CFPB Suit Against Debt Settlement Firm Will Proceed

CFPB Enforcement Single-Director Structure

On January 10, a federal judge denied a debt settlement company's motion to dismiss a CFPB enforcement action pending in the Central District of California, in which the company challenged the constitutionality of the CFPB’s powers. Consumer Fin. Protection Bureau v. Morgan Drexen, Inc., No. 13-1267, slip op. (C.D. Cal. Jan. 10, 2014). The CFPB action asserts violations of the  Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA), alleging that the company disguised illegal upfront fees assessed for debt settlement services as bankruptcy-related charges and deceived consumers into believing they would become debt free when only “a tiny fraction” of its customers actually do. In denying the company's motion to dismiss, the California court found that the CFPB’s lawsuit asserts valid claims under both the TSR and the CFPA, and that the agency’s formation and exercise of authority is constitutionally permissible under Articles I, II, and III. The debt settlement company previously raised in a separate lawsuit the constitutional claims and claims that the CFPB had “grossly overreach[ed] its authority” in the investigation on which the enforcement action is based, asserting that the agency lacks authority to regulate the law firms supported by the debt settlement service provider and that the information demanded by the CFPB—disclosed to lawyers by clients seeking advice regarding bankruptcy—was protected by the attorney-client privilege. That suit was dismissed in October 2013 in favor of the CFPB’s California-filed action.