This article is written by a non-lawyer and should not be considered legal advice.
The Consumer Financial Protection Bureau (CFPB) sued Credit Repair Cloud (CRC). In response, CRC moved to dismiss that lawsuit. Rather than explaining both, I’ve decided to go through the Judge’s order, which explains everything perfectly.
To understand the procedural posture of the case (i.e., where are we in terms of a resolution), you should understand a motion to dismiss.
Typically, you “answer” a lawsuit against you by admitting or denying the allegations in it. Then you move on to litigation. However, there are legal maneuvers you can do before a responsive pleading. One example is a motion to dismiss.
In a motion to dismiss, you’re telling the judge to toss the case in whole or in part due to some kind of legal flaw with the lawsuit.
The judge will either grant the motion to dismiss, which can temporarily or permanently dispose of the case. Or, the judge can deny the motion to dismiss, and the case moves forward.
In the case of CFPB’s complaint against CRC, that’s what just happened. The judge denied the motion to dismiss and the case is moving forward.
Reviewing the Order denying CRC’s motion to dismiss.
First of all, courts are usually confined to the “four corners” of the pleadings before it on a motion to dismiss. This means that they can’t consider things outside of the documents before the court. In rare situations, it can. It did so in this case.
The Court considered a letter from Congress to the CFPB asking for clarification on the distinction between the Credit Repair Organizations Act and the credit repair provision of the Telemarketing Sales Rule (TSR).
More about that is below.
The Court: CFPB Can pursue charges against CRC and its users are “covered persons” under the law.
One of the main points CRC argued is that the CFPB didn’t have the right to sue CRC. The root of CRC’s position is that CFPB doesn’t have jurisdiction over credit repair companies.
You should know that the Consumer Financial Protection Act (CFPA) specifically regulates “credit counseling” but does not specifically regulate “credit repair.”
Interestingly and alarmingly, the court basically said they’re the same thing for the purpose of determining which activities the CFPB can regulate under the CFPA.
In fact, the Court went further than credit repair. It went ultra general (which basically expanded the reach of the CFPA) suggesting that:
- “…offering financial aid application guidance booklets is a ‘financial advisory service”
- “[O]ne who ‘provides financial advisory services . . . to consumers on individual financial matters is a ‘covered person,’ regardless of the specific nature of that financial advice” (Emphasis added).
I think the Court got something majorly wrong.
At the dismissal level, it doesn’t matter, but later in this litigation, I’m hopeful this issue is addressed. The Court believes that credit repair companies are subject to the CFPA for an additional reason. To wit: credit repair companies are “in the business of providing consumer report information about consumers’ credit history”.
This is indefinitely erroneous.
Credit repair companies do not have the power or the ability (let alone the lawful authority) to “provide” consumer report information.
Nevertheless, this judge entertained this allegation at the dismissal level.
The Court: CRC is a “service provider” under the law.
Secondarily, CRC argued that it is not a service provider under the CFPA because it does not provide material support to a covered person (i.e., credit repair companies).
That law regulates not only “covered persons” but also “service providers” which basically means “any person that provides a material service to a covered person.”
I’ve excluded the full definition so you don’t mentally apply your own meaning to it.
Instead, here’s how the judge applied the definition to CRC:
- CRC’s services are “specific” to credit repair (not all businesses, generally).
- CRC provides material support to credit repair companies because they have the capacity to vet and monitor covered persons.
- CRC exercised “discretion, judgment, and skill” when providing support and services to credit repair companies.
- Without CRC software, credit repair companies could not have succeeded in their scheme.
For those reasons, the Court concluded that CRC is a service provider under the CFPA.
The Court: The CROA and the TSR do not conflict.
CRC argued that the CROA is the law of the land and, therefore, the credit repair provision of the TSR is invalid.
CRC is not alone in this argument. They join a growing list of parties who have asserted and lost this argument. I think this is the 6th time this has been argued… and failed.
The courts, like sophisticated parrots, have quoted the same conclusion of law… every time.
when a business is both a credit repair agency and a telemarketer, it is required to comply with both the CROA and the TSR. On the other hand, if a credit repair agency does not qualify as a telemarketer, then it need not comply with the TSR – only the CROA is applicableOrder DENYING motion to dismiss.
The only difference between this case and others is that they addressed (and swiftly disposed of) the letter from Congress.
Although Defendants cite a November 7, 2019, Letter from Congress to CFPB Associate Director Bryan A. Schneider (“Letter”), this Letter is unpersuasive as it provides no support as to whether the CROA in fact conflicts with the TSR.Order DENYING motion to dismiss.
The Court: The substantial assistance allegations can move forward.
It is a violation of the TSR if a credit repair company charges a consumer within 6 months after the services are completed. It is a violation of the TSR to substantially assist a credit repair company violating the TSR.
We discussed substantial assistance and observed that it’s very complicated, subjective, and construed on a case-by-case, fact-by-fact basis.
We’ll skip the mind-numbing complication and we’ll just bottom-line the Court’s conclusion:
- CFPB need only establish more than casual or incidental assistance to prove its substantial assistance allegation.
- CRC supplied “EVERYTHING” needed to “start a . . . credit repair business!”
- CRC provided a laundry list of materials, including training and sales scripts.
- CRC encouraged companies to charge advance fees.
- CRC knew or consciously avoided knowing that the credit repair companies using its software were both telemarketing and charging advanced fees.
- CRC’s ability to identify members of its “millionaires club” is evidence that CRC is aware of revenue models.
For those reasons, the Court concluded that CRC is not entitled to dismissal on the claim that it provided substantial assistance to credit repair companies in violation of the TSR.
Surviving a motion to dismiss is not difficult. Now the case will move to legal proceedings which reach the merits of the case, such as motions for summary judgment or trial.
Typically, it’s not instructive or predictive to look at a Court’s ruling on a motion to dismiss. However, the order denying CRC’s motion to dismiss was not typical. It was extremely thorough, researched, and conclusive.
It’s safe to assume that future orders on the merits of this case will likely mirror this order.
This does not look winnable for CRC.
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