The CFPB has filed a lawsuit in a California federal district court against Freedom Debt Relief (FDR) and its CEO for alleged violations of the Consumer Financial Protection Act (CFPA) and the Telemarketing Sales Rule (TSR).  The CFPB’s press release describes Freedom as “the largest debt-settlement services provider in the United States.”

According to the CFPB’s complaint, Freedom communicated by phone with prospective customers and, before enrolling a consumer in its programs, obtained a credit report to confirm the identities of the consumer’s creditors and information about the debts owed.  Freedom required consumers enrolled in its debt-settlement program to deposit money into dedicated accounts with an FDIC-insured bank and informed consumers that it would negotiate with creditors to accept less than the amounts actually owed.   When a debt was settled or collection attempts ceased, Freedom charged the consumer a fee that typically ranged from 18 to 25 percent of the amount of the debt.

The CFPB claims that Freedom knew that certain major credit card issuers and other creditors had policies against working with debt-settlement companies or “track records of repeatedly refusing to negotiate with Freedom.”  It also claims that, when it had been unable to negotiate with creditors, Freedom told consumers to negotiate directly with their creditors and gave them instructions for doing so.

The CFPB alleges that Freedom and its CEO violated the CFPA and TSR by engaging in the following conduct:

  • Despite knowing there was a significant chance that it would be unable to negotiate directly with certain creditors, by touting its “negotiating power” when marketing its services, creating “the false net impression that Freedom itself would be able to negotiate directly with all creditors.”
  • Despite representing to consumers that it would not charge any fees for its services until it had settled a debt and the consumer had made a settlement payment to the creditor, charging fees in cases where Freedom had not settled the consumer’s debt and no settlement payment was made.
  • Failing to disclose to consumers before they enrolled in Freedom’s program that they might be required to negotiate with creditors on their own.
  • Failing to clearly and conspicuously disclose that consumers owed the funds held in the dedicated accounts, could withdraw from the debt-relief service at any time, and, if the consumer withdrew, were entitled to all funds in the account other than funds earned by Freedom.

The CFPB’s complaint seeks consumer redress, civil money penalties, and injunctive relief.