August 7, 2014, Trial News
Debt-relief firms scamming student loan borrowers
Alyssa E. Lambert
Debt settlement companies have now targeted student loan borrowers, charging them for nonexistent services or free government services. Federal and state regulators have stepped in, and the Illinois Attorney General has filed lawsuits against two companies.
Debt settlement companies, which took advantage of unsuspecting consumers with mountains of mortgage and credit card debt following the U.S. financial crisis, have found their next target: student loan borrowers. These companies are charging consumers for nonexistent services or free government services. They promise to reduce or eliminate people’s student loans, but in reality, they take the money and offer nothing in return.
Federal and state regulators have stepped in. Last month, the Illinois Attorney General filed lawsuits against two companies; the New York Department of Financial Services is investigating 13 different debt-relief firms that have targeted student loan borrowers; and last year, the Consumer Financial Protection Bureau (CFPB) issued a warning to debt settlement companies that claim to help with student loans. The lawsuits are the first of their kind, and they may be the tip of the iceberg.
Nearly 40 million Americans have $1.2 trillion in outstanding student loans, and 7 million of them have defaulted on $100 billion of that amount, according to CFPB data. More than half of recent graduates are jobless, and the average person owes more than $20,000 in student loans. The sheer number of consumers buried under student loans became a breeding ground for debt-relief scammers.
Illinois Attorney General Lisa Madigan’s office received thousands of consumer complaints, which prompted the lawsuits filed in that state. (People v. Broadsword Student Advantage, LLC, No. 14-CH-184 (Ill., Champaign Co. Cir. filed July 14, 2014); People v. First Am. Tax Def., LLC, No. 14-CH-11483 (Ill., Cook Co. Cir. filed July 14, 2014).)
According to the complaints, Broadsword Student Advantage LLC and First American Tax Defense LLC were not authorized to do business in Illinois, but they advertised heavily on local radio stations, offering consumers several options to ease or reduce their debt burden. The companies touted their alleged expertise and false affiliation with the U.S. Department of Education (DOE) and asked for as much as $1,200 up front for illegitimate services, including assistance in enrolling in a fake federal loan assistance program and free government services. The lawsuits also name the companies’ individual owners as defendants. The complaints allege Broadsword and First American violated the Illinois Consumer Fraud and Deceptive Business Practices Act, the Credit Services Organization Act, and the 2010 Debt Settlement Consumer Protection Act, which bans companies from charging consumers up-front fees to help with debt relief.
Through an aggressive radio and online ad campaign, Broadsword allegedly offered free information to help anyone with $10,000 or more in federal student loans to cut their payments in half, reduce their interest rates, or consolidate their outstanding loans. Consumers who called the Texas-based company were persuaded to enter into agreements and pay $499.99 up front, and were later assessed monthly fees of $49.99. The fees went to Affordable Life Plans—a registered investment advisory firm and sister company of Broadsword—for financial planning services that were never provided.
The agreements assign the company a limited power of attorney, authorizing it to represent consumers in dealings with any governmental body, agency, or student loan servicer related to the student loan obligation, including preparing, signing, and filing any documents. The power of attorney also allows Broadsword to designate an employee, agent, or third party to assist in these matters.
In one example, Broadsword persuaded a teacher to provide her bank account number so that $499.99 could be withdrawn immediately. The company told her that she qualified for $17,500 in loan forgiveness. She paid $898.60 over eight months—including a monthly financial planning services fee she never agreed to—and had nothing to show for it. Broadsword eventually told her she did not qualify for loan forgiveness.
First American, a Delaware company based in Park Ridge, Ill., advertised wide-ranging loan services and charged up-front fees between $700 and $1,199 to do little more than complete Direct Consolidation Loan Applications for consumers. These applications were already available from the DOE at no cost. The company also promoted the nonexistent “Obama Forgiveness Program.”
“These companies are part of an emerging industry of scam operations that are seizing on this historic level of student loan debt for profit,” said Maura Possley, a spokeswoman for the Illinois Attorney General’s office. “We anticipate our office will not be the only consumer protection entity to file suits of this nature.”
Although Possley said her office is not aware of any private lawsuits filed by individual consumers, Deanne Loonin, Student Loan Assistance Program director at the National Consumer Law Center (NCLC), said she expected civil litigation to ensue and called the public enforcement component “critical.” “It is a multistate problem, and in many cases, remedies vary by state, so it’s important to get more states involved,” Loonin said.
In a June 2013 report, the NCLC, an advocacy group headquartered in Boston, said this new scam industry has developed in “response to the demand for borrower assistance and the dearth of reliable resources.”
“I don’t know for sure why student loan borrowers are such a target, but there are growing numbers of financially distressed student loan borrowers, and even though there are programs that can help many of them, these programs are complex,” Loonin said. “I believe that many of the same rip-off artists who worked in the credit card debt settlement area and foreclosure rescue are now turning to student loans.”