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Judge lets New York pursue student loan debt relief fraud case

Jonathan Stempel

NEW YORK, July 3 (Reuters) - A federal judge said New York's attorney general may pursue a lawsuit accusing Debt Resolve Inc and nine other defendants of involvement in a scheme to induce thousands of struggling student loan borrowers into paying for debt relief services they could have gotten for free.

U.S. District Judge Alison Nathan in Manhattan on Wednesday rejected requests by Debt Resolve, Chief Executive Bruce Bellmare, his predecessor Stanley Freimuth, and the other defendants to dismiss the September 2018 lawsuit.

Eric Krejci, a lawyer for Debt Resolve, Bellmare and Freimuth, declined to comment.

They had argued that Attorney General Letitia James failed to plead facts "supporting this allegedly 'fraudulent' debt relief scheme with particularity" against them.

The defendants were accused of making false assurances that they were affiliated with the government, or that their help was needed, and of typically charging over $1,000 for their services, often at a usurious 20.99% interest rate.

Without ruling on the merits, Nathan said New York offered sufficient evidence that state credit repair and telemarketing laws were violated because various defendants represented that they could shore up borrowers' credit scores, through the use of costly "credit plans" that lacked necessary disclosures.

Nathan also found sufficient allegations to suggest that Bellmare and Freimuth were "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."

James' office had no immediate comment.

The lawsuit seeking civil fines and restitution had been filed in state court against 12 defendants by James' predecessor Barbara Underwood, over alleged improper conduct since at least 2014.

Two defendants who did not respond to the complaint were later declared in default.

In October 2017, the Federal Trade Commission and 11 states announced their own crackdown on student loan debt relief scams, called "Operation Game of Loans."

The case is New York v Debt Resolve Inc et al, U.S. District Court, Southern District of New York, No. 18-09812. (Reporting by Jonathan Stempel in New York; Editing by Richard Chang)