(NOTE: This story was updated 11/9/2017 at 2 p.m. with a statement from Freedom Debt Relief)
The nation’s largest debt settlement firm was sued by federal regulators today, who accuse the company of misleading consumers and taking their money for doing little or no work.
Freedom Debt Relief, based in San Mateo, California, failed to work on behalf of consumers, but instead “coached” them to do the work themselves, according to the Consumer Financial Protection Bureau. The firm also overstated its ability to work out deals with creditors, and took fees even when it hadn’t negotiated settlements, in violation of federal law, the CFPB alleges.
In an emailed statement, Freedom said it denied the 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 read.
Freedom is the largest debt-settlement services provider in the United States, according to the CFPB. The firm claims that it has successfully negotiated and settled more than $7 billion in debts for more than 300,000 consumers.
“Freedom took advantage of vulnerable consumers who turned to the company for help getting out of debt,” said CFPB Director Richard Cordray. “Freedom deceived consumers about its clout with creditors that it knows do not negotiate with debt-settlement companies, made some customers negotiate on their own, and misled consumers about its fees and their accounts. Today’s lawsuit seeks to stop the deception and get compensation for consumers Freedom cheated.”
Consumers deep in debt and desperate for help often turn to firms which promise relief that doesn’t require declaring bankruptcy. Many of these strategies are risky, however. Debt settlement firms instruct clients to save cash separately, then theoretically use these small pools of cash to negotiate pennies-on-the dollar settlements. But in some cases, consumers stop paying their bills and stop talking to creditors when working with settlement firms, which only digs their debt hole deeper.
Debt settlement firms used to charge hefty up-front fees, too. Up front fees were banned by the Federal Trade Commission in 2010.
Other accusations in the lawsuit claim that Freedom:
- Misleads consumers about creditors’ willingness to negotiate: Freedom markets its “negotiating power,” but Freedom knows that certain major creditors have policies against negotiating with debt-settlement companies. Freedom does not make clear to consumers that they may need to handle the negotiations with those creditors themselves.
- Deceives consumers about the extent of its services: Freedom leads consumers to believe that the company’s experienced negotiators will deal directly with their creditors. But after they enroll with Freedom and deposit funds into an account, some consumers learn that Freedom offers only guidance or “coaching” on how to negotiate settlements on their own.
- Deceives consumers about its fees: Freedom falsely claims that it charges consumers only when it negotiates a settlement of a debt and consumers make a payment under the terms of the settlement. In fact, Freedom charges consumers its full fee even when creditors simply stop collection efforts in the absence of a negotiated settlement and consumer payment and when it takes no action on a consumer’s account.
- Fails to disclose consumers’ rights to funds: Freedom does not clearly and conspicuously inform consumers that they are entitled to get back the funds in their accounts if they leave the debt-settlement program.
The CFPB also directly calls out co-CEO Andrew Housser in its allegations.
“Housser knows certain creditors will not negotiate with Freedom, but its debt-resolution agreements claim that all creditors are willing to work with the company,” the CFPB said. “Housser also knows that Freedom charges consumers even if it doesn’t negotiate settlements with creditors. Yet he allows its agreements to assure consumers they will be charged only if there’s a settlement and consumers make a payment.”
In its statement, Freedom said it has asked to “sit down” with the CFPB on several occasions “to no avail,” and said the agency rushed to judgement instead.
“It’s surprising, and very unfortunate, that the CFPB chose to act without taking the time to focus either on the facts or the utility and purpose of ‘coached settlements,’ both of which were thoroughly and completely disclosed to consumers at various points in their debt settlement programs,” it said. “The overarching assertion that we cannot and do not settle client accounts with key creditors is simply not true. In fact, since 2010, Freedom Debt Relief has settled $1.2 billion in debt (nearly 200,000 accounts) for clients who came to us with accounts from the credit card issuers mentioned in the complaint. Sadly, the CFPB paid no attention to the enormous benefits our clients realized from our active assistance in their settlement process.
“Perhaps most important, we are not aware of any complaints to the CFPB from our customers over this (or any other) issue – zero complaints. Freedom Debt Relief’s business practices are legally compliant, highly ethical and serve the needs of our customers, saving them millions of dollars over what they would otherwise be required to pay,” it read.