A federal district court judge in Massachusetts denied a credit repair company’s motion to dismiss a case brought by the Consumer Financial Protection Bureau (CFPB) and the state of Massachusetts alleging that the company made false representations about customers’ ability to improve their credit rating and requested payment in advance of full performance, in violation of Telemarketing Sales Rule (TSR), 16 C.F.R. § 310 et. seq., the Consumer Financial Protection Act (CFPA), 12 U.S.C. §§ 5531, 5536, and state law. Consumer Financial Protection Bureau and Commonwealth of Massachusetts v. Commonwealth Equity Group, LLC d/b/a Key Credit Repair and Nikitas Tsoukales, Case No. 1:20-cv-10991-RWZ (Mass. August 10, 2021)

Defendant Tsoukales’ company, Key Credit Repair, offers assistance in removing negative information from customers’ credit reports and improving their credit rating. Customers learn about their services through the company website and advertising and call the company if they choose to engage in these services. Customers are required to pay a monthly fee before obtaining the promised results. On its website, the company promises to “fix unlimited negative terms” from a credit report, achieve an average “90 point increase in 90 days,” and to “dramatically increase credit scores.” Plaintiffs allege that these representations are false. They allege further that, from 2016 through 2019 alone, Key Credit Repair enrolled nearly 40,000 consumers nationwide, and since 2011, collected at least $23 million in fees from consumers.

In support of its motion to dismiss, the defendants argued that the TSR is secondary to the Credit Repair Organizations Act (CROA) and any conflict between the statute and the regulation should result in conflict preemption, such that the TSR should not apply. Concluding that the TSR and CROA did not actually conflict, the court found this argument unpersuasive. Id., at 2.

Next, the defendants contended that the TSR violates the Due Process Clause because its definition of “telemarketing” is vague and fails to provide fair notice as to who is covered by the regulation. Id., at 4. The rule defines telemarketing as “a plan, program, or campaign which is conducted to induce the purchase of … services … by use of one or more telephones and which involves more than one interstate telephone call.” Id at 4 citing 16 C.F.R. §310.2 (gg). Defendants claimed that the terms “plan”, “program,” and “campaign” would apply to all vendors and service providers who communicate with customers over the telephone yet acknowledged that TSR exempts liability for the vast majority of businesses, but expressly declines to exempt credit repair organizations like Key Credit. Id. at 5 citing 16 C.F.R. §310.6 (b)(5). In rejecting this argument, the court relied on Hoffman Estates v. Flipside, Hoffman Estates, 455 U.S. 489, 495 (1992) which held “[a] party who engages in some conduct that is clearly proscribed cannot complain of the vagueness of the law as applied to the conduct of others.” Id.

Defendants further asserted that TSR’s definition of telemarketing placed a content-based restriction of speech by burdening credit service providers with a restriction as to when they collect payment for their services. The court disagreed, opining that the restriction is on conduct — the timing of the payment, not on speech. Id., at 6.

Defendants also claimed that the Federal Trade Commission (FTC) exceeded its authority in promulgating rules targeting their conduct, arguing that Congress intended for only unsolicited telemarketing calls to be addressed by the FTC’s regulations. The court found the defendants’ interpretation narrow, holding that the definition does not require that the calls be unsolicited but only requires the use of a telephone — which can both make and receive calls. Id., at 6 (citing 15 U.S.C. § 6016(a)(1)).

Finally, the defendants argued that the CFPB overstepped its authority following the Supreme Court’s ruling in Sella Law LLC v. Consumer Financial Protection Bureau, 140 S. Ct. 2183 (2020). The court rejected this argument, quoting Bureau of Consumer Fin. Prot. v. Citizens Bank, N.A., 504 F. Supp. 3d 39, 51 (D.R.I. 2020), which held, “[t]hough the Seila Law decision is still young, the two courts to address this issue thus far have determined that a CFPB enforcement action pending at the time of Seila Law may continue if the action is ratified by the Director.” The court concluded that the amended complaint, filed after the Seila Law decision, served as ratification of the action, and accordingly there was no basis for dismissal on this ground.

This case highlights CFPB’s close oversight of the credit repair industry and potential deceptive and abusive telemarketing practices. Troutman Pepper will continue to monitor this case.