In our recent Alert, “The Consumer Financial Protection Bureau’s First Major Enforcement Action and What the $210 Million Dollar Settlement Means to You,”1 we discussed the CFPB’s first major enforcement action. That action resulted in Consent Orders and an agreement by Capital One Bank (USA) N.A., (“Capital One”) to pay $210 million in fines and restitution for conduct related to marketing practices by Capital One’s service provider in the sale of credit card add-on products. Equally significant is the fact that on the very same day it announced that settlement, the CFPB filed its first civil enforcement action under seal in the U.S. District Court for the Central District of California, pursuant to its litigation authority found at Section 1054 of Title X2. The target of the action was not a big bank, but a Los Angeles law firm and others, (“Law Firm Defendants”) which the CFPB alleged were “covered persons” and “service providers” as defined by Section 1002, as well as providers of “mortgage assistance relief services,” as defined by Regulation O at 12 C.F.R. §1015.2. The timing of this court filing cannot be understated. The “covered” industry is keenly aware of the multitude of pending civil investigative demands and investigations by the CFPB Enforcement Unit.3 Hence, the Capital One settlement, plus the filing of the civil enforcement action, are clear messages by the CFPB that it fully intends to pursue its mandate to implement and enforce federal consumer financial law against and in relation to conduct of service providers to the fullest extent of its authority.
The seven-count complaint against the Law Firm Defendants included violations of Sections 1031 and 1036, and violations of Regulation O.4 In a nutshell, the complaint alleges that the Law Firm Defendants duped distressed homeowners into paying high upfront fees with false promises of a loan modification.5 Further, it claims that the Law Firm Defendants charged thousands of dollars in advance fees to homeowners and then provided “little if any meaningful assistance to consumers.”6 And that the Law Firm Defendants intentionally utilized language or images on mailings and marketing material that falsely represented an affiliation with the federal government.7 As a result, the CFPB contends that in “numerous instances, consumers who paid the Law Firm Defendants’ fees suffered significant economic injury, including foreclosure and the loss of their properties.8 Part of the service at issue that the Law Firm Defendants allegedly offered was a fee based forensic audit mixed with pro-bono legal services which included loan modification documents.9
The complaint was filed right before the CFPB released its semi-annual report highlighting its activities during the first half of the year, including the launch of consumer outreach campaigns, and proposing new mortgage industry regulations and guidance as to appropriate disclosures in telemarketing scripts. Thus, while the CFPB surprised many by having its first civil action proceed against a law firm, the action appears to fall clearly within the CFPB’s focus. To be clear, this case is less about the practice of law and more about the mortgage assistance relief services the law firm, acting with its related entities, provided. Acting as a “common enterprise,” the Law Firm Defendants are alleged to be jointly and severally liable for the violations alleged in the complaint which include false promises to obtain loan modifications that lower monthly fees, misrepresentations about their prior proven success at doing so, preventing foreclosures while the loans were being modified, and utilizing the Gordon Law Firm that is alleged to have “specialized knowledge and expertise” to ensure the clients were properly advised. Interestingly, the complaint does not address the exclusion for the practice of law under the CFPA, 12 U.S.C. § 1027 (e) 1-3. Nonetheless, the pleadings were carefully crafted to demonstrate that these activities fall outside the “practice of law” required by the limited exception, as the purported “legal work” was purportedly secondary to the full gamut of the mortgage relief services provided by all the defendants. For this reason the CFPB likely chose not to go any further to explain why the exclusion was not applicable. Nonetheless, this exclusion may be one area of defense raised by the Law Firm Defendants as the case proceeds.
Ex Parte Relief
An additional significant point here is that no notice was given prior to the filing of the action. In fact, at the time of filing, the CFPB was armed with a 71-page Ex-Parte Temporary Restraining Order, which granted the CFPB limited expedited discovery, a preservation order as to company records, an accounting of defendant’s assets, suspension of the corporate entities websites and domain names, and immediate access to defendants’ business records and premises. The Order also supplied carefully crafted proposed findings of fact, explained in detail the strength of the CFBP’s case, and likelihood of success on its merits, so as to secure an asset freeze against each defendant, and the appointment of a temporary receiver over the Gordon Law Firm and the other corporate entity defendants. In a public comment, Kent Markus, Director of Enforcement at the CFPB stated, “This action allows us to prevent further harm to consumers and lawfully gather additional evidence and data as the case moves forward.”10 Presumably, this means is that the CFPB viewed this case as extreme, and that, as set forth in Bulletin 2011-04, this is a circumstance where “notice may not be appropriate … such as in a case of ongoing fraud or where [the CFPB] needs to act quickly.” One take-a-way for the industry is that the CFPB is not afraid to flex its muscle without prior notice, where appropriate, in the face of its critics.
