Yesterday I mentioned the Consumer Financial Protection Bureau filed suit against Morgan Drexen. As I mentioned, I said I would take more time today and wander through the complaint filed and share more about the allegations.
If there was no doubt in the mind of any debt relief industry executive if the CFPB was set to regulate the industry, the CFPB makes is clear it has the power to supervise.
“Mr. Ledda is a “covered person” under the CFPA. Mr. Ledda is also a “covered person” under the CFPA because he engages in the offering or providing of consumer financial services through his provision of financial advisory services, including services to assist consumers settle debts.”
What follows is from the CFPB complaint.
In or around August 2007, Morgan Drexen began employing what is known colloquially as the “Attorney Model” of debt relief services. Under the Attorney Model, consumers contracted directly with attorneys affiliated with Morgan Drexen for the provision of debt relief services and paid the attorneys up-&ont fees in advance of any debt being settled. Morgan Drexen, not the attorneys, actually performed the debt relief work on behalf of consumers. The attorneys, in turn, paid Morgan Drexen the majority of the up-front fees they received from consumers.
At the outset of its use of the Attorney Model, Morgan Drexen entered into a business arrangement with a number of lawyers (” Engagement Attorneys” ). Morgan Drexen and the Engagement Attorneys agreed that they would work together to offer debt relief services to the entire nation. Each of the Engagement Attorneys was assigned a region of the country. The Engagement Attorneys then contracted with attorneys in jurisdictions where the Engagement Attorneys were not licensed to practice law (“Local Attorneys” ) (Collectively, Local Attorneys and Engagement Attorneys are referred to herein as “Network Attorneys”).
Though consumers paid Network Attorneys directly, the attorneys would only keep a small percentage of the funds received. Morgan Drexen retained the majority of the up-front fees paid by consumers.
In October 2010, the FTC responded to the proliferation of abusive and deceptive practices in the debt relief sector by amending the TSR to, among other things, prohibit debt relief companies engaged in telemarketing from requesting or receiving advance fees before renegotiating, settling, reducing, or otherwise altering the terms of at least one of a consumer’s debts. The TSR amendments do not provide an exemption for attorneys practicing law in connection with debt relief.
On or around the effective date of the TSR amendment, Morgan Drexen changed its business practice.
Under its new practice, Morgan Drexen presents the consumer with two contracts to enter into with a Network Attorney, one purportedly for debt relief services and one purportedly for bankruptcy-related services(” Dual Contract Model” ).
The Dual Contract Model is designed to disguise consumers’ up-front payments for debt relief services provided by Morgan Drexen as payments for bankruptcy-related work purportedly performed by Network Attorneys.
DEFENDANTS’ DUAL CONTRACT MODEL
Morgan Drexen Advertises Debt Relief Services
Morgan Drexen markets debt relief services through television commercials, radio advertisements, and the internet, including through websites that it creates and manages for Network Attorneys.
Morgan Drexen’s television commercials appear on network and cable television on local and national stations across the country. The commercials contain messages that encourage consumers to call Morgan Drexen immediately to take advantage of a limited opportunity.
In its commercials, Morgan Drexen claims that it can help consumers eliminate their debt through debt relief programs supported by attorneys. In the television commercials, these claims are generally plastered across the screen in large neon print. Such claims include:
a. “No more debt”
b. “Eliminate your debt”
c. “Call now~ And erase your debt”
d. “Call for. .. a free legal services catalogue to explain how the attorneys can eliminate your debt”
e. “Attorneys supported by Morgan Drexen will work to reduce any type of unsecured debt”
In one commercial, a woman smiles and states, “Now I’m debt free, yes I am, yes.” In some commercials, a background voice instructs, “Call now, this is your opportunity to be debt free in months,” while the message “Be debt free in months” flashes on the screen in large, bold neon print.
Morgan Drexen states in its commercials that the advertised services do not require any up-front fees. In television commercials, the words “$0 up-front fees” are displayed on the screen in large bold neon print, while a voice in the background announces, “Best part — no up-front fees. You have nothing to lose except your debt.”
Morgan Drexen also advertises its services as a way for consumers to avoid bankruptcy, with statements such as: “Start your life over without filing bankruptcy.”
In its commercials, Morgan Drexen claims that attorneys will work on behalf of consumers to reduce their debt. For example, one commercial includes the following statement: “attorneys supported by Morgan Drexen will work to reduce your debt.” Another includes the following statement: “Put a lawyer on your side.” In most commercials, Morgan Drexen does not name a specific attorney. Instead, it refers generally to “attorneys supported by Morgan Drexen.”
Each television and radio commercial contains a toll-free telephone number for consumers to call in order to speak with a Morgan Drexen representative.
The Intake Call
Consumers respond to Morgan Drexen’s advertising and call the toll-free telephone number listed by Morgan Drexen to inquire about the advertised debt relief services.
During telephone calls, employees of Morgan Drexen advise consumers that Morgan Drexen can assist in negotiating unsecured debts so that a consumer will be able to repay the debt for less than what is owed.
Morgan Drexen employees advise consumers that, under the terms of the advertised debt relief program, the consumers will make fixed monthly payments for a defined period of time.
