1. On August 20, 2013, the CFPB filed a Complaint filed in the United States District Court for the Central District of California against Morgan Drexen, Inc. and one of its principals, Walter J. Ledda. The Complaint is here. The Complaint alleges that the defendants violated sections 1031(a), 1036(a), 1054 and 1055 of the CFPA and the Telemarketing Sales Rule. The Complaint alleges the following:
Morgan Drexen holds itself out as a company that provides debt relief services for consumers through television, internet and radio advertising.
Morgan Drexen advertised that it would not charge upfront fees, that the consumer could avoid bankruptcy by using its services and that the consumer will be linked up with an attorney.
Morgan Drexen, in order to take advantage of the fact that some states do not regulate debt relief services provided by attorneys, contracted with attorneys throughout the country “for the provision of debt relief services and paid the attorneys up-front 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 tum, paid Morgan Drexen the majority of the up-front fees they received from consumers.”
Morgan Drexen charged the consumer upfront fees (or 18% of the debt to be relieved), fixed monthly payments, and other fees pursuant to written contracts between Morgan Drexen, the attorney and the consumer. The CFPB alleges that, “[d]uring the intake call, Morgan Drexen makes a series of contradictory statements about the fees consumers must pay under the advertised debt relief program.”
If the consumer elects to litigate against the creditor or file for bankruptcy, the Morgan Drexen debt relief program does not provide attorneys to represent the consumer.
“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.”
“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.
For those of you who actually read my updates, you will notice that this is not the first time that the CFPB has initiated a lawsuit against a company that provides debt relief services. In fact, it appears to be the low hanging fruit for the CFPB as many of the allegations in this Complaint look similar to the allegations in the other debt relief lawsuits. What I find interesting about this case is not necessarily the allegations in the Complaint itself, it is the story behind the Complaint. Last month, while the CFPB was in the midst of issuing CIDs to Morgan Drexen and others related to the Morgan Drexen investigation, Morgan Drexen filed a lawsuit against the CFPB. Morgan Drexen has a website dedicated to its lawsuit against the CFPB, and that website is here. The Morgan Drexen lawsuit challenges the constitutionality of the CFPB. I did not write about this lawsuit when it was filed because there are several existing lawsuits challenging the constitutionality or authority of the CFPB and my take on these lawsuits is that they will not go anywhere and I do not want to waste your time. The CFPB is here to stay and I do not think that any of the constitutional challenges will prevail. Please do not heckle me if I turn out to be wrong. I digress.
Getting back to Morgan Drexen. What I find interesting is while the CFPB alleges that Morgan Drexen provides debt relief services for consumers, and is therefore within the jurisdiction of the CFPB, the Morgan Drexen lawsuit against the CFPB alleges that Morgan Drexen is a company that simply provides back office support for small law firms that does not engage in any activities that the CFPB enforces. The Morgan Drexen lawsuit against the CFPB alleges, in essence, that the CFPB is trying to regulate law firms through the back door. A review of the Morgan Drexen complaint against the CFPB also reveals that Morgan Drexen thought that the CIDs that it and others received from the CFPB were overly broad and responding to them were costly (not exactly an original argument, but I digress again.) Instead of challenging the CIDs through the procedure set forth in the CFPA (a petition to set aside or modify the CID), however, Morgan Drexen filed the lawsuit against the CFPB. I am not implying that Morgan Drexen should have filed a petition to set aside or modify the CID, as I think that Morgan Drexen would have lost. But I also do not think that the lawsuit against the CFPB will get Morgan Drexen where it wants to be.
I do not know who is telling the truth with respect to the activities in which Morgan Drexen engages, but the lawsuits between the CFPB and Morgan Drexen are great for CFPB watchers like me because it appears that the CFPB and Morgan Drexen will beat each other up before the consent order is signed (that is my way of saying that I do not think that either case will go to trial.) I have my popcorn ready and will update you about these cases going forward.
2. On August 21, 2013, the CFPB issued a Supervisory Report, which highlights its supervisory accomplishments between November 2012 and June 2013. That report is here.
Have a great weekend and remember that our weekly updates are on our website, www.cfpaguide.com/weeklyupdates.