CT regulators say debt relief firm took customer money without paying off debts

A debt relief company based outside Connecticut has been ordered to stop operating in the state and pay a $2.1 million penalty after regulators found it had collected consumer payments without settling the debts it promised to resolve.

CDS Debt Relief was fined $1.2 million for fraudulent conduct, while company officials were also hit with personal penalties. Manager David Lugo was ordered to pay $600,000, and manager Kevin Lugo was assessed a $300,000 penalty, according to the order.

The state Department of Banking said the company carried out unauthorized debt negotiation, debt adjustment and money transmission without a Connecticut license. Regulators said CDS Debt Relief took money from consumers who believed it would pay off credit cards and bank loans, but did not follow through. The order said the company negotiated with at least 12 Connecticut debtors in violation of state law.

State banking officials issued a cease and desist order, required restitution and imposed penalties, along with disgorgement, which means forcing a person or company to surrender profits gained through illegal or unethical conduct.

The order also said CDS Financial charged fees above the maximum allowed under state law and entered into at least one contract with a Connecticut debtor that did not include the required three-day right to cancel.

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CDS Debt Relief and CDS Financial, a related company, list addresses in West Palm Beach, Florida, and Saugus, Massachusetts, according to the banking department order. The fines and penalties must be paid to the state treasurer within 45 days of the date the order was mailed to the company and its managers, the order said.

Emails sent to company-listed addresses seeking comment were not answered.

Regulators also said CDS Relief misled Connecticut debtors enrolled in a program in which CDS Financial promised debt negotiation and related services, withdrew payments from debtors’ bank accounts meant to settle debts, deposited the money into a CDS Financial account, and then misused those funds for operating expenses, direct payments to David Lugo and other personal expenses.

The order further said David Lugo and Kevin Lugo failed to create, enforce and maintain policies and procedures for supervising employees, agents and office operations in a way designed to comply with debt negotiation laws and regulations.

Debt relief firms typically charge customers a fee to help resolve debt, often promising to combine bills into one payment and negotiate with creditors. But in some cases, those payments may instead be used for fees or administrative costs while no debt is actually settled. Customers may later find their balances have grown, their credit has been harmed and collection lawsuits have been filed.

Connecticut Banking Commissioner Jorge Perez issued a temporary cease and desist order to CDS Relief and managers David Lugo and Kevin Lugo. The later order made that action permanent.