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On April 1, the U.S. Court of Appeals for the Fifth Circuit upheld a district court’s ruling in favor of defendant credit repair organizations (including a law firm), holding that plaintiff data furnishers failed to provide sufficient evidence supporting their claims of fraud and fraud by nondisclosure. The plaintiffs filed suit, alleging that the defendants were sending dispute letters that appeared to have come directly from the defendants’ debtor clients. Under the FCRA and the FDCPA, the plaintiffs are obligated to investigate disputed debts that come directly from debtors. Letters from law firms, the plaintiffs argued, do not trigger such requirements. According to the plaintiffs, the disputes they were receiving were costing them money to investigate, which they would not have spent if had they known the letters were coming from a law firm. A jury returned a verdict in favor of the plaintiffs on their claims of fraud and fraud by non-disclosure and awarded them roughly $2.5 million. The district court ultimately vacated the jury’s verdict, however, explaining that the evidence failed to show that the defendants made any false misrepresentations, material or otherwise, when they signed their clients’ names on letters mailed to the plaintiffs. The law firm defendant “had the legal right to sign its clients’ names on the correspondence it sent on their behalf to data furnishers who reported inaccurate information about the clients’ credit,” the district court wrote.
On appeal, the 5th Circuit determined, among other things, that the plaintiffs did “not provide any precedential support or explanation for their assertion that these facts demonstrate Defendants committed fraud and fraud by non-disclosure beyond the observation that the jury found for them on those claims.” Moreover, the appellate court disagreed with the plaintiffs’ argument that the engagement agreements that clients signed with the defendant law firm, which allowed it to send dispute letters on a client’s behalf, were fraudulent because the defendant law firm did not discuss the letters with the consumers first. According to the appellate court, the existence of any such discussion was immaterial because the engagement agreements allowed the defendant law firm to send letters on a client’s behalf. However, the appellate court noted that “[w]hile we do not hold today that there are no situations in which a third party may act fraudulently when it mails dispute letters (and leave for another day what those situations may be), we can safely say that this is not one of them.”
On August 25, the CFPB filed a motion in the U.S. District Court for the District of Northern Florida to compel a telemarketing company (defendant) allegedly associated with a credit repair operation to comply with a subpoena and produce documents requested by the Bureau. According to the Bureau, the defendant has refused to comply with a subpoena in the ongoing litigation of a 2019 CFPB action against the credit repair operation (covered by InfoBytes here). The operation allegedly violated the Telemarketing Sales Rule and the Consumer Financial Protection Act by using “Hotswap Partners,” such as the defendant, who allegedly engaged in deceptive acts and practices when selling and marketing financial products and “live-transferr[ing]” consumers to the credit repair operation’s telemarketing call centers. The Bureau contends that the defendant transferred “thousands of consumers” to the operation each year for at least a decade, yet has only provided a minimal number of documents in response to the subpoena, which seeks records related to the defendant’s business activities and marketing relationship with the credit repair operation. According to the Bureau, the defendant has refused to produce additional materials based on “boilerplate and unsubstantiated objections.” The Bureau also argues that the defendant has failed to provide a basis for its objections, which include a “general privilege objection and a general objection that the requested format of certain unspecified documents would ‘impose an unreasonable burden on the Company,’” and has “rebuffed” every attempt made by the Bureau to discuss compliance with the subpoena.
On May 21, a credit repair trade association filed a complaint against the CFPB in the U.S. District Court for the Southern District of Florida alleging the Bureau violated the credit repair organizations’ First Amendment rights under the Constitution by enforcing a six-month payment waiting period in the FTC’s Telemarketing Sales Rule (TSR). The association is challenging Section 310.4(a)(2)(ii) of the TSR, which prohibits credit repair organizations from requesting or receiving payment for services rendered for a minimum of six months after the services have been performed. The complaint alleges that the prohibition (i) exceeds the FTC’s statutory authority under the Telemarketing and Consumer Fraud and Abuse Prevention Act; (ii) conflicts with the Credit Repair Organizations Acts (CROA); and (iii) is an infringement on the First Amendment rights of credit repair organizations by improperly impairing fully protected speech. Specifically, the association argues that the TSR is only applicable to credit repair organizations in certain situations, and the CROA—which does not require the six-month waiting period nor proof that “results were achieved”—is “the final and decisive law concerning credit repair organizations, including the time and manner of their billing practices.” Moreover, the complaint argues that the Bureau does not have the authority to enforce the TSR against credit repair organizations, as the Dodd-Frank Act did not explicitly transfer the authority from the FTC. The complaint is seeking a declaratory judgment that the TSR is unenforceable, invalid, and unlawful.
