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Editor’s note: This article was updated Nov. 10, 2017 to include Freedom Debt Relief’s response to the government’s allegations.
The federal government’s consumer financial watchdog sued the nation’s largest debt settlement company Wednesday, saying Freedom Debt Relief LLC misled customers – and sometimes charged them fees without contacting a creditor.
The lawsuit filed in California’s northern district seeks unspecified refunds from the San Mateo, California-based company. It also names co-founder and CEO Andrew Housser.
“Freedom took advantage of vulnerable consumers who turned to the company for help getting out of debt,” CFPB Director Richard Cordray said in a news release announcing the lawsuit.
The company advertises its services helping people negotiate credit card debt, medical debt and other unsecured types of debt. On its website, Freedom Debt Relief says it has resolved debts for nearly 400,000 clients.
Freedom Debt Relief issued a press release Nov. 9 saying it denies all the consumer bureau’s allegations. “We firmly believe that the CFPB fundamentally misunderstands how debt settlement works and has acted without proper regard for the consumers it is charged with protecting,” the statement said.
Company touted negotiating power it lacked
While the company touts its negotiating power, it failed to tell consumers that many large creditors – including American Express, Chase Bank and Discover – refuse to deal with the company, according to the CFPB’s lawsuit. In fact, those creditors and others have policies against negotiating with debt settlement companies at all, the complaint states.
Instead of informing clients of its limitation, the debt settlement company sometimes coached them to negotiate with creditors themselves – but still collected fees for settlement services, the CFPB charged. Fees typically equaled 18 percent to 25 percent of the amount of debt that clients had when they first enrolled in the program. In some cases, fees were in the thousands of dollars per debt enrolled in the program.
Concerns about debt settlement?
Freedom also charged some clients its fee when collection activity stopped, even if no settlement was reached, according to the complaint. Sometimes settlement fees were charged when the company had not communicated with the creditor.
The company said it explained to clients that “coached settlements” would be used with creditors who refused to negotiate with debt settlement companies. Since 2010, the company has settled $1.2 billion with the credit card issuers named in the CFPB complaint, the statement continued.
“If they (clients) don’t approve the settlement terms, we don’t do the settlement or charge one cent,” according to the company’s statement.
Federal court records indicate the company has not yet filed a formal answer to the CFPB’s charges.
How Freedom operated
On its website, Freedom says it was founded in 2002 and has settled over $7 billion in debts for clients. Under its program, clients deposit funds into a bank account they control. When the amount is sufficient, Freedom negotiates with creditors to obtain maximum savings, the company website says. Clients must authorize the settlement before it is finalized. Fees are not collected until a settlement is final, the company says.
According to a profile of the company by the Better Business Bureau, Freedom Debt Relief has an A+ rating, despite a history of state regulatory crackdowns, and 314 customer complaints, of which 123 were resolved to the client’s satisfaction. The company also operates as Freedom Financial Network.
“I closed my account with this company – their \u2018fees’ were predatory and they left much to be desired,” one unnamed client complained, according to the BBB. “They ended up selling/giving my information to a loan company that wouldn’t stop calling me.”
The BBB closed the woman’s October 2017 complaint after the company responded that it had tried to contact her. In her complaint, the woman said Freedom had already denied her a refund.
Previous allegations against Freedom
Freedom settled allegations of violating state debt-settlement law with Colorado in 2014 and New Hampshire in 2015, the BBB’s report on the company states.
The company paid $133,604 in restitution to New Hampshire clients and a penalty of $54,250, without admitting wrongdoing.
In Colorado, the company revised its agreements and disclosures and made unspecified refunds, the BBB said.
In 2008 the company, Housser and affiliates settled state charges in California for a $90,000 penalty and $360,000 in reimbursement for the state’s costs. The settlement required Freedom Debt Relief to disclose all fees to clients and not withdraw or transfer money in clients’ debt-settlement accounts. The company did not admit wrongdoing.
The CFPB brought its legal action under the Telemarketing Sales Rule and the Consumer Financial Protection Act of 2010, in connection with the marketing of debt relief services.
Debt relief companies have been a frequent target of crackdowns by the agency. Most recently, in October, the CFPB announced a lawsuit and injunction against a Maryland-based company called FDAA that pretended to be linked to a federal program and collected upfront fees before delivering debt relief services.