The Consumer Financial Protection Bureau on Tuesday sued Morgan Drexen Inc., of Costa Mesa, Calif., alleging it illegally charged more than 22,000 customers millions of dollars in upfront fees to help resolve outstanding debts.
The suit says Morgan Drexen and its CEO, Walter Ledda, deceived consumers into signing up for costly bankruptcy-related services by telling them they would be "debt-free in months." But an investigation found that "little to no bankruptcy work is actually performed for consumers," according to the CFPB. Federal law prohibits companies from charging fees for debt-relief services until the debt has been settled or its terms have been altered.
The suit, filed in U.S. District Court in Los Angeles, intensifies a dispute between the CFPB and Morgan Drexen, a firm that provides services to consumers through debt-relief lawyers. Morgan Drexen in July filed a suit against the CFPB in U.S. District Court in Washington, D.C., stating it lacked the authority to demand documents and sensitive financial records about the company's customers.
According to Morgan Drexen's suit, such data mining violates attorney-client privilege, and that it is "improper and unethical for the CFPB to data mine the personal and confidential information of financially distressed consumers considering bankruptcy."
Morgan Drexen officials say the CFPB is seeking names, addresses, phone numbers, amount of debt owed, income total and a list of creditors and essentially all other financial obligations. The CFPB also wants details of when clients talked to their attorney, the type and nature of the contact and for how long.
The company's suit further also alleges that the CFPB's structure is unconstitutional because it is funded directly by the Federal Reserve, outside the congressional appropriations system. The arrangement allows the CFPB to avoid proper checks and balances, the suit said.
The company said Tuesday that the CFPB was "overreaching" in its suit filed Tuesday, and "attempting to regulate lawyers practicing law." Morgan Drexen also stated that the CFPB is engaging in "procedural gamesmanship" by filing a lawsuit in Los Angeles instead of simply fighting the D.C. suit.
Since October 2010, more than 22,000 Morgan Drexen customers signed up for its bankruptcy program. Despite paying the upfront fees, "only a tiny fraction of consumers who work with the company ever become debt-free" the CFPB said.
In May, Wisconsin's banking regulator ordered Morgan Drexen to pay $6.1 million in restitution and fines for violating state debt-collection laws. The company is challenging the order.