The Consumer Financial Protection Bureau (CFPB) recently filed a lawsuit in federal district court accusing a California-based software company and its founder, owner, and CEO of providing “substantial assistance” to illegal credit-repair businesses. At first blush, the Complaint appears to be limited to the alleged actions in the Complaint. However, the impact of this case and the Bureau’s approach in dealing with companies that provide “substantial assistance” to others who are allegedly violating the law could have very far reaching implications.
The CFPB sued this software company and its owner for allegedly assisting illegal credit repair businesses. In its Complaint, the CFPB claims that the software company and its owner violated the Telemarketing Sales Rule and the Consumer Financial Protection Act of 2010 by providing substantial assistance to credit repair companies that used telemarketing to contact consumers and that charged unlawful advance fees; all in violation of the law.
The CFPB claims that the software company and its owner are actively assisting credit repair businesses in violating federal consumer protection laws. The Bureau claims the company and owner facilitated and encouraged these businesses to charge illegal advance fees and that caused broader consumer harm in the marketplace.
In its Complaint, the CFPB claims that the company:
• Offers an “all-in-one solution” for people to start and run their own credit repair businesses;
• Advertises that to start a credit-repair business using their software, “all you need is a computer, a phone and software”;
• Provides users with software that provides a customer-relationship management system. Users can track and organize customer details and activity, including customer names, contact information, date they signed up for services and whether the customers are up-to-date on their payments;
• Provides software that allow users to import and review their customers’ credit reports;
• Provides a database of over 100 template-dispute letters that the software will automatically pre-populate with consumer information and template contracts for users to supply to consumers;
• Provides training programs on how to start and run a credit-repair business, including telemarketing sales scripts, template marketing materials, and template websites;
• Lays out steps for disputing negative items on credit reports and encouraging charging consumers a monthly fee;
• Facilitates networking among users through social media and as well as in-person gatherings, including hosting an annual credit-repair conference and creating a privacy community chat group;
• Encourages the use of telemarking to sell credit repair services and provided sales scripts for these calls;
• Encourages and advises users to charge consumers at enrollment with subsequent monthly fees, including an FAQ that states charging fees upfront is how all credit repair companies get paid; and
• Provides a billing platform that allows users to charge an upfront fee and encourages users to sign up for this platform.
The owner also wrote a book about how to start and run a credit repair business, which includes template dispute letters. He also hosts a podcast where he interviews users of their program. His book and podcast are advertised on the company‘s website. The owner also writes blog posts that are posted on the company website and he provides advice to perspective and active users about how to convert customers into active paying customers and how and when to collect fees.
The CFPB claims that both the company and the owner have encouraged and facilitated the use of telemarketing as well as the charging of advance fees by users and that these users have violated the Telemarketing Sales Rule. The Bureau also claims that the company and its owner do not instruct or encourage their users to wait to charge fees until after the time permitted by law.
The Bureau also claims that the company and its owner have known or have consciously avoided knowing that its users were telemarketing and charging advance fees in violation of the law. The Bureau supports this claim by stating that the company and its owner had social media interaction, in-person network gatherings, through interviews of users, accessing the users’ fee structure information, and reviewing the users’ business models.
Finally, the Bureau claims that through the companies and the owners master class and in their training materials, they help users build websites and provide templates for those websites. And, these websites routinely include information regarding the fee structure including monthly fees and enrollment fees, all in violation of the law.
Therefore, the Bureau claims that the company and its owner have provided substantial assistance or support to their users and that they have known or consciously avoided knowing that their users were violating the law.
As to the company’s owner, the Bureau also claims that he has known or has been recklessly indifferent to the fact that the company has been providing substantial assistance or support to its users in violation of the law.
The Bureau also claims that users of the company software are “covered persons” and that the company and its owner are “service providers” to these covered persons because they participate in designing, operating, or maintaining the users’ provision of credit repair services, and they provide a material service to these users. Therefore, the Bureau claims that the company and its owner violated the Consumer Financial Protection Act.
The Bureau is seeking injunctive relief against the company and its owner, monetary relief including the refund of monies paid, restitution, discouragement or compensation for unjust enrichment and payment of damages, civil monetary penalties, costs and other relief.
What really turned my head about this Complaint is that the CFPB chose to pursue a software company under a “substantial assistance” theory for violations of these laws rather than proceeding against the end users. At least for now. As the CFPB‘s Complaint notes, the software company is not a typical software company, which typically provides just the platform for the user. In this case, the Bureau claims that the software company provides substantial resources to its users. The Bureau also claims that both the company and its owner actively trained and encouraged their users to violate these consumer protection laws. As the Acting Director stated “The CFPB will not tolerate companies facilitating and profiting from other companies’ violations of federal consumer protection laws.”
Only time will tell if the CFPB will continue to use its “substantial assistance” authority against other persons that may provide advice, templates and trainings to other parties, like a bank or finance company may provide to their dealers. It’s a great time to read through this Complaint and talk to your friendly lawyer!
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