The Consumer Financial Protection Bureau, the California Department of Financial Protection and Innovation (CA DFPI), and ten state Attorneys General have filed a lawsuit against Prehired, LLC (Prehired) and two related companies, Prehired Recruiting, LLC and Prehired Accelerator, LLC, alleging that the companies violated the Consumer Financial Protection Act (CFPA), the Truth in Lending Act (TILA), and the Fair Debt Collection Practices Act (FDCPA) in connection with offering and collecting on income share agreements (ISAs). The CFPA claims are brought by the CFPB and the state plaintiffs, who rely on the provision of the CFPA that authorizes state attorneys general and state regulators to bring lawsuits to enforce the CFPA. The TILA and FDCPA claims are brought only by the CFPB.
Prehired operated an online training program for consumers seeking entry-level positions as software sales development representatives and offered consumers enrolled in its program the opportunity to enter into ISAs to finance the cost of the program. Prehired Recruiting and Prehired Accelerator acquired defaulted ISAs originated by Prehired and engaged in collection activities. Because the three companies have filed for Chapter 7 bankruptcy relief, the lawsuit was filed as an adversary proceeding in the bankruptcy cases.
A central allegation of the complaint is that the ISAs were “credit,” thereby making Prehired a “covered person” under the CFPA, and that such “credit” was subject to TILA. Prehired Recruiting and Prehired Accelerator are also alleged to be “covered persons” based on their collection activities. The complaint includes the following claims:
- Prehired engaged in deceptive practices in violation of the CFPA by (1) misrepresenting to consumers that the ISAs were not loans or credit and did not create debt, and (2) misleading consumers to believe that no payments would be due on an ISA unless and until the consumer had a job making at least $60,000 per year when the terms of the ISAs in fact required consumers to make payments when they were making at least $30,000 per year.
- Prehired violated TILA and Regulation Z by not providing TILA-required disclosures for the ISAs and, by violating TILA and Regulation Z, Prehired violated the CFPA.
- Prehired Recruiting engaged in unfair practices in violation of the CFPA by filing debt collection lawsuits in a distant forum when consumers did not live in that forum and were not physically present in that forum when they executed the ISA.
- Prehired Recruiting and Prehired Accelerator engaged in deceptive practices in violation of the CFPA in attempting to collect on ISAs by inducing consumers to enter into settlement agreements providing for monthly payments for several years by deceptively describing such agreements as beneficial to the consumers without disclosing that the true purpose of the agreements was to avoid consumers’ defenses to the ISAs and impose more onerous dispute resolution and collection terms.
- Prehired Recruiting and Prehired Accelerator violated the FDCPA by making false or misleading representations in connection with the collection of ISAs including falsely representing the amount of debt owed by consumers and deceptively describing the settlement agreements. By violating the FDCPA, Prehired Recruiting and Prehired Accelerator violated the CFPA.
The relief sought in the complaint includes the following:
- A declaration that the ISAs originated by Prehired were void ab initio because they were procured by misrepresentation;
- An order directing the defendants to make restitution to all consumers who suffered losses as a result of the conduct alleged in the complaint or, in the alternative, an order allowing an unsecured creditor claim on behalf of the plaintiffs for the full restitution amount;
- An injunction permanently enjoining the defendants from selling or assigning, transferring, conveying, collecting or causing to be collected any portion of an ISA;
- An order directing defendants to disgorge and forfeit all money it has collected as a result of the conduct alleged in the complaint; and
- An order directing payment of civil penalties, or in the alternative, an order allowing an unsecured creditor claim for civil penalties.
The CFPB and the CA DFPI have previously taken the position that ISAs are extensions of credit. In September 2021, the CFPB issued a consent order against an ISA provider in which it concluded that the provider’s ISAs were extensions of credit under the CFPA and TILA. In August 2021, the CA DFPI announced that it had entered into an agreement with a company that acts as a program manager of ISAs that included the CA DFPI’s finding that ISAs made solely for the purpose of financing a postsecondary education were “student loans” under the California Student Loan Servicing Act.
As indicated above, in asserting CFPA claims against the defendants, the state plaintiffs rely on the provision of the CFPA that authorizes state attorneys general and state regulators to bring lawsuits to enforce the CFPA. We note, however, that this provision only authorizes state attorneys general to bring such lawsuits in a federal district court in the attorney general’s state or in a state court located in the attorney general’s state. Even assuming the Delaware Bankruptcy Court would be considered the Delaware federal district court for purposes of the Delaware Attorney General’s participation in the lawsuit, it is unclear whether the other state Attorneys General have authority under the CFPA to file a lawsuit in a Delaware venue.