Almasi is an associate in the Intellectual Property Practice Group in the firm's San Francisco office.  

Areas of Practice

Pouneh’s practice focuses on intellectual property litigation with an emphasis on copyright and trademark issues.  She is also a member of the firm’s Blockchain Technology & Digital Currency Team.

During law school, Pouneh worked as a judicial extern to the Honorable Jacqueline Scott Corley at the Northern District of California in San Francisco...

415-774-3103
Katie Daw Government Investigations Attorney Sheppard Mullin Law Firm
Associate

Katie’s practice focuses on government investigations into antitrust and competition issues and antitrust litigation.

Prior to joining the firm, Katie completed internships with United States Senator Dianne Feinstein and with United Kingdom Member of Parliament Graham Allen, for whom she conducted nutritional poverty research and drafted initiatives. She also served as a law clerk for the Baltimore Police Department, where she focused on compliance with the city’s consent decree entered into with the Department of Justice.  

202-747-2191
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