Federal civil penalty fund pays refunds to scam victims

Rare fund managed by CFPB uses penalties to pay back ripped-off consumers

Fred O. Williams
Senior Reporter
Expert on consumer credit laws and regulations

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California credit repair company Prime Marketing Holdings took about $2 million from 50,000 people in illegal upfront fees and false promises of erasing debts, the federal government’s consumer financial watchdog charges.

In August, the U.S. Consumer Financial Protection Bureau got a court order halting the company’s credit repair operations and charging a penalty, but the fine was just $150,000. The consent order didn’t include refunds – as often happens when an offender has burned through its ill-gotten gains. The company, also known as Park View Credit, National Credit Advisor and Credit Experts, agreed to the penalty without admitting guilt.

But the lack of refunds doesn’t mean victims of the credit repair scheme are out of luck. Its tapped-out customers will eventually be eligible for restitution from the agency’s Civil Penalty Fund.

How it works
The CFPB’s Civil Penalty Fund is a unique consumer benefit from the federal government. It takes fines paid by companies – more than $550 million since its inception in 2013 – and allocates them to victims of other schemes that lack money to pay them back. If money is left over in the fund or victims can’t be found, the agency may spend the extra on consumer education and financial literacy programs.

The unconventional fund, in which refunds come from companies other than the ones that harmed them, has been called unaccountable by critics in the financial industry and Congress. But it gets accolades from consumer advocates – and the gratitude of consumers hit by financial scams.

“I don’t think it matters how the money gets sent to them, as long as they get restitution,” said Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington, D.C.

Since 2013, the fund has allocated $482.2 million to victims of 20 schemes, from credit repair and debt settlement to phony mortgage relief and misleading come-ons for small-dollar loans.

In August, it started mailing out checks in its biggest distribution yet. Credit repair company Morgan Drexen is bankrupt, but victims of the illegal upfront fees charged by it and related entities are in line to receive $132.4 million from the fund, according to CFPB financial reports. The CFPB sued the company and CEO Walter Ledda in 2013 for violating a federal ban on upfront fees for debt relief. In 2015, a federal court ruled against the company after finding that it had falsified evidence.

“I just got a check in the mail from these guys (CFPB) for $1,550 ...” Florida resident Jason Shoots said in a Twitter post Sept. 2.

One-of-a-kind fund
Seven other federal agencies can collect civil money penalties when they crack down on wrongdoers. Most, however, simply deposit the money into the U.S. Treasury, according to a 2014 report by the Government Accountability Office.

“I don’t think it matters how the money gets sent to (scam victims), as long as they get restitution.”

Three agencies – the Securities and Exchange Commission, the Commodities Futures Trading Commission and the Centers for Medicare and Medicaid Services – can use some of their penalty funds to compensate whistleblowers or ripped-off investors, or for programs to improve conditions for nursing home residents. The CFPB fund is the only one designed to make refunds to scam victims who would otherwise be out of luck.

“When you look at (the formation of) the CFPB, a lot of it is asking what works and what doesn’t work at other agencies,” Rheingold said.  Federal agencies often halt scams too late to collect money for victims. Compensating those consumers “is something that didn’t exist in other consumer protection agencies,” he said.

State-level consumer protection also lacks comparable refund powers, according to the National Association of Attorneys General. State consumer watchdogs love to announce refunds, when they come down on a scammer who has the money to pay. But the association said it did not know of any state that maintained a refund-providing fund like the CFPB’s.

The GAO report was ordered by then-U.S. Rep. Shelley Moore Capito, whose unsuccessful 2013 bill called the “CFPB Slush Fund Elimination Act” would have ended the civil penalty fund and sent the money collected to the U.S. Treasury.

Capito, a Republican from West Virginia and now the state’s junior senator, said the fund’s management lacked accountability. The GAO report, however, did not support that contention. The watchdog issued only a mild recommendation that the civil penalty fund document the factors that go into how it allocates funding for consumer education and financial literacy.

Getting the money
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created the civil penalty fund, along with the CFPB itself, and gave the agency powers to crack down on anti-consumer practices in financial services.

Under CFPB rules governing the fund, the fund administrator makes allocations to scammed consumers twice a year. The eligible people are those who are not in line for refunds from the company or entity, and are not expected to get redress otherwise.

Sometimes payments from the fund are supplemented by refunds paid by the company to the agency then relayed to victims, a process called “bureau-administered redress.” Generally, the bureau prefers the company to make refunds directly to its own customers if possible, a faster process than the twice-yearly fund allocations.

