The Consumer Financial Protection Bureau (CFPB) has filed a lawsuit against Costa Mesa, Calif.-based debt settlement company Morgan Drexen Inc. and its president and CEO, Walter Ledda, for allegedly charging illegal upfront fees and deceiving consumers.
In its suit filed in federal district court, the CFPB alleges that the company ‘falsely claims 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 if they work with Morgan Drexen.’
‘This company took advantage of people who were struggling,’ Richard Cordray, director of the CFPB, says in a statement. ‘The company charged consumers illegal fees and deceived them about the services provided. We will hold them accountable for these actions.’
Ledda, who founded Morgan Drexen in 2007, has a 93% stake in the company and ‘plays an active role in its business strategies and practices,’ according to the CFPB. Since October 2010, more than 22,000 consumers have reportedly enrolled in the company's debt relief program. These consumers have been charged millions of dollars in upfront fees for debt-relief services, the CFPB claims.
The CFPB is accusing Morgan Drexen of violating the Telemarketing Sales Rule and the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Telemarketing Sales Rule prohibits deception in telemarketing and ‘generally prohibits debt-relief providers from charging a fee for any debt-relief service until it has actually settled, reduced or otherwise altered the terms of at least one of the consumer's debts,’ the CFPB states in a press release.
According to the CFPB, 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.’ Through its investigation, the bureau has come to believe that ‘little to no bankruptcy work is actually performed for consumers,’ even though they are charged fees.
The CFPB further alleges that the bankruptcy-related contract offered by Morgan Drexen is actually a ‘ruse designed to disguise the illegal upfront fees the company is charging consumers for debt-relief services as bankruptcy-related fees.’
According to the CFPB, Morgan Drexen claims in its marketing that ‘consumers will not pay upfront fees for debt-relief services, when, in reality, they typically pay hundreds, if not thousands, of dollars in upfront fees.’
Further, Morgan Drexen claims that consumers will be debt free in months when, in fact, ‘only a tiny fraction of consumers who work with the company ever become debt free,’ the CFPB claims.
Through its lawsuit, the CFPB is asking the court to issue an order stopping Morgan Drexen's alleged unlawful practices. The lawsuit also asks the court to impose penalties on the company and require that restitution be paid to consumers who have been harmed.
A blog post on Morgan Drexen's website dated Aug. 15 claims that the company, along with Connecticut attorney Kimberly Pisinski, has filed a complaint against the CFPB, accusing the bureau of ‘attempting to seize the private bankruptcy documents of thousands of struggling American consumers.’
"[The] CFPB has also substantially burdened Morgan Drexen's business by demanding that it produce documents that are protected by the attorney-client privilege,’ the blog post states, referring to the complaint. ‘These documents include the private notes by attorneys of their communications with clients. Morgan Drexen maintains these documents for its business partners (attorneys like Pisinski), who expect that their client's confidences and privileges will be honored. CFPB's demands present Morgan Drexen with a Hobson's choice: either produce the confidential data (thus violating Morgan Drexen's ethical obligations and harming its client relationships) or refuse to produce the documents and face CFPB retribution. Plaintiffs have standing to challenge this demand."
The blog post includes a link where the court filings can be viewed. (http://morgandrexenvscfpb.com/filings/)
The post points out that the CFPB's data mining efforts are currently under scrutiny – not just by private firms but also by members of Congress. It includes a quote from Sen. Mike Crapo, R-Idaho, a ranking member of the Senate Banking, Housing and Urban Affairs Committee who has recently called some of the bureau's data mining practices into question.
"The Bureau is monitoring up to 900 million credit card accounts, and it has spent more than $20 million to collect and analyze this data," Sen. Crapo said in a recent statement that can be accessed on his congressional website. "We do not know exactly what information is being collected or how it is being used; the agency has been evasive in its answers to questions from Congress."
The blog post points out that, in response to Crapo's concerns, the Government Accountability Office has launched an investigation into the CFPB's data-mining program.