Consumer Complaints Matter
Another take-a-way for consideration is the impact of the CFPB consumer complaint database and program. It has been reported that the database contains no fewer than 60 complaints against the Gordon Law firm alone.11 The CFPB’s Supervision and Examination Manual notes that even a “single substantive complaint” may be enough to raise serious concerns that warrant further review.12 One message clearly resonates. To avoid costly enforcement, covered industry actors need to have in place an effective compliance program, one that manages, measures and properly responds to complaints. Simply put, the CFPB’s goal is “to make it more expensive to break the law than to abide by it.”13
The Defendants' Viewpoint
What are the Law Firm Defendants saying about this? Gary Kurtz, Mr. Gordon’s lawyer, said the CFPB has it all wrong: Gordon was offering desperate homeowners a “custom legal product,” an expert analysis of their loan, and where they stood legally, for a fee.14 He noted that his client had serviced 2,000 clients since 2010, and had helped more than 90 percent of those clients modify their loans so they could keep their homes.15 “His programs are designed to be consistent with the current state of legislation and we will vigorously defend against any suggestion to the contrary,” he said.16 Kurtz claimed the CFPB was acting based on complaints from “less than .01 percent of the clients who Mr. Gordon has serviced.”17 But the court-appointed receiver painted a very different picture, reporting that 42 percent of paying customers did not receive a loan modification, and very few of them ever received a refund.18 This is consistent with what the CFPB said in court documents when they alleged that Gordon and his business associate, co-defendant Abraham Pessar “used consumers’ last dollars to fund a lavish lifestyle, including expensive cars, dinners, and nightclubs.”19
Perhaps this is also a situation where the CFPB had little sympathy for Chance Gordon, thanks to his own, fairly well documented, notoriety. Commenting in a WSJ Law Blog about the case and of the activities of the CFPB, Chance Gordon spoke for himself. He stated: “This is a strikingly illegal demurer, motion to strike, slander to title, fatally flawed, immoral, failure to object, sacrilegious attack on those with almighty moral character. I denounce this aboriginal attempt to hinder my pristine repute as the white MLK [Martin Luther King]. Henceforth, I suggest that this halt at once.”20 It is highly unlikely, however, that the CFPB will halt its efforts. And with that, there will be new lessons to be learned.
- Entities excluded from the CFPB’s enforcement authority per Section 1027, are not in the clear. This case was an unmistakable warning sign that an entity cannot avoid enforcement when it is perceived to be going beyond the protective bounds of the excluded conduct.
- The CFPB consumer complaint database is a powerful tool for enforcement and covered parties need to be on guard and keeping watch concerning complaints against them. Along those lines, compliance and complaint management needs to be a priority.
- The CFPB has vast powers and can, and indeed now has, used its mandate in very aggressive ways. The relief it requested in its Ex-Parte TRO, granted in full by the court, granted it expedited discovery, asset discovery, an asset freeze, appointment of a Receiver, and ensured any ongoing viability of the Defendant Corporate entities — all before the defendants were even made aware of the Complaint. This tells us that the CFPB is not afraid to flex its muscle when needed, and that it is truly a force to be reckoned with.
The mandate of the Consumer Financial Protection Bureau (CFPB), created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, is to implement and enforce federal consumer financial law. Greenberg Traurig closely monitors the CFPB's activities, including the robust discussion and almost daily movement on multiple industry fronts the CFPB makes as it redefines consumer finance law. An entirely new system has been and is being created for the consumer financial services industry. Once complete, the question will be, "How does our clients’ business match up?" Our GT CFPB Task Force regularly observes and analyzes the actions of the CFPB in order to advise clients in best practices for the days ahead.
CFPB's authority includes writing and issuing new rules, and interpreting virtually all federal consumer protection laws. It also has expanded reach to execute fair lending examinations and the power to prohibit "abusive actions." Its power includes subpoena and civil investigative demand (CID) authority, and the ability to file enforcement actions in U.S. District or state courts seeking relief including significant monetary fines. The CFPB is actively issuing CIDs as it continues to examine specific practices and a wide variety of industries.
Companies affected by CFPB include more than banks. Non-banks and service providers face the prospect of federal and state regulation that, until now, had not been affected. These companies will need to put in place new risk management processes and compliance procedures.