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CFPB Suit Against Debt Relief Company Should Make Industry Very Afraid

Written by Steve Rhode

Yesterday the Consumer Financial Protection Bureau filed suit against American Debt Settlement Solutions, Inc. and Michael DiPanni. If you are in the debt relief industry you need to become painfully familiar with this suit because it will make you soil your pants.

For the first time the CFPB has laid out its hand on what they feel is an abusive practice. What the CFPB goes after is something that the majority of debt relief companies, including nonprofit credit counselors do on a daily basis.

According to the statute, Section 1036(a)(1)(B) of the Consumer Financial Protection Act, an act or practice is abusive if it “takes unreasonable advantage of . . . a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service.” The CFPB also said the actions were abusive because consumers reasonably relied on the company to “act in their interest by enrolling them in a debt-relief program that they can be reasonably expected to complete, and which will therefore result in the negotiation, settlement, reduction, or alteration of the terms of their debts.”

But the CFPB says the actions of American Debt Settlement Solutions took an “unreasonable advantage of consumers’ lack of understanding of how long it will take [American Debt] to settle their debts and therefore how much money they will spend before realizing any benefits from enrolling in [American Debt’s] debt-relief program.”

This new path of action could be easily applied to debt relief companies that can not support their plan has a reasonable chance of success and does no harm to the consumer.

For example, is enrolling someone in a debt management program and sacrificing future retirement savings an abusive practice? The case could be made it is if the consumer is not fully aware and informed about the consequences of their actions.

Let’s Look Closer at the Suit

In this action, the CFPB did not wait to bring states onboard, they took action themselves and filed the suit.

ADSS is a Florida for-profit corporation that is located, resides, and does business in this district at 7601 N. Federal Hwy., #2108, Boca Raton, Florida 33487. At all times material to this Complaint, ADSS has provided and offered a consumer financial product or service that is covered by the CFPA. 12 U.S.C. § 5481(5), (15)(A)(viii)(II). Accordingly, ADSS is a “covered person” under the CFPA. 12 U.S.C. § 5481(6). At all times material to this Complaint, ADSS has transacted business in the Southern District of Florida.

So what does that statute say and cover?

(5) Consumer financial product or service
The term “consumer financial product or service” means any financial product or service that is described in one or more categories under—

(A) paragraph (15) and is offered or provided for use by consumers primarily for personal, family, or household purposes; or

(B) clause (i), (iii), (ix), or (x) of paragraph (15)(A), and is delivered, offered, or provided in connection with a consumer financial product or service referred to in subparagraph (A).

(6) Covered person
The term “covered person” means—

(A) any person that engages in offering or providing a consumer financial product or service; and

(B) any affiliate of a person described in subparagraph (A) if such affiliate acts as a service provider to such person.

(15) Financial product or service

(viii) providing financial advisory services (other than services relating to securities provided by a person regulated by the Commission or a person regulated by a State securities Commission, but only to the extent that such person acts in a regulated capacity) to consumers on individual financial matters or relating to proprietary financial products or services (other than by publishing any bona fide newspaper, news magazine, or business or financial publication of general and regular circulation, including publishing market data, news, or data analytics or investment information or recommendations that are not tailored to the individual needs of a particular consumer), including—

(I) providing credit counseling to any consumer; and

(II) providing services to assist a consumer with debt management or debt settlement, modifying the terms of any extension of credit, or avoiding foreclosure; – Source

DiPanni is ADSS’s owner and at all times material to this Complaint is, or has been, charged with managerial responsibility for ADSS. He has approved, ratified, endorsed, directed, controlled, and otherwise materially participated in the conduct of ADSS’s affairs. Given his status as an officer or managerial employee, DiPanni is a “related person” under the CFPA. 12 U.S.C. § 5481(25). Because of his status as a related person, DiPanni is deemed a “covered person” for purposes of the CFPA. Id. At all times material to this Complaint, DiPanni has transacted business in the Southern District of Florida.

