HIGHLIGHTS:

  • The U.S. District Court for the Western District of Wisconsin has ruled that the Consumer Financial Protection Bureau (CFPB) may hold the owners of two law firms offering debt-relief services liable for alleged violations of federal consumer protection laws.
  • The CFPB brought the action against two law firms and four lawyers associated with them, alleging violations of the Consumer Financial Protection Act of 2010 (CFPA) and Regulation O, which governs mortgage assistance relief services.
  • The court ruled that the defendants misrepresented their services to consumers and charged consumers impermissible advance fees.

The U.S. District Court for the Western District of Wisconsin ruled on July 20, 2016, that the Consumer Financial Protection Bureau (CFPB) may hold the owners of two law firms offering debt relief services liable for alleged violations of federal consumer protection laws. In a 54-page opinion, the court also ruled that the defendants misrepresented their services to consumers and charged consumers impermissible advance fees. In its ruling, the court punted on the question of whether the defendant law firms' debt relief services qualified as the practice of law and thus were outside of the CFPB's authority. Lastly, the court also held that the individual defendants may be liable not just for illegal profits, but for all of the revenue generated by the defendants' alleged illegal practices.

Background 

The CFPB brought suit against two law firms offering debt relief services and four lawyers associated with those companies, alleging violations of the Consumer Financial Protection Act of 2010 (CFPA) and Regulation O, which governs mortgage assistance relief services. Specifically, the CFPB alleged that while providing mortgage relief services to more than 6,000 consumers in 39 states, the defendants:

  • made misrepresentations about their services, in violation of Regulation O and the Consumer Financial Protection Act
  • failed to make certain disclosures required by Regulation O
  • collected advance fees in violation of Regulation O

The CFPB alleged that the individual defendants may also be held liable because they either participated directly in the illegal acts or had the authority to control the actions of the corporate defendants.

In response, the defendants argued that they were exempt from the CFPB's authority. The lawyer defendants argued that they offered the debt relief services as part of their practice of law, and qualified for a statutory exemption.

Last year, both sides moved for summary judgment. The court previously ruled on a number of issues presented at the summary judgment stage, including the validity of Regulation O and defendants' qualification for the statutory and regulatory exemption for attorneys. In this most recent ruling, the court addressed remaining issues related to: 1) liability and available remedies; 2) the CFPB's summary judgment claims relating to the defendants' alleged violations of Regulation O and the CFPA; and 3) the defendants' summary judgment claims for two of the individual defendants.

Opinion

Representations About Legal Services and the Practice of Law Exemption. The court concluded that the defendants represented to consumers through a variety of media that they would receive the services of an attorney and legal representation. The court found that the defendants did so on their website and in scripts used by intake specialists that enrolled clients by, among other things, making claims that they were "one of the most sophisticated consumer protection law firms in the country" and that "our mortgage relief specialists are some of the highest rated professionals in the field."

It is important to note that while the court found that defendants' actions implied that consumers would receive an attorney, the court did not rule that consumers did not actually receive legal services.The court reserved the question for trial of whether the defendants' services qualified as the practice of law, acknowledging that is a state-by-state question that involves applying each state's practice of law definition to the defendants' services.

Advance Fees. Under Regulation O, a debt relief company may not charge any fees prior to obtaining a written loan modification agreement. The court found that the defendants' monthly fee structure violated this prohibition.

Additional Violations of Regulation O. The court found that the defendants failed to make certain disclosures required by Regulation O, that the defendants impermissibly implied that consumers should stop speaking with lenders and making loan payments, and that the defendants steered consumers away from nonprofit loan counseling services.

Individual Liability for Owners. The court stated that the individual defendants could be held liable if the CFPB could show that each individual: 1) participated directly in the illegal practices or acts or had the authority to control them, and 2) knew or should have known about the illegal practices. Applying this standard, the court held that three of the four individual defendants may be held individually liable for the law firms' violations if the corporate defendants are found liable at trial. Two of the three individuals were held liable because they partly owned and exercised control over the company, including an individual that served as general counsel. The third individual was held liable because he managed the day-to-day affairs of the company and made key decisions about the firm's operations and services. The court, however, did notfind the individual defendants liable for misrepresentations made to consumers by lead generators hired by the corporate defendants at the summary judgment stage. The court reserved this question for trial to determine if any of the individual defendants actually exercised any control over the lead generators.

Damages. The CFPB sought restitution or disgorgement of all revenue – a total amount of more than $20 million against all defendants, a permanent injunction and civil penalties of up to $1 million per day for knowingly violating the Consumer Protection Act and Regulation O. The defendants argued that, if found liable, damages should be profits received as opposed to disgorgement of all revenue.

The court held that if the defendants are found liable at trial, they will be liable for all revenue received – upwards of $20 million. With respect to remedies, the court specifically held that "the appropriate measure for restitution or disgorgement in this case is the defendants' net revenue from the advance fees that they collected, less any refunds that the consumers have received. Unless defendants are found exempt under the Act and Regulation O, their revenues all flow from their illegal practices of requesting and receiving advance fees, making certain misrepresentations to consumers and failing to make certain disclosures. Their liability should not be reduced to account for consumers who received some form of benefit." The court specifically rejected the defendants' contention that the measure of damages should be net profits, i.e., the gross revenue generated from the wrongdoing reduced by the business expenses incurred.

Conclusion

This case, set to go to trial this fall, brings to the forefront a number of issues relating to the CFPB's jurisdiction and the types of implied representations that may bring companies in the financial services industry to the attention of the CFPB. The court's decision to allow the CFPB to pursue disgorgement beyond profits made by the corporation to all revenues generated from the corporate and individual defendants is significant. It raises the monetary stakes for any organization or individual whose actions are subject to Regulation O.