CFPB Consent Order Imposes Over $8 Million in Fines, Bans Respondents from Engaging in Debt Relief Payment Processing Following Illegal Practices

Summary of the Consent Order

A May 11, 2022, Consent Order filed by the CFPB finalized an enforcement action the CFPB has filed against debt relief payment processors and their respective founders. According to the Consent Order, the respondents violated multiple federal laws including the Telemarketing Sales Rule (TSR), and Consumer Financial Protection Act (CFPA). The Consent Order alleges that the respondents violated portions of the TSR and CFPA by substantially assisting student-loan and other debt relief companies in various fraudulent actions. These actions include requesting or accepting advance fees for debt relief services, misrepresented payment processing activity to consumers, and unfairly disbursed unearned fees for student loan debt relief services after consumers had terminated their service contracts with those companies. 

Deceptive Fee Practices

The Consent Order states that the respondents led consumers to believe that the payment processors would not disburse fees to the student loan debt relief companies until those debt relief companies had earned their fees. However, according to the Consent Order, the respondents failed to confirm with the debt relief companies that they had earned the fees before disbursing them. 

Payment for Referrals

The Consent Order also alleges that the respondents paid commissions to third-party marketing companies who were affiliated with debt relief companies in return for consumer referrals. According to the Consent Order, this activity is illegal. 

Disbursing Illegal Upfront Fees

In addition to failing to confirm debt relief companies had earned their fees before disbursing payments to them, the Consent Order alleges that the respondents also disbursed illegal upfront debt relief fees to the companies. The Consent Order states that these fees were for services marketed by debt relief companies to consumers as “legal plan memberships.” 

Undisclosed Conflict of Interest 

In addition, the Consent Order also alleges that two of the founders of the debt relief payment-processors were unjustly enriched by illegal relationships with affiliated financing and debt relief companies. Specifically, the Consent Order posits that the two individuals owned a financing company that advanced a significant portion of the fees that the debt relief companies collect from consumers who use their services. The Consent Order alleges that the respondents failed to disclose this conflict-of-interest between the payment-processors and the financing company. 

Conclusions of the Consent Order

As a result of the respondents illegal activities, the Consent Order is requiring the respondents to pay certain civil penalties and subjects them to compliance requirements and maintenance of business records as determined by the CFPB. Specifically, the Consent Order requires the respondents to refund $8.7 million to consumers enrolled in student loan debt relief services, as well as a $3 million fine to the CFPB. The Consent Order also mandates that the respondents submit compliance reports to the CFPB within 14-days of a written request made by the CFPB upon the respondents. 

Additionally, the Consent Order requires the respondents to cease their provision of services to both student loan debt relief service providers and debt relief service providers receiving funding from or owned by an affiliated company. stop paying commission to third-party marketing companies for consumer referrals, and consent to the CFPB’s supervisory authority. Finally, the Consent Order holds that the respondents are banned from operating in the debt relief payment processing and account maintenance industry.

Market Participant Regulatory Summary

Marketing Companies/Front End Debt Service Companies

  • “Marketing” includes but is not limited to “formulating or providing, or arranging for the formulation or provision of, any advertising or marketing material.”
  • “Seller” means “any person who, in connection with a telemarketing transaction, provides, offers to provide, or arranges for others to provide goods or services to the customer in exchange for consideration.” 
  • “Telemarketer” means “any person who, in connection with telemarketing, initiates or receives telephone calls to or from a customer or donor.”
  • Per the TSR regulations, a seller or telemarketer may not request or receive payment for services rendered to debt relief providers until the seller or telemarketer  has renegotiated, reduced, settled or altered the terms of a debt settlement agreement for a consumer and the consumer has made at least one payment pursuant to the debt settlement agreement.
  • A marketing company that receives commission from a debt relief service provider for consumer referrals may be in violation of the TSR. 

Payment Processors

  • Payment processors who are affiliated with the debt relief service companies they offer services to may be in violation of the CFPA for engaging in deceptive practices or acts.
  • “Payment Processing Service” means providing a person, directly or indirectly, with the means used to charge or debit accounts through any payment mechanism… Payment Processing Services include…: (a) reviewing or approving applications of debt relief service providers to be customers of the payment processing service; (b) providing the means to transmit consumer payment transaction data to banks and/or other financial institutions; (c) clearing, settling, or distributing consumer payments from acquiring banks or financial institutions to debt relief service providers or other persons; or (d) processing returned payments.
  • A payment processor may be required to make a “reasonable determination” that a debt relief service provider has earned their fees before the payment processor makes any payment to them. A “reasonable determination” may be a determination by the payment processor that the debt relief service provider has  renegotiated, reduced, settled or altered the terms of a debt settlement agreement for a consumer and the consumer has made at least one payment pursuant to the debt settlement agreement, pursuant to the TSR. 
  • In determining whether a debt relief service provider has earned their fees, a payment processor may consult “proof of performance” documentation from the debt relief service provider that may include whether a consumer has made a payment on a loan. 
  • Payment processors may be advised to develop written policies and procedures to ensure illegal advanced fees are not paid to debt relief services providers or legal plan providers.
  • Payment processors may be advised to screen legal plan providers, gathering information including ownership information, contracts the legal plan provider has with debt relief service companies, and consumer complaints against the legal plan provider.  

Legal Plan Providers

  • Legal plan providers may fall under the ambit of the TSR because “in connection with a telemarketing transaction,” they arrange through affiliate and joint-marketing agreements for debt relief service providers to sell legal plan memberships to consumers.
  • “Legal Plan Provider” means any person that offers or provides ancillary services in connection with debt relief services that are represented to provide consumers receiving debt relief services with access to legal services, including but not limited to defending debt collection actions brought by consumers’ creditors and bringing affirmative lawsuits on behalf of consumers against creditors.
  • “Legal Plan Membership” means any ancillary service offered or provided by legal plan providers that is represented to provide consumers with access to legal services, including but not limited to defending debt collection actions brought by consumers’ creditors, bringing affirmative lawsuits on behalf of consumers against creditors, or pre-litigation services such as representing or advising consumers in negotiations with creditors.
  • Legal plan memberships may be considered debt relief services under the TSR if a legal plan provider represents to consumers either that a legal plan membership include services to renegotiate, settle, or alter the terms of consumers’ debts with unsecured creditors, or are an essential part of a service to renegotiate, settle, or alter the terms of consumers’ debts with unsecured creditors.
  • If a legal plan provider accepts advanced payments before rendering services or before a client makes a payment towards such services, they may be in violation of the TSR.

Debt Relief Service Providers

“Traditional Debt Relief Service Provider” or“ Traditional DRSP” means a Debt Relief Service Provider that is not a Student Loan Debt Relief Service Provider.

  • Debt relief service providers may be subject to the TSR if they provide debt relief services in exchange for consumer payment, “in connection with a telemarketing transaction.”
  • Debt relief service providers who initiate or receive telephone calls to or from customers may be considered telemarketers under the TSR because they receive or initiate such calls “in connection with telemarketing.”
  • Your company may be considered to be offering debt relief services if it offers to renegotiate, settle, or alter the terms of payments of consumers’ loans.
  • If a debt relief service provider receives payment for debt relief services before renegotiating a consumers’ debt or before consumers make “at least one payment” pursuant to a settlement agreement may be held in violation of the TSR.

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On November 6-7, 2022, Shipkevich PLLC will be hosting a Regulatory Workshop in Costa Mesa, California focusing on the fundamental regulatory issues facing debt relief professionals and how they can adapt.