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March 17 — State attorneys general and the Consumer Financial Protection Bureau are taking more aggressive stances against student loan debt-relief scams, but more resources may be needed to arrest the deluge of fraudulent schemes weighing down the 40 million Americans struggling with educational debts, consumer and law enforcement officials told Bloomberg BNA.
Since the beginning of 2016, state and federal agencies have announced significant enforcement actions targeting companies that purport to offer consumers student loan forgiveness, loan consolidations and affordable payment schedules. The CFPB and attorneys general in Florida, Illinois, Kentucky, Massachusetts, Minnesota and Washington determined that many of the companies falsely advertise special relationships with the U.S. Department of Education and then cheat their customers with worthless services and exorbitant fees. In many cases, law enforcement accused the companies of saddling consumers with higher levels of total debt after their loan modifications.
Recent enforcement actions include:
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Consumer advocates praised the CFPB and the state attorneys general, but also expressed concerns that the initiatives are not keeping up with the galloping pace of the frauds. Several consumer credit experts told Bloomberg BNA the scale of the student debt crisis is just too broad, the frauds are just too easy to launch, and the mood of borrowers trapped in educational debt is just too desperate.
“This is a major problem and it’s only going to get worse, especially as borrowers find themselves getting more desperate,” said Vicki Jacobson, director of the Center for Excellence in Financial Counseling at the University of Missouri, St. Louis, and director of a national student loan counseling program. “It is the borrowers in the most difficult situations who are tempted by these scams. And then they are worse off than when they started.”
Prentiss Cox, a professor of consumer protection law at the University of Minnesota Law School, said the student loan scams are a natural progression from the debt counseling frauds that targeted homeowners during the mortgage crisis and credit card debtors during the financial collapse. Cox said law enforcement is currently toiling at an early phase in the life cycle of the student loan crisis.
“This is a classic situation where you’d want to see a robust UDAAP (Unfair, Deceptive or Abusive Acts and Practices) response,” said Cox, a member of the CFPB’s Consumer Advisory Board. “The AGs—Lori Swanson and Lisa Madigan—and the CFPB are some of the most aggressive enforcers on the block and it makes sense they are making these cases. It’s a great area for UDAAP enforcement, but one would hope to see it ramped up.”
Even Minnesota Attorney General Swanson expressed doubts about the states’ current capability to halt the progress of the bad actors.
“It’s a whack-a-mole problem,” Swanson told Bloomberg BNA in an interview. “You can sue one outfit and shut it down, but because the barriers to starting one of these companies are so low, new ones start up. When you consider the volume of students, the high student debt, and the easy pattern of exploitation, there will have to be a continuing response.”
The CFPB recently estimated total outstanding student debt at $1.3 trillion, with the vast majority from federally sponsored student loans. Of the 40 million consumers holding such debt, 8 million borrowers are currently in default on balances totaling more than $100 billion.
An analysis of data compiled by the Federal Reserve Bank of New York suggests student loan borrowing more than tripled over the last decade. In 2004 total outstanding student loan debt totaled $346 billion, compared with outstanding auto and credit card debt of $728 billion and $717 billion respectively. By 2014, however, student loan debt surged to $1.15 trillion, outstripping auto and credit card debts, which stood at $955 billion and $700 billion respectively.
By 2012, this tidal wave of debt and default created a foundation for fraud.
“The CFPB has seen an increase in the number of companies and websites requiring large upfront fees to help student loan borrowers enroll in an income-driven plan that can be done for free,” said Moira Vahey, a spokeswoman for the CFPB. “While we have warned consumers about these scams, we remain concerned that these practices bear a close resemblance to the foreclosure crisis, where borrowers were given conflicting information about their options and found scammers who made false promises about loan modifications in exchange for upfront fees.”
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Persis Yu, director of the National Consumer Law Center's Student Loan Borrower Assistance Project, said the frauds are nearly identical in structure. The perpetrators, operating from web-based portals or call centers, present themselves as debt counseling agencies authorized to renegotiate loans, consolidate multiple loans and reduce total indebtedness.
Yu said the perpetrators reel consumers in with names that sound like government agencies. Others deceive consumers by purporting to hold exclusive relationships with the Department of Education or loan servicing organizations such as Sallie Mae and the National Education Loan Network.
Yu said “debt counselors” participating in the schemes quickly coerce borrowers into upfront fees of $500 to $2,000 for enrollment in long-term payment plans. In many cases, the schemes extract monthly processing fees of $20 to $50.
“Theoretically, the model assumes a relationship with the borrower until the loan is paid off, which could be 20 or 25 years,” Yu said. “So maybe someone has paid $1,000 or $1,500 for the initial processing and then up to $600 per year beyond that. Unfortunately they are targeting the lowest income borrowers, so this isn’t an insignificant amount of money to these people.”
NCLC documented these abuses in a 2013 report, “Searching for Relief,” which outlined several abusive and illegal qualities to the schemes. The report found the scams routinely:
Swanson said these frauds can be launched in matter of days and then closed when customers and law enforcement become suspicious.