ADSS’s Debt-Relief Services

ADSS began doing business in late 2008. Since then, it has sold or offered to sell debt-relief services to consumers.

In exchange for a fee, ADSS has promised to renegotiate, settle, reduce, or otherwise alter the terms of at least one debt between consumers and one or more unsecured creditors or debt collectors pursuant to a settlement agreement, debt-management plan, or other contractual agreement executed by a consumer.

ADSS has marketed its debt-relief services via the Internet at http://www.americandebtss.com and received telephone calls from consumers in response to its Internet marketing efforts.

As part of the consumer-enrollment process, ADSS has required that consumers complete detailed worksheets describing their monthly income (including income sources), expenditures, and debts. ADSS has then reviewed these worksheets with consumers before they enter into any debt-relief program.

ADSS has enrolled consumers in debt-relief programs varying in length from 24 to 48 months by entering into contracts with them.

Under the terms of ADSS’s contracts with consumers, consumers have paid ADSS an “enrollment” fee in an amount calculated as a percentage – typically 15 percent – of the amount of the consumers’ enrolled debts. Since its inception, ADSS has collected the balance of this “enrollment” fee in the first three to six months of a consumer’s enrollment.

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Under the terms of ADSS’s contracts with consumers, consumers also pay ADSS a “service” fee that is assessed on a monthly basis for the duration of the debt-relief program. This monthly service fee is typically $99, of which a portion is applied to pay a payment processor.

At all times material to this Complaint, ADSS’s practice has been to request or receive enrollment fees, processing fees, debt-relief service fees, or other types of fees in advance of settling at least one of a consumer’s debts.

ADSS entered into a contract with a payment processor to receive services for the management, processing, and administration of payments. Under this contract, the payment processor has managed the savings account (“Dedicated Account”) of each consumer who is enrolled in an ADSS debt-relief program. Since its inception, ADSS has required and relied on assistance from the payment processor to collect and disburse monies through the consumer’s Dedicated Accounts.

Upon enrollment in an ADSS debt-relief program, ADSS has directed consumers to stop paying their creditors. ADSS has directed consumers instead to sign up for a Dedicated Account with the payment processor and to make monthly payments by ACH transfer into that account.

ADSS has represented to consumers that, when a consumer’s Dedicated Account reaches a sufficient balance, ADSS would instruct the payment processor to transmit funds to the consumer’s creditors to help satisfy the consumer’s debts.

At all times material to this Complaint, ADSS has directed the payment processor to disburse payments to and from consumers’ Dedicated Accounts.

At all times material to this Complaint, ADSS has provided to the payment processor a copy of each contract that it entered into with consumers for its debt-relief program.

At ADSS’s direction, the payment processor has: (1) withdrawn funds from the consumer’s bank account through ACH transfer and deposited them into the Dedicated Account, and (2) transmitted funds from the Dedicated Account to itself and to ADSS for the payment of processing and servicing fees, including the fee ADSS has charged consumers for its debt-relief services. The payment processor has managed the routine transfer of consumers’ funds out of consumers’ accounts to pay ADSS’s debt-relief fees before making any payments to creditors. ADSS and the payment processor have also communicated directly about ADSS’s fee structure.

When consumers have closed their Dedicated Accounts, the payment processor has typically refunded to consumers any money remaining in their Dedicated Accounts. Consumers typically have not received any refunds of fees paid to ADSS or the payment processor.

At all times material to this Complaint, ADSS has represented to all consumers that it will renegotiate, settle, reduce, or otherwise alter the terms of debts that consumers enroll in its program. For example, ADSS’s form contract with consumers makes the following representations:

  • “Eliminate your unsecured debt sooner than you ever thought possible.”
  • “Reduce your current monthly expense on debt service.”
  • “[B]e off the debt treadmill and on the road to recovery.”

