The Washington State Attorney General recently filed an action in state court against a student loan debt adjustment firm and its individual principal alleging that the firm charged illegal fees and failed to provide required disclosures in violation of the state’s Debt Adjusting Act (DAA) and Consumer Protection Act (CPA). The lawsuit illustrates the need for firms providing student debt relief services to ensure that their fees, documentation, and other practices comply with applicable federal and state law.

The complaint alleges that the firm was a “debt adjuster” subject to the DAA and charged student loan borrowers an up-front fee equal to the greater of 1 percent of the borrower’s federal student loan balance or $250 and, until the loan was paid off, a monthly fee that was generally $39. In the complaint, the AG claims that the fees violated the DAA’s fee limits, which provide that a “debt adjuster” cannot charge an initial fee greater than $25 or retain a fee from each payment that exceeds 15 percent of the payment. The AG claimed that the firm’s contracts did not contain the notice required by the DAA, which includes a statement on the borrower’s right to cancel the contract within three days of signing.

Unless the result of “an accidental and bona fide error,” the DAA renders void any contract that violates the DAA’s fee limits and requires the debt adjuster to refund to the debtor all payments received from the debtor that have not been distributed to creditors. In the complaint, the AG seeks a declaration that every contract the firm entered into with a Washington consumer is void, an order directing the firm to return payments to Washington consumers, and an injunction prohibiting the firm from entering into contracts that do not contain the DAA-required notice.

The AG also alleges in the complaint that the DAA violations constitute unfair or deceptive practices in violation of the CPA. Relying on the DAA’s remedy provisions, the AG seeks an order requiring the firm to return all amounts obtained in violation of the DAA and CPA and pay a civil penalty of $2,000 for each CPA violation. (The AG alleges that the firm committed at least 144 violations, consisting of 88 consumers who paid an unlawful initial fee and 56 consumers who paid unlawful monthly fees.)

The Washington AG’s action is another example of recent aggressive enforcement activity by regulators targeting the student debt relief industry. In January 2014, a student protection unit was established within New York’s Department of Financial Services to serve as a consumer watchdog for student borrowers. The unit has served subpoenas on student debt relief providers that allegedly charged borrowers high enrollment fees for services that were available free of charge through the U.S. Department of Education. Two student debt companies alleged to have engaged in similar conduct were the targets last year of Consumer Financial Protection Bureau enforcement actions, one of which was filed jointly with the Florida AG.