The Bureau of Consumer Financial Protection (CFPB or Bureau) has filed suit against the largest debt settlement services provider in the country, accusing the California-based entity of violating Dodd-Frank and the Telemarketing Sales Rule by deceiving consumers about its services.
According to the CFPB, the company “charges consumers without settling their debts as promised, makes customers negotiate their own settlements, misleads them about its fees and the reach of its services, and fails to inform them of their rights to funds they deposited with the company.”
The lawsuit—filed against the company and its cofounder—seeks compensation for consumers, civil penalties and an injunction against the defendants. The company promotes itself with claims that it has successfully negotiated and settled more than $7 billion in debts for more than 300,000 consumers, the Bureau said, using telemarketing to learn about prospective customers’ debts.
When a customer enrolls in the debt settlement program, he or she is required to deposit money into a dedicated account with an FDIC-insured bank, the CFPB said. Once the account has sufficient funds to make a settlement offer, the company promises customers it will begin negotiations with creditors to persuade them to accept less than the amount owed.
The agreement used by the company states that all creditors would engage in negotiations, touting the “negotiation power” of the defendants. But according to the Bureau, the company knows that some creditors refuse to negotiate with debt settlement companies but fails to inform customers of this fact.
“[The company’s] practice of enrolling consumers in its debt settlement program under these circumstances took unreasonable advantage of the consumers’ lack of understanding of the material risks, costs or conditions of enrolling in [the defendants’] debt settlement program, and it is abusive,” the CFPB claimed.
Consumers were also deceived by the defendants regarding the extent of the company’s services, the CFPB alleged, leading customers to believe the company would handle all dealings with creditors. Instead, many customers handled negotiations on their own or received limited “coaching” from the defendants, the Bureau said.
The company’s “instructions to these consumers included directions to mislead their creditors by concealing the fact of their enrollment in [the defendants’] debt settlement program and misrepresenting the source of the funds available for settlement,” according to the Bureau’s complaint.
Although the company promises to charge a fee—ranging between 18 and 25 percent of the amount of debt owed on the day the customer signed up for the program—only when it negotiates a debt settlement, it charges the full amount in other circumstances, the CFPB asserted, such as when creditors simply stop collections without a settlement and when consumers negotiate settlements on their own.
Finally, the Bureau said the company neglected to clearly and conspicuously disclose to customers their right to the funds in their accounts, which they are entitled to get back if they leave the debt settlement program.
To read the complaint, click here.
Why it matters
While there is no question that a Mulvaney-led CFPB will be a very different creature, the CFPB is, in this case, taking an understandably aggressive stance against what it views as unfair or abusive practices. Here, the defendant “took advantage of vulnerable consumers who turned to the company for help getting out of debt,” then-CFPB Director Richard Cordray said in a statement. Whether the CFPB will continue to tackle cases like this one with the same vigor is a question that only time will answer.