The CFPB announced this week that it has entered into a proposed settlement of a lawsuit it filed in 2019 in Utah federal district court against a group of defendants who constitute the largest credit repair organizations in the United States. Rather than targeting the quality or effectiveness of the credit repair services actually provided by the defendants, the lawsuit targeted the marketing methods allegedly used by the defendants to obtain referrals of consumers. In the lawsuit, the CFPB alleged that the defendants violated the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA). The settlement would require the companies to pay approximately $2.7 billion in consumer redress and more than $64 million in civil money penalties. However, because the defendants filed for Chapter 11 bankruptcy relief in June 2023, little, if any, of these amounts is likely to be paid.
The CFPB filed an amended complaint in 2022 in which it alleged that the defendants:
- Violated the TSR by charging advance fees before providing consumers with a credit report showing that the promised results were achieved as required by the TSR; and
- Violated the CFPA by engaging in deceptive acts or practices through their use of a network of marketing affiliates to obtain referrals of consumers. The affiliates, who primarily advertised various products and services often related to consumer credit, used deceptive advertising to generate referrals to the defendants of credit repair services, such as falsely representing to consumers that they were required to use the defendants’ credit repair services in order to obtain the advertised products or services or that the credit repair services would enable them to obtain or create a high likelihood of obtaining the advertised products or services.
The defendants’ bankruptcy filing was precipitated by the district court’s entry of partial summary judgment in March 2023 in favor of the CFPB on the CFPB’s TSR claims. The court did not reach the question of what relief was appropriate for the TSR violations and the proposed settlement order states that as part of the settlement, the defendants neither admit nor deny the CFPB’s TSR allegations in the amended complaint and waive their right to appeal the March 2023 summary judgment order. The defendants also do not admit or deny the CFPB’s CFPA allegations.
The proposed settlement would:
- Require the defendants to pay $2,641,926,481 in consumer redress for the TSR claims and $19 million for the CFPA claims. (In its press release about the settlement, the CFPB states that due to the defendants’ insolvency, it will determine whether the CFPB’s victims relief fund can be used to make payments to injured consumers.)
- Require the Progrexion defendants to pay a civil money penalty of $45,817,452 and the law firm defendant to pay a civil money penalty of $18,408,726.
- Ban the defendants for a period of 10 years from participating in telemarketing of credit repair services or from offering for sale, selling, or providing credit repair services that are advertised, promoted, or sold through telemarketing
- Require the defendants to send a notice of the settlement to any remaining enrolled customers who were previously signed up through telemarketing and that describes the CFPB’s lawsuit and the court’s summary judgment ruling, and states that the lawsuit has been settled, the consumer has the right to cancel their credit repair service, the process for canceling, and that if the consumer does nothing, they will continue to be billed pursuant to their contract.
- Require the defendants to send a notice of the settlement to any remaining enrolled customers who were previously signed up through telemarketing that (1) describes the CFPB’s lawsuit and the court’s summary judgment ruling, and (2) states that the lawsuit has been settled, the consumer has the right to cancel their credit repair service, the process for canceling, and that if the consumer does nothing, they will continue to be billed pursuant to their contract.
The lawsuit and settlement serve as yet another example of the ongoing issue of unlawful conduct by large-scale credit repair organizations that purport to assist consumers. We are pleased that the CFPB continues to hold credit repair organizations accountable for unlawful actions that are detrimental to the interests of consumers.
The FTC has also been aggressive in bringing enforcement actions against debt relief companies that violate the TSR and Section 5 of the FTC Act. We have represented consumer lenders in suing debt relief companies for tortious interference with contractual relationships. While these enforcement and litigation initiatives are usually successful, segments of the debt relief industry continue to ride rough shod over consumers who are in financial trouble, creating a situation akin to the carnival game “Whack-a-Mole.”