Defanged Consumer Watchdog Shows Its Teeth in Court

SAN FRANCISCO (CN) – Despite assuming a less aggressive watchdog role under its new leadership, the Consumer Financial Protection Bureau on Tuesday defended its lawsuit against a debt relief company accused of deceiving borrowers.

The bureau sued Freedom From Debt Relief, the nation’s largest debt settlement services provider, in November 2017, less than three weeks before Trump administration budget director and frequent bureau critic Mick Mulvaney took over the agency.

Despite its new marching orders to act with “humility and moderation” in enforcing consumer protection rules, the bureau appears committed to pursuing legal action against a company accused of misleading borrowers about its fees and services.

On Tuesday, a bureau attorney urged a federal judge to deny Freedom From Debt Relief’s motion to dismiss the lawsuit.

“It is an abusive practice,” bureau attorney Maxwell Peltz said of the company’s pattern of charging borrowers, even when it failed to negotiate debt settlements with creditors as promised.

Freedom from Debt Relief claims to have settled more than $7 billion in debts for more than 300,000 consumers. It signs up customers through telemarketing contracts and instructs them to deposit money into bank accounts, which are used to make settlement offers to creditors.

But the bureau says Freedom failed to inform consumers that several large creditors – including Chase, American Express, Discover, Macy’s, and Synchrony Bank – have policies against negotiating with debt settlement firms. The company allegedly charged fees after consumers negotiated settlements themselves, with some coaching, or had their debts discharged for other reasons.

Freedom attorney Joseph Barloon insisted it was not misleading or deceptive for his client to state that it “believed” each creditor would negotiate with the company.

That argument appeared to hold little weight with the judge.

“What if you said we believe this snake oil will cure your cancer,” U.S. Magistrate Judge Elizabeth Laporte asked. “It’s not enough to offset a false statement.”

Barloon also argued the case should be dismissed because the Dodd-Frank Act, which established the bureau and limits the president’s power to remove its director except for reasons of “inefficiency, neglect of duty, or malfeasance” violates the separation of powers principle of the U.S. Constitution.

Laporte rejected that argument as well.

“I don’t think it’s unconstitutional, and even if it is, I do think it’s severable,” Laporte said, referring to the ability to hold the removal provision unconstitutional without invalidating the entire agency.

Cristina C. Arguedas, an attorney for Freedom’s co-founder and co-CEO Andrew Housser, asked the judge to dismiss claims against her client as well. She said the bureau failed to specifically allege that Housser knew statements written in contracts and documents that he signed were false or misleading.

The bureau maintains Housser attended meetings and received regular updates on Freedom’s efforts to persuade creditors to start negotiating with the company. Logic dictates that he knew Freedom could not negotiate settlements with those creditors, Peltz told the judge.

Laporte questioned whether higher penalties for reckless and knowing violations of the Telemarketing Sales Rule suggest one can violate the rule without direct knowledge of misrepresentations.

The judge asked both parties to submit 5-page supplemental briefs on what impact, if any, the three-tiered penalty has on individual scienter, the legal requirement of proving an accused person’s intent or knowledge of wrongdoing.

Mulvaney took control of the bureau on Nov. 28 last year after a federal judge ruled President Donald Trump could appoint a new director when former director Richard Cordray resigned. Cordray had appointed bureau deputy director Leandra English as interim head of the agency.

English has appealed the judge’s ruling, but ended the litigation this past July when she resigned from the bureau.

Since Mulvaney took over, the bureau has only taken legal action against one company in court: a Nevada-based business called Future Income Payments that allegedly packaged high-interest loans as “lump sum payments” in exchange for future debits of pensions.

In June, Mulvaney dismantled the bureau’s 25-member Consumer Advisory Board, which is tasked with advising the agency on policy and regulations.


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