In a decision released earlier this summer, the United States Court of Appeals for the Seventh Circuit overturned the district court’s order granting restitution, imposing civil penalties and issuing an injunction in a lawsuit brought by the CFPB. against two mortgage assistance companies and four lawyers. associated with businesses. The decision imposes significant limits on the Bureau’s ability to recover both monetary relief and injunctive relief through enforcement action.
In CFPB v Consumer First Legal Group, LLC, the CFPB filed a lawsuit in 2014 in which it alleged that the defendants breached Regulation O while providing mortgage assistance services by misrepresenting their services, failing to make required disclosures and receiving illegal advances. The district court ruled that the companies committed the material violations alleged by the CFPB and that the defendant attorneys could be held personally liable for those violations and were not exempt from Regulation O because the work they performed did not constitute not the “practice of law”. .” He ordered restitution in the amount of $21.7 million, imposed civil penalties totaling $34.1 million distributed among the four attorneys, and a civil penalty of $3.1 million against one of the companies. , and permanently banned three of the attorneys from providing debt relief services.
While affirming defendants’ liability for the substantive violations alleged by the CFPB, the Seventh Circuit reversed all aspects of the district court’s remedial order. The district court’s restitution award was based on defendants’ “net earnings” during the relevant period, that is, gross receipts less reimbursements made. The Seventh Circuit concluded that, based on the United States Supreme Court’s decision in Liu vs. SEC, which was issued after the district court issued its restitution award, the award should have been based on the defendants’ net profits. In Liu, the Supreme Court found that restitution is “equitable relief” available to the SEC provided it is limited to net profits from wrongdoing after deducting legitimate expenses. The Seventh Circuit rejected the Bureau’s attempt to distinguish restitution from restitution, stating that at Liu’s the reasoning was “not limited to restitution and was intended to set forth a rule applicable to all categories of equitable relief, including restitution”.
With respect to civil penalties, the district court found that three of the attorneys acted recklessly with respect to their violations, that the fourth attorney was only liable for his violations under the theory of liability strict and that the company had committed reckless violations. The CFPA has established three levels of penalties: strict liability violations at $5,000 per day; reckless violations at $25,000 a day; and experiencing violations at $1 million a day. The defendants argued that they were unaware of a risk that their conduct was illegal because Rule O prohibits common conduct for attorneys, such as demanding installment payments. They also argued that because Regulation O is a complicated regulatory scheme, their violations resulted from a misunderstanding of the regulation’s applicability rather than recklessness.
The Seventh Circuit concluded that while their conduct did not constitute the “practice of law”, it was “a step too far to say that they were reckless, i.e., they should have been aware of one unjustified high Where obvious may violate O. Rules (emphasis added). Accordingly, the Seventh Circuit reversed the District Court’s findings of recklessness regarding the three attorneys and the company and ordered the District Court, on remand, to enforce the daily sentence for the strict liability violations. The Seventh Circuit also agreed with defendants that the District Court used incorrect time periods to calculate penalty amounts and ordered the District Court to measure those periods differently on remand.
The Seventh Circuit also found that the injunction issued by the district court was too broad. The three attorneys permanently barred from providing debt relief services argued that the case did not warrant such a broad injunction and that it would create undue hardship for them as career bankruptcy attorneys. Having concluded that the defendants’ violations were not knowing or reckless, the Seventh Circuit concluded that such a broad injunction “is not necessary to protect the public from future harm”. He also observed that the companies were out of business and “not a complete scam”, having secured mortgage modifications for hundreds of consumers. The Seventh Circuit ruled that the injunction “need only ensure that individual defendants do not deviate from the scope of the [CFPA] and its implementing regulations.
More and more industry players have litigated cases with the CFPB in recent years, and rulings like this seem to suggest that it is sometimes necessary to litigate with the Bureau, particularly when it is There is a significant disconnect between the opinion of the Bureau and that of members of the industry as to an appropriate remedy. . We believe there is every reason to anticipate that more Bureau cases will come to litigation, bolstered by rulings such as this, which make the prospect of litigating a CFPB enforcement case more attractive to application targets.