March 30, 2016

CFPB Targets Student Debt Relief

3 min

The CFPB requested that a federal district court enter a final judgment that would shut down a student debt relief scheme that allegedly charged millions in illegal upfront fees for federal student loan services. This lawsuit, started in December 2014, alleged that the company charged consumers illegal upfront enrollment fees before providing any services, deceived customers about the costs of their services, and falsely represented an affiliation with the Department of Education. The proposed judgment would order the company to pay $8.2 million in refunds to its customers, require payment of a civil money penalty, cancel all contracts with consumers, and ban the company and its owner from any future debt relief or student loan services.

Since 2011, the company has run a website and marketed services to advise and assist loan borrowers applying to the U.S. Department of Education. A large majority of consumers who signed up with the company were interested in income-based repayment programs. In calls with consumers, the company told the consumers that they were prequalified for certain student loan repayment programs. The company even purported to work with the Department of Education, and the website contained no disclaimer that the company was not affiliated with the Department of Education until at least 2012. The company's social media accounts and pages still do not have a disclaimer.

In its February 5, 2016 ruling the court found violations of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act. In support, the court cited to evidence that the company failed to disclose truthfully, in a clear and conspicuous manner, the total costs of purchasing, receiving, or using their student loan services before a consumer consented to pay for those services. If a consumer elected to enroll with the company, the company would gather the consumer's payment information to collect the enrollment fee, equivalent to 1% of the consumer's student loan balance. The enrollment fee was required to be paid in full before services were rendered. In addition to the enrollment fee, the company charged a recurring monthly fee for the service. The recurring fee was disclosed only after the company had collected the consumer's payment information.

The CFPB emphasized in its announcement of this action that the court's ruling creates important precedent by establishing that companies offering to enroll students in the Department of Education repayment programs may be running afoul of federal consumer financial laws if the companies collect upfront fees, or do not clearly disclose all fees for their services before the consumer supplies any payment information.

Finally, in the February ruling, the court held that the company's service was debt relief pursuant to the TSR. The company argued that its service was simple loan consolidation. The court was not convinced, and stated that the TSR's definition of "debt relief service" is broad, and the FTC's intent was to cover entities that engage in practices substantially similar to those of loan consolidation middlemen. Moreover, the plain language of the TSR's advance fee exemption for refinancing programs does not apply here because the exemption applies only to new extensions of credit. The company did not extend credit, and worked with students only on the process of getting access to federal student loan repayment programs.