On May 22, the CFPB and the Massachusetts attorney general announced a joint lawsuit against a credit repair organization and the company’s president and owner (collectively, “defendants”) for allegedly committing deceptive acts and practices in violation of the Consumer Financial Protection Act (CFPA) and the Massachusetts Consumer Protection Law. The complaint also alleges the defendants engaged in deceptive and abusive telemarketing acts or practices in violation of the Consumer Financial Protection Act’s (CFPA) prohibition against deceptive acts or practices and the FTC’s Telemarketing Sales Rule (TSR). According to the complaint filed in the U.S. District Court for the District of Massachusetts, the defendants allegedly enrolled tens of thousands of consumers by deceptively claiming that their credit-repair services could help consumers substantially improve their credit scores. The services also allegedly promised to fix “unlimited” amounts of negative items from consumers’ credit reports. However, the complaint asserts that in “numerous instances,” the defendants failed to achieve these results. The defendants also allegedly engaged in abusive acts and practices in violation of the TSR by requesting and collecting fees before achieving any results related to repairing a consumer’s credit. Among other things, the complaint further alleges that the defendants claimed to have more than 60 credit repair experts but actually only employed a handful of Boston-based employees, only some of whom interacted with consumers. The majority of the interactions, the complaint alleges, were conducted by telemarketers located in Central America who were paid “almost entirely by commission” based on the number of consumers they enrolled.
The complaint seeks injunctive relief; “damages and other monetary relief against [the defendants] as the Court finds necessary to redress injury to consumers resulting from [the defendants’] violations, which may include, among other things, rescission or reformation of contracts, refund of monies paid, and restitution; and civil money penalties.”
On March 9, the FTC filed a complaint against a Colorado-based credit repair company and its owner for allegedly making false representations to consumers regarding their ability to improve credit scores and increase access to mortgages, personal loans, and other credit products in violation of the Credit Repair Organizations Act, the FTC Act, and the Telemarketing Sales Rule. In its complaint, the FTC alleged that the defendants charged consumers illegal, upfront fees ranging from $325 to $4,000 per tradeline with the deceptive promise that they could “piggyback” on a stranger’s good credit, thereby artificially inflating their own credit score in the process. As the FTC explained, “piggybacking” occurs when a consumer pays to be registered as an “additional authorized user” on a credit card held by an unrelated account holder with positive payment histories. The FTC alleged that the defendants’ practices did not, in fact, significantly improve consumers’ credit scores as promised, and that while the defendants claimed on their website that their piggybacking services were legal, the FTC “has never determined that credit piggybacking is legal” and the practice does not fall within the protections of the Equal Credit Opportunity Act. Under the terms of the proposed settlement, the defendants will be banned from selling access to another consumer’s credit as an authorized user and from collecting advance fees for credit repair services. The defendants will also be required to pay a $6.6 million monetary judgment, which be partially suspended due to the defendants’ inability to pay.
On February 6, the U.S. District Court for the Northern District of Texas vacated a jury award of $2.5 million in favor of two nationwide debt collection agencies (plaintiffs), in an action alleging fraud by a law firm and vendor (defendants) in their provision of credit repair services. According to the opinion, the plaintiffs claimed that the defendants ran “a fraudulent credit repair scheme” in which the defendants “prey[ed] on financially troubled consumers by drafting, signing, and mailing frivolous dispute correspondences—all using [the defendant’s] patented software that generates context-based unique letters—in the name of consumers, without the consumer’s specific knowledge or consent, and without identifying that the letters are from a law firm, rather than a consumer,” in violation of the FDCPA and the FCRA. The defendant law firm responded that all of its credit repair clients provided consent for the law firm to send the letters on their behalf in an effort to improve their credit. After a six day trial, the defendants filed an amended motion for judgment as a matter of law, claiming the plaintiffs had not met their burden of proof on several elements of their fraud claims. The court “reserved ruling on the motion and stated that it would consider the arguments raised in the motion post-verdict, as necessary.” After the jury found in favor of the plaintiffs and awarded them $2.5 million in damages, the defendants filed a renewed motion for judgment as a matter of law, arguing that the plaintiffs had not shown any “material misrepresentation” or “material false statement” by the defendants, and further, that the plaintiffs did not show a “reasonable reliance” on such statements, or that the defendants had any duty to disclose facts to the plaintiffs.
According to the opinion, the defendants’ motion for judgment as a matter of law called into question the “legal sufficiency” of the plaintiffs’ evidence in support of the jury’s verdict. In granting the motion and vacating the jury award in favor of the plaintiffs, the court held that the plaintiffs failed to show a material false statement by the defendants, and therefore the evidence could not support the jury’s fraud verdict.
