Judge Alison Nathan of the Southern District of New York ruled on Wednesday that a case against nearly a dozen companies accused of defrauding student loan borrowers could proceed, rejecting a motion for the suit to be dismissed filed by the companies’ attorneys.
The suit, brought by New York Attorney General Letitia James, claimed that the companies, many owned and led by Debt Resolve, Inc., charged students hundreds of dollars for filing paperwork related to repayment and forbearance options for outstanding student loans, made materially untrue statements when questioned about the necessity of their programs by borrowers, and charged usurious interest and fees on financing options. According to the complaint, the companies made statements implying that they were affiliated with the federal government despite no such affiliation, falsely informed borrowers that they could not file on their own for repayment programs, and offered “open ended financing options” for borrowers who could not afford the thousands of dollars of fees that the debt companies charged with annual percentage rates exceeding 20%. Attorney General James argued that these business practices were responsible for “hundreds of complaints to the Better Business Bureau and Consumer Financial Protection Bureau” and breached New York lending and marketing laws.
In her opinion, Judge Nathan did not rule on the merits and decide whether the companies were responsible, but found that there was enough evidence of wrongdoing to allow the case to proceed to a full trial. Nathan stated that Debt Resolve was “aware of the deceptive scheme and directly participated in aspects of it, or, at the very least, had authority to control some of the entities involved” and dismissing the complaint without a trail would be improper. The case is scheduled to move forward later this month.
The decision comes less than a week after the Seventh Circuit Court of Appeals ruled that state law claims against student loan companies were not preempted by federal law, opening the door for state prosecutions of debt relief companies that rely on predatory practices to be sued in state courts.