The Consumer Financial Protection Bureau (CFPB) yesterday filed suit against a debt settlement company in California for not disclosing the relationship with the loan company they were affiliated with.
The CFPB filed a complaint in federal district court alleging that SettleIt, Inc. engaged in abusive acts or practices under the Consumer Financial Protection Act of 2010 (CFPA) and violated the Telemarketing Sales Rule (TSR). The Bureau and SettleIt filed a proposed order that, if entered by the court, would require SettleIt to return at least $646,000 in fees to consumers, pay a $750,000 civil penalty, and stop settling debts for creditors with which it shares an ownership interest.
“SettleIt’s strategy of steering consumers into sweetheart deals with its confederates was illegal,” said CFPB Director David Uejio. “The CFPB will not tolerate companies that purport to represent consumers, but instead abuse their trust in a self-dealing scheme. This case provides a clear example of what Congress intended to prohibit when it created the CFPB and gave it authority to prevent abusive practices.”
SettleIt, Inc. presents itself as an independent debt-settlement company that helps consumers negotiate with creditors like CashCall and LoanMe. But SettleIt is affiliated with CashCall and LoanMe – the same individual owns SettleIt and CashCall, and LoanMe is tied to SettleIt through loans and agreements. The CFPB alleges that SettleIt abused consumers’ trust by charging fees to negotiate settlements that favor those companies. The CFPB also alleges that SettleIt steered distressed consumers into taking out expensive loans with CashCall and LoanMe, while hiding the fact that SettleIt took its debt-settlement fees from these loan proceeds. SettleIt kept consumers in the dark about its relationships with CashCall and LoanMe, and it even included language in call scripts saying “we are not owned or operated by any of your creditors.”
CashCall has been active on my radar for more than a decade.
SettleIt Alleged Business Practice and Statements
According to its website, SettleIt “negotiate[s] with your creditors to get a reduction of your outstanding, unsecured debt.”
SettleIt claims that its “skilled negotiators work to get your creditors to agree to discounted lump sum payoff amounts and the creditors forgive the rest of your balance.” SettleIt collects its performance fee upon settlement of the first debt.
SettleIt’s sales scripts state: “We DO NOT begin negotiating your debt immediately after your first payment clears. We send a power of attorney to your creditors to plant the seed for future negotiations. The negotiation process normally starts once you have made three payments into the program. Under certain circumstances, we may begin negotiating immediately but that is an exception to the standard process.”
Consumers who enroll in SettleIt’s program typically sign a series of documents totaling nineteen pages, the first page of which is a Program Overview.
The Program Overview states: “Although settlement policies differ from Creditor to Creditor, our general policy is to begin the negotiation process once you have saved twenty percent (20.00%) of the debt not including any fees that would be owed to SettleIt.”
The Program Overview includes the program start date, the monthly draft amount, the program length, the enrolled debt amount, and the estimated settlement amount.
The Program Overview juxtaposes the total enrolled debt and estimated settlement amount next to each other, but it does not include SettleIt’s fee, which is 25% of the enrolled debt.
SettleIt discloses its fee five pages after the Program Overview, in the middle of a section titled Compensation: “We do not collect any compensation until one of your Debts is settled. When we reach a settlement of a Debt and you make a payment to the Creditor to satisfy the terms of that settlement we charge and collect 25% of the enrollment amount of that Debt as listed in Exhibit A.”
SettleIt’s sales associates, during their sales pitches, deemphasize the cost to consumers of SettleIt’s services.
SettleIt instructs sales associates to be vague about the fee by saying that the program’s cost and consumers’ savings would be determined when its negotiations with creditors were finished.
In fact, SettleIt’s performance fee is based on the amount of consumers’ total enrolled debt, so it is determined at the time consumers enroll in the program and could easily have been disclosed to them.
SettleIt also discloses its fee in the middle of a long, recorded disclosure at the conclusion of each sales call.
SettleIt’s enrollment paperwork states: “You must approve all settlement offers prior to our acceptance of any form of compensation from your Reserve Account and reserve the sole discretion to accept or reject a settlement offer, unless you have executed the attached Pre-authorization form.”
SettleIt’s Pre-Authorization Form includes the following or substantially similar statement for consumer signature: [I/we] authorize SettleIt, Inc. to settle any accounts with an offer less than or equal to sixty five (65.00%) percent of the enrolled balance without separate written approval and/or recorded settlement authorization. In the event such a settlement is reached, this authorization also directs DPG to forward payment for such settlement from my/our trust account to my/our creditor without separate written approval and/or recorded settlement authorization. Any settlement offers made above sixty five (65.00%) percent must receive my/our written and/or recorded authorization.