Morgan Drexen employees further advise that, once Morgan Drexen has negotiated a settlement of unsecured debt, the funds the consumer has paid on a monthly basis will be used to pay the negotiated, reduced debt amount, thereby settling the debt.
Consumers are often placed on hold during their initial call to Morgan Drexen. While on hold, consumers hear testimonials from people who state they are happy with the program advertised by Morgan Drexen. These testimonials often emphasize the benefits of avoiding bankruptcy. For example, one such testimonial reads:
And I thought I was going to have to claim bankruptcy, but I really didn’t want to do that, so I decided to take a chance on the program I saw advertised. Now of course I was very nervous at first because it was something new I hadn’t heard of before. But, I’m debt free now. I could hardly believe it. It’s awesome to get a second chance.
Morgan Drexen employees obtain detailed information from consumers about the amount and source(s) of their income and the amount and number of their debts.
Once Morgan Drexen has obtained information about the consumer’s income and debt, the consumer is transferred to a “Legal Intake Specialist,” another Morgan Drexen employee at its call center. Morgan Drexen has prepared a script for Legal Intake Specialists to follow when talking to consumers. The script includes the following language:
Basically, I’m a Morgan Drexen Legal Intake Specialist who works with (name the firm). This is a law firm that settles with creditors. (Name the firm), with our support, negotiates with your creditors to get you out of the debt. Although this depends on the circumstances of each individual client, their average settlements are about 40 to 50% of the balance due (excluding fees and accretion). Ultimately, they work with you to pay back the debt at a reduced amount, without the scar of filing for bankruptcy.
If a consumer is still interested in signing up for the advertised debt relief program, a Morgan Drexen employee determines the amount of the monthly payment the consumer will have to make under the program and informs the consumer of this.
During the intake call, Morgan Drexen makes a series of contradictory statements about the fees consumers must pay under the advertised debt relief program.
For example, per Morgan Drexen’s call scripts, Morgan Drexen employees state that the “only fee” a consumer will be charged for debt relief services is a flat percentage of the consumer’s original balance of a debt, and that the flat percentage will only accrue once the debt is settled.
But then the employee explains that the consumer will also be charged three fees for bankruptcy services: (1) a $1,000 to $1,500 engagement fee; (2) a $450 bankruptcy filing fee; and (3) a $50 monthly administrative fee. The employee states that Morgan Drexen provides the consumer with bankruptcy services as a “safety net, just in case you need a new beginning.” The employee describes how an attorney will prepare a bankruptcy petition for the consumer, but will not file it until the consumer consents and has paid the fees. The employee then explains that these fees are “built into” the consumer’s payment and thus are not an “out of pocket expense.”
As the final step of the intake call, the Morgan Drexen employee asks consumers with internet access to access a web portal and electronically sign two contracts for services with the Network Attorney to which Morgan Drexen has assigned them. The first contract is titled, “Attorney/Client Agreement — Debt Resolution Representation” (“Debt Relief Contract”). The second contract is titled, “Attorney/Client Bankruptcy Fee Agreement” (“Bankruptcy Contract”).
The Debt Relief Contracts are at least five-pages long, contain many legal terms, and are written in small font, in single-spaced form. The Bankruptcy Contracts are at least four-pages long, contain many legal terms, and are also written in small font, in singled spaced form.
Consumers do not have any contact with an attorney prior to signing these contracts.
The vast majority of consumers seeking Morgan Drexen’s debt relief services sign both contracts.
When consumers enroll in the program, Morgan Drexen employees tell them to stop paying debts they want to settle.
Consumers who stop paying debts as a result of Morgan Drexen’s advice may be harmed because the failure to pay may result in, among other things, a lowered credit score, collection calls, and the imposition of late fees.
Morgan Drexen also obtains authorization from consumers to automatically deduct a monthly payment from their bank account. Once Morgan Drexen has this authorization, it immediately withdraws $100.
The Architecture of Moran Drexen’s Dual Contract Model
The Debt Relief Contract
Under the Dual Contract Model, the Debt Relief Contract the consumer signs does not require the payment of up-front fees. Instead, it requires that the consumer pay his or her attorney a contingent fee that is a percentage (18%) of the verif ied original balance of the resolved account at the time of engagement. It also requires the consumer to pay a “pass-through charge” of either 4% of each debt that is settled or $10 per each payment the consumer makes to pay off a debt that is settled, whichever is less.
The contract commits a Network Attorney to represent a consumer with respect to the attempted negotiation and settlement of the consumer’s debts. In numerous instances, however, Morgan Drexen, not Network Attorneys, performs virtually all of the debt resolution work. Among other things, Morgan Drexen:
a. Creates and publishes advertisements for debt relief services;
b. Fields phone calls from consumers responding to its advertisements;
c. Performs consumer intake;
d. Analyzes consumers’ budgets to determine the potential savings that consumers may realize as a result of enrolling in the debt relief program;
e. Determines consumers’ monthly payments;
f. Appoints Network Attorneys for consumers to enter into a contract with;
g. Sends letters to consumers instructing them to call Morgan Drexen rather than their attorneys if they have a question;
h. Obtains paperwork from consumers to process enrolled debts;
i. Sets up automatic withdrawals from consumers’ bank accounts;
j. Develops relationships with creditors to facilitate debt relief;
k. Sends letters to creditors in the names of Network Attorneys (Morgan Drexen has signature stamps from the attorneys that it uses for this purpose);
l. Directs creditors to communicate only with Morgan Drexen, not attorneys;
m. Determines when to make a settlement offer to creditors;
n. Directly negotiates with creditors to settle consumers’ debts;
o. Transfers funds from the accounts of Network Attorneys to itself, creditors, and other third parties; and
p. Handles inquiries or complaints from consumers, the Better Business Bureau, and government agencies.
