CFPB v. Consumer First Legal Group, LL
6 F.4th 694
| 7th Cir. | 2021Background
- In response to widespread mortgage-relief scams, the FTC promulgated a Mortgage Assistance Relief Services rule later reissued by the CFPB as Regulation O; Congress limited the CFPB’s authority over activities "as part of the practice of law."
- The Bureau sued two large nationwide firms (The Mortgage Law Group; Consumer First) and four lawyers for Regulation O violations while providing mortgage-modification services to ~6,000 customers in 39 states.
- Firms used centralized nonattorney intake staff who gathered documents and sent standardized files to brief "attorney review" by HQ and local counsel; fees averaged ~$3,375 per client with upfront retainers.
- The district court (after summary judgment and a bench trial) found the firms violated multiple Regulation O provisions (upfront fees, misrepresentations, disclosure failures, advising no-contact/stop-payments, misrepresenting free alternatives), held certain individuals liable, awarded $21.7M restitution (net revenues), assessed large civil penalties, and entered a broad injunction.
- On appeal the Seventh Circuit: (1) invalidated portions of Regulation O that expanded the statutory attorney-exemption beyond Dodd–Frank; (2) affirmed the liability findings that the firms were not practicing law and committed the challenged violations; and (3) vacated and remanded the remedies (restitution, penalties, injunction) for recalculation/tailoring.
Issues
| Issue | Bureau (Plaintiff) Argument | Providers (Defendant) Argument | Held |
|---|---|---|---|
| Validity/scope of Regulation O attorney-exemption (§1015.7) | Regulation O limits exemption consistently with Dodd–Frank and may refine conditions under the saving clause | Regulation O adds extra conditions (licensure-in-client-state, client-trust-account rules) beyond §5517(e) and is ultra vires | Court invalidated §1015.7(a)(2), (a)(3), and (b) as exceeding statutory authority; rejected CFPB’s broad reading of §5517(e)(3) |
| Whether attorneys were "practicing law" (exemption eligibility) | The associated attorneys did not perform substantive legal work; their role was limited and perfunctory | Attorneys performed legal services (some foreclosure/bankruptcy work); HQ counsel and affiliation with local counsel established practice of law | Factfinding upheld: local and HQ attorneys’ roles were largely pro forma; providers not engaged in practice of law and not exempt |
| Liability for specific Regulation O violations (no-contact, stop-payments, misrepresenting free alternatives; upfront fees; disclosure failures) | Scripts, welcome letters, and testimony show instructions to avoid servicers, to stop payments, misleading statements about free alternatives, failure to disclose and unlawful advance fees | Scripts contained contradictory language and disclosures; defendants relied on belief and legal advice that their structure was lawful | Affirmed: sufficient evidence supports liability on the contested counts and the uncontested counts (upfront fees, misrepresentations, disclosure violations) |
| Remedies: restitution metric, penalty culpability/period, injunction breadth | Restitution may reflect total net revenues; recklessness supports high penalties and long periods; broad injunction needed to protect consumers | Liu requires disgorgement/restitution limited to net profits; defendants were not reckless (at most mistake); penalty periods and injunction are excessive/overbroad | Vacated restitution and remanded to calculate relief consistent with Liu (net profits); vacated recklessness findings and remanded to apply strict-liability penalties and fix penalty periods; injunction narrowed/remanded for tailoring |
Key Cases Cited
- Liu v. SEC, 140 S. Ct. 1936 (2020) (equitable disgorgement/restitution limited by reference to net profits)
- Chevron U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984) (steps for reviewing agency interpretations of statutory authority)
- City of Arlington v. FCC, 569 U.S. 290 (2013) (Chevron deference applies to agency jurisdictional interpretations in some contexts)
- Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007) (definition of recklessness for civil liability)
- Liparota v. United States, 471 U.S. 419 (1985) (mens rea standards and when knowledge of illegality is required)
- NLRB v. Kentucky River Cmty. Care, Inc., 532 U.S. 706 (2001) (burden of proof for asserting statutory exemptions)
- FTC v. Febre, 128 F.3d 530 (7th Cir. 1997) (equitable restitution authority in consumer-protection enforcement)