The Dodd-Frank Act gives the Consumer Financial Protection Bureau (“CFPB”) the power to obtain a wide range of legal and fair remedies, as well as civil monetary penalties. 12 USC § 5565. A recent opinion of 7e Circuit in CFPB c. Consumer First Legal Group, LLC (“CFLG”) provides essential legal benchmarks for how and when these remedies apply. The court’s opinion is expected to play an important role in future CFPB enforcement actions.
The case involved claims against two law firms and related parties that provided mortgage assistance services to consumers. The CFPB alleged that the defendants violated Regulation O, 12 CFR part 1015, by charging consumers upfront fees, making misleading representations about their services and failing to provide required disclosures. It is important to note that Regulation O (like the Dodd-Frank Act itself) contains an exemption for lawyers practicing law in certain circumstances. In a decision relevant to its discussion of remedies, the appeals court held that because the activities of the defendants did not constitute the practice of law in the circumstances, the exemptions of counsel did not apply. The court therefore upheld the district court’s finding of liability.
As far as appeals are concerned, however, the appeals court has split from the district court (and CFPB) on several important points.
First, building on the recent Supreme Court ruling in Liu v. DRY, 140 S. Ct. 1936 (2020), the court held that the power of the CFPB to obtain restitution goes only to the defendant’s net profits and not his net income. The court rejected the CFPB’s argument that Liu only applies to “disgorgement” requests, stating rather that “Liuthe reasoning of s is not limited to disgorgement; instead, the opinion purports to set out a rule applicable to all categories of equitable relief, including restitution. “1 In this case, the district court had ordered restitution on the basis of the defendants’ net income – gross receipts minus refunds issued. Instead, apply Liu, the appeals court remanded the case to determine the defendants’ net profits — gross receipts minus reimbursements and expenses. This same issue was raised in another CFPB enforcement action pending appeal in the Ninth Circuit (the CashCall case discussed below). To the extent that other courts follow CFLG, the court’s decision is likely to have important ramifications for many CFPB application cases, as the agency often seeks consumer compensation as a remedy. (As we have already noted (here and here), in at least two other cases, district courts have rejected CFPB’s blanket restitution requests on the grounds that not all consumers have been affected by the conduct found to be illegal.)
Second, the CFLG The court made two important decisions regarding the calculation of civil monetary penalties (“CMP”) in CFPB enforcement actions. The Dodd-Frank Act authorizes the CFPB to obtain three levels of CMP “for each day in which [a] violation … continues “as per defendant’s guilt – strict liability violations ($ 5,000 / day), reckless violations ($ 25,000 / day) and knowing violations ($ 1,000,000 / day). Given the disparity of the amounts of the penalties, the determination of guilt is essential.
The District Court of CFLG concluded that several of the accused had committed reckless violations and calculated the CMPs accordingly. The Court of Appeal overturned this decision. The court noted that “[a] the defendant acts recklessly when his conduct involves “an undue risk of harm which is known or so obvious as to be known” (citing Safeco Ins. Company of Am. v. Burr, 551 US 47, 68-69 (2007)). The court then clarified that when, as in the present case, the conduct in question is not manifestly wrongful, dangerous or unlawful on its face, the determination of recklessness must be made with regard to the illegality of the conduct. and not with regard to the facts constituting the offense. In other words, the question is not whether the defendants were reckless in the way they acted, but whether they were reckless in ignoring the illegality of the conduct in question. Applying this standard, the appeals court noted that although the district court found that the defendants ‘conduct was not covered by the attorneys’ exemptions of the Dodd-Frank Act and O Regulation, and that the Defendants were therefore subject to the regulations at issue, “the question was legitimate.” As a result, the court concluded that the defendants were unaware of an “unjustly high or obvious risk of violating” the law and therefore did not commit a reckless violation. the CFLG the court ruling mirrors the district court ruling in CFPB’s enforcement action against CashCall, in which the court dismissed CFPB’s claim for CMP on the basis of the recklessness standard. In that case, the district court relied heavily on the novelty of the CFPB’s request to reject a finding of recklessness, noting that it was only when the court ruled on liability that the defendants could have known that they were breaking the law and that “[a]At best, the CFPB established that the defendants were prepared to accept the business risks associated with structuring a loan model that would avoid relevant federal and state laws and employed legal counsel to assist them in this endeavor. ” Call for funds is currently on appeal to the Ninth Circuit, where the CFPB argued for setting aside this aspect of the district court’s finding, so further appeal directions on this point could be provided.
The second aspect of the CFLGEqually important is the decision of the CMP and deals with how to calculate the amount of a penalty. As noted above, the Dodd-Frank Act sets the amount of the penalty on a “per day” basis. In CFLG, there was a dispute as to the period during which the defendants registered consumers in their services in violation of Regulation O. The district court considered the last date of registration of a consumer (the “last date”) and calculated the penalties on the basis of the entire period up to the latter date. The Court of Appeal noted, however, that there was no evidence that entries had taken place on most of the days leading up to the latter date and that those days of non-violation should not be counted in calculating the penalty. simply because a violation may have occurred on a later date. That is to say, CFLG represents the proposition that penalties are appropriate only for days when actual violations occurred and not for any period of time that a particular policy or practice was in effect if no actual violation occurred at certain dates. This more nuanced approach to calculating penalties will have important ramifications for both contentious cases and settlements in which the CFPB requests the maximum applicable penalty amount.
Finally, the CFLG The court also rejected the scope of the injunction issued by the district court. The district court had banned individual defendants from providing “debt relief services”. Noting that an injunction “cannot be ‘onerous on the defendant than is necessary to grant full redress to the plaintiffs'” (citing Califano vs. Yamasaki, 442 US 682, 702 (1979)), the court of appeal narrowed the scope of the injunction to cover only mortgage relief services. Several factors motivated the court’s decision in this regard, namely that the violations at issue concerned only mortgage relief services, that the defendants had not acted recklessly and that the defendants’ transactions “were not not a complete scam: in the end, [defendants] has in fact secured loan modifications for hundreds of clients in their two or so years of operation. Call for funds, where the district court dismissed the agency’s claim for restitution in part because the CFPB “failed to show that the defendants intended to defraud consumers or that consumers had not benefited from their Marlet”. the CFLG the court’s opinion provides important benchmarks to consider when negotiating (or litigating) the scope of any injunction in CFPB enforcement cases.
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The CFPB has had great success in its enforcement disputes, generally outweighing the merits of its claims. But the CFLG The decision is the latest in a series of court rulings (and the first appeal decision) dismissing the CFPB’s broad claims for redress in such cases. As more contentious cases are resolved or appealed, we await further legal advice on the scope and implementation of the general redress tools available to the CFPB.
1 The court in Liu recognized that the remedy of “deprivation[ing] violators of their net profits from illegal activities “took various names, including accounting, restitution and restitution. Liu, 140 S. Ct. At 1942-43.
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This article by Mayer Brown provides information and commentary on legal issues and developments of interest. The foregoing does not constitute a complete treatment of the matter at hand and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action on the matters discussed in this document.