On January 27, the Michigan governor signed HB 4411, which establishes provisions for credit service organizations. Among other things, HB 4411 prohibits persons engaged in credit service activities from (i) charging or receiving money from a buyer seeking a loan, extension of credit, or other valuable consideration before closing; (ii) charging a buyer or receiving from a buyer money or other valuable consideration before completing all agreed upon services, or “for referral to a retail seller that will or may extend credit to the buyer if the credit that is or may be extended to the buyer is substantially the same as that available to the general public”; (iii) making or using false or misleading representations, or engaging in a fraudulent or deceptive act or practice connected with the offer or sale of a credit services organization, stating that the organization has the ability to delete adverse credit history, or guaranteeing that the organization can obtain an extension of credit regardless of the buyer’s credit history; (iv) failing to perform the agreed upon services within 90 days after the contract is signed by the buyer; (v) advising a buyer to make untrue or misleading statements to certain entities, including a consumer credit reporting agency; (vi) assisting in the removal of adverse credit information that is accurate and not obsolete, or assisting a buyer in creating a new credit record using alternative personal information; and (vii) submitting buyer disputes to consumer credit reporting agencies without a buyer’s knowledge. The act is effective immediately.
On January 13, the Illinois attorney general announced that he filed two separate suits in the Circuit Court of Cook County against two credit repair companies and three individuals who allegedly engaged in deceptive and fraudulent practices when promoting credit repair services to consumers and collecting debts in violation of the Consumer Fraud and Deceptive Business Practices Act, the Credit Services Organization Act, and the Collection Agency Act.
In the first complaint, the AG alleges a credit repair agency is not registered in Illinois as a credit services organization, and that it, along with its owner, a co-defendant, has not filed the statutorily required $100,000 surety bond with the Secretary of State’s office. The AG’s complaint alleges that the company charges unlawful upfront fees while making false promises that it will increase consumers’ credit scores. When the defendants fail to live up to these promises, they subsequently refuse to refund the money that consumers paid for the credit repair services they did not receive.
In the second complaint, the AG makes the same allegations against a different credit repair company, its owner, and a former employee. In addition, the second complaint also alleges that the company operates as a debt collection agency, but does not possess the requisite state license as a collection agency. Further, the complaint claims that, among other things, the defendants extract payments for “completely fabricated” payday loan debt from consumers who do not actually owe on the loans by using threats and other abusive and harassing collection tactics.
The AG seeks a number of remedies including injunctive relief prohibiting all defendants from engaging in any credit repair business, and prohibiting the second company and its owner and employee from engaging in any debt collection business; rescission of consumer contracts; and restitution to all affected consumers.
On January 17, the FTC announced it had reached settlements with a number of defendants alleged to have operated “an unlawful credit repair scam that has deceived consumers across the country.” According to the FTC’s complaint, the defendants purportedly made false representations to consumers regarding their abilities to improve credit scores, falsely promised to remove any negative entries on the consumers’ credit reports, illegally collected upfront fees from consumers before the services were fully performed, and used threats and coercion to intimidate consumers from disputing charges. The FTC alleged these misleading statements and illegal actions violated TILA, the FTC Act, the Telemarketing Act, and the Credit Repair Organizations Act, among other things. Additionally, the FTC claimed that the defendants “routinely engage in electronic fund transfers from consumers’ bank accounts without obtaining proper authorization, and use remotely created checks to pay for credit repair services they have offered through a telemarketing campaign, in violation of the TSR.” The defendants, without admitting or denying the allegations, agreed to settlements that ban the defendants from offering credit repair services through “advertising, marketing, promoting, offering for sale, or selling,” impose a total monetary penalty of nearly $14 million, and require several defendants to turn over the contents of bank and merchant accounts as well as investment and cryptocurrency accounts. See the settlements here, here, and here.
On June 21, the FTC announced that the U.S. District Court for the District of Connecticut temporarily halted the operation of an alleged credit repair scheme based on allegations the company charged illegal upfront fees and falsely claimed to substantially improve consumers’ credit scores in violation of the FTC Act, the Credit Repair Organizations Act, the Telemarketing Sales Rule (TSR), the Consumer Review Fairness Act, TILA, and the EFTA. According to the complaint, since 2014, the company, among other things, (i) claims they can improve consumers’ credit scores by removing negative items and hard inquiries from credit reports; (ii) charges advance fees for their services; (iii) does not provide the required disclosures for its services, including credit transaction disclosures related to the financing of the service fees; (iv) engages in electronic funds transfers from consumers’ bank accounts without proper authorization; and (v) threatens consumers with legal action after consumers complain about the lack of results. The court order requires the company to temporarily cease its operations and ensures the company’s assets are frozen.