This preauthorization form is a standard part of the SettleIt paperwork that consumers signed.
SettleIt relied on consumers’ pre-authorization form to settle debts without obtaining specific agreements between consumers and their creditors to settle the debt.
Here is Where it Gets Really Stinky
Though it presents itself as an independent debt-settlement company, SettleIt is affiliated with certain creditors, including CashCall and LoanMe, with which it purports to negotiate.
SettleIt, CashCall, and LoanMe, as well as LoanMe’s subsidiary, Redo Lending, all do business from the same building in Orange, California.
The same individual, J. Paul Reddam, owns and controls both SettleIt and CashCall.
Reddam also has a relationship with LoanMe: Reddam indirectly has loaned money to the company and previously owned an option to purchase the company, but sold most of it, retaining an option to purchase a 9.9% stake.
LoanMe is wholly owned by Bliksum, LLC, of which Jonathan Williams— formerly CashCall’s treasurer and Reddam’s employee—is the sole owner.
CashCall’s website provides a link to SettleIt’s website.
CashCall and LoanMe employees transfer consumers as debt-settlement leads directly to SettleIt’s sales associates.
SettleIt trains its sales associates to treat consumers who have debts to CashCall and LoanMe differently than other consumers.
SettleIt’s program-enrollment guidelines require a minimum enrolled debt of $7,500, with just one exception: “Less than $7,500 OK if LoanMe/CashCall account is being enrolled and at least two total accounts are enrolled.”
SettleIt enrolled in its program some consumers with significant debts to CashCall and little other debt.
CashCall and LoanMe also gave SettleIt contact information for consumers who were behind on their payments, in some cases by directly transferring those consumers’ phone calls to SettleIt.
SettleIt favors repayment of debts owed to CashCall and LoanMe over debts owed to other lenders who are not associated with SettleIt.
About 12% of SettleIt’s consumers have debts to CashCall or LoanMe.
Only 1.2% of all consumer debt enrolled with SettleIt is owed to CashCall, but 2.8% of consumers’ payments went to CashCall.
Only 2.4% of all consumer debt enrolled with SettleIt is owed to LoanMe, but 4.5% of consumers’ payments went to LoanMe.
SettleIt’s sales associates told consumers that SettleIt would be their advocate to creditors.
The SettleIt sales script includes in its introduction, in a section specific to consumers with debts to CashCall or LoanMe: “Please be advised we are not owned or operated by any of your creditors.”
The SettleIt sales script also states that it is acceptable to describe SettleIt’s relationship with CashCall and LoanMe as “strategic partner” or “does business with.”
SettleIt’s Marketing of New Loans from CashCall and LoanMe
SettleIt’s website advertised: “DON’T Borrow More Money.”
But SettleIt did, in fact, market new loans—including from CashCall and LoanMe—to consumers who completed a certain portion of their debt-payment programs.
These new loans—called “Fresh Start” loans—are a key part of SettleIt’s business.
The term of the Fresh Start loan is typically between 36 and 84 months, depending on the size of the loan.
The Fresh Start loans offered by CashCall and LoanMe through the SettleIt program have a 24% APR.
SettleIt advised consumers regarding the potential benefits of the loans:
- “Zero out balances of previous debt and establish a positive trade line with new loan.”
- “Leverage to negotiate debts in a lump sum typically reduces the cost of getting out of debt.”
- “Accounts are settled now versus over time.”
If consumers ask how much money they would need to borrow with the Fresh Start loan, SettleIt’s sales associates are instructed to answer: “Typically, we are able to resolve your debts for 75% of your enrolled debt balance, including our fee….”
Consumers do not always understand that the Fresh Start loan would be used to pay SettleIt’s fees in addition to the consumers’ debts, so consumers ultimately paid interest on a Fresh Start loan to pay SettleIt fees.
SettleIt’s failure to make clear that the Fresh Start loan proceeds would pay SettleIt’s fee meant that consumers did not know how little it would actually take to resolve their enrolled debts, and consumers were in no position to then bargain over the fees.
For at least some consumers, accepting a Fresh Start loan extended the duration of their payments.
For consumers with enrolled debts to CashCall or LoanMe, the Fresh Start loan effectively refinanced their initial debts to CashCall or LoanMe, plus other unsecured debts, with a larger Fresh Start loan from CashCall or LoanMe.
SettleIt did not disclose to consumers that it was affiliated with CashCall and LoanMe.