CFPB announces settlement of lawsuit against student loan debt relief company

by Ballard Spahr LLP

The CFPB announced the filing of a proposed stipulated final judgment and order in its December 2014 lawsuit against Student Loan Processing.US (a fictitious business name of Irvine Web Works, Inc.) and its individual owner. Filed in a California federal district court, the CFPB’s lawsuit alleged that the defendants violated the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA) prohibition of unfair, deceptive or abusive acts or practices (UDAAP) by conduct that included falsely representing an affiliation with the U.S. Department of Education, charging unlawful advance fees, and misleading borrowers about the costs and terms of the company’s services.

Last month, the district court granted summary judgment to the CFPB on its claims that the defendants violated the TSR by accepting advance fees and failing to adequately disclose the total cost of its services before a consumer consented to pay for the company’s services. It also found that the TSR disclosure violation constituted a violation of the CFPA UDAAP prohibition. The court rejected the defendants’ argument that the services they provided in  assisting students to obtain Department of Education consolidated loans were not “debt relief services” as defined by the TSR. The defendants asserted that the FTC did not intend the TSR to cover a service that facilitates a consumer obtaining new credit via a consolidated loan. In making this argument, the defendants relied on a footnote in in the FTC’s comments on the 2010 amendments to the TSR which stated that the definition of “debt relief services” was not intended to cover “services or products that offer to refinance existing loans with a new loan as a way of eliminating the original debts, as such a process would result in a new extension of credit that replaces the existing debts rather than altering them.” The court concluded that the carve out for “new loans” only applies to persons who extend new credit.

The proposed judgment and order requires the company to shut down all operations within 45 days of the entry of the court’s judgment, rescinds all contracts with consumers, and directs the defendants to cease assessing fees. It also requires the defendants to pay $8,249,548.48 in consumer redress, with all except $326,000 suspended based on the defendants’ inability to pay.

Because of the defendants’ inability to pay, the judgment and order imposes a civil money penalty of $1 plus any remaining portion of funds set aside for expenses in ceasing operations. According to the CFPB’s press release, by imposing the penalty, “victims of the defendants’ illegal practices may be eligible for additional relief from the CFPB Civil Penalty Fund (CPF) in the future, although that determination has not yet been made.” (Section 1017 of Dodd-Frank established the CPF and requires the CFPB to deposit civil money penalties it collects into the CPF to compensate consumers who were harmed by the activities for which civil money penalties were imposed and as otherwise permitted by Section 1017.)

Under the terms of the judgment and order, the defendants are permanently barred from marketing or providing debt relief and student loan services and must send a prescribed notice to consumers who had entered into contracts that informs them of the settlement and advises them to contact their federal student loan servicers to ensure that their contact information is correct and recertify if enrolled in an income-driven repayment plan.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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