Back in 2019, the Consumer Financial Protection Bureau (CFPB) filed suit against PGX Holdings, Progrexion Marketing, Progrexion Teleservices, eFolks, CreditRepair.com, Lexington Law, and John Heath.
I’ve kept an eye on the case against the credit repair operations but much of it has occurred behind closed doors under sealed documents.
But we now have a public update to the case from a recent filing from the CFPB that exposes the current position and claims of the CFPB.
The CFPB position is that the credit repair services offered by Lexington Law and CreditRepair.com fall under the Telemarketing Sales Rule (TSR). Under the TSR “companies are those that sell or telemarket “goods or services represented to remove derogatory information from, or improve, a person’s credit history, credit record, or credit rating.” And covered companies must satisfy both of the Provision’s preconditions before requesting or receiving payment. First, the time frame for providing all of the services must have expired. 16 C.F.R. § 310.4(a)(2)(i). Second, the company must demonstrate through a consumer report that the promised results have been achieved and maintained for six months.”
The Provision operates much like a contingency fee arrangement. The seller must specify the time frame for services and the outcome—the “promised result”—and achieve that outcome before any payment obligation arises. Because derogatory items may be reinserted shortly after their removal, the seller cannot request payment until six months after achieving the successful result for the customer.
The CFPB has made the following statements:
“Plaintiff Bureau of Consumer Financial Protection (“Bureau”) seeks summary judgment on Count I of its Complaint (ECF 2) against all Defendants. The undisputed material facts establish that from March 8, 2016 to the present, Defendants, through the brands Lexington Law and CreditRepair.com, have unlawfully telemarketed and sold credit repair services to millions of consumers in violation of the Telemarketing Sales Rule’s credit repair provision, 16 C.F.R. § 310.4(a)(2) (“the Provision” or “Section 310.4(a)(2)”). Specifically, in contravention of the Provision, Defendants have requested and received payments for services represented to remove derogatory items from, or improve, consumers’ credit history, record, or rating without (i) providing consumers a time frame in which all of the services will be provided; and (ii) waiting more than six months after achieving the promised results of their services, as demonstrated by a consumer report provided to the consumer. Because this conduct is undisputed and clearly violates the law, the Bureau is entitled to judgment in its favor against all Defendants on Count I.
The Bureau further seeks summary judgment dismissing Heath’s Second, Third, Fifth, Sixth, Ninth, Eleventh, Fifteenth, and Seventeenth, and Progrexion’s Second, Third, Fifth, Sixth, Tenth, Twelfth, and Thirteenth Affirmative Defenses. These defenses are unsupported and fail as a matter of law.
At this time, the Bureau seeks summary judgment on Count I regarding all Defendants’ liability for violating Section 310.4(a)(2) during the period March 8, 2016 to the present, reserving the question of monetary relief, injunctive relief, and civil money penalties for later determination.”
Defendants Are Liable for Charging Illegal Fees for Telemarketed Credit Repair Services
“The material facts relevant to Count I are indisputable. The question here is a legal one: do Defendants’ credit repair billing practices violate Section 310.4(a)(2)? The plain language of the regulation establishes that answer is “yes”: all Defendants are liable for violating Section 310.4(a)(2) as a matter of law.”
Defendants are telemarketers and sellers under the TSR.
The TSR defines a “seller” as “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.” 16 C.F.R. § 310.2(dd). A “telemarketer” is “any person who, in connection with telemarketing, initiates or receives telephone calls to or from a customer or donor.” Id. § 310.2(ff). Heath and Progrexion vigorously telemarket their credit repair services under the Lexington Law and CreditRepair.com brand names.
Defendants are covered by Section 310.4(a)(2).
Section 310.4(a)(2) covers companies that sell or telemarket “goods or services represented to remove derogatory information from, or improve, a person’s credit history, credit record, or credit rating.” Heath and Progrexion promote Lexington Law, and Progrexion promotes CreditRepair.com, as “goods or services represented to remove derogatory information from, or improve, a person’s credit history, credit record, or credit rating.” SUMF ¶¶ 15-19 (Lexington Law); SUMF ¶¶ 26-29 (CreditRepair.com). Consequently, the undisputed material facts establish that Defendants are all covered by Section 310.4(a)(2).
