Every spring at colleges across the country, many graduates receive a diploma in their hand – and an albatross around their neck. The burden of student loan debt weighs heavily on American families. And given the pressures on cash-strapped employees, businesses say they’re paying a price in productivity. The FTC has brought numerous cases against companies that pitch deceptive student loan “debt relief.” Actions announced by the FTC and the Minnesota Attorney General continue that effort, but come with a twist that should be relevant to those in the financial sector.
Manhattan Beach Venture, LLC, undertook a massive telemarketing campaign to sell purported services to consumers struggling with student loan debt. The pitch was persuasive. According to the complaint, the company’s telemarketers told consumers they qualified under a federal program to get forgiveness for all or part of their student loans or that they could get a permanent reduction in what they paid each month. People just needed to sign up with Manhattan Beach Venture, which would enroll them in the program.
What if consumers – many of whom were already struggling with debt – couldn’t pay the fee to sign up? Manhattan Beach had an answer: People could get financing through a third-party lender, Equitable Acceptance Corporation. And that’s where the FTC and Minnesota AG allege the defendants compounded the consumer injury.
You’ll want to read the complaint to get a feel for the sales tactics the defendants used, but here’s a summary. When a Manhattan Beach telemarketer had an interested consumer on the phone, the telemarketer sent the person a contract via email to sign electronically. If the consumer met Equitable Acceptance’s prescreening requirements for financing, the telemarketer also emailed the consumer a contract with Equitable Acceptance and directed the consumer to sign immediately. The complaint alleges that the consumers walked away from the telemarketing call with a new monthly payment that they thought was going toward their student loans and ultimately loan forgiveness.
But according to the FTC and the Minnesota AG, despite what Manhattan Beach claimed, there was no basis for Manhattan Beach’s promises that consumers would get their loan payments permanently reduced or their loans forgiven. What’s more, the monthly payments consumers were required to pay weren’t applied toward their student loans. Instead, the payments were pocketed by the defendants. In addition, the lawsuit alleges that Equitable Acceptance locked consumers into high-interest loans to pay Manhattan Beach’s $1300 to $1400 fee without clearly disclosing fundamental terms, including the amount financed and the finance charge. The result: double-decker deception by Manhattan Beach and Equitable Acceptance.
The FTC and Minnesota AG’s complaint charges the Manhattan Beach Venture defendants with multiple violations of federal and state law, including violations of the Telemarketing Sales Rule’s ban on advance fees for debt relief services. The lawsuit also alleges Equitable Acceptance violated the TSR by providing substantial assistance to Manhattan Beach Venture when it knew (or consciously avoided knowing) that the company engaged in deceptive and abusive telemarketing. In addition, the complaint charges that Equitable Acceptance violated the Truth in Lending Act and state consumer protection provisions by – among other things – failing to clearly disclose important information about the financing.
But that’s not all. The FTC also filed suit against a company known as Student Advocates, another outfit that allegedly engaged in similar deceptive student loan debt relief practices – and also used Equitable Acceptance financing.
To settle the Manhattan Beach case, the company and its owners Christopher Lyell and Bradley Hansen have agreed to a lifetime ban from selling any kind of debt relief product or service and a $4.2 million judgment, all but $156,000 is suspended based on their inability to pay. They also must notify their customers that none of their prior payments have gone toward student loan repayment.
Based on its conduct with customers of both Manhattan Beach Venture and Student Advocates, Equitable Acceptance has agreed to a monetary judgment of almost $28 million, all but $1 million of which is suspended. The FTC’s case against Student Advocates and its owners is pending in federal court.
Other companies can take three points from the settlements with Manhattan Beach Venture and Equitable Acceptance.
Expansive student loan debt relief claims are likely to attract law enforcement attention. Legitimate federal loan forgiveness programs let people apply for free, but they have very strict eligibility requirements. For example, applicants for Teacher Loan Forgiveness must have taught for five years in a low-income school. Income-driven repayment programs, which last at least 20 years, require annual recalculation of the borrower’s monthly payments – a recalculation that marketers can’t quantify in advance. So if your company makes claims about student loan debt forgiveness or reduced monthly payments, expect federal and state scrutiny.
If you use telemarketing – in-bound or outbound – to promote debt relief services, it’s illegal to charge upfront fees. The Telemarketing Sales Rule doesn’t mince words. Charging consumers upfront fees for purported relief from any kind of debt, including student loans, is illegal. Period.
Liability under the FTC Act, the Telemarketing Sales Rule, and state consumer protection laws is expansive. Companies like Equitable Acceptance can’t bury their head in the sand in an effort to ignore what partners and affiliates are up to. The settlement should serve as a message to others in the financial sector that it’s a bad idea to try to make an illegal buck from people struggling to pay their student loans.
The FTC also has advice for consumers about student loans.