Alleging that the company acted “abusively” by taking “unreasonable advantage of consumers’ lack of understanding,” the Consumer Financial Protection Bureau (CFPB) reached a $25 million settlement with a debt-relief company in a lawsuit that also included allegations of deceptive acts and practices in its communications with consumers and its telemarketing practices.
The bureau’s reasoning in determining that the company acted abusively references the Dodd-Frank Act definition of an abusive act or practice, which was the subject of the CFPB’s first panel discussion two weeks earlier in a planned symposia series about the agency’s policies and activities.
The CFPB claimed that Freedom Debt Relief, the nation’s largest debt-settlement services provider, violated the Consumer Financial Protection Act (CFPA) by charging consumers for debt relief services without settling their debts as promised, charging consumers after making them negotiate their own settlements with creditors and misleading consumers about the company’s fees and its ability to negotiate directly with all of a consumer’s creditors.
Per a stipulated final judgment issued by the District Court for the Northern District of California, Freedom Debt Relief will pay $20 million in restitution to affected consumers and a $5 million civil money penalty to settle charges that it deceived consumers about fees it charged for its services and its ability to negotiate with creditors. The CFPB will remit $493,500 of the $5 million civil penalty it assessed in light of the penalty that the company was ordered to pay the Federal Deposit Insurance Corp. (FDIC) in a separate consent order.
Although the company knew that certain creditors have policies against negotiating debt settlements with third-party debt relief providers – and had tried, unsuccessfully, to convince some to reverse such policies – Freedom’s marketing messages, since at least 2012, often informed consumers otherwise.
“Despite knowing that certain creditors would not negotiate with it, Freedom told consumers that it could negotiate all of their debts,” the complaint states. “In company scripts, Freedom instructed employees in pre-enrollment telephone calls to mention its ‘professional Negotiations Division of 200 negotiators’ and to tell consumers that Freedom would ‘negotiate directly with [their] creditors to settle [their] debt for less than’ what was owed. In marketing materials, Freedom touted its ‘negotiating power.’ Freedom did not tell consumers that there might be certain creditors with which it would be unable to ‘negotiate directly.’ ”
In addition to deceiving consumers about its debt-negotiating capabilities, the company, on some occasions, left the task of settling debts to the customers while still charging them for debt-relief services. The company often did not immediately tell consumers why they were being asked to negotiate their own debts.
“Since at least 2013, when creditors refused to negotiate with Freedom, Freedom would tell some consumers to negotiate with their creditors directly and would give these consumers instructions on how to negotiate a settlement on their own,” the complaint states. “Typically, it was only after consumers had been enrolled in Freedom’s program for months or years that Freedom revealed that one or more of the consumers’ creditors refused to negotiate with Freedom and told consumers that they would need to negotiate directly with those creditors. When consumers acting on their own were able to negotiate a settlement with a creditor, Freedom still charged consumers its fee, usually in the thousands of dollars per enrolled debt — even when Freedom had not directly negotiated with the creditor (or, in some cases, even communicated with the creditor).”
In advising consumers how to negotiate their own debt-settlements, the company often told consumers to lie to creditors, according to the bureau.
“As part of the instructions given to consumers for negotiating settlements on their own, Freedom told consumers to expressly mislead their creditors when asked directly about their enrollment in a debt-settlement program,” the complaint states. “Freedom’s instructions to consumers stated: ‘If they ask you if you are enrolled into our program, let them know that as it pertains to this account, you are looking to resolve it on your own.’ Freedom directed consumers to make this representation to a creditor when the consumers were in fact enrolled in Freedom’s program to settle that creditor account. Freedom instructed consumers to represent to creditors that the source of settlement funds was from family, friends, tax refunds, or the sale of a vehicle. But this was not true; in fact, the funds came either from Freedom’s affiliated loan program or from the funds consumers deposited in the dedicated account set up upon their enrollment in Freedom’s debt-settlement program.”
As it has done in previous cases, the CFPB cited the Dodd-Frank Act definition of an “abusive” act or practice in explaining its determination that Freedom acted abusively, asserting that the company “took unreasonable advantage of consumers’ lack of understanding.”
“Freedom took unreasonable advantage of consumers’ lack of understanding by, with full knowledge of its own misrepresentations and failure to correct them, enrolling consumers in its debt-settlement program who reasonably might have chosen not to enroll if they understood that they might have to negotiate with creditors themselves and be instructed by Freedom to mislead those creditors during negotiations,” the complaint states. “Freedom’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 Freedom’s debt-settlement program, and it is abusive in violation of [the Dodd-Frank Act’s prohibition against unfair, deceptive or abusive acts or practices].”
The CFPB reasoning that Freedom acted abusively by allegedly taking advantage of consumers’ lack of understanding aligns with the bureau’s stated reasoning in accusing CashCall of engaging in abusive acts or practices in December 2013 and in deeming actions allegedly taken by Cash Express were abusive in an October 2018 settlement.
Former CFPB Director Richard Cordray argued that CashCall “took unreasonable advantage of consumers’ lack of understanding about the impact of applicable state laws on the parties’ rights and obligations” by collecting on illegal loans made through Western Sky Financial and, therefore, “engaged in ‘abusive’ acts or practices.”
In the Cash Express lawsuit, the CFPB claimed the company “took unreasonable advantage of the consumers’ lack of understanding” by withholding funds during check-cashing transactions to satisfy outstanding amounts on prior loans and did not disclose the practice to consumers when initiating a transaction.
The bureau’s explanation of its reasoning for using the abusive prong of its UDAAP authority under Dodd-Frank is significant given the ongoing debate over what truly separates an abusive act or practice from and unfair or a deceptive one. The question was the center of the CFPB’s symposium on the subject in June. Among the prominent points raised during the discussion was that the bureau never has accused a company of an abusive act or practice without also accusing it of engaging in unfair and/or deceptive acts or practices, as well.
The bureau also charged Freedom with failing to abide by disclosure requirements outlined by the Telemarketing Sales Rule (TSA), which implements the Telemarketing and Consumer Fraud and Abuse Act (Telemarketing Act). The TSR allegations stem from Freedom’s purported practice of charging advance fees and its failure to inform consumers of their rights to funds they deposited with the company, the complaint states.
“While Freedom’s Debt Resolution Agreement explained that consumers could withdraw from the program and terminate the agreement, it did not notify consumers that if they withdrew from the program, they would receive all funds in their accounts, minus any fees that Freedom had already earned,” the complaint states.