“All you need is a glossy looking website, which you could do for a couple hundred bucks, and a call center,” Swanson said. “So you set up a website and a boiler room and you’re off and running. It’s a very low overhead operation and there are a lot of students to exploit. The barriers to entry to this market are incredibly low.”
Swanson said she has also been struck by the brazenness of many of the perpetrators.
Swanson specifically pointed to Damien Alvarez, co-president of the Student Aid Center, who routinely posted comments and pictures on social media of his boiler room and employees soaking clients for up to $1 million per week. Alvarez likened himself to Jordan Belfort, who pleaded guilty on federal fraud charges linked to penny stock manipulation and was depicted by actor Leonardo DiCaprio in the movie “The Wolf of Wall Street.”
“It's troubling that someone purporting to help young people sees the ‘Wolf of Wall Street' as his hero,” she said.
Swanson said Minnesota won an injunction effectively shutting down the Student Aid Center in October 2015. The resulting stipulation and order barred the company from engaging in violations of the Minnesota Debt Settlement Services Act. Attorneys for the state filed an amended complaint against the company on Jan. 26 in Hennepin County District Court. Swanson said the state is seeking monetary relief on behalf of the 800 Minnesotans defrauded by Student Aid Center, although as many as 20,000 borrowers across the country may have suffered losses.
Illinois Attorney General Madigan has been the most aggressive player in state law enforcement's efforts to police student debt schemes. In total, Madigan has filed eight complaints against debt-relief companies under Illinois' Consumer Fraud and Deceptive Business Practices Act, and its Debt Settlement Consumer Protection Act. Four of those actions have resulted in judgements or settlements, forcing the companies to cease operations. Two of the cases resulted in payments of damages to the affected consumers.
In addition to National Student Loan Rescue, the defendants include:
Attorneys general in Massachusetts and Washington have taken aim at some of the same bad actors.
Washington Attorney General Bob Ferguson (D) won an order against SLP on Aug. 15, 2015 acknowledging 2,700 separate violations of his state's consumer fraud statute. Ferguson called on the court to impose $130,000 in civil penalties and $132,000 in restitution to SLP's clients in Washington ((Washinton v. IrvineWebWorks LLC, Wash. Dist. Ct., No. 15-2-08325-2SEA, 8/14/15).
On Nov. 24, 2015, Massachusetts Attorney General Maura Healey (D) announced settlements with SLP and Interactiv Education, forcing the two companies to cease operations in Massachusetts. Under the settlements, SLP will pay $56,000 to aggrieved consumers and Interactive Education will pay $40,000. Healey said at least 200 borrowers would be able to seek relief under the settlements.
California Attorney General Kamala D. Harris (D) is tooling up for enforcement, issuing an consumer alert to Californians last August to raise awareness of student loan debt consolidation scams and providing support to borrowers seeking to navigate the debt consolidation process. Harris also called for consumers affected by such schemes to file complaints with her office in advance of potential enforcement action.
In addition to its action against SLP, the CFPB filed suit with Florida Attorney General Pam Bondi (R) at the end of 2014 against Tampa-based College Education Services LLC. CFPB won a permanent injunction on Jan. 15, 2015, barring College Education Services from operating and requiring a $25,000 civil penalty (CFPB v. College Education Services LLC, M.D. Fla., No. 8:14-cv-3078-T-36EAJ, permanent injunction 1/15/15).
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Both consumer advocates and attorneys general told Bloomberg BNA that law enforcement actions alone would not halt the volume of fraud preying on student loan debtors. They said real success will only occur when consumers are properly educated about their loan repayment options and loan servicers properly respond to the needs of borrowers.
Becky Pruitt, chief of the Consumer Fraud Division of the Office of the Illinois Attorney General, attributed the explosion in fly-by-night debt-relief companies to inadequate support from student loan servicers. She said the servicers have not provided borrowers with counseling, objective information and understandable processes for remedying their repayment problems.
Madigan emphasized the point last summer in a letter to the Department of Education. Madigan called for a pilot program to provide certified nonprofit credit counselors for the millions of student loan borrowers seeking help to repay their federal student loans.
“Student loan borrowers have nowhere to turn right now to access legitimate information and assistance about their repayment options,” Madigan said June 2, 2015. “It is critical that we provide these borrowers a lifeline before they make costly mistakes by turning to scam artists for help.”
The CFPB emphasized this point in a September 2015 report examining student loan servicing. The agency drew connections between current fraudulent trends and inadequate loan servicing, and made recommendations for accountable loan servicing changes.
“The bureau has stressed that sloppy loan servicing can spawn scams,” the CFPB's Vahey said. “Borrowers rely on their student loan servicer, the company that collects student loan payments, to provide information on repayment options, and in some cases, servicers may be guiding consumers into less favorable options.”
The NCLC's Yu noted that the federal government, states and nonprofit groups established dozens of credible programs to assist consumers during the mortgage crises, but no equivalent response has occurred in the wake of the $1.3 trillion student debt crisis. She said no amount of enforcement could arrest the boiler room frauds preying on consumers, and called for high quality student loan debt counseling services.
“It would be hard to stop this completely. You can take out one or two, but it’s hard to take out all of them,” she said. “The more important approach is to make sure there is a servicing environment in which borrowers know where to go and they are getting good information.”
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