The agency uses companies’ records to identify recipients and determine the amount. Often it hires contractors such as Rust Consulting or Epiq Systems to handle the distribution of funds.

“When you look at (the formation of) the CFPB, a lot of it is asking what works and what doesn't work at other agencies. (Compensating those consumers) is something that didn't exist in other consumer protection agencies.”

What to do if you think you are due compensation
But while the system is designed to find and compensate scam victims, it doesn’t hurt to have a heads-up attitude if you think you are due compensation, the agency says.

“We will attempt to contact consumers in the future if and when funds are available to provide compensation,” senior spokesperson Sam Gilford said in an email interview, referring to the Prime Marketing Holdings order. “However, we may not be able to reach all consumers harmed by these practices.”

People can monitor the CFPB fund’s website detailing payment eligibility for 14 bureau crackdowns, some of which involved multiple companies or entities. People taken by an unscrupulous financial operator also can file a complaint with the CFPB, Gilford said, increasing the documentation of the harm and helping alert the regulator to sharp practices.

CASES IN WHICH THE CFPB HAS ALLOCATED CIVIL PENALTY FUNDS

Here are cases in which the consumer bureau has allocated civil penalty funds and has begun distributing funds to victims. Some cases also include money from the company that was collected by the consumer bureau for distribution to victims, called “bureau-administered redress.” Some of the cases are closed, but the agency still takes questions about them from consumers. This list excludes cases in which funds have been allocated, but payments have not begun.

  • American Debt Settlement Solutions Inc. (closed)
    • $499,000 in refunds allocated for debt-relief services that weren’t delivered.
    • Get details about this closed distribution from the CFPB website.
  • Amerisave Mortgage Corp.
    • $1.38 million is allocated from the fund, in addition to $14.9 million in bureau-administered payments, for a bait-and-switch mortgage scheme that lured victims with misleading interest rates and locked them in with high upfront costs.
    • Get details and instructions on distribution from the CFPB website.
  • Colfax Capital Corp. (closed)
    • $3.8 million in refunds for hidden finance charges. 
    • Get details about this closed distribution from the CFPB website.
  • Global Client Solutions
    • $116.2 million for helping debt-relief companies collect illegal fees.
    • Get details and instructions on this distribution from the CFPB website.
  • Gordon, and others
    • $10 million allocated for victims of mortgage relief scam.
    • Get details and instructions on this distribution from the CFPB website.
  • Hoffman Law Group (formerly known as Residential Litigation Group)
    • $11.1 million for distressed homeowners who paid illegal advance fees.
    • Get details and instructions on this distribution from the CFPB website.
  • Meracord (closed)
    • $11.5 million allocated for helping collect illegal upfront debt settlement fees.
    • Get details about this closed distribution from the CFPB website.
  • Morgan Drexen and Walter Ledda
    • $132.9 million allocated to victims of debt settlement scheme that used a false front of providing legal services to charge forbidden upfront fees.
    • If you believe you are a victim and did not already receive a check, visit the CFPB website to submit a claim form.
  • National Corrective Group Inc., and others
    • $23.3 million allocated for using false threats of criminal charges to collect debts.
    • Get details and instructions on this distribution from the CFPB website.
  • National Legal Help Center (closed)
    • $2.1 million for violating rules governing mortgage relief services.
    • Get details about this closed distribution from the CFPB website.
  • Payday Loan Debt Solution Inc., PLDS (closed)
    • $488,815 for illegal upfront fees for settling payday loan debts.
    • Get details about this closed distribution from the CFPB website.
  • Student Aid Institute, Steven Lamont 
    • $3.5 million for victims of student loan relief scheme that falsely claimed ties to the U.S. Department of Education.
    • Get details and instructions on this distribution from the CFPB website.
  • Student Financial Aid Services
    • $9.3 million for hidden charges for Free Application for Federal Student Aid preparation service.
    • Get details and instructions on this distribution from the CFPB website.
  • Union Workers Credit Services
    • $18.9 million allocated for fees charged for a so-called “credit card” that was actually a buyers’ club membership card.
    • Get details and instructions on this distribution from the CFPB website.
  • 3D Resorts-Bluegrass LLC Inc.
    • $6.7 million allocated for deceptive marketing of properties in the Green Farms Resort in Kentucky.
    • Get details and instructions on this distribution from the CFPB website.

See related: CFPB widens debt-settlement crackdown, CFPB's complaint system makes friends and enemies


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Updated: 11-21-2017