The CFPB recently announced the settlement of a bankruptcy court adversary proceeding filed jointly with the Attorneys General of 11 states against Prehired, LLC (Prehired) and two affiliated companies (Prehired Affiliates) for alleged violations of the Truth in Lending Act (TILA), the Fair Debt Collection Practices Act (FDCPA), and the Consumer Financial Protection Act (CFPA) in connection with a vocational training program operated by Prehired and related Income Share Agreements (ISAs) offered by Prehired to students to finance the cost of the program. After entering into ISAs with students, Prehired would transfer any non-performing ISAs to the Prehired Affiliates for collection.
The adversary proceeding was filed in July 2023, after Prehired and the Prehired Affiliates had filed for Chapter 11 relief. The Chapter 11 cases were subsequently converted to Chapter 7 liquidations. The Stipulated Final Judgment and Order provides for entry of a $4.2 million judgment against Prehired and the Prehired Affiliates that will be treated as an allowed, unsecured claim in the bankruptcy cases. It also voids all outstanding ISAs (which, according to the CFPB, are valued at about $27 million by Prehired.)
In the adversary proceeding complaint, the CFPB and AGs allege:
- Prehired engaged in deceptive acts or practices in violation of the CFPA by (1) misrepresenting to consumers that the ISAs were not loans or credit and did not create debt when, in fact, the ISAs were loans and did create debt, and (2) creating the net impression that a consumer would not be required to make any payments on an ISA unless and until the consumer had a job paying at least $60,000 per year when, in fact, the terms of the ISAs required many consumers to make payments when they were making at least $30,000 per year and Prehired adjusted its servicing system to trigger repayment at a $30,000 annual income.
- Prehired violated TILA and the CFPA by failing to make TILA disclosures for the ISAs.
- Prehired engaged in unfair acts or practices in violation of the CFPA by filing collection lawsuits in Delaware against consumers who (1) had signed ISAs far away from Delaware, and (2) resided far away from Delaware when the lawsuits were filed. Even when an ISA did contain a venue selection clause providing for venue in Delaware, consumers either (1) had little or no opportunity to review the portion of the ISA that contained the venue clause, or (2) read and understood the clause but had no opportunity to bargain for its removal because the clause was non-negotiable.
- Prehired engaged in deceptive acts or practices in violation of the CFPA by inducing consumers to convert ISAs into settlement agreements to make recurring monthly payments for several years, which it deceptively described as beneficial to the consumer without disclosing that the true purpose of the agreements was to avoid consumer defenses to the original ISAs and impose more onerous dispute resolution and collection terms.
- The Prehired Affiliates violated the FDCPA and CFPA by using false, deceptive or misleading representations in connection with the collection of ISAs, such as stating that Prehired could collect more than the consumer legally owed.
Although the complaint is indicative of the views of the CFPB and at least some state AGs on the legal questions presented on these particular facts, it bears noting that the stipulated judgment constitutes only a voluntary settlement with bankrupt entities, and did not involve or result in adjudication of any issue of law. Many of the most significant issues presented relating to ISAs in general remain unsettled in the context of reported judicial decisions.