Since its inception, ADSS has failed to renegotiate, settle, reduce, or otherwise alter the terms of a single debt for approximately 89 percent of the consumers who enrolled in its debt-relief programs.

In the welcome package provided to all consumers, ADSS has provided a list of “frequently asked questions,” including, “How long does it take for my first settlement?” In response, ADSS has stated: “the first settlement could be in 90 days, or as much as six months.”

Since its inception, ADSS has only rarely renegotiated, settled, reduced, or otherwise altered the terms of debts for consumers within three to six months of their enrollment.

Since its inception, ADSS has known that it was nearly impossible for ADSS to renegotiate, settle, reduce, or otherwise alter the terms of debts under $700. Nonetheless, it has been ADSS’s practice to enroll consumers in its program with debts under $700 without disclosing this limitation.

Since its inception, it has also been ADSS’s practice to enroll consumers in its program even when ADSS knows that the consumers’ incomes are inadequate to complete the debt-relief programs in which they are enrolled.

Since ADSS’s inception, consumers have deposited more than $9.9 million into their Dedicated Accounts, and ADSS has directed the payment processor to make payments totaling less than $2 million to creditors in settlement of their debts. Most consumers have paid fees to ADSS but closed their Dedicated Accounts before their creditors received any payments in settlement of the consumers’ debts.

With respect to Dedicated Accounts that were established on or after October 27, 2010, the effective date of the TSR, and from which no creditors received payments for settlements achieved through ADSS’s debt-relief program, ADSS collected fees totaling approximately $43,665.95.

ADSS has collected fees on or after July 21, 2011, the effective date of 12 U.S.C. § 5536(a)(1), from consumers who, according to the information they provided to ADSS, had inadequate income to complete the debt-relief program in which they were enrolled.

The Defendants are facing the following counts:

(ADSS’s Violations of the TSR and the CFPA – Advance Fees)

In the course of telemarketing debt-relief services from approximately October 27, 2010 to present, ADSS requested or received fees from consumers for debt-relief services before renegotiating, settling, reducing, or otherwise altering the terms of at least one of such consumers’ debts. ADSS requested or received payment of these fees prior to consumers’ making at least one payment pursuant to any settlement agreement, debt-management plan, or other valid contractual agreement between consumers and their creditors. (Seems to apply to credit counselors as well.)

(ADSS’s Violations of the TSR and the CFPA – Deception)

Section 310.3(a)(1)(ii) of the TSR prohibits a seller or telemarketer from failing to truthfully disclose all material restrictions, limitations, or conditions to purchase, receive, or use the goods or services that are the subject of the sales offer before a customer consents to pay for goods or services offered.

In connection with the advertising, marketing, promoting, offering for sale, or sale of debt-relief services, in numerous instances, ADSS has represented, directly or indirectly, expressly or by implication, that it likely will renegotiate, settle, reduce, or otherwise alter the terms of consumers’ debts.

In truth, ADSS failed to disclose the material restriction, limitation, or condition that it is nearly impossible for ADSS to renegotiate, settle, reduce, or otherwise alter the terms of debts under $700.

In numerous instances, in connection with the advertising, marketing, promoting, offering for sale, or sale of debt-relief services, ADSS has represented, directly or indirectly, expressly or by implication, that it will likely renegotiate, settle, reduce, or otherwise alter the terms of consumers’ debts within the first three to six months after consumers enroll in a debt-relief program with ADSS.

In truth, ADSS is not likely to renegotiate, settle, reduce, or otherwise alter the terms of debts within the first three to six months after consumers enroll in a debt-relief program with ADSS.

In truth, ADSS is not likely to renegotiate, settle, reduce, or otherwise alter the terms of debts for consumers who enroll in its debt-relief programs.

(ADSS’s Violations of the CFPA – Abusiveness)

Section 1036(a)(1)(B) of the CFPA prohibits “unfair, deceptive, or abusive acts or practices.” 12 U.S.C. § 5536(a)(1)(B). An act or practice is abusive if it “takes unreasonable advantage of . . . (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.” 12 U.S.C. § 5531(d)(2).

