By Pete Schroeder

WASHINGTON (Reuters) - The U.S. Consumer Financial Protection Bureau said on Wednesday it filed a lawsuit against Freedom Debt Relief, the largest U.S. debt-settlement services provider, and its co-Chief Executive Andrew Housser, alleging that they deceived consumers.

The CFPB said its suit alleges "that Freedom charges consumers without settling their debts as promised, makes customers negotiate their own settlements, misleads them about its fees and the reach of its services and fails to inform them of their rights to funds they deposited with the company."

The agency is also seeking compensation for affected consumers, civil penalties, and an injunction against the San Mateo, California-based company and Housser to end their unlawful conduct, it said in a statement.

Freedom Debt Relief did not immediately respond to a request for comment.

The CFPB accused the company of offering to negotiate debt settlements on behalf of consumers while knowing that some companies refuse to negotiate with debt-settlement companies as third parties. Furthermore, the CFPB alleged that the company leads consumers to believe its negotiators will work on behalf of consumers, even when some consumers merely receive "coaching" before having to negotiate on their own.

“Freedom took advantage of vulnerable consumers who turned to the company for help getting out of debt,” said CFPB Director Richard Cordray. “Freedom deceived consumers about its clout with creditors that it knows do not negotiate with debt-settlement companies, made some customers negotiate on their own, and misled consumers about its fees and their accounts. Today’s lawsuit seeks to stop the deception and get compensation for consumers Freedom cheated.”

The CFPB also said the company misleads consumers on its fees by claiming payment is only required when it negotiates a settlement. Rather, the CFPB said the company charges a fee when creditors stop collection efforts even without a settlement, or when the company took no action on the consumer's account.

(Reporting by Eric Walsh and Pete Schroeder; Editing by David Gregorio)