As consumers across the country worry about how they’ll afford next month’s bills amid the coronavirus pandemic, executives accused of bilking student-loan borrowers out of roughly $15.6 million are receiving leniency because of their financial circumstances.
The Consumer Financial Protection Bureau recently announced settlements with the players in two schemes accused of illegally charging borrowers fees to help them manage their student loans. Through a vetting of the defendants’ financial documents, the agency determined that those accused in the schemes had a limited ability to pay the full amount the agency said was owed to consumers. Instead, they’ll pay a fraction of what borrowers lost as part of the settlements.
In one deal announced last week, the agency determined that more than 7,300 consumers were charged $3.8 million in illegal fees, but the company and two of its executives will pay a total of $22,000.
In the other set of settlements announced Monday, the CFPB alleged that the scheme cost borrowers $11.8 million in illegal fees. A judgement was entered against one of the companies’ owners for the full $11.8 million, but as part of the deal he’ll pay $25,000. In total, a group of four people allegedly involved in the scheme will pay roughly $81,500.
In addition, the settlements ban those allegedly involved in the schemes from working in the debt-relief industry in the future.
It is not unheard of for regulatory agencies or states attorneys general to allow for a suspended payment as part of an enforcement action. It can be difficult to collect blood from a stone, as the saying goes.
And even though the gap between the amount borrowers lost and what the executives will pay is large, borrowers will still likely get relief thanks to the CFPB’s civil penalty fund — a coffer the agency can use to pay out redress to consumers in instances where the agency may struggle to collect from an insolvent defendant. By imposing a $1 civil penalty on each of the officers allegedly involved in the schemes, the CFPB can access that fund to help borrowers.
Still, critics say the contrast between the way those accused of these crimes and their victims are treated is stark. Borrowers who fall behind on their student loans have few options — it’s difficult to get rid of the debt even in bankruptcy. Perhaps one of the more extreme examples of the stickiness of student loans: borrowers who acquired their student debt to attend for-profit colleges that allegedly lured them to attend under false pretenses about future job prospects. They have struggled under the Trump administration to get their loans cancelled, despite a law that entitles them to relief.
“This is yet one more reminder for the millions of Americans who get a student-loan bill each month that at every single turn the Trump administration has chosen predatory student-loan companies over their best interests,” said Seth Frotman, the executive director of the Student Borrower Protection Center, an advocacy group, and the former student loan ombudsman at the CFPB.
“At the very moment in which the Trump administration is demanding that borrowers ripped off by predatory schools pay every single penny back on illegally made debt, it’s giving a free pass to student-loan scammers at every turn.”
In cases where the CFPB imposes a $1 penalty and redress together, the complementary remedies are applied “with the goal of providing the maximum redress to harmed consumers in any given case,” a CFPB spokesperson wrote in an emailed statement.
“In actions where the company or individual that is alleged to have caused consumer harm cannot pay the full amount of redress to consumers, the Bureau will seek to obtain the greatest redress possible from that company or individual and then may couple that redress with a nominal $1 penalty,” the statement reads.
It’s not uncommon for people accused of financial crimes to pay less than what consumers lost
Other agencies do sometimes allow for defendants to pay less than the cost of their illegal activity in cases of financial insolvency. Of the 722 monetary penalties imposed by the Securities and Exchange Commission in fiscal year 2019, the agency waived part or all of the monetary penalty based on defendants’ poor financial condition in six cases, according to an analysis from Urska Velikonja, a professor at Georgetown University Law Center.
In these cases, the defendants need to prove not only that they have no money or assets, but that they have no hope of making any money in the future, Velikonja said. “It’s more common for the SEC to start collection efforts and then they fail because they can’t find any assets than to say from the start ‘we’re not even going to bother,’” she said.
The suspended penalty approach is typical in some types of Federal Trade Commission enforcement actions, said Prentiss Cox, a professor at the University of Minnesota Law School who has tracked these issues. These deals at the CFPB are a signal to Cox that the agency is moving towards an enforcement model more similar to the FTC’s.
In 2014, the CFPB never agreed to suspended penalties to resolve enforcement actions related to the Unfair and Deceptive Practices Act, according to an analysis of UDAP enforcement across agencies that year published in 2017 by Cox and other authors. During that year, two out of six FTC cases with nominal civil penalties had those penalties fully suspended and one was partially suspended.
“Going after large entities is more the kind of thing you would see from an aggressive Democratic appointment, it’s what you see more from aggressive Democratic, elected state [attorneys general],” Cox said. “When you switch leadership that’s typically more aligned with the industry, you tend to see the enforcement either goes away, or it shifts down to smaller more scam-like entities.”
Student-debt relief scams have been hard to eliminate
Student-debt relief scams like those that are the subject of the CFPB’s recent settlements have existed for years and despite efforts from a variety of government agencies, they’ve been tough to eliminate. Even as some are shut down, others pop up. These companies charge borrowers for help managing their student loans, often providing services borrowers can access for free.
In the case of one company, Timemark Solutions, which the CFPB settled with last week, the firm and its executives allegedly used Google
ads, YouTube and other resources to advertise services that they said would help federal-student loan borrowers enroll in forgiveness and repayment programs — applications they can do for free on their own.
When borrowers called inquiring about these servicers, representatives would allegedly collect some or the entire amount of Timemark’s payment, which ranged from $99 to $699, before the Department of Education would approve a borrower’s application for a payment plan change or before a borrower would make a payment on the changed debt. This is a violation of the Telemarketing Sales Rule.
Timemark’s attorneys didn’t respond to a request for comment.
The CFPB announced a settlement with actors in another student-debt relief scheme Monday. In that case, two companies, GST Factoring Inc. and Champion Marketing Solutions, allegedly orchestrated a program where borrowers would receive flyers in the mail advertising debt-relief help for federal student loans. If borrowers called the phone number advertised, and said they had private student loans, they would be encouraged to sign up with an attorney to mitigate their debt, according to the complaint.
These services typically did not require legal expertise and borrowers would be encouraged to stop paying their student loans to make lenders more likely to agree to a settlement, the CFPB alleged. The borrower would sign an agreement on the phone that typically required them to pay a fee upon enrollment or shortly thereafter — in other words, before the debt was settled in violation of the Telemarketing Sales Rule.
Three out of the four people allegedly involved in the scheme who settled with the CFPB did not provide comment by press time. The fourth could not be reached.
Though the CFPB settlements mean that these companies and people can no longer participate in the debt-relief business, Dalié Jiménez, a professor at the University of California-Irvine’s School of Law, said this approach to enforcement does little to discourage other bad actors.
“It’s just sending a message of ‘you can do this, it’s going to cost you a couple thousand bucks,’” said Jiménez, who was on the founding staff of the CFPB. “It just seems like opening the can of worms for the people who are doing these kinds of scams to get bolder.”