Illinois Sues 2 Student-Loan Debt-Relief Firms

July 15, 2014

The attorney general of Illinois filed lawsuits on Monday against two student-loan debt-relief companies, accusing them of charging borrowers large fees to enroll them in free government programs.

According to the complaints, the companies—First American Tax Defense LLC and Broadsword Student Advantage LLC—duped struggling borrowers into paying as much as $1,200 for "bogus services" and for help in applying for free federal repayment plans, such as loan consolidation.

The lawsuits are the first state action against the growing debt-relief industry for student borrowers and could serve as precedent for lawsuits by other states. Already this year, a watchdog group established by New York’s governor, Andrew M. Cuomo, has sent subpoenas to 13 such companies as part of an investigation into misleading advertising and improper fees. Attorneys general in Arkansas and Minnesota have issued warnings about such businesses.

Last year the federal Consumer Financial Protection Bureau put out a "consumer advisory" reminding borrowers that "you don’t have to pay someone to help with your student loan." Rohit Chopra, the bureau’s student-loan ombudsman, said it had received complaints about the companies’ marketing tactics and lack of transparency.

Some of the reports "remind us of the worst practices that emerged in the wake of the meltdown of the mortgage market," when dozens of companies cropped up, promising relief to struggling homeowners, Mr. Chopra said. "Too often, this cottage industry was offering high fees with borrowers not getting much in return."

Now the industry's focus has shifted to the student-loan market, where the total debt level has exceeded $1-trillion and millions of borrowers are delinquent or in default.

What’s "particularly troubling" this time around, Mr. Chopra said, is that the programs being pitched by the companies are free and widely available, with standard terms. Unlike in the credit-card and mortgage industries, the businesses selling student-loan relief cannot negotiate a better deal for borrowers of federal loans, he said.

The consumer bureau and the Federal Trade Commission have taken action against several debt-relief companies in recent years, but none of those actions involved student loans.

Efforts to reach the companies accused in the Illinois lawsuits were unsuccessful. The Better Business Bureau of Chicago and Northern Illinois has given an F, its lowest rating, to First American Tax Defense, in Chicago, citing the dozens of complaints it has received and the company’s alleged failure to resolve them.

‘Sloppy Servicing’

Monday’s lawsuit came just over a year after the National Consumer Law Center published a report criticizing student-loan debt-relief companies. The report, which was based in part on "secret shopper" calls to 10 of the businesses, found that they charged initial fees as high as $1,600 and sometimes charged monthly fees of up to $50, even though it was "unclear what services," if any, they provided after enrolling borrowers in federal programs. In many cases, the companies failed to disclose or specify their fees upfront.

Since the report’s release, the student-loan industry has formed an association with the stated goal of self-regulation. The Association for Student Loan Relief requires its members to sign a code of ethics promising not to mislead consumers and to charge fees that are "reasonable and fair."

Deanne Loonin, author of the law center’s report, said some companies were "starting to put disclaimers on websites, that you can get this for free." But many companies’ sites still contain inaccurate information, she said.

Mr. Chopra, the federal student-loan ombudsman, blames "sloppy servicing" for spawning the scams.

"Consumers need to receive clear and accurate information about their repayment options from their servicer," he said. "Borrowers should know that they don’t have to pay someone to help with their student loan."