Defendants failed to set a time frame for all of their services.
The plain language of subsection (a)(2)(i) requires a seller to specify the time frame in which all of the goods or services will be provided and refrain from requesting or receiving payment until expiration of that time frame. Heath and Progrexion admit that neither Lexington Law nor CreditRepair.com met this requirement. SUMF ¶¶ 23, 33. On this basis alone, Defendants are liable for violating the Provision.
The time frame requirement ensures that sellers cannot string along consumers for months and months—all the while charging them—without providing all of the goods or completing the agreed services. But Defendants fail to provide this necessary protection to consumers. They avoid telling consumers how long it will take for their credit repair “solutions” to work, even when consumers ask expressly. Defendants’ failure to give consumers a definitive time frame means that the “time frame in which all of the goods or services will be provided” never expires, and Defendants are therefore prohibited from requesting or receiving payment. The undisputed record therefore establishes that Defendants violated subsection (a)(2)(i) as a matter of law.
Defendants failed to wait six months before requesting or receiving payment.
Subsection (a)(2)(ii) requires a company to wait six months after achieving documented credit repair results for the consumer before requesting or receiving payment. Defendants admit that they have a routine practice of charging consumers for credit repair services within the month after a consumer first enrolls, and on a monthly basis thereafter. SUMF ¶¶ 21-22, 31-32. Manifestly, then, Defendants do not wait six months before requesting or receiving payment for their services. This undisputed fact compels the conclusion that Defendants violated the Provision.
Defendants’ Third Defense should be dismissed because Defendants had no reasonable basis in fact or law to violate the TSR.
Defendants claim that they “reasonably interpreted applicable law” and acted “in good faith,” insinuating that a mistake of law excuses their conduct. But the Supreme Court has “long recognized the common maxim, familiar to all minds, that ignorance of the law will not excuse any person, either civilly or criminally.”
Neither the Telemarketing Act, the TSR, nor the CFPA contains a general mistake-of-law defense.
Nor can Defendants use a mistake-of-law defense to escape certain penalties under the CFPA. Defendants were keenly aware of both the TSR and the fact that their billing practices systematically contravened it. Lexington Law’s predecessor was sued by the State of Tennessee for violations of the Provision in 1996, and the Middle District of Tennessee expressly rejected numerous legal defenses raised by Lexington Law—including some very similar to those Defendants assert in this litigation—and held that the TSR applied. Tennessee v. Lexington Law Firms, 1997 WL 367409, at *4-8. Defendants cannot demonstrate that by March 8, 2016, when liability for Count I in this case begins, they were unaware of the Provision or its application to their conduct.
Credit repair permitted under First Amendment
Defendants claim that the Provision violates their rights to free speech under the First Amendment. This argument is unavailing because the Provision regulates a course of conduct—the timing of payment for credit repair services—not speech. Even if the court were to find that the Provision regulates speech, it would nonetheless survive First Amendment scrutiny.
CFPB Should Not Interfere with Clients
Heath’s Seventeenth Defense asserts that the Bureau’s claims “are barred or limited,” because they would “disrupt, substantially change, and undo existing lawyer-client relationships” and “existing contracts,” thereby purportedly injuring consumers. But, as Heath itself admitted in open court, its provision “of credit counseling services does not constitute the practice of law.” Lexington Law Firm v. S.C. Dep’t of Consumer Affairs, 677 S.E.2d 591, 595 (S.C. 2009).
The undisputed record evidence, taken as a whole, precludes any rational trier of fact from finding in Defendants’ favor on Count I. Rather, the evidentiary record and governing law entitle the Bureau to summary judgment on that Count.
Likewise, no genuinely triable issue exists regarding Heath’s Second, Third, Fifth, Sixth, Ninth, Eleventh, Fifteenth, and Seventeenth, and Progrexion’s Second, Third, Fifth, Sixth, Tenth, Twelfth, and Thirteenth Affirmative Defenses. The Bureau is entitled to summary judgment on those defenses as a matter of law.
The Court should grant summary judgment on Count I against all Defendants for violating Section 310.4(a)(2) during the period March 8, 2016 to the present. – Source
I’m sure they think this is all ridiculous and disagree with the CFPB position.
I’ll keep you posted on updates.
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