CFPB Sues Debt Relief Firm that Questioned its Authority

The Consumer Financial Protection Bureau Tuesday filed a lawsuit against a debt relief firm for charging illegal upfront fees and deceiving consumers. The suit is notable because just last month the firm, Morgan Drexen, was a party to a lawsuit filed against the CFPB that challenged the regulator’s authority to request certain information.

In the CFPB suit filed Tuesday, the government said that Morgan Drexen, Inc., and its president and chief executive officer, Walter Ledda, charges illegal upfront fees and deceives consumers by falsely claiming that it does not charge consumers upfront fees for debt-relief services and falsely represents to consumers that they will become debt free in months.

“This company took advantage of people who were struggling,” said CFPB Director Richard Cordray in a press release. “The company charged consumers illegal fees and deceived them about the services provided. We will hold them accountable for these actions.”

Morgan Drexen is a nationwide debt-settlement company that was founded by Ledda in 2007. Ledda maintains a 93 percent stake in the company and plays an active role in the company’s business strategies and practices.

The CFPB alleges that the defendants have violated the Telemarketing Sales Rule and the Dodd-Frank Wall Street Reform and Consumer Protection Act.

According to the suit, when consumers sign up for Morgan Drexen’s services, the company presents them with two contracts, one for debt-settlement services, and the other for bankruptcy-related services. Based on its investigation, however, the Bureau believes that little to no bankruptcy work is actually performed for consumers. Consumers are nevertheless charged fees.

The CFPB said that it seeks to stop the unlawful practices of Morgan Drexen and Ledda. The Bureau has also requested that the court impose penalties on the company and Ledda for their conduct and require that restitution be paid to consumers who have been harmed.

The lawsuit was filed after an investigation by the CFPB that began in 2012. In July, Morgan Drexen and an affiliated bankruptcy attorney filed a lawsuit rejecting the CFPB’s investigative demand to hand over what they claim are privileged and confidential communications as well as sensitive financial records of thousands of financially distressed consumers who are considering filing for bankruptcy.

“At some point, this agency, which has expansive powers to write its own rules, needs to be reeled in,” said Kimberly Pisinski, the attorney that filed the suit and is a client of Morgan Drexen. “Americans facing bankruptcy have enough to deal with without having the personal, privileged details of their financial troubles seized by the federal government for an unknown purpose.”

The CFPB disagreed with that assessment. “We believe this work is within our authority and consistent with the ordinary course of a government investigation,” Moira Vahey, a CFPB spokeswoman, said. “Our goal is to determine whether companies are complying with the law and seek appropriate remedies where that’s not the case.”

When Morgan Drexen was informed by the CFPB that it was under investigation it initially cooperated. But in April of this year, the CFPB told the company that it faced an official legal action, presumably the one filed Tuesday. The firm began preparing its suit and brought in one of its clients, Pisinksi, to serve as an additional plaintiff since many of the records were those of her clients.

In May, Morgan Drexen was fined $6.1 million by the state of Wisconsin for allegedly violating consumer protection laws regarding debt negotiation. The firm is also fighting that action.