CFPB obtains default judgment in lawsuit against debt relief companies

Ballard Spahr LLP

The CFPB has obtained a default judgment in the lawsuit it filed in October 2017 in Maryland federal district court against two commonly-owned debt relief companies, their affiliated payment processor, and three individual principals for alleged violations of the Telemarketing Sales Rule and the Consumer Financial Protection Act.  (The debt relief company defendants were Federal Debt Assistance Association, LLC and Financial Document Assistance Administration, Inc.  The payment processor defendant was Clear Solutions, Inc.)

Since the lawsuit was filed under the leadership of former Director Cordray, the Bureau’s decision to pursue a default judgment suggests that the debt relief industry will remain a target of CFPB enforcement actions.  The industry has also faced a barrage of enforcement actions by the FTC and state AGs and is likely to remain a target of such actions.

The Default Judgment and Order (Order), in its findings of fact, finds that the defendants did not answer or otherwise defend the CFPB’s action.  It further finds that the two debt relief companies, who targeted credit card debt, violated the TSR and CFPA by engaging in conduct that included the following:

  • Requesting and receiving fees before they had renegotiated the terms of at least one debt pursuant to a bona fide plan with the creditor or debt collector, before the customer had made one payment pursuant to that plan and in which the fee was not proportional to the amount saved.
  • Misrepresenting that they would reduce consumers’ principal balances by at least 60%, leave consumers’ creditors without recourse on the debts, and increase consumers’ credit scores
  • Instructing consumers to stop making payments on the debts enrolled in the program without disclosing that doing so might lead to the consumer being sued or to an increase in the amount owed.
  • Misrepresenting their affiliation with, endorsement by, or sponsorship by the CFPB and FTC.

The Order also includes as a finding of fact that for each of the CFPA and TSR violations committed by the two debt relief companies, the payment processor and three individual defendants also violated the CFPA and TSR by providing substantial assistance or support to the debt-relief companies’ unlawful acts and practices.  It also finds that the individual defendants each violated the CFPA “by directly contributing to the development, review, and approval of materials containing the misrepresentations about the companies’ government affiliations.

The Order enters judgment in favor of the Bureau against all of the defendants, jointly and severally, in the amount of $4,972, 389.31 for the purpose of providing consumer redress.  It also enters judgment against all of the defendants, jointly and severally, for a civil penalty of $16 million and imposes an injunction that permanently bans the defendants from engaging in the telemarketing of debt relief and credit repair products and services.

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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