In numerous instances, in connection with the advertising, marketing, promoting, offering for sale, or sale of debt-relief services, ADSS has enrolled in its debt-relief programs consumers whose financial conditions make it highly unlikely that they can complete the programs.

ADSS knows that the financial conditions of these consumers make it highly unlikely that they will complete the debt-relief program in which ADSS enrolls them, especially given ADSS’s knowledge that ADSS is unlikely to settle their debts within the first three to six months of enrollment. Before enrolling consumers in its debt-relief programs, ADSS has secured from consumers a detailed worksheet describing their monthly income (including income sources), expenses, and debts. Using this information, ADSS can determine whether a consumer is able to afford the monthly payments required by the debt-relief program.

Despite receiving financial information showing that some consumers could not afford the monthly payments under the debt-relief program in which they were enrolled, ADSS nonetheless collects “enrollment” fees from these consumers in the first three to six months of their enrollment. This practice causes certain consumers to spend their last savings paying ADSS fees for a service from which they will not benefit.

Instead of negotiating any debts with creditors during the first three to six months of a consumer’s enrollment – as it represents to consumers that it will – ADSS collects its “enrollment” fees during this period. As a result, consumers with inadequate income to complete the program drop out after paying significant fees and without receiving any benefit.

This practice takes unreasonable advantage of consumers’ lack of understanding of how long it will take ADSS to settle their debts and therefore how much money they will spend before realizing any benefits from enrolling in ADSS’s debt-relief program.

Consumers also reasonably rely on ADSS to act in their interest by enrolling them in a debt-relief program that they can be reasonably expected to complete, and which will therefore result in the negotiation, settlement, reduction, or alteration of the terms of their debts. Consumers also reasonably rely on ADSS to act in their interest by settling their debts as soon as possible and, in particular, within three to six months of enrollment as represented by ADSS.

Therefore, ADSS’s acts or practices violate sections 1031(a) and 1036(a)(1)(B) of the CFPA, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B), and are abusive.

And What is the CFPB Seeking?

Wherefore, the Bureau requests that the Court:

  1. permanently enjoin Defendants from advertising, marketing, promoting, offering for sale, or selling any debt-relief product or service;
  2. permanently enjoin Defendants from assisting others engaged in advertising, marketing, promoting, offering for sale, or selling any debt-relief product or service;
  3. permanently enjoin Defendants from committing future violations of the CFPA, 12 U.S.C. §§ 5531, 5536, and the TSR, 16 C.F.R. pt. 310;
  4. award restitution against Defendants in the amount of all
    unlawfully collected fees;

  5. order disgorgement of ill-gotten profits against Defendants;
  6. award civil money penalties against Defendants;
  7. award attorneys’ fees and costs against Defendants; and
  8. award additional relief as the Court may determine to be just and proper. – Source

Boom goes the dynamite.

Boom goes the dynamite.

This case could be a blueprint of how the CFPB plans to go after others in the debt relief world who are abusing consumers.

At the very least it should make all debt relief companies take stock of their actual performance and making logical and clear decisions about what is best for the consumer rather than just the company.

For years I’ve been warning about the fiduciary duty of debt relief companies and yesterday it all came true.

Sincerly,
Steve

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

60 Comments

  • CFPB announces final rule covering debt relief industry and despite what some commenters observed, it does appear the CFPB is shifting responsibility to the debt relief companies to make sure consumers make choices that do not put them in risky positions. “is engaging, or has engaged, in” that poses risks to consumers. The Bureau further believes that past conduct may pose risks to consumers, even if the identical conduct is not likely to recur, to the extent that such conduct indicates weak compliance systems that might lead to other potential law violations or harms to consumers.”

    For more on this see https://getoutofdebt.org/52918/here-it-comes-cfpb-supervision-of-debt-relief-and-credit-counseling

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