Permissible Purpose & the FCRA – CFPB Reaches Settlement For Use of Consumer Reports to Market Debt Settlement Services

On May 14, 2020, the Consumer Financial Protection Bureau (“CFPB”) filed a proposed stipulated final judgment and order (the “Order”) against Chou Team Realty, LLC (“Monster Loans”) and several related individuals and entities to resolve alleged violations of the Fair Credit Reporting Act (“FCRA”), the Telemarketing Sales Rule (“TSR”), and the prohibition on unfair, deceptive, or abusive acts or practices (“UDAAP”). The Order demonstrates the CFPB’s continued scrutiny of the use of credit reports and claims made by debt settlement services providers in their advertisements.

The CFPB filed a complaint against Monster Loans and others in the U.S. District Court for the Central District of California on January 9, 2020. The complaint alleged that mortgage lender Monster Loans purchased prescreened lists of consumers with student loans from a credit reporting agency (“CRA”) and shared those lists with other companies. Monster Loans allegedly certified to the CRA that it would use the lists to make firm offers of credit for mortgage loans and market its own mortgage products. Instead, according to the complaint, Monster Loans shared the pre-screened lists with other companies, which used the lists to market debt settlement services to consumers with student loans.

The CFPB also alleged that a “sham” entity called Lend Tech was used to obtain pre-screened lists from a CRA. Specifically, Lend Tech certified to a CRA that it would use prescreened lists to make firm offers of credit for mortgage loans. Instead, it allegedly sold these lists to other companies, including companies that used them to market student loan debt settlement services. Lend Tech allegedly never operated as a mortgage brokerage company, and had only been used to obtain pre-screened lists from the CRA. The CFPB alleged that Monster Loans helped Lend Tech pass the CRA’s due diligence screening, including by providing an approval letter agreeing to fund loans brokered by Lend Tech. Lend Tech did not settle with the CFPB under the Order.

The FCRA governs the collection, assembly, and use of consumer report information, and requires that entities have a permissible purpose in order to obtain a consumer report. Permissible purposes include obtaining a consumer report without a consumer’s consent for purposes of making “a firm offer of credit.” A “firm offer” is an offer that will be honored (subject to certain exceptions) if the consumer continues to meet the specific criteria used to select the consumer for the offer. 15 U.S.C. § 1681a(l). As noted above, the CFPB alleged that Monster Loans and Lend Tech certified to the CRA that they would use the prescreened lists that they obtained to make firm offers of credit for mortgage loans but did not do that.

The CFPB alleged that using or obtaining prescreened lists to market debt settlement services is not a permissible purpose under the FCRA. It also alleged that the companies’ certifications to the CRA did not state that the prescreened lists were being obtained for use by other companies or for the purpose of marketing debt settlement services. The CFPB further alleged that Monster Loans did not actually use the pre-screened lists to make firm offers of credit. It is unclear from the filings whether Monster Loans ever actually marketed any loans.

In addition to the FCRA allegations, the Bureau alleged that non-settling student loan debt settlement company defendants who obtained prescreened lists from Monster Loans and Lend Tech violated the TSR and the prohibition on UDAAP. These defendants allegedly collected advance fees in violation of the TSR and made misleading statements asserting that (1) consumers would obtain lower interest rates by consolidating their federal student loans, (2) consumers would improve their credit scores by consolidating their loans, and (3) the United States Department of Education would become the “new servicer” on their loans. The complaint alleges that Monster Loans and a non-settling individual defendant “substantially assisted” these violations by the debt relief settlement companies.

Under the Order, the settling defendants would be:

• Permanently banned from offering or providing debt settlement services;
• Permanently banned from using or obtaining prescreened reports;
• Prohibited from using or obtaining consumer reports for any business purpose other than mortgage lending; and
• Prohibited from the disclosure of consumer information.

The Order also includes the following monetary penalties and redress:

• Monster Loans: $18 million for the purpose of providing redress to customers who were charged fees by student loan debt settlement defendants, although this amount is suspended subject to Monster Loans’ payment of $200,000 in monetary redress and compliance with certain other obligations listed in the Order. Monster Loans will also pay a nominal $1 civil money penalty based on its attested inability to pay.
• Thomas Chou, the president of owner of Monster Loans, and TDK Enterprises, LLC, through which Chou owned interests in the non-settling student loan debt settlement defendants: Disgorge $403,750 in profits for the purpose of providing redress. Chou will pay a $350,000 civil money penalty.
• Sean Cowell, co-founder of Monster Loans and its Chief Visionary Officer, and Cre8labs, Inc., through which Cowell owned interests in the non-settling student loan debt settlement defendants: Disgorge $406,150 in profits, although this amount was suspended based on inability to pay. Cowell will pay a $100,000 civil money penalty.

Many consumer lenders use prescreened lists from CRAs in order to make firm offers of credit to consumers. This settlement highlights the need for such lenders to carefully consider the FCRA’s requirements regarding the use of prescreened lists.