District court allows prosecution of CFPB’s TSR claims against software maker

On April 5, the U.S. District Court for the Central District of California denied a motion to dismiss complaints filed by the CFPB alleging violations of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act ( CFPA). As previously covered by InfoBytes, the California-based software company and its owner (collectively, the “Defendants”) market and sell commercial credit repair software and other tools to credit repair companies that charge illegal advances to consumers. According to the Bureau, the defendants provide substantial assistance to these companies and allegedly encourage them to “levy illegal advance fees” even though, under the TSR, companies that telemarket their services are prohibited from requesting or receiving consumer fees until consumers receive a credit report demonstrating that the promised results have been achieved.

The court was not persuaded by defendants’ argument that the Bureau exceeded its authority to pursue enforcement action against them, claiming that credit repair companies that use defendants’ products and services are not not “covered persons” under the CFPA, as the companies “only provide retroactive credit repair services and therefore do not provide financial services to potential consumers under the CFPA. The court held that the CFPA’s broad purpose and broad language covered services provided by credit repair companies to improve or repair consumer credit and that such activity is considered “credit counseling.” under the CFPA and is therefore a “consumer financial product or service.” The court further found that credit repair companies were “covered persons” based on allegations that they provided the background consumer credit history to assist in the approval of a mortgage or car loan, recognizing that performing a consumer credit history analysis as part of a decision about a financial product or service is covered by the CFPA. The court also rejected the defendants’ argument that they are not “service providers” under the law. , in part because defendants “have the ability to control and monitor” credit repair companies. The court was also not convinced that the provision of the Credit Repair Organizations Act (CROA) allowing credit repair companies to charge a monthly fee supersedes the TSR requirement that such a company cannot collect payment until promised results are achieved, believing that the requirements of each are not in conflict and noting that “if a credit repair agency is not considered a telemarketer, it is not not required to comply with the TSR – only the CROA is applicable”, and that nothing in the wording of the CROA indicates that the defendants’ activities “cannot be simultaneously regulated by the [TSR].”

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