In numerous instances, Network Attorneys perform little, if any, work with respect to debt relief.
Local Attorneys receive a monthly retainer of $500 for a client base of three hundred consumers ($1.66 per consumer). Morgan Drexen provides incentives to Local Attorneys to approve settlement offers. Local Attorneys receive an additional $250 per month to review and approve or reject up to fifty settlement offers ($5 per offer). After receipt of the initial $250, Local Attorneys are eligible to receive another $5 per settlement offer, but only for settlement offers that they approve.
When Morgan Drexen has negotiated a settlement offer from a creditor, it emails Local Attorneys through a web portal. Upon receipt of the email, an attorney must choose one of four options: “cancel,” “accept,” “accept with comments,” or “deny.”
If Local Attorneys do not respond to the settlement proposal within 24 hours, the proposal is automatically deemed approved. Settlement offers are routinely approved.
If debt settlement negotiations fail, and a creditor seeks to collect a debt through litigation, consumers are not provided representation under the Debt Relief Contract.
If a consumer wants litigation representation, he or she may enter into a separate, limited scope agreement with a per-service fee structure, and even then receives only a consultation regarding the filing of pro-se pleadings.
The Bankruptcy Contract
Under the Bankruptcy Contract presented to the consumer, the consumer is required to pay up-front fees. At the outset of the engagement, a consumer pays:
a. an engagement fee of between $1,000 and $1,500, as determined by Morgan Drexen;
b. a $450 bankruptcy filing fee; and
c. a flat monthly servicing fee of $50.
By the bankruptcy contract’s own limited scope, little to no bankruptcy work is performed for consumers.
Though the Bankruptcy Contract refers to bankruptcy in its title and throughout the document, the contract does not commit Network Attorneys to provide legal representation to consumers in a bankruptcy proceeding. It limits a Network Attorney’s engagement to counseling the consumer “with respect to preparation for possibly filing a bankruptcy petition” and “with respect to pre- and post-filing claims by creditors.” If a consumer seeks representation in a bankruptcy proceeding, he or she must pay the Network Attorney additional fees under a new contract, or find another attorney
to represent him or her.
Moran Drexen’s Receipt of Up-Front Fees
Once the consumer enrolls in Morgan Drexen’s Dual Contract Model program by signing both contracts, Morgan Drexen commences making automatic monthly withdrawals from the consumer’s account and depositing this money in his or her Network Attorney’s account.
With limited exception, it is not until the consumers’ payments have covered the up-front fees due under the Bankruptcy Contract — which may take a number of months — that the consumer’s monthly payments (minus the $50 monthly administrative fee or other outstanding fees) are placed into a trust account to be used towards settlements with the consumer’s creditors as negotiated by Morgan Drexen.
Morgan Drexen transfers the vast majority of all of these fees from the Network Attorneys’ accounts into its own account.
If consumers seek to terminate their relationship with Morgan Drexen and the Network Attorneys and obtain a refund of the money they have paid, they typically are unable to do so, or they obtain only a partial refund. Morgan Drexen routinely argues that the fee payments are nonrefundable, regardless of whether Morgan Drexen has obtained any settlements for the consumer.
The Consumer Experience Under The Dual Contract Model
Consumers who respond to Morgan Drexen’s marketing efforts have unsecured debt(s) and typically are having difficulty making their monthly payments. They typically contact Morgan Drexen to inquire about debt relief services, not bankruptcy-related services.
At least 22,000 consumers have enrolled in Morgan Drexen’s Dual Contract program since October 27, 2010 and have been charged millions of dollars in up-front fees.
On average, Morgan Drexen customers who enter into the Dual Model Contract program enroll fourteen debts, totaling tens of thousands of dollars.
Few, if any, consumers become debt free in months by using Morgan Drexen’s Dual Contract Model program.
Only a tiny fraction of consumers who enter into Morgan Drexen’s Dual Contract Model have all of their enrolled debts renegotiated, settled, reduced, or otherwise altered. The vast majority of consumers do not have any enrolled debt renegotiated, settled, reduced, or otherwise altered.
Morg an Drexen and the Network Attorneys rarely perform any bankruptcy related work for consumers. Typically, where bankruptcy work is performed, it is limited to Morgan Drexen’s preparation of a draft bankruptcy petition for the consumer.
What Do You Think?
If you would like to read the full complaint, you can do so here.
Did the CFPB miss something in their complaint?
Is the complaint unfair to Morgan Drexen?
Post your comments below.
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